XPO Inc (XPO) 2014 Q2 法說會逐字稿

Welcome to the XPO Logistics second quarter 2014 conference call and web cast. My name is Shannon, and I will be your operate for today's calls. (Operator Instructions).

Before the call begins, let me read a brief statement on behalf of the Company regarding forward-looking statements, and the use of non-GAAP financial measures. During this call the Company will be making certain forward-looking statements within the meaning of applicable Security Laws which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the Company's SEC filings.

The forward-looking statements in the Company's earnings release are made on this call are made only as of today, and the Company as 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 notice 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 of the Company's website at www.xpologistics.com. I will now turn the call over to Mr. Brad Jacobs. Mr. Jacobs, you may begin.

Thank you, Operator and good morning everybody. Thanks for joining our call. With me today or John Hardig, our CFO, Scott Malat, our Chief Strategy Officer, Karl Meyer, who leads our Last Mile Operations, and Tavio Headley, our Director of Investor Relations. As you saw last night we had a very strong quarter. We also announced two acquisitions that will create a lot of value for our shareholders. First, the quarter.

I'm happy to say that we out performed across-the-board. Our gross revenue, volume, net revenue margin and EBITDA all came in significantly ahead of plan. We increased our gross revenue by 324%, to $581 million and we grew net revenue by 530%, to $122 million. Our Company wide organic growth which excludes acquisitions was a strong 49%, and Organic Growth and Freight Brokerage was even better, at 67%. We also generated $14 million of EBITDA in the quarter which was significantly ahead of plan. So, an exciting inflection point at XPO based on our accelerating performance and on these acquisitions we've raised our year-ends target run rates to $3 billion of revenue, and $150 million of EBITDA. 50% more EBITDA than our previous target.

Now, I will give you some color on the two transactions starting with New Breed. We view New Breed as the Rolls Royce of contract logistics. It's the leading provider of highly engineered 3PL solutions for blue chip companies. It's customers are in industries where there is a growing need for these types of services such as technology, telecom, eCommerce, aerospace, defense, medical equipment and select areas of manufacturing. For the past ten years New Breed has achieved compound annual growth rates of 16% for revenue, and 19% for adjusted EBITDA. The sophisticated nature of these services drives high contract rules and mitigates cyclicality's.

New Breeds' contractual revenue rule rate for the past three years has been about 99% so it's a very stable business. In the great recession New Breed's EBITDA went up 38% in 2008, and was up 45% in 2009. New Breed has a very attractive model. It's non-asset based and generates a very high return on capital and free cash flow conversion. For 2013 New Breed's return on capital was approximately 38%, and free cash flow conversion was approximately 71%. New Breed's CapEx is used mainly for developing proprietary IT, and in 2013 their CapEx was just 4.2% of revenue. Both XPO and New Breed have an intense commitment to cutting-edge technology. The combination of the companies is going to double the number of our IT professionals to more than 600, with experience in every major area of logistics.

A key IT opportunity for us relates to New Breed's transportation management system. We're very familiar with it because they're already a customer of ours. New Breed's system has robust applications for carrier selection and management, dynamic freight optimization, low tendering freight bill audit and payment, and routing guide management. We plan to integrate our XPO NLM's expedited freight management platform with this system and offer customers industry defining transportation management solutions that are proprietary to XPO. The operations will benefit from the strong leadership of Louis DeJoy, who has been New Breed's CEO since 1983.

His vision created significant value for New Breed and I'm pleased that Louis will be coming onboard. We've been impressed with how Louis and his team have created a contract logistics company that's completely differentiated itself from other providers. To give you an idea of the transformational scale of this transaction, New Breed processes over 275,000 orders a day and employs about 6,800 people. After closing, XPO will be and organization of approximately 10,000 employees with more than 200 locations. There's lots of excitement about this combination on both sides and we expect to close the transaction in the third quarter. Now, our second acquisition, Atlantic Central Logistics, or ACL for short. We closed on this transaction Monday.

It's smaller than New Breed, but strategically it's just as important to us because of the vast scalability it has in eCommerce. ACL is a non-asset based Last Mile logistics provider with 14 East Coast locations. Its contracts are with large companies that need to move huge volumes of eCommerce purchases. One of the many things that we like about ACL is that their lanes and delivery schedules compliment those of XPO Last Mile. We have begun integration of ACL and XPO Last Mile, and will leverage that capacity as we increase the volume. This acquisition takes all the boxes for strategy growth in Last Mile. Deep relationships in eCommerce, complimentary truck capacity, a strong multi- regional footprint, and most importantly a demonstrated track record of successfully handling the demanding service requirements of Last Mile. So, it's exciting times here at XPO.

We had excellent results in the quarter and with New Breed and ACL we're' positioning the Company to grow even more rapidly and to serve customers more completely. Now, I will turn the call over to John who will provide a summary of the quarter and give you more detail on the transactions.

Thanks, Brad. I will go over some details on the acquisitions and then I will talk about our results. The New Breed acquisition will be an all cast transaction for purchase price of $615 million. At the closing New Breed's CEO, Louis DeJoy, will use $30 million of his proceeds to purchase XPO restricted stock from the Company. We expect to close the New Breed acquisition in the third quarter.

New Breed had revenue of approximately $597 million and adjusted EBITDA of $77 million for the 12 months ended June 30th. The value of the transaction represents a consideration of approximately eight times adjusted EBITDA. On Monday, we bought Atlantic Central Logistics for $36.5 million in cash, or approximately 5.9 times trailing 12 months adjusted EBITDA. ACL had revenue of $63 million, and adjusted EBITDA of $6.2 million for the 12 months ended June 30th. We intend to finance the New Breed acquisition with a combination of cash on our balance sheet, our ABL facility, and a debt commitment we've arranged from four commercial lenders led by Credit Suisse. We will be opportunistic as to how we shape the final structure, but we intend to finance the acquisition with debt.

Turning to our performance in the quarter we delivered very strong revenue growth. We also continued to drive margin improvement. We increased net revenue margin Company wide by 690 basis points. Adjusted EBITDA was a positive $14 million, compared to a loss of $12 million a year ago, and breakeven last quarter. Freight Brokerage, our largest segment, delivered organic growth of 67% and over $23 million in EBITDA. Within Freight Brokerage, Truck Brokerage continued to scale-up as our sales reps became more productive. Our reps have closer relationships with more customers and carriers than they did a year-ago. And, they have the benefit of the continuous enhancements to our technology as well as more pricing and lane data.

Our eleven freight brokerage cold-starts are only a year and a half old on average and are now on and annualized revenue run-rate of $220 million. That's up from $90 million a year-ago. We increased our net revenue margin in truck brokerage by 70 basis points from a year-ago which was our fifth consecutive quarter of year-over-year improvement. That's excluding the contribution from Pacer which would make the increase even higher. We also significantly increased the profitability in both our Intermodal and Last Mile businesses following the weather difficulties in the first quarter. In expedited transportation we had another strong quarter of top-line growth and profitability driven by our XPO NLM managed transportation business, our Air Charter operation, and a generally more robust expedited market environment.

In Freight Forwarding we increased revenue and continue to be on track with our plan to consolidate the former Pacer logistics operations. The addition of the Pacer business had the effect of shifting our transaction mix more toward international transactions which tend to be higher revenue, but lower margin. Corporate SG&A was $15.1 million including $2.3 million of corporate costs and integration costs from Pacer. The Pacer corporate costs will be ongoing so looking forward we perfect corporate SG&A to be in the range of $13 million to $14 million a quarter.

Our reported tax rate for the quarter was 11.4%. We expect our tax rate to remain in the 10% to 15% range although the rate could be significantly higher next quarter given the accounting for New Breed. This would result in a non-cash benefit since we had tax carry-forwards and don't expect to be a cash taxpayer for some time. We entered the quarter with $129 million of cash on the balance sheet including $17 million of restricted cash. We had no debt other than the $120 million of convertible notes that are trading well on the money. Now, I will hand it over to Scott for his comments on the Operations. Scott?

Thanks, John. The operating environment across our businesses is more favorable than what we had seen in 2012 and 2013. In Truck Brokerage, capacity remains tight and truckload pricing is up. We're a major beneficiary as more shippers look to the bigger brokers, like XPO, to find trucks. In addition, tighter capacity has led to more emergency freight which is lifting our expedite business. We expect a number of factors including regulation, and driver shortages to keep over the road capacity tight for some time. That's a good dynamic for us. In Last Mile the demand for home goods remains strong and we're growing our business with our existing customers.

We have a healthy pipeline for new business in Last Mile with a big eCommerce component. Our purchase of ACL puts us in and even better position to take advantage of the demand from eCommerce which is projected to keep growing at a double digit rate. With Intermodal, we're benefiting from an uptick in demand as shippers return to rail following weather related service disruptions in the first quarter, and we perfect Intermodal to continue to grow based on secular converse from trucks to rail for long-haul freight. The integration of Pacer has been going very well. The Truck Brokerage group is benefiting from being on our XPO technology, having access to our nationwide capacity and our new proprietary Rail Optimizer technology platform is under development and will be launched in early 2015.

We have moved them to our reporting processes which gives us more actionable business intelligence. We rolled out new training modules and compensation plans. All these things have had a positive effects on morale. Our Intermodal team as new spring in their step and we're right on schedule for the $15 million of cost savings that we previously identified. Drilling down on Intermodal we see tremendous growth potential in cross-border Mexico freight movements which is the fastest growing area of proportion and it's where we're the number one provider. Mexico has become the site of choice for many manufacturers. BMW and Nissan just became the most recent auto makers to announce $1 billion plus investments to build factories in Mexico.

The supplier Robert Bosch also announced a $500 million investment. Several other manufacturers are expected to follow suit. Industry analysts are projecting Mexico's automotive output will increase 60%, to 5 million cars by 2020 from roughly 3 million today. And it's not just the auto companies. A sizable amount of near shoring growth is being driven by other industries. So, for example, Unilever is building a major new food and beverage manufacturing facilities in Mexico and the billions of dollars being invested in Mexican production capacity should cause Mexico to surpass China as the top US trading partner within the next five years. Switching gears, we've had a lot of success in our cross-selling activities by our strategic account managers. Since April we've been awarded business for new services lines at 45 existing customers, and we're presently bidding on cross-selling business with another 57 accounts.

Already, we're generating business from multiple services lines for 33 out of our top 50 customers. Nine of these accounts are using three or more XPO services. We've made recent progress in our re-branding strategy. Re-branding is an important piece of the cross-selling opportunity. We're marketing to customers as one integrated portfolio of supply chain services under the XPO brand. As of June, our Express-1 business, which is the core of our expedited transportation capacity, operates as XPO Express, and in Last Mile our platform acquisition, 3PD, now operates as XPO Last Mile. Our XPO family now includes XPO Express, XPO NLM, XPO Air Charter, XPO Last Mile, XPO Global Logistics, and our flagship brand XPO Logistics.

So, Company wide we're benefiting from secular and cyclical tailwinds. We're ahead of plan with organic growth and acquisitions. Our service offering has become significantly more compelling to customers with the addition of best-of-breed solutions across key areas of the supply chain. We have hit an inflection point with profitability both in terms of our investments in growth and our operating leverage. And by December we project that our Company will be roughly 17 times the size it was three years ago with plenty of runway ahead of us. Now I'm going to hand it back to the operator for Q&A.

Thank you. We will now begin the Question and Answer session. (Operator Instructions). Our first question comes from Rob Salmon, from Deutsche Bank. Please, go ahead.

Hey. Good morning guys. Thanks for taking my question.

Morning, Rob.

You know, congrats on the two acquisitions that you announced this morning, Brad. You know, I'm curious to gets your thoughts with regard to New Breed. Obviously, contract logistics is a new foray for XPO. How should we be thinking about the cross-selling opportunity given the roughly 275,000 orders that are flowing through their network?

Cross-selling will be a big emphasis going both ways. So, New Breed has a long-term relationships with customers that we're in general nowhere with, we don't have any business with whatsoever. And, if you look at their top ten customers, their average tenure with new breed has been ten years. So they're long, stable relationships and a valued supply chain partner. So we're going to do what we have done with other acquisitions, the same thing. We're going to go in together and ask them for possibilities of getting other business and I'm optimistic we will get that business. By the same token, when we did the due diligence and we were looking at New Breed's target list of new customers, we are doing business with about a quarter of them, and doing business in a significant way, because they're mostly Tier 1 customers. So, we may be helpful in introducing New Breed with a positive introduction to those customers, so I'm excited about that.

Thanks, Brad. And with regard to the current New Breed customers, is there much overlap between XPO and New Breed's customer list? It sounds like there as a decent amount of cross pollination on the XPO side for some of these targeted customers for New Breed, but just the current account base. Any color there would be helpful.

Now, on the existing customers in New Breed there's not much overlap, which is exciting for us because there's a lot of transportation volume for some of those big aerospace customers, and big technology customers, and especially retailers. There's not a lot of overlap, but there is a lot of truckload business. There's a few customers that New Breed is the 4-PL for, they're doing the managed transportation for, and actually we are getting freight from them, from those customers. That's exciting to us because transportation management is a trend that is happening in our space and we've got our toe in the water with the XPO NLM product and now with the New Breed product, we're getting some critical mass there.

That's really helpful. Scott, in your prepared comments you had talked about some of the cross-selling that's going on in XPO. You had highlighted that you guys or bidding on 57 accounts and that you had won new business with different services lines of 45 customers. Can you give us a sense of when that new business is going to be coming on, as well as when we could hear more about the potential wins of those 57 accounts that you had highlighted?

Yes. The new service lines of 45 existing customers, most of them are in setup stages right now and we are starting up in a small way. Typically, when we get new business from a strategic account, it's been averaging about $1 million in the first year on an annualized run-rate. So those companies going in about $1 million. We also brought on 36 new strategic accounts this quarter and, again, it's been about $1 million an account once they get going.

Thanks so much for the time.

Thank you.

Our next question comes from Chris Wetherbee, from Citi. Please, go ahead.

Great, thanks. Good morning, guys.

Good morning.

I wanted to touch a little bit also on the New Breed acquisition. When you think about the pipeline of the opportunities that they're seeing, even before you guys stepped to the table you mentioned 16% revenue growth historically and better than that on the EBITDA side. Does the pipeline still suggest that the business, on a standalone basis, still [inaudible] type of pace and then, obviously, there's some cross-selling there, but want to get a rough sense of how the core business on the standalone basis look going forward.

It looks good, but their main growth has been with existing customers getting more and more business with long-term existing customers. Frankly, they have been distracted a little bit with us and with this process. Louis and I were joking about this on the phone last night. He's looking forward to getting back to getting his nose down into the business and enlivening the whole sales and marketing effort for new customers, and that's something I would love to work with him on.

Okay. That's helpful. What's the average length of contract for New Breed right now?

It's five to ten years in the average and those are typical contracts. The average life of a contract is five and a half years.

Okay. Okay. That's great. And then switching gears to the updated guidance obviously some good acquisitions and clearly some strong underlying organic growth. When you think about the run rates both on a revenue and an EBITDA basis, can you break out a little bit of where you're getting the surprise to the upside? Obviously, a lot of acquisitions planned over the course of the last several years, but how strong is the underlying organic growth rate, and is that driving, potentially, some of the upside here?

It's really off the charts organic growth. I've run a lot of businesses over my career. I've never run a business that had 49% organic growth. So, this is coming from a few different places. It's coming from adding people, and it's coming from people that we added in previous years becoming more productive, it's coming from being in a good brokerage market. That's not something we can take credit for, it just happens to be a good brokerage market, and there's more volumes in it. And, it's coming from getting bigger gross margin percentage. So, the gross margin percentage going up a lot so we're getting more revenue per load.

Okay. And on that point, my last question would just be any updated thoughts as we're moving into the third quarter about that core truck load brokerage market. Just want to gets a rough sense of maybe how things are trending as we're crossing over from 2Q to 3Q.

You know, Chris I really don't know. If you look at the last six months, it's been a great truck brokerage market. It's been so much better than it was in 2011, 2012, 2013. And the world really did change for truck brokerage and truck brokers are standing tall and getting a lot of love from shippers now, and volatility is a good thing. But, I don't know. I mean, if you look at 2Q, what were the factors that made it a great quarter and will they stay or not? Not sure. So, we had catch-up freight. There was a lot of freight that was deferred from the first quarter because the weather was just a bomb in the first quarter. And, you had rollover freight that was coming from Intermodal. The rail service had definitely improved a lot from the first quarter, but it's still not up to speed.

So, you are still seeing freight coming off the rails on it over the road. And that will continue to get better for the rails so there will be more Intermodal, less brokerage, in that respect. And then you had this port strike which never happened out in Southern California. It was freight pulled forward that would have ordinarily gone in the third quarter got into the second quarter. And I guess on top of that you had what I would call PTSD syndrome still from the shippers who were so in shell shock from the first quarter with not being able to move their product that they weren't as razor sharp difficult on pricing as they usually are. So, some of those factors will continue, some of those factors will not continue. One thing that is likely to continue for the foreseeable future, I don't see any way that capacity is not going to be tight. There's just no factors that are bringing more capacity in, and there's a whole bunch of factors taking capacity out. So, that bodes very well for the brokerage market.

Okay. So the starting point is a positive one. We will see where the freight takes us from here, I guess.

Yes.

Okay. Great. Thanks very much for the time. I appreciate it.

Thank you and thank you for taking up coverage of us. We appreciate it.

Our next question comes from Bill Greene, from Morgan Stanley. Please, go ahead.

Yes. Hey there. Good morning.

Morning, Bill.

Hey Brad you and I have talked about this in the past, but I think maybe it would be worth while to revisit now in light of the New Breed acquisition. So, a lot of investors thought of you as a truck brokerage roll-up and you've evolved the strategy a fair amount. Can you talk about your thoughts on that? Do you feel like maybe we were too narrow in our thinking about what XPO was ultimately going to be, and kind of how you see in goes as we look forward?

Maybe I was too narrow in my thinking, not you. Couple things here. How do we look at contract logistics, and what are we trying to be when we interact with customers? On contract logistics, we step back and say, if I could visually draw this I could make it really clear. Let's look at a supply chain movement from something starting in Shanghai, going by air, or more likely by see to LA. Okay. We do that. We have air and ocean. Container coming off in Long Beach, going by Intermodal to Chicago. Okay, check that box. We can do that, too. Going from Chicago to say Kansas City truck, truck brokerage, we're the fourth biggest trucker we can it that, too.

Now you get into the warehouse in Kansas City. We lose touch with the freight. Our hands are not on the freight. We don't know what's going on, we don't know where it is, it just goes into sort of a black hole. That was missing. Then at the end of the warehouse, after it's refurbished, or reconfigured, or transposed, or trans-modified, whatever is done in the warehouse, comes out of the warehouse and it goes by truck to a retail location, or a DC, or arrives in someone's home or apartment. We do all of that. By getting into contract logistics we complete the supply chain. So now we have a complete supply chain from, in this example, Shanghai into your apartment in Manhattan. So, that's how we look at it. And we look at from positioning ourselves to the customer we never wanted to be just a truck broker saying give me some loads and we will be the cheapest price. It was never our business plan. Our business plan from the beginning, if you dig up our slides from 2011, when we bought Express-1, was to be into four verticals primarily, a truck brokerage, expedite, Freight Forwarding and Intermodal. We weren't in Intermodal yet at the time, and obviously eventually got into that.

We found over time as we got wiser, two new verticals that customers wanted. Same exact customers that we deal with, same compact freight that we deal with in another part of the supply chain. And those were Last Mile, which we got into last year, and a contract logistics which we got into now. So, with these verticals we are complete. We're a full-service provider to a shipper and I don't think anybody else can say that. And, we have a different level of conversation and we can bring more solutions to the table more worth while discussion. And that's how we look at it. No more complicated than that.

Yes. And now, when you look at what you have built here now is there anything left that's not here or is it just build to scale now and so any acquisitions would fit into the verticals that you have now built?

If you look at the 100 acquisitions we're looking at, roughly 90 of them, or a little over 90 of them, are in the verticals that we're in right now, including contract logistics and Last Mile. There's a small handful of them that are in things that are intriguing that we may or may end up doing. I mean, customs brokerage would be an interesting thing to on cross-border Mexico, would make us more sticky with customers and be a full-service provider there and that's one little thing that's missing but we don't have anything actionable or anything imminent that's about to happen there. And we never could figure out how to crack the nut of package and not just be like a little tiny decimal point compared to UPS and FedEx. We don't know how to get into that. It would sure be nice to because we're moving a lot of packages and our customers are moving a lot of packages but we don't see a way to do that. So, the short answer to your question is the vast majority, the vast, vast majority of the acquisitions we're going to go going forward are in businesses that we're already in.

Okay. Fair enough. And then, on the guidance you touched on, the 14 guidance. You didn't touch the long-term guidance but presumably these acquisitions get you closer to that. Is that fair, or is there a reason you didn't address the longer-term views?

No. We're very much on track for $425 million in EBITDA. It's likely we'll have a higher margin profile in the business than we laid out, just in terms of the nature of the acquisitions that do have solid margins. But the 425 is absolutely, we're on track.

Yes. And then just last question. I know you're going to finance this likely through the balance sheet, but presumably you won't stay levered that way. So, is it realistic to think some of this over time, assuming your long-term targets go a bit higher, that we would see some equity raise?

Debt. Debt. The next markets that we will tap are debt markets. We have an ABL facility that's got $415 million of availability and another $100 million of accordion. Very nice rates, and very nice terms and very covenant light. It's a beautiful thing, and we like that. There's other debt markets that are very receptive right now and we don't need to raise equity in order to fund the business plan.

Alright. Fair enough. Thanks for your time.

Thank you.

Our next question comes from Allison Landry, from Credit Suisse. Please, go ahead.

Thanks. Good morning. Just a follow-up on that last topic. What do you see your available borrowing capacity being post-closing New Breed and I know that you just recently closed ACL?

Well, after the ACL acquisition our pro forma cash balance is going to be order of magnitude $90 million, and then we have a completely un-drawn ABL facility. So, prior to closing New Breed we'll have that 100% available to us.

Okay. And any sense of what you think the availability will be after New Breed closes?

After New Breed closes we will have a couple hundred million dollars of dry powder left to pursue acquisitions after that. That will be a combination of cash and ABL depending on how much incremental debt we raise to fund the acquisition.

Okay. And thinking about New Breed and taking on new customers, is there any change in the way that we should think about the incremental dollars needed to start a new customer contract within contract logistics relative to your existing business?

All self-funding. New Breed generates a lot of cash flow. That's what we look towards to finance that.

Okay. And any idea with respect to integrating the two IT platforms? How you're going to attack that, and how long that might take?

Over time. They have a great IT platform. We got a great IT platform. We want to merge those things slowly, carefully, methodically over time.

Okay. I'll segue into Intermodal. I know that part of the Pacer technology platform you mentioned earlier in the call that you're setting up a Rail Optimizer technology to be rolled out next year. Could you maybe give us a little bit of additional color on that?

Yes. Sure. The technology team has a lot of momentum. They are pumped up and they're working. We have some people that are working on the Rail Optimizer out of our technology headquarters in Cambridge as well and they are starting to roll onto certain portions of that over the next several months and that integration onto the Rail Optimizer will be complete in the first quarter of next year.

Fantastic. Okay. Thank you for the time.

Thank you, Ali.

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

Thank you. Good morning, gentlemen.

Good morning, Kevin.

I remember years ago, I don't want to-date myself here, but Pete Rose at Expediters once told me he never liked contract logistics because it was a low margin business, high start-up costs, lack of customer stickiness, if you will. But what do you see in New Breed that may be different than how one of the legends of the industry would characterize the business?

You know, contract logistics is a funny space, in a sense, that there's a lot of different players doing a lot of different things and different approaches to the business, different types of customers, different services they're providing, different levels of success or lack thereof. I think, in terms of the ones you just mentioned, low margin does not apply to New Breed. New Breed provides a very sophisticated high-end technology enabled service and that gets an appropriate margin that's not a low one. In terms of, I can't read my handwriting, it says "lack of customers", oh, lack of customer stickiness.

Oh, stabilities of customers. Let the numbers speak for themselves. If you look at the ten top customers of New Breed, their average time that they have been doing business with New Breed is ten years. So, I would call these very, very stable customers as opposed to some of our transact ional spot business where they can come and go in a matter of months.

Okay. Thank you. And your net revenue margin in the quarter was [inaudible] of 21.3%. I think you said some of it was due to acquisitions of 3PD, Optima, Pacer, but could you tell us how much of that significant year-over-year improvement is due maybe the favorable environment? In particular, can you give us some color as to what were your prices paid to carriers in the quarter, or at least directionally what they were, and what were your prices received from shippers? And I ask that question because your primary competitor this morning in truck brokerage cited a swing in their favor of that dynamic. Did you guys see the same thing?

Hey Kevin, yes. So if you back out the Pacer acquisition, our net revenue margins were up 70 basis points year-over-year and that's been driven by an improvement. The average revenue per mile is up and the, obviously, the average cost that we're paying to transportation providers is not up as much. Ours is not up as much as what you're seeing in the field because we've been able to improve our purchasing power, relatively dramatically, year-over-year as we gain scale, as our technology has had a bigger effect, and we've improved the alga rhythms with more data. As our sales people increase their tenure, not only they're pricing better but then our carrier procurement folks have stronger relationships with those carriers and are getting better pricing. We're not up as much as others say in terms of our cost of transportation, but our price of transportation, we're seeing in spot rates up in some cases in the mid-teens.

Got you. Thanks, Scott. And, Brad, you had talked a lot about the truck brokerage environment; carrier failures and shippers and how they see the market. Are more shippers, maybe new shippers, coming to you guys because of your extensive carrier network sensing potential carrier failures on the horizon from the 20 or so new regulations out there that could impact the trucking markets? Are you getting more and more inquiries from new customers, new shippers that are looking to you guys for capacity?

There's no doubt that we have had a lot of success in the last six months, especially, in signing up new accounts. There's no question about that. That's coming from two different things. That's coming because our people are longer in the tooth, they have been now doing it for two or three years in many cases that we have hired. And also people that we have hired have been in the business for 10 or 15 years so we've got a more mature organization than we had in previous years. But, to be honest, it's also because the market is much more favorable and shippers had a disastrous first quarter with their supply chains getting clogged up, and brokers, roll in life, elevated as a result of that. Shippers who used to just taken bounds calls were making out bounds calls, and a lot of those to brokers, to get capacity. So brokers that have great access to capacity, that give real good track and trade, give very high on time pickup and delivery, this is a really good time to be in the business.

Got you. Thanks. And, Brad, it looks like you really liked the Last Mile service offerings, I think, given the growth in eCommerce. Let me ask you about the dynamics of that business. Do you have integrators now implementing dimensional weight pricing? I think the post office is raising rates all of these changes in eCommerce. Is this an opportunity for you guys to grow and possibly even maybe take share in this eCommerce market?

Yes. This is Karl. I mean I think that's right. We've seen strong growth in the second quarter in our transact ional business and we're going to continue to grow that as we expand our footprint. We ended the second quarter with 26 facilities, we will add seven more by the end of the year. The ACL acquisition brings us in season another 1200 carriers to service the business. So, we're expanding our footprint, we're expanding our capacity, and we think we'll be able to take market share.

Great, Karl. Thank you. And last question here. Brad, are you tracking a little bit faster in cold starts maybe than you initially planned and if so, is there a function of the seasoning of your sales people, or maybe it's an improving brokerage environment, or possibly a combination of both?

The cold starts are doing great. I mean with all this different news we've got with the acquisitions, that kind of got lost. I'm glad you mentioned that. Cold starts are up to about $220 million in run-rate, and that's up from about a year ago. What was it a year ago?

$90 million.

$90 million. It's wasn't even $100 million. It's up over like roughly two and a half times in 12 months and it's very, very gratifying because even though that's not billions of dollars it's only, $200 million, $220 million, it's organically grown with very little invested capital. So, maybe we've got, don't hold it against us, something like $10 million or $15 million invested into that, something in that ZIP code, and it's generating $220 million. We didn't have to go out and pay $200 million to buy that. We invested, and were patient, and grew that over a period of a couple years. So, we're going to continue doing those cold starts and we're going to continue to invest in the cold start network that we have grown already. It's working very, very well. It's just not huge. It's high growth on a low base.

Got you. Thank you. Thanks for your time. Congratulations on the acquisitions. The high point area of North Carolina is a great place to be.

Thank you, sir.

Our next question comes from Scott Schneeberger, from Oppenheimer. Please, go ahead.

Thanks. Good morning.

Hey, Scott.

Hey, Brad. A couple questions. First one, and I've asked something similar to this last quarter but it's still certainly relevant. You guys have been incredibly active on the M&A front and surpassed the acquired revenue guidance that you provided for the year. What should we think about nearer term kind of in the back half of the year on your appetite, your activity, given a lot of, obviously, integration need here?

We're going to be flexible. We're going to be adaptable. We're going to be agile. We're going to be opportunistic, and we're going to keep and open mind. That may be we end up doing nothing for the rest of the year. It may be end up we doing something.

Fair enough. I was just seeing what the reaction there would be. Karl, getting you involved again, Please,. With ACL, any unique differentiators regarded with it? Is it very much a nice add on to what Last Mile is at XPO at the moment, or anything unique that you would like to highlight specifically?

Sure. I mean I think the first is it's a great business. It's benefiting from trends where online retailers are seeking ways to increase velocity and lower cost for fulfillment. So, it's a big part of it, and there's a lot of growth ahead there. The other piece of it is the daily cyclical nature of their business. They will run on average through most of the year about 600 carriers every night, but they run from, call it, midnight until 6.00 in the morning, which is counter to our core business today. So, you know, we're always focused on capacity and a big part of capacity is the ability to generate revenue for our carrier partners. So, this creates a scenario where we can offer opportunities for our carriers to expand their business, to run fixed cost assets that are already leveraged in their day business to run them at night, [inaudible] and generate more revenue, so that's the other part of it. I think there's a lot of synergy there and we're looking for a tremendous amount of growth. It's a very strong pipeline in that business right now.

Great. Thanks. And Brad, one more if I can swing back to you. Could you address the state of the nation progress report on your Management Team? Top to bottom but primarily toward the top. Now that you've added on a lot of businesses, how is the integration of personalities and working relationships? The structure at the top and the leadership. What's your comfort level there and what do you view the challenges?

My comfort level with the senior Management Team is very, very, very high. I love each and every one of them and we all love each other and we're getting along very, very well and we're focused on the goal and people are working ridiculously long hours and ridiculously long weeks and we're loving every minute of it. We just have a great team and everything is going really well there. Troy is COO. You know Troy from United Rentals, United Waste. Troy has been with me for 20 years. He's been right at my side. He integrated 200 acquisitions [inaudible], he helped build-up United Way to 86 trucking companies and 120 different other facilities. We've promoted Paul Smith to with Dan's input, Dan's guidance, to President of Intermodal. Paul was Vice President of Network Profitability and Management for Pacer and he was responsible for optimizing all of Pacer's Intermodal network including the capacity flow, and the asset management, and doing market based pricing, and capacity planning, and he had a role in the rail relationships. It was a very, very perfect choice and we took Dan's advice in promoting him to President of Intermodal.

Of course, Karl here. I couldn't find a better head of Last Mile. Karl Meyer, what can I say? And Chris Healy is President of the Expedite Team, a real legendary figure in Expedite. He has been in Expedite his entire adult life and he's my age, that's a long life. We've taken that Expedite and really created something new that didn't exist before because we integrated, under Chris, the former Express-1 which we have now re branded as XPO Express. We have also put under Chris NLM, which we have re-branded as XPO NLM. And we have also put under him the Expedite division of Turbo, which we rebranded as XPO Logistics. So, all of that XPO Expedite it's all under Chris and we're going to market in a very cohesive, integrated, powerful way and customers are absolutely resonating well with this and that's one of the reasons Expedite is doing so well. I could go on and on. I could brag about each one of the top 20 people. I won't take-up the time, but everyone is doing very well.

Great. Thanks. Congrats on your busy first half.

Thank you, sir.

Our next question comes from John Larkin, from Stifel. Please, go ahead.

Yes. Good morning and thanks for taking my call.

Good morning.

Really intriguing announcements and congratulations on so much growth so quickly here. It's really impressive. I wanted to talk a little bit about some of the feedback we get from investors. A lot of it is around share counts. There's some confusion around that, and also, the pace at which intangibles are amortized and that leads to estimates that are kind of all over the map a little bit and I was just wondering if there's some way that maybe through your IR effort you could sort that out and provide a little more clarity for people. I think it might actually help out in telling the overall story.

Well, I'll pass to John or Scott to go into the details of the share counts and the pace. I think from my level, I hate that accounting that you have to do when you do the acquisitions. You have the intangibles and then you write off the intangibles, because it just kills EPS. I personally focus on EBITDA and that's my 100% exclusive. I don't even know our EPS, but go ahead, John.

I will just comment. We do have cable in the back of our press release each quarter that kind of goes through the share count. I think the one part that makes it difficult is all of the potentially diluted securities, the convertibles, warrants and things like that.

They don't really affect the share counts on a fully diluted basis because they would actually increase earnings-per-share if you looked at them on a fully diluted basis. Until we are net income positive those shares won't follow into the share count but we do have just under 80 million shares on a fully diluted basis.

So, if you think about the convert were converted, and the preferred's were converted, and you had full impact of the all the options and warrants and things, those would all be just under 80 million shares. We would be happy to give more detail around that if you need a little more information we could do that on the phone separately. On the amortization, every time we make an acquisition it's a funny thing. The accounting is the accounting. We have to value the intangibles that we're acquiring, put those on the balance sheet and amortize them. The rate at which they amortize is different based on the asset and based on even, like, the customer relationship values, those can change based on contract length and things like that. So, we have a very detailed schedule how the amortization is going to run out in the future which you guys don't have the benefit of, but we can think about doing something to give a little more color there in terms of how it's going to roll out in the future. We had total amortization in the quarter of about $15 million. That will run the at the same rate the rest of this year until we close on New Breed and then we will pick up some more intangible with that transaction which will cause a step-up in the intangible amortization.

Got it. No. I didn't want to criticize you there. Tavio was actually extremely helpful on both these point. It's just that it appears that not everybody is seeing from the same song sheet when you look at the consensus estimates going forward. That was more of a comment than a question.

That's good feedback. We appreciate that feedback.

Yes, thanks for listening to me there. And then, with respect to the next strategic push. I guess you have just about all the bases covered in what I would call the domestic logistics space when it comes to, what I would general lay refer to, as containerizable freight. With the fracking boom that's under way and all of the liquid bulk and solid bulk freight that's going to be moving around, is there any desire to perhaps move into that space as a new avenue of growth, and is there any interest in perhaps moving more aggressively into what I would call the inter-continental market?

What is the inter-continental market?

Well, I mean, from the US to Europe.

Oh, air and ocean.

Yes. Air and ocean.

So, on the air and ocean we have a few hundred million dollars of air and ocean between what we had at what's now called XPO Global Logistics, used to be called CGL, Cons Group Logistics, we rebranded it as XPO Global Logistics, and what we acquired through Pacer's air and ocean business, and we've got about a quarter billion dollars in air and ocean. Over $200 million of air and ocean. It's fine. It's a business that is a real business and allows us to work with customers that we might not have otherwise and ask them for other freight. It's not growing like a weed, like our other businesses. It will grow by global GDP. If there's more international freight, that business will get better. And if there's not, it's going to be hard to get better. So, there's not a big emphasis on that. That's not something we're itching to get much deeper in, but you never know. If something came up that was extremely attractive and opportunistic, we would keep and open mind, but it's not top of mind at the moment. We don't know much about all the other stuff you mentioned. How to take advantage of the fracking boom and that stuff. That's something we've got to get smarter about. It hasn't been something on our radar.

Got it. There was a couple of people over the last couple of weeks during earning season that have mentioned that it's been, obviously, difficult to find truck drivers, difficult to find mechanics, but now increasingly difficult to find young people who are interested in becoming, what I would call, young brokers within a network like yours. How are you dealing with that problem, and are you having success bringing a lot of new people and training them in order to drive the organic growth of the cold starts?

We have no problem recruiting millennials to come work for XPO. We've got a nice brand. We've got nice presence in cyber space and social media and we're active out in many different venues and we're all over the place. There's many, many pore people applying for jobs than we have jobs open. But, from our point of view, what's really important is that we hire the right people. We're not doing that person a favor hiring them if they're not going to succeed, and we're certainly not doing ourselves a favor hiring them if their skill set doesn't match, if they don't have a clear understanding of what the job is. This is a rigorous job with long hours and hard work.

There's a lot of rejection, there's a lot of stress. It's a serious job for someone in their 20s and we want to make sure that they're very likely to succeed because we don't profit from a new recruit for at least a year. We're training them, we're doing on-the-job training after that. They helping with some of the back office. We don't really get them up to a point where they're doing $1000, $2000, or $3,000 a month in margin, for at least a year.

Got it. And then on the contract logistics side, I guess, [inaudible] in the distance we're suggesting that there might have been some other contract logistics properties out there. Ones that were perhaps not as sophisticated and didn't and quite as much value, that were more in the, what I would call, normal logistics of supply chains. Would one of those at some point in the future be complimentary to New Breed given that it would allow you to attack the contract logistics market in the broader, more generic space, or are you pretty much wedded to the concept of building out New Breed as it's currently configured?

Well, we're certainly very much wedded to working with Louis and building up New Breed to a much larger Company than it is right now because the service that New Breed provides is just really, really impressive. It's the top of the line contract logistics that is working with industries and companies of industries that have needs for this and they're bringing a real genuine value to these fortune 50 companies and saving them very large amounts of money on these big mega projects. So, we're absolutely wedded to that. Now, could we buy another contract logistics company or companies in time and there would be synergy there and some business plan that makes sense? Could be, but I'm not trying to telegraph to you that we're about to do that or that we're not about to do that. Just in general terms, we're very much committed to New Breed, and we will keep and open mind on the other ones.

Then maybe just one final question on the general size of acquisitions. I guess two and three years ago my impression was, and maybe I was just off base, was that you were going to be doing a much larger number of smaller acquisitions. As time has evolved here you have sort of focused around larger transformative, pretty attractively priced, acquisitions that have allowed you to round out your service offerings. Is that the type of thing we should see more of, or now are we going to pivot to more of the smaller tuck-in types of acquisitions now that you have filled out the five vertical silos?

You will see both. We get a constant inflow from our operating guys about little tuck-ins that were not on our radar and things that would make a lot of sense for them and we have done a few of those and they make a lot of sense to do. They don't move the needle hugely but they do sharpen our service offering and make us more competitive in the marketplace. So, those are good. In terms of growing up to a company that's going to do 5/10 billion dollars of revenue and hundreds of millions of dollars in EBITDA, we will do transformational transactions here and there.

Got it. Thank you very much for taking my questions.

Thank you, very much.

Our next question comes from Todd Fowler KeyBanc Capital Markets.

Hi. Good morning, and congratulations on the transactions.

Thank you and good morning to you, Ryan.

Most of my questions have been answered but just a couple of ones I wanted to tackle here. First, Brad, the question was asked earlier on about the mix of business maybe how that evolved with the story of the last couple years. I would be curious to know just based on the type of businesses that you have right now, how you view the mix of the Company maybe longer-term out towards that 2017 target, relative to maybe where you were originally when you put the plan out there?

The original plan Contract Logistics and Last Mile weren't in our consciousness but today, if you say what is our best estimate of where we'll be from a mix point of view in say 2017, truckload and LTL will be the biggest. I am taking about EBITDA. Revenue is nice but EBITDA is what it's all about. Truckload and LTL will be the biggest. So, when we're at $425 million plus of EBITDA, you could see truckload and LTL be $125 million EBITDA, something like that. What we've got in Contract Logistics rights now with about $77 million in New Breed's EBITDA and that growing.

If we didn't buy anything else and New Breed just grew at similar type, mid-teens growth, that would get up to, over $100 million of EBITDA, $115 million, $120 million, that kind of magnitude. The third rank down I would put Last Mile. Last Mile would be something in the magnitude of $75 million dollars EBITDA, up from $45 million dollars EBITDA now. Intermodal now pre corporate allocations is roughly about $35 million dollars of EBITDA and that would grow to get you to, don't hold me to these exact numbers but just trying to give you a broad tableau, $50 million of EBITDA.

Expedite now is something like approaching $20 million EBITDA. That could grow to depending on the Expedite markets to $30 million of EBITDA. Freight Forwarding would be a little less than that. And then, to be determined on what we end up buying. That would be what we grow organically. What we have got right now and then acquisitions depends on what we buy. And then, obviously, you've got to net out the corporate overhead from that.

No. That's actually really good color. Appreciate that. The other question I had is on the synergy opportunity, the revenue synergy opportunity with New Breed. It sounds like maybe the focus could be targeted towards the strategic national accounts. I just would be curious to know, maybe some additional color around that, in terms of where you are with that today and where you see that by the end of next year, or several years, in terms of really what New Breed can provide, and maybe accelerate that initiative going forward.

I didn't quite l follow the question. You mean what can New Breed provide us in terms of getting business from their existing customers?

Yes. More so on the larger national accounts it seems like New Breed certainly can provide some leverage and accelerating that growth. I know that has been and area of focus for you guys. I just wanted to get some more color around that.

Exactly. Okay, I get it. All of New Breed's accounts are what we call Tier 1 accounts. They're large sophisticated, usually, fortune 50 companies, that are the biggest aerospace companies, the biggest telecom companies, fortune 50 retailers, companies doing Omni channel distribution, or eCommerce projects. Big projects involving lots of technology to keep track of things moving around, spare parts and so forth. All those big customers have a lot of freight and they're very picky, very, very picky who their Service Providers are. Very mission critical, service sensitive customers. Also, the government agencies some of it is top secret clearance stuff. It's very top of the line customers. We're very much looking forward to meeting with those customers and explaining to them the services that we have, and looking for business. I'm optimistic, and so is Louis, that we're going to get it.

Okay. Great. And then I guess the last question I had is on Pacer. I think in the slide deck you had mentioned that the revenue of Intermodal was up about I want to say it was 11% or 12% or so. Was that the case, and then also what type of revenue growth are you anticipating within your Intermodal services here over the next couple quarters?

Revenue in Intermodal was up 11.7% in the quarter and volume was up 7.7%. It's good when the revenue is up more than the volume, so that's a good thing. I find it very encouraging that even in a, I would call it, a challenging Intermodal market for the first half of this year because of the service issues in the rails, we're still growing the business and the business is actually growing, and growing nicely in very adverse situations. So, my expectation is that when the service issues are behind us all and the rails are functioning on all eight cylinders, so to speak, the growth is going to pick up.

Okay. Thanks guys. Appreciate it.

Thank you, Ryan.

Our final question comes from Jack Atkins, from Stephens. Please, go ahead.

Great. Thanks guys. Thanks for squeezing me in here.

No problem. Good morning, Jack.

Good morning. So just a couple questions here. I guess first on ACL. Is there an opportunity to grow that business into some other geographies with your larger customers? Because, I know you have got some large customers within that business. And, on the flip side, is there any risk that those online shippers that makeup a good chunk of that ACL business could take their business in-house, or try to squeeze you guys on margins as they look to lower their transportation costs?

Yes. I mean I think there's a lots of it. This is Karl. I think there a lot of opportunity to grow additional markets. We're pretty limited right now within ACL on the East Coast, so we're looking to expand into the Midwest and the West Coast. I think we're uniquely positioned with them and into our business to be extremely competitive, first and foremost, to be able to leverage that business to drive margins, but also to create cushions to be able to maintain that business and still hold good margins if we have to. I mean, the key to that is providing more revenue opportunity for our carriers, and when you do that, their revenue is spread across a fixed cost asset more favorably. So, I mean, I feel strong about growing the business. I think the trend itself for retailers to find more creative solutions to get to the end consumer and accelerate velocity and reduce cost is going to continue. It's natural, and I think with ACL we have got the ability to offer a strong value proposition to those customers. So, I think we're going to grow the business.

Okay. Okay. That makes sense. And then, Karl, just to follow up on that. Are other contracts with ACL, or, I guess, I should say, are there contracts, multi-year contracts there or is it more spot in nature in terms of the business?

No. They're multi-year contracts, dedicated contracts. and then there is component in the northeast that is tariff based.

Okay.

The majority of it is dedicated.

Okay. Okay. And then shifting gears here, I know you guys touched on the IT integration of Pacer, but with this new Rail Optimizer platform that's going to be rolled out early next year, will that complete the IT integration of Pacer into your existing XPO infrastructure?

That will. We will continue to add bells and whistles and features, and we have a lot of ideas for optimizing the business and improving terms and decreasing the empty miles and all different things we can do in technology. From and integration standpoint, that's on the latest technology. It's much easier to use, much quicker. The number of key strokes will be down, the systems are all integrated and unified and we're moving very quickly on that.

Okay. Great. And then last question for me, would you expect to be cash flow positive after you close the New Breed acquisition, and will that business at that point be self-funding?

Yes, we do.

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

Thank you, sir.

Thank you, everyone. We appreciate your time and will talk to you in three months. Bye-bye now. Have a good day.

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