XPO Inc (XPO) 2014 Q1 法說會逐字稿

Good morning and welcome to the XPO Logistics first-quarter 2014 conference call and webcast. My name is Brandon and I will be your operator for today's call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). Please note that this conference is being recorded.

Before the call begins let me read a brief statement on behalf of the Company regarding forward-looking statements and the use of non-GAAP financial measures.

During this call the Company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the Company's SEC filings.

The forward-looking statements in the Company's earnings release, or made on this call, are made only as of today and the Company has no obligation to update any of these forward-looking statements 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 Investor section on the Company's website at www.XPOLogistics.com. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

Thank you, operator, and good morning, everybody. Thanks for joining our first-quarter conference call. With me today are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Head of Investor Relations.

Last night we reported a strong first-quarter performance with significant growth in every major metric. We increased our gross revenue by 148% and we grew net revenue by 259%. Our organic growth, which excludes acquisitions, was 51% companywide and in Freight Brokerage we generated organic growth of 75%.

At the same time we continued to drive margin improvement. We increased net revenue margin companywide by 640 basis points compared to the prior year quarter, primarily due to the acquisitions of 3PD and NLM. In Freight Brokerage we increased margin 90 basis points from a year ago, excluding the benefit of last mile margins. And that is our fourth consecutive quarter of year-over-year improvement in our core business margin.

Excluding costs associated with the acquisition of Pacer, this was the second consecutive quarter of positive EBITDA. And we are solidly on track to reach an EBITDA run rate of $100 million by the end of the year.

The integration of Pacer is going extremely well, morale is very high. We now have one combined sales force under the strong leadership of our Chief Commercial Officer, Julie Luna, who was previously head of intermodal sales for Pacer.

We have a lot of confidence in Julie; she's a 25-year industry veteran with a great track record of dealing with some of the largest shippers in North America. At UP she led Union Pacific's $1.2 billion automotive transportation business.

We are getting a very positive response from our customers about our multimodal capabilities. A number of our Brokerage customers are asking us to move long-haul freight on the rails. Within about an hour of sending an email that we had bought Pacer we received more than 300 responses from our customers, many of them requests for intermodal quotes.

In addition to revenue generation we made great progress in taking out costs in the Pacer acquisition and our updated estimated cost of synergies has tripled from our initial expectations. We have now identified $15 million of synergies in technology, real estate, sales and administrative functions, public company costs and duplicative personnel and we've already executed on many of them.

For example, we quickly implemented our plan to reverse the losses at Pacer's logistics business. We closed or consolidated 16 offices and retained 10 profitable operations now part of our XPO Global Logistics Freight Forwarding group. Dominick Muzi, who has done a superb job at ramping up our profitability in Freight Forwarding over the last three years, is now in charge of growing this combined organization.

With Brokerage we put the former Pacer Brokerage business under the leadership of Josh Allen who fully integrated it with XPO. Josh is one of our regional VPs who has been growing our Brokerage offices in Louisville and Cincinnati at a fast clip and we moved the operations onto our proprietary Freight Optimizer technology which has allowed the team to serve customers better and price loads more effectively. They can do their job faster on a more user-friendly system with access to the more than 26,000 carriers we now have in our network.

So in sum, we reported a very strong first quarter and delivered sizable internal growth, we completed a transformative acquisition that made us the third largest intermodal provider in North America and the largest cross-border Mexico intermodal player, we continue to achieve our milestones and we're on track to generate 2017 revenue of $7.5 billion and EBITDA of $425 million. Without I will hand it over to John. John?

Thanks, Brad. The completion of the Pacer acquisition had a meaningful one-time impact on our results for the quarter. So I will start by covering that and then I will turn to the very positive performance of our three business units.

Because we completed the Pacer acquisition on the last day of the quarter, Pacer's first-quarter results of operations were not reflected in our P&L. However, we did incur $4.6 million of transaction expenses, largely related to Pacer, and $6.4 million of one-time Pacer integration charges consisting of severance and lease impairment costs.

Our year-over-year top-line growth was very strong. We increased Freight Brokerage revenue by 196%, and increased net revenue dollars by 340%. Within Freight Brokerage segment we drove up revenue in our truckload LTL and intermodal operations by 85% year over year and achieved organic revenue growth of 75%. This demonstrates our ability to leverage our carrier network and technology to scale up our Brokerage operations especially in times of market volatility.

Net revenue margin for truckload LTL and intermodal increased by 90 basis points to 13.8%. Also within Brokerage, our Last Mile business grew it's revenue by approximately 15% year over year. Net revenue margin for Last Mile declined by 210 basis points sequentially from the fourth quarter primarily due to weather constraints.

We're seeing a positive trend in demand for white glove delivery services and we're continuing to capitalize on our position as the clear leader in this space.

Our Expedited Transportation business had a strong quarter. We increased revenue by nearly 42% and increased operating income by 397% over last year. This reflects our acquisition of XPO NLM in December as well as a very strong Expedited market during the first quarter.

Net revenue margin increased to 34% from 16% a year ago. Because XPO NLM recognizes revenue on a net basis virtually all of its gross revenue goes to margin. Volume through the portal increased by 47% year over year.

Our Freight Forwarding business achieved strong revenue and profit growth in the quarter. We increased revenue by 20% over last year and improved operating income by 48%. Excluding the one-time charge last year for rebranding it as XPO Global Logistics, this is the sixth consecutive quarter with year-over-year increases in revenue and operating income in Freight Forwarding.

We will be rebranding two more of our businesses in the second quarter. We are changing Express-1 to XPO Express and our 3PD business will become XPO Last Mile. They will be joining the rest of our XPO brand family which currently includes XPO Logistics, XPO NLM, XPO Global Logistics and XPO Air Charter.

This will further harmonize our businesses under a common XPO banner. We expect to incur approximately $4.6 million of one-time charges in the current quarter related to the Expedited and Last Mile branding changes of which $3.3 million will be non-cash amortization of the old brands.

Corporate SG&A expense was $21.7 million for the quarter. This includes the $11 million of transaction and Pacer integration costs I mentioned earlier; $1.4 million of non-cash compensation expense and $1.2 million of litigation costs.

Net interest expense was $10.1 million for the quarter consisting of $4.5 million for the Pacer debt commitment we received from Credit Suisse, $3.2 million of interest on our convertible notes and $2.3 million related to early conversion of some convertible notes to common stock.

On April 1 we amended our ABL to upside the facility to $415 million with an additional $100 million accordion. The facility has an interest rate of LIBOR plus 175 to 225. It is currently undrawn and with our cash it gives us liquidity to do acquisitions.

Our effective tax rate for the quarter was 10.5%. Our tax rate was lower than expected due to the intangible asset valuation of the Pacer acquisition. This resulted in a valuation allowance against our deferred tax assets. It is no affect on our ability to use our tax benefits in the future and at the end of the quarter we had $155 million of federal tax NOLs.

Capital expenditures for the quarter were $3.9 million consisting mainly of technology-related spending. With Pacer added as of March 31, our planned full-year CapEx is approximately $30 million.

Our liquidity position remains very strong. At the end of the quarter, immediately after completing the Pacer acquisition, we had $157 million of cash on our balance sheet including $13 million of restricted cash. And apart from our convertible notes which are treading well in the money, we have just $2 million of debt and capital leases.

So each of our business units is performing very well, our balance sheet is strong and we have a lot of momentum going into the second quarter. Now I'm going to turn it over to Scott and then we will go to Q&A. Scott?

All right, thanks, John. A big part of our growth in the quarter was the fact that we were able to get our hands on capacity and move record amounts of freight during severe weather disruptions. I'm proud to say that we honored all of our commitments. Our customers very much appreciated that and they rewarded us with a substantial amount of incremental spot business.

The weather service caused problems for the rails which drove more freight over the road. That tightened up truck capacity which led to more Expedite business, and then some does Expedite loads shifted to air charter.

We were able to move freight through our Brokerage network, through the owner operators at Express-1, through our auction platform at XPO NLM, and through XPO Air Charter.

While the weather impact was temporary, we gained new customers who had hit a wall with their usual capacity providers. We were also able to build stronger relationships with our existing customers. This helped us grow the business even as capacity loosened over the past few weeks.

We are finding that customers of all sizes are very receptive to giving XPO some first-time freight. They are actively looking to partner with large multimodal 3PLs that have deep capacity and are in this for the long run. They can see that we're investing in growth and capacity and infrastructure. This resonates particularly with larger accounts who want stable supply chain relationships.

Our strategic accounts team brought in business from 33 new customers in the first quarter. Now when we meet with our customers the dialogue is not just about moving freight but also about analyzing their supply chains. We are looking at where they have issues and where XPO can add value. This is exactly why we bought Pacer, 3PD, Optima and NLM, they all provide services that are rapidly growing in demand in the North American supply chain.

Of our 24 cold starts, 11 are in Freight Brokerage including our newest location in Kansas City, which we opened in March. Our Brokerage cold starts already have an annual revenue run rate of over $190 million. A year ago the run rate was roughly $78 million, so we've increased our Brokerage cold start revenue by 2.5 times in about 12 months and will continue to grow them fast.

Looking ahead, we expect our profitability to ramp up through the second quarter and the rest of the year. Our Last Mile business is starting to see a bump from the string season and new housing; the positive impact of the Pacer acquisition will start to show up in our second-quarter results; and we will continue to drive organic growth, improve productivity and gain operating leverage over our fixed costs.

With the $400 million of revenue we expect to acquire between now and year-end, we're on track for a run rate of $2.75 billion by December 31. We've delivered a strong start to the year and will continue to push the pace on our many initiatives for growth. Now we're going to open up the call for your questions.

(Operator Instructions). Rob Salmon, Deutsche Bank.

Brad or Scott, could you -- you guys had highlighted kind of the stepped-up Pacer synergies. Could you give us a sense of how quickly you expect to achieve those cost synergies and how much of the benefit you guys are receiving from the adjustments you have made to Pacer Logistics segment?

Hey, Rob, it is John Hardig. Yes, the Pacer synergies, we stepped that up to about $15 million. That is made up of about a third of corporate overhead savings, about a third of public Company and IT consolidation savings and about a third from improvements in the Logistics business. We expect to achieve roughly about $6 million of that by the end of this year and the rest kind of rolling into 2015 and 2016. Some of the IT savings are going to take a little bit of time to achieve.

Perfect, that is really helpful. And then when we are thinking about the Pacer Intermodal lien balance, I know that's been something which has been -- something that has constrained Pacer's profitability in recent quarters. Can you give us a sense how much you've been able to leverage your Expedite and some of the automotive traffic that you guys handle in terms of balancing out that two way flow?

Rob, you are exactly right, that is a big opportunity for us to drive incremental savings on top of that $15 million. No benefit from there is included in those $15 million of cost savings. Right now empty miles are roughly about 39%, if you look at peers it is more like the mid-20%'s. Every percentage point decline in those empty miles could drive about $1 million to the bottom line. So a lot of opportunity to drive additional savings. We are just getting going on those initiatives and stay tuned.

Thanks for so much for the time, guys.

Kevin Sterling, BB&T Capital Markets.

Brad, let's kind of start with Pacer, sounds like the integration is going well. How many -- and maybe you could ballpark it for me. How many of Pacer's customers did not use truck Brokerage, Expedited or Freight Forwarding or Last Mile, any of your suites of services, that you've already been able to maybe cross sell that to?

Well, most of Pacer's customers were using Pacer strictly for intermodal. Some of them but a very small percentage of them were also doing truck, Pacer didn't have Last Mile, so there was no Last Mile there.

Pacer did have an expedite, they called it Just in Time, but an expedite group, had a little bit of expedite business and we have now merged that expedite business with ours, we have merged the truck Brokerage business with ours and intermodal is just one solid organization integrated throughout the United States now for us. And we merged the sales forces.

So we had a three-day sales summit in the first week after we bought the company and we had their top salespeople, our top salespeople -- we are just now XPO salespeople, one organized group. And we came up with a go-to-market strategy and we redivided up the list of customers.

And we went through customers one by one and talked about what share of wallet we're getting in each of the different modes and how can we be more of assistance to them and how can we offer them more services and what is the right way to go about them. We have had some wins even in the first few weeks, but it is still early stages for that.

Okay, thanks. And I think you mentioned kind of within announcing the Pacer acquisition a lot of your customers reached out to you guys asking about intermodal. So maybe -- how many of your customers in the past did not use intermodal and are now looking to XPO for intermodal?

So if you look at our customers and you look at their -- the moves that we're making for them, and we are doing about 25,000 loads a day now, about -- take out the Last Mile and look at just the truckload customers, about a third of them are going over 600 miles. And of that third of the volume over half of it is business that could be and maybe should be converted to intermodal. We've got a big effort going on to do just that.

Some of those loads aren't close enough to (inaudible), some of that freight is a little too time sensitive or delicate to be going by rail. But a whole bunch of it is right for conversion to intermodal. And these are mostly small and midsize customers.

The large shippers have discovered intermodal and they are still refining their networks and still -- there is still more penetration to go. But from our view the big, big penetration is with those small customers, it is quite a large amount.

Okay, thanks, Brad. And then I think in the press release you mentioned your strategic accounts team had signed 33 new major accounts in the quarter. How do you define major accounts and where do you want to grow that major account base say a year from now?

Our definition of strategic account is a company that has at least $1 billion of revenue in their business. Ideally you'd like to categorize them by transportation [stem], but it is hard to get that accurate information on every single customer. So we just benchmark it by the size of their business.

So all those 33 companies that came on board as new customers for us, they are billion or multibillion-dollar companies. Now where do we want to grow that? We want to grow that really big, because there is a lot of business out there, there is a lot of freight to move and we have a very compelling value proposition on a multimodal capability to offer them. So that is something that should be billions of dollars over time.

Okay, great. And one last question for me and I will get back in queue. Scott, you talked about April some capacity loosing up kind of with anecdotes we have heard. Are there any other trends you could share with us that unfolded in April now that winter has stalled?

No, sequentially we are still tight. Overall the market is still -- truckload capacity is relatively tight. Sequentially it has loosened incrementally for the last five, six weeks. Produce season did get off to a little later start than usual. You started to see produce only in the last few weeks and it is only in the southern parts of Florida and Southern Arizona.

It will make its way up and you will start to see some things coming out of South Carolina and Georgia. And produce season, like I said, just getting going and starting to tighten up capacity in the southeast certainly.

Okay. Great, thanks so much for your time, gentlemen.

Ryan Cieslak, KeyBanc Capital.

Congratulations I guess on the official closing of Pacer.

Thank you.

Brad, I guess just to dovetail off that last question, I just want to maybe get your perspective right now on the truck Brokerage market. Following the first quarter there have been some puts and takes of how much of it was weather-related and how sustainable it is. But I just wanted to get your view on how you are looking at the market or how you view the market going forward.

And if it is something that is sustainable in terms of an unbalanced or tighter market now going forward, how we should be thinking about the earnings leverage within your core Brokerage business as you will finally be in an environment that is certainly more favorable than it has been the last couple of years.

Well, from our perspective it was a real fun market to be in after two years of a real boring market to be in. There was a lot of disruption, there was a lot of chaos, there were a lot of people who had real urgent problems to be solved that we could help them solve them. It was just a really nice situation to be in.

So they had lots of supply-chain disruptions and rail was most disruptive of all of them. And then the freight from the rail, it was going to rail, went onto the highway, there already was a tight capacity situation. That made it even worse, rates went up a lot, a lot of freight that was regular highway moved to Expedite, some of the ground Expedite even moved to Air Charter.

So we were pushing all the different levers that we've got on the supply-chain there and it worked really well and the numbers show that.

Now, fortunately from an overall point of view, we won't have all that bad weather forever, that is an anomaly. And things are starting to get back to normal. Capacity is tighter than it was before all of that crazy weather.

It is not as tight as it was three or four weeks ago; we've seen a significant loosening in the market. It is not loose but it is not this crazy, crazy tight market where you have to spend hours and hours to find a truck. The low truck ratios have gotten a little more reasonable, you can find a truck.

Southeast is a tight part of the country right now because produce season kicked in, all be it late but it did kick in. And you will see some more produce season tightness coming in in Texas and other parts of the country as the normal seasonality of produce kicks in. But I don't think you are going to see this mega tightness come back unless there is some unforeseen disruption.

You will see a generally tighter market then it was last year and I don't know how much to contribute that to tightening capacity due to hours of service, due to demographics, due to all of that and how much to attribute that to the economy just little by little coming back. Does that more or less give you the color that you are looking for?

No, that is actually -- it is really helpful, I appreciate that. I guess the next question I had is just on the gross margin improvement within the truck Brokerage line. And again, a very nice quarter to be able to show that here on a year-over-year basis.

I wanted to get a sense of how much of that improvement I think at this point is under your control I guess going forward, meaning is there still a lot of opportunity to continue to see year-over-year improvement aside from whatever the market gives you at this point. Or are we sort of getting to a point now where maybe it is a little bit more difficult?

Well, we are getting better as we should as the tenure of our reps increases. And I would say where we are most getting better is on procurement, on procuring trucks, procuring capacity because we have a bigger network, we've got 26,000 active vetted carriers that we are working with.

And we've got better technology. We've got technology that is now processing all of that information that we've got in our network around the country and quickly prompting our carrier reps of who are the right carriers to call. So we (inaudible) the combination of those factors there is some opportunity for more margin improvement -- apart from what the market does as a whole.

Okay, great. And then on the acquisition market, maybe just any update there on what you've been seeing here year to date, any relative to your expectations and sort of how the pipeline looks right now?

We have a lot of discussions going on. There are a lot of talks, many of them serious. And stay tuned. There nothing to announce today, but we definitely are in serious discussions with a number of very interesting and attractive acquisitions.

Great, good to hear. And then just one last housekeeping question for John. The corporate expense line going forward, now that we will have Pacer fully baked in, how should we be thinking about that maybe from a run rate perspective?

Well, it's going to -- it is really not going to change a lot from where it is now because we really have -- in terms of the corporate spend we kind of built the infrastructure that we need to scale up the Company according to our plans. And we should be able to leverage that corporate expense quite a bit as we grow the top-line. So I would expect this quarter to be pretty representative of what we will see the rest of the year.

Okay, thanks, guys, appreciate it.

Allison Landry, Credit Suisse.

Scott, I think in your outlook comments you mentioned that you expect to generate operating leverage in the business. I just wanted to clarify if you think you will be able to generate positive EBIT in each of the remaining quarters or was the comment more in reference to the full year?

As we go through the year our EBITDA will scale up, our EBIT certainly will scale up but with future acquisitions you never know how the amortization is going to turn out. But our EBITDA will certainly be scaling up through the year.

Okay. So operating leverage on an EBITDA basis I guess is what you are trying to say?

That is right.

Okay.

Yes.

And I guess thinking about the 33 strategic new accounts that were added, and I realize that Pacer didn't close until the end of the quarter. But do you think that any of those accounts were somehow related to Pacer? For example, did it move certain discussions along further, push them over the hurdle rate? Can you give any color on that?

Yes, absolutely. Of those 33, four came from Pacer which we are really excited about. I mean the deal closed only four weeks ago. We have won business with about 12 companies due to cross-selling with Pacer just in the last four weeks. Four of the started shipping and are part of those strategic accounts and we have submitted another -- just now, we submitted another eight joint customer bids, we are submitting some more now. So off to a great start.

Justin Garrabrant, one of our strategic account reps that we took from Pacer closed just last week, was our largest award ever, it was a $51 million award. But we was with an existing customer, it wasn't a new customer. So that is not part of the 33 new accounts.

Okay. And then in terms of the productivity metrics that you saw improvement, could you give us any detail behind those? And is there any way to sort of parse out what you are seeing in terms of these metrics for the more mature employees?

Well, we have seen a steady improvement in almost every single one of our productivity metrics that we look at since the first quarter of 2013. So as we added people the new employees up until that point had taken down the metrics in terms of gross revenue and net revenue per employee up until first quarter 2013.

Even though we kept adding employees we started to see a sequential uptick. And from there we have had four consecutive quarters of improvement and now we are up year over year on our productivity metrics in terms of gross revenue per person in Freight Brokerage, in terms of net revenue per person, in terms of number of loads per day per sales rep, in terms of outbound calls per rep. If you look at all of our productivity metrics they are all up on a year-over-year basis now.

Okay. Do you think at some point in the future you will provide some of these -- I mean obviously I can figure out the employee ones, but loads per day, per rep, outbound calls, is that something you plan to share with us in the future?

Sure, we can break out things in different ways. We would love to break out some of those things.

Sounds good. That is all for me. Thank you.

Oppenheimer, Scott Schneeberger.

Just following up on that last question, how are the attrition trends and how does that weigh into your productivity measures right now and what you expect over the balance of the year? Thanks.

Well, we had attrition in the low 30s in 2013. We would like to get that down. Attrition for us is costly, it is expensive, we have a lot of initiatives in place to drive that down, one of which we will get just by the tenure of the reps.

As you start to see the tenure increase in the reps and the ones that have been there the longest the attrition rates drop significantly. So a lot of that for the new hiring. The low 30s, is that good? With a lot of new reps it is okay, we would like to be better.

Great, thanks. Switching it up, we talked a little bit about the truck Brokerage business and intermodal and weather impact in the first quarter and into April. Could you address Last Mile, what you were seeing there and how that is transitioning from first to second quarter? Thanks.

Yes, last mile is starting to see a spring bump and usually going from first quarter/second quarter, the improved productivity and improved profitability, especially from a first quarter that had a lot of the weather impact.

So with the weather impacts you had retail stores closing in some cases, you had -- more importantly for our business, we backfilled capacity with trucks called rapid response teams that we brought in to make sure that we provide very high levels of customer service even during tough times in the weather.

We will pay up for that and we took it in margin, that's where you saw 28% margin. Since then you have seen us move more towards our typical 30% margin in Last Mile business.

Thanks. And then, Brad, you had mentioned earlier a very active M&A pipeline. We can guess at the base of truck Brokerage maybe some tuck-in in intermodal, tuck-in in Last Mile Logistics. Is there anything outside of those categories that you are looking to build in the XPO portfolio going forward? Just any hints that things that you would expand outside of that realm. Thanks.

We are looking at some contract logistics companies, they are a little different from each other, we are still getting to learn it more. We like the fact they have large sticky blue-chip customers and they have high margin strong free cash flows and high return on capital.

And more importantly, from a strategic point of view, there could be some cross-selling opportunities and some synergies with the rest of our business. And some of them are leveraged to e-commerce which is something that we believe in. We haven't decided to pull the trigger on any of them.

Other than that, almost all of the rest of the acquisitions are in our standard old verticals -- Intermodal, Truck Brokerage, Last Mile, Expedite.

Great, appreciate that. And then one more housekeeping. John, the restricted cash, could you just elaborate how restricted that is, what that is, how restricted? Thanks.

Right. So when we closed Pacer we had to terminate their credit facility and they had about $11 million of letters of credit issued under that credit facility mainly to support their insurance programs, their commercial insurance for their trucking operations. And so, once that facility was terminated we were really forced to cash collateralize those LCs right at the closing.

We haven't had an opportunity yet to get through all the paperwork to issue new LCs under our credit facility. Once we do that $11 million of that cash will be released and freely usable by us. And then about -- the other $2 million is related to a captive insurance program that 3PD has.

And so, we really don't have access to that cash until the end of the policy year and then we see kind of what is left over in there, sometimes we take distributions. But typically that $2 million would be considered locked up. And in terms of the LCs on pacer, we should have that cash freed up $11 million within the next couple of weeks.

Great, thanks. And congratulations on the good start to the year.

John Mims, FBR Capital Markets.

So, let me ask on Pacer and just kind of a general broad industry question. Capacity additions this year, are you all [buying] boxes? And what do you think -- to what expense you can forecast peak season now, how do you think your capacity and industry capacity lines up with expected demands?

I will take the last part and let Scott take the first part. In terms of capacity and pricing you've got to remember in our Intermodal business our capacity is lined up on long-term contracts and the vast majority of our customers are on long-term contract. So we have a kind of built in spread there and if the market is going up and going down it is not really a big factor in what we are doing on that.

There is some part of the business that spot is transactional that is off the -- out of the confines of the larger contract. And there we try to play a role to help our customers and to get more demand for our rail partners. And I will let Scott or John talk about the CapEx.

In terms of the boxes which we do lease that don't show up in CapEx, we will -- we are looking to increase the turns. We are looking to increase the productivity of our boxes. The empty miles which we had talked about before being in the high 30s, every percentage point that we decline we will drive that $1 million to the bottom line.

So that is the big focus this year rather than adding boxes, increasing the productivity of the ones that we have available to us today.

Okay, fair enough. And are you going to keep the Pacer brand or are you going to roll it into XPO Intermodal?

We are definitely going to keep the Pacer brand in Mexico because everyone in transportation in Mexico knows Pacer because Pacer has been there for something like 26 years and is the largest cross-border Intermodal player and has just got a great, great reputation there.

And to switch the brand from Pacer to XPO in Mexico, even the letter X is -- you don't say XPO in Spanish, it wouldn't work. Then the rest of the business we will be switching to XPO Logistics in the fullness of time.

Interestingly, when we had the town hall meeting in Dublin right after we closed the transaction, we had already printed a logo that says XPO Intermodal, and I thought it looked pretty good actually, but they didn't want to be XPO Intermodal, they wanted to be part of XPO Logistics, part of the family, part of the organization and completely integrated.

And we said that is great, so we will do that, with a few exceptions with some specific contracts and customers. But in general, we are moving towards XPO Logistics.

Great, great. All right, thanks for the time.

Jack Atkins, Stephens.

So I guess just first going back to Brokerage, there was some nice year-over-year margin expansion there which you guys pointed out. But we did see some sequential compression in net revenue margins on the truckload side of the Brokerage business. And I think most of your peers have been seeing some modest expansion.

Could you maybe comment on what drove that? Was there something specific either in the market this quarter for you guys or maybe in the 4Q that you were comping against that sort of made that trend a little bit different?

Yes, Jack, it is Scott. Well, year over year, this is the fourth consecutive quarter we have expanded it. And when you look at it versus last quarter on a sequential basis, capacity was tighter, revenue per load increased. So you see net revenue margin per load increased sequentially. But at the same time, you had a lot higher revenue per load. You had a lot higher cost per load, and on a percentage basis that comes down.

But as we look out, these are good levels of margin. We had a good margin in fourth quarter as well. We have been doing well on margin. We are looking to stay in this type of range, although we do have many initiatives to get improvement, through pricing and procuring capacity. As we add data to our database, we should be able to drive improvement beyond the market, but these are good ranges.

Okay, great. Thank you, Scott, for that. And then just kind of continuing on the Brokerage side, I think we have seen a large merger in the space fairly recently between two of your bigger competitors over the last couple of months. Do you guys think that that will change the competitive landscape at all, in terms of going after some of the larger customer accounts?

I don't. I think you can expect M&A to continue in the truck Brokerage sector because there is advantages to size, and you can serve customers better with size. And you can access capacity better when you have a bigger network and you can afford better technology. So I think there will be a trend of more M&A in truck Brokerage.

Okay. Okay, thanks, Brad. Then last question, John, just kind of a housekeeping item. You mentioned the tax rate in the quarter being lower because of a valuation allowance. But should we expect a little bit lower tax rate for the next couple of quarters? I know in the past you guys have been kind of been guiding us to a 30% tax rate. Just how should we be thinking about that from a modeling perspective?

Right, Jack. So part of why the tax rate ended up being lower is that our intangibles that we booked for Pacer ended up being less than we initially estimated. So we got less -- a smaller DTL came onto the balance sheet with that acquisition. So the tax rate was lower than we initially anticipated with the Pacer deal.

The tax rate should be between 10% to 15% for the rest of the year. So it is going to run about the same level.

Okay, John. Thanks so much again for the time, guys.

Thanks, Jack. And Jack, we were thinking about you watching the news the last few days. We are happy to hear that in Arkansas, the weather didn't hurt you. Glad to see you are doing great.

Thanks, Brad, I appreciate it. Came through okay.

Good.

David Campbell, Thompson Davis & Company.

Thank you very much for all of your comments. I am absolutely amazed at the NLM revenues. I mean, Landstar never came close to getting that kind of growth, and you did it in the first month of acquiring it. So it does lead me to say, was it a competitive factor that drove? Because I know that in the expedited space, there has been some tough times and some people have gone out of business, have cut back.

Was that a factor or was it just your sales? Of course, how much of it was the market, the market and the whole disruptions with supply chains?

Well, first of all, I'm glad you pointed out that because of all the different things that happened in the first quarter, I agree that what happened at XPO NLM and Expedite was just amazing and it was really the most interesting thing.

Here we bought a company that was managing about $500-million-some-odd of gross transportation spend and we managed more than half of that in the first quarter. So if you annualized the first quarter we would be on a $1 billion run rate for managed transportation spend there.

But, having said that, I don't think we can pat ourselves on the back and say we are better operators than Landstar because, truth be known, we had two real favorable factors going for us in the first quarter.

Number one, the auto customers are very prolific right now and big users of Expedite and just very active, extremely, extremely active. Their production is up and we are benefiting from that.

And second, because Expedite is at the bottom or top of the food chain, depending on how you are looking at it, the end of the food chain with all of the weather disruptions, a whole bunch of freight turned into Expedite.

All right. So you don't think it was from competitive reasons?

I wish I could say we were just great and we were fantastic. And we were very good and people worked long hours and I was out in Southfield and other places in our expedite group in the first quarter and they were tire, they are working long, long, long hours servicing customers, huge, huge amounts of volume coming in there.

But I think the main reason why we did so great there was we were just in the right place at the right time. It was a good time to be in Expedite. That's not always the case, but the first quarter certainly was.

So, well that leads me to suggest it may not be sustainable.

Expedite is lumpy and clunky and sometimes it is great and sometimes it is not great. I think Expedite as a whole we are going to very well in because we have the leading position in that sector where we manage more expedite than anybody now. And we have got a nice integration between the expedite we've got in Gainesville, the expedite we have got in Buchanan, in Metro Detroit and in Southfield and other places. And we're working together in a very, very coherent organized way. But the external factors do affect that.

Yes, it just looked (inaudible) without NLM there wasn't a lot of sequential growth.

We had growth, we had really good growth in Gainesville Expedite. I don't have the number of the top of my head but I know it was really substantial. And we also had growth in Buchanan as well. But NLM is really where it soared, XPO NLM.

Right. Well, thank you very much, it was amazing, amazing numbers.

Barry Haimes, Sage Asset Management.

Great quarter. I have a couple questions. One is congrats on the better margins in Brokerage and, as you point out, some of that is self-help and volume leverage. But I wonder if you could just characterize how pricing has been as you have moved through the year so far.

And then separately but related, your ability to reprice, how much volume do you have under long-term contract? I'm under the impression it is not that much. But what we sure ability to, in a rapidly changing market, reprice in a way that you were still making money? And I had one more after that. Thanks.

Good morning, Barry, thank you for the question. On the pricing, rates are up roughly 20% year over year. They were up a little more than that a few weeks ago, but they have settled a little bit down to up about 20%.

In terms of how much business we have under contract, we have fixed prices in truck Brokerage, it's roughly about 25%. And in terms of repricing that, we price it while we are still under contract. While it is under contract that is the deal and we perform without any deviation from that. Sometimes that works and our favor, sometimes that works against us. So be it, a contract is a contract.

We normally have somewhere between 4% and 8% of money losing loads, in the first quarter we had about 12% money losing loads, it is substantially more. Having said that, we have got a whole bunch of extra freight that we wouldn't have gotten otherwise if we didn't have that contract business. So it deepened our relationship with those customers where they saw us performing.

Great. And then one other question, the Burlington Northern has had some pretty well-publicized issues with the weather in Chicago and so on. In terms of Pacer's ability to maybe get new business, sell new customers, has that been an opportunity for you guys? Thanks.

It is hard to say where business is coming from because it's a question you don't always -- it's an indelicate question sometimes to ask customers, particularly when they are in a pinch. But I think in general terms it is just mathematical if a certain vendor goes down then that business go somewhere else.

Great, thanks, guys. Thanks, Brad.

Robert Hoffman, Princeton Opportunity Partners.

I just wanted -- one of the challenges of cross-selling in any organization is getting the incentives right because obviously different people's commissions might be different if they sell directly versus they pass the baton.

Can you just talk a little bit about how you think about that and obviously it seems to be working in the first quarter because that is where a lot of your growth came from, the ability to pass from Brokerage to Expedite. Can you just flesh that out a little bit for us?

Yes, good morning, Robert. So we have a real simple philosophy about that, we pay the full commission to both sides. We don't split them, we don't deduct them, we just pay the full commission. And why do we do that? Because we'll take the minor hit on the SG&A, but we want to promote cross-selling.

We don't want people siloing their customers. We don't want people hoarding their opportunities. We want to be going to the market as one coherent organized company that sells a multimodal solution of truck, intermodel, Last Mile, Expedite, Freight Forwarding, LTL, managed trans. And for each customer we want to be offering everything that we have got.

So, salespeople will sell for what is in their -- what is in their pocket, as the commercial said, and what their incentive is. We don't want to disincentivize people to -- we want them to share their customers.

That is interesting. Is that sustainable? I mean, do you think you can keep that going? I mean -- it just seems like if there is a customer that normally uses both, how do you deal with that?

We have a single point of contact for every customer. We're up to about 14,000 customers now. And a rep in XPO is literally assigned to that and he or she is the prime relationship manager for that account. But sometimes you will bring in subject matter experts and you will bring in other vertical experts or other people with more expertise to help fulfill the customer's requirements.

Okay.

Everybody is on Salesforce.com and every customer is in there and it is a big, big sin to step on someone else's customer.

Wonderful, thank you.

David Campbell, Thompson Davis & Company.

One thing I forgot to ask -- John Hardig, you went over it kind of fast, I couldn't get it. You said there was a $4.5 million fee? And I assume -- and I don't know where that fee is.

That is -- that was a fee we paid to our bankers for the bridge commitment to close the Pacer deal. And that actually hits the P&L on the interest line.

So it's not going to happen again in the second quarter?

That -- you know --.

Unless we do another deal and we have another commitment letter (multiple speakers).

Right, absent another deal, no.

Right, right, right, right. That is when I meant, yes. Okay, great, thank you very much.

Thank you. We will now turn it back to Brad Jacobs for closing remarks.

Thank you, operator. Thank you, everyone, for participating in the call. We look forward to speaking to you at the next opportunity. Have a great day. Bye.

And this concludes today's conference. Thank you for joining. You may now disconnect.