XPO Inc (XPO) 2017 Q1 法說會逐字稿

Welcome to the XPO Logistics Q1 2017 Earnings Conference Call and Webcast. My name is Michelle, and I'll be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

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

During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which by their nature involve a number of risks and 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, except to the extent required by the 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 related financial tables or in the Investors section on the company's website at www.xpo.com. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section on the company's website.

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

Thank you, operator. Good morning, everybody. Thanks for joining our earnings call. With me in Greenwich this morning are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Head of IR.

I am happy to report that we're off to a strong start in 2017. We have solid beats across the board on net income, operating income and adjusted EBITDA. We swung from a net loss last year to net income of $19.5 million this year. Our adjusted EBITDA was up 16% from a year ago, going from $249 million to $290 million. Even more impressively, last year's numbers included truckload and this year's didn't. We improved our adjusted EBITDA margin by 120 basis points to 8.2%, from 7% a year ago. This was a result of organic growth and reducing costs. We're very much on track with our plan to continue to increase our EBITDA margin to 10% in 2018.

Once again, North American LTL was a standout. On a year-over-year basis, we grew LTL operating income by a noteworthy 49%. We improved our adjusted operating ratio in LTL by 390 basis points. Adjusted OR was 89% compared to 92.9% a year ago. We're very proud of the disciplined execution of our LTL strategy. We signed up $716 million of new business in the first quarter. This is up 67% from the $429 million we signed up in Q1 2016. We're on a roll.

In addition, we signed a record intermodal contract, which is also the largest contract we've won in any line of business in our entire company history. We also won a large new contract to manage reverse logistics in North America for a global consumer brand. These are just some of the highlights of the new business we've recently won. The wins were broad-based. A little over 60% of these wins were in transportation, with the rest in logistics. And by geography, about 60% of the wins were in the United States, with Europe generating the rest. Currently, we have active bids in our global sales pipeline of about $3 billion. That's comprised of approximately $1.9 billion in transportation and $1.1 billion in supply chain.

Several things are driving our sales trajectory.

We've built a larger, more focused sales force, including 38 strategic account managers in North America. These are all highly-respected industry veterans who have a lot of credibility with our largest customers. And we're in the process of building a similar senior sales organization in Europe. We're also pressing our e-commerce advantage in last mile and supply chain. Because XPO is established as the #1 provider of outsourced e-fulfillment services in Europe, if a retailer there has plans to grow online sales, we're almost always asked to bid. We're winning more e-commerce business in North American supply chain, as we transfer best practices and customers from Europe. And in Europe, we're developing verticals such as technology, agriculture and aerospace. These are verticals where we have a lot of experience in North America and it's opening doors for us in Europe. During the quarter, we generated revenue growth in last mile of 16%, and revenue growth, excluding foreign exchange in European supply chain, of 12%.

The U.K., Italy and Netherlands, in particular, are on fire with e-commerce wins. We remain firmly on track to deliver adjusted EBITDA this year of at least $1.35 billion, at least $1.575 billion EBITDA next year, and approximately $900 million of cumulative free cash flow between this year and next.

With that, I'll ask John to review the first quarter numbers in more detail.

Thanks, Brad. We delivered another strong quarter. Reported revenue was $3.54 billion versus $3.55 billion a year ago. Last year's revenue included $129 million contributed from our North American truckload business, which was divested last year. Net income attributable to common shareholders for the quarter was $19.5 million compared to a loss of $23.2 million last year. Adjusted EBITDA, a non-GAAP measure, was $290 million compared to $249 million last year, which is an improvement of over 16%. Company-wide, we generated organic revenue growth, excluding truckload, of 4.4% in the quarter. We expect organic revenue growth to accelerate through the year based on a combination of our strong sales pipeline and the large contracts we signed with customers in the last 6 months.

Revenue in our transportation segment was $2.28 billion versus $2.3 billion last year. Last year included the North American truckload business. Excluding truckload, revenue increased 5%. We increased adjusted EBITDA by 13.4% to $222 million. Adjusted EBITDA margin in our transportation segment was 9.8%, an increase of 130 basis points versus last year. Excluding truckload, both EBITDA growth and margin expansion would have been even higher. Within this segment, less-than-truckload had another strong quarter. On an adjusted basis, excluding amortization of intangibles and integration costs, we increased operating income by 63.8% from the prior year. We improved our adjusted operating ratio by 390 basis points to 89% from 92.9% a year ago.

We increased tonnage by 4.8% year-over-year, due primarily to growth in local accounts. We increased weight per shipment by 3.8% to 1,393 pounds, which is consistent with our strategy to target heavier freight. The net result was an improvement in operating ratio, as heavier weight shipments increase our revenue per shipment.

In last mile, we continue to generate exceptional growth. We increased revenue by 15.7%, due primarily to market expansion with existing customers, especially e-commerce accounts. Growth was especially strong in appliances and furniture as well as in our nondedicated national e-commerce network.

In freight brokerage, we increased revenue by 6.9% year-over-year. Net revenue margin declined due to the weak spot freight market, which began last year. Within freight brokerage, we grew truck brokerage volumes by 9.6%. Net revenue margins in truck brokerage improved sequentially from the fourth quarter, but were still below levels in the first quarter of 2016. Truck brokerage margins have been modestly improving sequentially since June of last year, although margin trends turned more negative again in April.

In intermodal, we grew volumes 4.2% through new contract wins in a challenging market. Intermodal margins in the quarter remained under pressure due to excess truck capacity, low fuel prices and increased competition. We signed a significant amount of new business in truck brokerage and intermodal in the first quarter this year, which we expect will drive higher growth as these contracts ramp up through the year.

In our European transportation operation, revenue was generally flat versus last year. Softness in our nondedicated full truckload business and a headwind from the British pound was offset by strong growth in LTL, brokerage and dedicated truckload. Trends have been consistent with prior quarters, with revenue growth strongest in our U.K. and France operations, while Spain and Eastern Europe remain more competitive. We continue to reduce costs through operating efficiencies and procurement initiatives.

Our Logistics segment had a strong performance in the quarter, both in North America and in Europe. Revenue increased 3.1% to $1.3 billion. Operating income increased 48% to $47 million, and adjusted EBITDA increased by 12.5% to $99 million. In European logistics, revenue increased 4.9% compared to last year. Foreign exchange mainly from the British pound caused a 7% drag on top line growth. We drove exceptional growth through new contract starts, notably with e-commerce and food & beverage customers. Revenue growth in local currency was led by our operations in the U.K., Italy and the Netherlands. In North American logistics, revenue increased 1.3% to $627 million. Although volumes in transportation management were down year-over-year, we had very good growth in our higher-margin contract logistics business, leading to overall excellent improvement in our EBITDA.

In contract logistics, strength in our e-commerce, food & beverage and aerospace verticals drove net revenue growth of 8.8%. Contract logistics wins continue to gain momentum, which we expect will deliver increasingly strong revenue growth as we progress through the year.

Corporate SG&A improved versus last year, primarily due to lower integration costs. Interest expense for the quarter decreased to $76 million from $93 million a year ago as a result of the debt pay down from our sale of North American truckload and the 2 opportunistic refinancings we completed in August and March.

Net CapEx for the quarter increased to $102 million from $97 million last year. We made investments in technology, new contract wins and contract logistics, and replenishment of our fleet. We reduced the average age of our North American LTL tractor fleet to 5.3 years versus 5.6 years this time last year. We recorded a tax benefit in the quarter of $9.8 million. This included $10.7 million associated with tax benefits, resulting from share-based compensation awards that vested or settled in the quarter. Recognizing these benefits and income tax expense is part of a new accounting standard, which we adopted in 2016. Based on the share price and the vesting schedule, we'll likely see similar first quarter tax benefit in future years.

Taxes also included $5.8 million in discrete tax benefits, primarily related to state tax planning initiatives. Free cash flow for the quarter was negative $87 million. As a reminder, the first quarter typically has the weakest cash flow performance of the year, due to business seasonality, annual prepayments and the payment of annual bonuses. We're pleased that consistent with our pay-for-performance culture, we increased the company-wide bonus pool paid to more than 25,000 of our employees. Our full year free cash flow forecast remains at least $350 million.

We ended the quarter with $342 million of cash and $900 million of liquidity, including our ABL facility.

Now I'll turn it over to Scott.

Thanks, John. Starting with the macro. In North America, in a lukewarm transportation market, industrial freight trends have been stronger than retail; that's been a plus for LTL volumes. In North American truckload, the market continues to be loose, with the exception of the Southeast. We're seeing some tightness there for the produce season. In Europe, we've seen modest improvement in March and April economic trends after a slow start to the year.

In the logistics market, by contrast, activity is strong globally. Customers seem to be feeling more confident. They're more willing to commit to projects than we've seen in a while. We're opening a new site every 2 weeks in North America and at a similar cadence in Europe. We're creating major sales momentum in this environment. Last quarter, we told you about the investments we're making in new salespeople, sales support, training and our global CRM platform. I'm happy to report that it's paying off. We're cross-selling our services more to customers and growing our leadership position in e-commerce.

In less-than-truckload, we turned the corner on sales with 6% revenue growth in the quarter. Our local sales organization is fired up. We've hired 168 new local account executives in LTL since the beginning of 2016. We're putting feet on the street with each rep meeting with, on average, around 7 customers a day. We're also staying disciplined on price. Contract renewals had an average price increase in the quarter of 2.9%. We have new technology tools that instill a strong pricing methodology. And we're more focused on freight that complements our LTL network. For example, we like heavy freight. It lowers our revenue per hundredweight metric, but it improves our profitability by reducing our costs per hundredweight. Our weight per shipment was up almost 4% in the quarter and there's room to grow. In 2016, we were averaging around 1,350 pounds per shipment, while some of our peers were closer to 1,600 pounds.

We've also continued to take significant costs out of our LTL network. We've now executed on $175 million of profit improvement in LTL. Our original target was for $170 million to $210 million by year-end, so we hit the mark 9 months early. The latest savings include procurement and pickup & delivery optimization. Overall, comparing the 2015 results, preacquisition to trailing 12 months, we've grown our LTL adjusted EBITDA from $387 million to $585 million, that's an increase of over 50%. We still have a lot of runway in LTL. For instance, we've just gotten started in improving trailer utilization. It's one of our most important levers. A 1% improvement in load factor, which is a measure of trailer utilization, equates to annual profit of about $9.5 million. In the first quarter, we focused on utilization in our service centers and increased our load factor by over 3%. We're rolling out technology upgrades to improve network planning, which will drive the next round of savings. We estimate that we have a realistic opportunity to gain 10 percentage points of trailer utilization or about $95 million.

In European transportation, we're implementing many of the same initiatives as we are in North America. This cross-pollination is a major reason why our European transport business outperforms the market each quarter. Most of the growth in European transport is coming from LTL, truck brokerage and dedicated truckload. Combined, these 3 service lines generate about 3/4 of our European transport EBITDA. When you break it out, there are solid reasons why we expect sustained growth in these operations. First, we're an LTL leader in Western Europe with an excellent reputation and a strong brand. We're implementing improved yield management tools and engineered standards for dock operations in pickup and delivery. This is the same playbook we're successfully using in North America. Second, in truck brokerage, our freight optimizer technology is providing greater visibility across our European network, which is helping the team source capacity. And the third component, dedicated truckload is particularly strong in the U.K. and France. This is a business that generates strong returns tied to long-term contracts. Company-wide, we have global initiatives underway to improve our cost structure, operate more efficiently and serve our customers more cohesively as one XPO.

In procurement, our centralized procurement team achieved annual savings of $80 million. Next up, our global RFPs for the procurement of material handling equipment, insurance, uniforms, travel and other categories that combined add up to around $1.7 billion of our current spend. And we're going to keep that ball rolling. We expect to double the run rate to about $160 million of procurement savings by late 2018.

I'll mention 1 final lever for cost savings, because it's a big one. Workforce productivity. Our new operations performance team is collaborating between North America and Europe to optimize our warehouses. The team is helping every site understand the gaps between average and great performance, and deliver improvements. Last month, XPO was ranked as the largest logistics company in North America by Transport Topics. Without question, we have our amazing employees and strong customer relationships to thank for this achievement. We still have a long runway of opportunity ahead of us. We've aligned our entire organization with matching objectives, metrics and incentives. We're laser-focused on continuously improving service for our customers and increasing value for our shareholders. It's shaping up to be a landmark year of growth for XPO.

With that, I'll turn it over to questions. Operator?

(Operator Instructions) Our first question comes from Chris Wetherbee with Citibank.

I wanted to touch base, Scott, on some of the comments you had on the LTL side. So you talked about the load factors there and the opportunity for maybe 10 percentage points of improvement. Could you give us a sense of sort of how you think about that from a timing perspective? And I guess, what type of backdrop from a tonnage growth standpoint you need to be able to achieve those goals?

Sure. So if you take a step back, our utilization of our trucks are roughly 65%. That means when you're moving down the road, our trucks are only filled 65% of the way. We have an opportunity to take it up 10 percentage points, 75%, even to get it up to 85% over a long period of time. We expect the load factor improvement to be somewhere in the mid-single digits this year and then the same type of improvement next year.

Okay. That's helpful. And then, I guess, talk a little bit -- if you could talk a little bit about the tonnage environment that you're seeing right now. How things have trended post the end of the first quarter and sort of what your outlooks are for the year? Talking to your customers, you mentioned industrial end market strength. And so I'm just kind of curious how that's playing out in Q2 so far?

In general, April was a strong month on volumes. So in LTL, our volumes improved from March to April. Our volumes improved every month of the first quarter. January to February, February to March, and then March to April, volumes improved again.

Okay. So run rate, maybe growth rate and year-over-year basis roughly the same is what you're able to post in the first quarter. Is that a fair assumption?

We expect the growth to improve in the second quarter from the first.

Okay. And then just want to get -- 1 last question, just on sort of the pipeline of business. So, obviously, a lot of business wins in the first quarter, intermodal side and some of the other end markets. I guess, you know, maybe, Brad, it seems like there's -- you guys are gaining momentum. Can you give us a sense of maybe how much is company-specific with sort of the sales force organization that you talked about, but also sort of the backdrop from an economic standpoint?

Sure. Well, on supply chain, I think that's more us than the market. We happen to be positioned in some of the fastest-growing parts of supply chain. So e-commerce, food and beverage over in Europe and those customers are growing really fast, and since we're the largest in Europe in there, we're 1 of the largest here in that, that business gravitates towards us. On transportation, it's definitely us because the market is sluggish. We're taking share. We're just -- we have to struggle more to show the kind of growth that we've been showing and the numbers we've been showing in transportation that we do in supply chains. So supply chain, it's coming more to us. In transport, we have to work more for it. But you're absolutely right, there's a huge momentum in sales. It's almost every day now that we're winning some big contract. Just a few years ago, thinking of winning $0.5 billion contract was almost unthinkable and then topping that a year later, as we did this month, just didn't think about that. So we got a $50 million contract, we've got a $95 million contract, a nice, steady stream of wins.

Our next question comes from Todd Fowler with KeyBanc Capital Markets.

Brad, maybe just to start with the guidance. I know that you are too open ended when you have the "at least" in front of the guidance, but it sounds like a lot of momentum here on the new business wins, it sounds like a lot of cost opportunity. So how do we think about your thought process around guidance for this year. What it would take for you to maybe move it up and incorporate some of the revenue wins and those sorts of things into the outlook?

I forgot what S&P and Moody's call it, but it was a positive watch? We have got a positive watch guidance. So it's a little early in the year to be raising guidance. But there's an upward bias to possibilities going forward. So let's just see how the next few months play out and then we'll revisit the estimates. Right now, we are very, very comfortable with the estimates that we have out there, with the guidance we've given and there's some upward bias to it.

Let me ask it this way, is there anything in the first quarter that you view as being unsustainable or anything that kind of helped you if it was fuel trends in the LTL business or something that you're watching that, that may not repeat in the first quarter as you think about the progression through the year?

I don't, Todd. I think the first quarter was a quarter where we had to work hard. And we had some headwinds, we had some tailwinds. But internally, as an organization, it's really jelling. And people are very focused on the right levers in order to improve both the profitability of the company and customer service at the same time. And it's broad-based by our different business lines and by our geography. So I am optimistic about the year, starting off on a very good foot.

Okay, good. That helps. And then just for my follow-up, maybe for John on the cash flow. I know that you walked through some of the timing issues here in the first quarter. But could you give a little bit more color on the working capital? It sounds like that there is some prepayments and some incentive comp. But is there anything on your days sales outstanding or anything like that, that helped you last year that isn't recurring this year? And then do you have an updated CapEx number for the year?

Yes, sure, Todd. I'll do the last one first. On the CapEx, we are not changing our guidance for the year. And so we're still looking at in the midpoint of the range, something that's around $443 million in net CapEx for the year. On working capital, the first quarter is always the weakest quarter seasonally, as you know. EBITDA is the lowest. We also have a lot of things that hit in the first quarter that don't have -- hit in the other quarters, such as we do a lot of prepays for things like our insurance program, then we have the annual cash bonus. And in my comments, I mentioned that, we have 25,000 employees that got bonuses this year. We had some drivers that got bonus increases as much as 65% year-over-year. And so that's a pretty significant drag on cash flow in the first quarter. And then, if you look at our revenue activity, it ramped up through the quarter and really stepped up in March. So we had an outsized, kind of, beyond-our-expectations uptick in revenue in March and then that's obviously a drag on working capital because you have to fund that business. So those are really the key drivers.

Our next question comes from Ravi Shanker with Morgan Stanley.

Brad, so it looks like you guys are clearly on your path to 2018, and while I wouldn't take anything for granted at this point, can we get a view into your insight on kind of what targets look like beyond that, in terms of longer term organic growth and maybe a longer term EBITDA margin target?

Well, we haven't issued long-term guidance past 2018. I guess, most companies haven't even put out 2018 guidance. So we feel good about the visibility we have given for this year and next year. But big picture, we are going to continuously improve the company. We're going to drive sales. We are going to figure out all kinds of ways to continue to take out costs through our global procurement initiatives, through best practices. We are very focused on growing our margins and generating, as a result of that, increasing amounts of EBITDA, increasing amounts of cash flow, that's the plan. And that's what we get paid to do. So as a management team, that's our job: To not stop at 2017, not stop at 2018, but every year and every year going forward to continually improve. Grow sales, take out costs, grow margins and generate more profit. And at the same time, delighting our customers more and more. That's the mission and that's what we intend to do.

Got it, got it. I understand. And as a follow-up, we heard Walmart announced last month that they are offering 3% to 5% discounts to customers to come pick up online orders in stores instead of having delivered to their homes. Do you think this only applies to like small boxes? Or does this, as a trend, not specific to Wal-Mart, but if this grows as a trend among brick-and-mortar retailers, do you think this could also apply to heavier goods that you have in your last mile business?

Probably not, because going to Walmart to pick up a package is a lot easier than going to Walmart to pick up a refrigerator or a stove or a washing machine or exercise equipment. You need a different vehicle, you need a couple of people, it's a much more tricky thing to do. Furthermore, on the heavy goods, on a lot of them, you need some expertise to actually install them. You can't just pick them up and plug-and-play, put in your house. You need people who are technicians, who can install them. So I don't think in the near-term that's really on anyone's agenda to be incentivizing people to go pick the heavy stuff up themselves.

Our next question comes from Scott Schneeberger with Oppenheimer and Company.

I'm going to focus on one of the smaller pieces of your business and one that's not been performing well, but a big contract win and that would be intermodal. Could you elaborate what the contract or contracts that you've just won will do for forward growth, and comment on just the business environment, in general?

Scott, thanks. The intermodal -- our intermodal growth will accelerate. The big contract we won is a 3-year deal that starts ramping up in April of this year. But that wasn't the only one. We won another very large contract with a retail-based company, that's ramping up as we speak right now. So in intermodal, we put in a new platform, a new rail optimizer platform that took out a lot of cost, improved the visibility for customers. It's really a best-in-class system, that's one of the reasons we're winning more business.

Great. And then, obviously, last mile logistics continues to be quite strong. Could you just elaborate on what you have going on there? And perhaps a little bit of commentary with regard to U.S. and Europe.

So in last mile, we are winning more business that have more complex installation parts to the service. And we upgraded our technology to handle those increasingly complex. And then we're growing a lot with our e-commerce customers. About 20% of our freight in last mile is through our e-commerce network. It's a co-mingled freight network that's growing very fast. In Europe, we're ramping up projects in the U.K., in Ireland and then we have some other projects in France as well.

Our next question comes from Brandon Oglenski with Barclays.

So, Scott, can we just come back to the discussion around LTL pricing. Because I think there is a little bit of confusion out there. You know, your unit revenues were a little bit lower, but I think -- I didn't hear all the prepared remarks, but I think you mentioned closer to 3% on a consistent pricing basis. So can you help us out on the more industrial side and LTL business, what's going on there with competition?

Sure. It's a rational market. We increased the like-for-like contracts, like you're saying, like 2.9%. And then our operating income increased 49%. So we are pricing still very rationally. But the new business coming on like agriculture-type stuff, fertilizers, heavy-type goods have better a utilization factor. They are putting more weight on the trucks, that takes down our cost of service on an average hundredweight basis. But it also does have a lower revenue per hundredweight. So it's the new freight coming on the system. That's very profitable for us. It's making us a lot of money, but it has a lower revenue per hundredweight.

Okay. So incrementally, LTL pricing sounds like it might have even been a little bit stronger in the market then?

It's been relatively consistent at about 3%. All through last year, we had same like-for-like pricing increases of around 3% and then we had accessorials on top of that.

Okay. I appreciate that. And then on the European transportation side, you said FX is impacting the optics of top line growth. I think you provided the logistics impact on FX, but would you be willing to do that on the transportation side?

The European transport FX impact was a 5.5-percentage-point impact. And on European supply chain, it was 7 points.

Okay. So can you talk a little bit more then about the European strategy. And how that business has been transformed in the last year?

We are growing very fast in European supply chain. That is very much a combination of e-fulfillment and a cold chain distribution. We'll continue to win in those contracts and to win in that business that's growing amongst our customers itself. In XPO Europe transport, there's really 3 things that make up about 75% of our EBITDA in Europe. It's LTL, it's brokerage and it's dedicated truckload. All 3 of them have very good returns and are growing. LTL, we have an advantage. We're using the same things we're doing in North America and Europe. We're the largest player in Western Europe. We have a lot of density. We have great customers. We have a great network. In brokerage, that's something that was run very -- it was run country-by-country in the past and it was run very segmented and didn't have visibility across the entire network. We weren't pricing -- before we put in the freight optimizer system, we weren't pricing very methodically or analytically. We were doing it more on the seat of our pants, and now we brought more rigor around pricing and ability to procure capacity across Europe. And then in dedicated truckload, there's mainly a focus around U.K. and France. More customers are asking us to do more dedicated type contracts, move trucks from our nondedicated network to dedicated contracts. For us, that's a better return, that's a better use of capital for trucks in dedicated rather than non-dedicated truckload.

Our next question comes from Kevin Sterling with Seaport Global Securities.

Brad, so your sales pipeline, I think, is this new customers to XPO or are you cross-selling products with existing customers or maybe it's a combination of both?

Yes, and yes. There's a lot of cross-selling going on. If you look at our Top-100 customers, 87 of them used more than 1 service in the quarter. And 24% of the sales that we generate from these Top-100 customers come from the secondary service lines, and you compare that to a year ago, that was only 19%. So there is a lot of cross-selling going on. We're also growing greater share of wallet with our existing customers in the lines of business we already are in with them on. So this is a multi-year process that we've started years ago, and you start off, you got to earn your stripes, maybe get $5 million of business, maybe get $10 million of business, you don't walk in and get $50 or $100 million of business in the first year normally. So that's snowballing. That whole penetration of the existing customer base is snowballing.

Okay. And you guys briefly touched on the intermodal contract or contracts you've won. Is that highway conversion or did you take market share?

That was -- in 1 customer, actually, it was highway conversion, but that was an anomaly. We do not see a lot of highway conversion going on in intermodal. The intermodal market is weak. There is not a lot of conversion from truck to rail because truck capacity is ample, it's inexpensive. But business has picked up for us recently because we've got some good wins and big wins. But that should not be confused with how the overall market is in intermodal, it's not high.

Got you. Okay. And Brad, last question here and I'd love to get your thoughts. We're seeing some truckload consolidation, couple of major players getting together, who knows we may see more. What are your thoughts on TL consolidation and, in particular, any impact, good or bad, you might see to your truck brokerage business?

I don't see a lot of impact to the truck brokerage business because there's 200,000 trucking companies out there. So there would have to be a lot, lot, lot more consolidation before that would change the dynamics there. It's still an intensely competitive business on the trucking side. With respect to what my personal views on truckload consolidation, we're not in North American truckload business anymore. We sold that last year. But in general, I think consolidation in fragmented industries is a good thing. I think it brings more economies of scale and it brings best practices, and you're allowed to attract better talent and just a lot of good things come from properly-executed consolidation, including in truckload.

Our next question comes from Brian Ossenbeck with JPMorgan.

So obviously, fuel has been pretty distorted for all the transport companies this quarter. I was wondering if you could give us a sense of what organic revenue was in the quarter. I guess, it says about 4.4% headline, but what was that excluding fuel. And now that we see the net revenue margins here and it's not surprising to see freight brokerage going down, given the trends in that market. But was there also an impact on -- that you would call out as significant on some of the net revenue margins per the various business lines as well?

I didn't understand a lot. So let me start with the organic growth. We have 4.4% organic growth, which does exclude fuel and FX. In transportation, if you look overall transportation, it was 3.4% organic growth and supply chain was 7.1%. What was the question on net revenue margin with fuel?

Yes, I was just asking if -- fuel going up tends to distort and when it goes up, it will pressure the net revenue margin as a percentage. So clearly, the truckload brokerage had some pressure from a cyclical industry perspective. I was just wondering if that masked any of the improvement in the underlying other segments, because we pretty much saw margins that were pretty consistent year-over-year?

There is some smaller degradation of margin percentage just by fuel. But it is a pass through, so it is just the percentage basis. When you look at truck brokerage, we've seen a steady improvement starting in June -- it really hit the bottom in June of 2016, we've seen a steady improvement up until April, then it came down. In intermodal, first quarter was a tough margin quarter. This year-over-year was a difficult margin quarter. We've seen an improvement in April. Really, it wasn't as much driven by the fuel percentage. It was more driven by contract prices and truckload are flat or are in many cases down. And cost to run on the rail still moves up, so you'll get pressure on the margin line.

Right. Okay. So one of the other smaller businesses, managed transportation. You mentioned that there was some declines in that area. It's been an area of focus for some of the other logistic companies. So I was just wondering, if there's anything changing in that business? (inaudible) if there's more competition or is this just as you expand the broader book of services, is this just not something that you're expecting to grow as much?

On managed transportation, we took the eye off -- our eye off the ball on that this quarter and, frankly, last year. We are very focused on other lines of business. We didn't put enough management time into it. As a result, we got outcompeted and we lost a few customers. We did get some great contract renewals, but we have to turn the corner on that. All of our other businesses are up and to the right, managed transportation isn't. Having said that, to answer the other part of your question, it is a priority for us. Managed transportation is an important service that we provide to our customers and we want to grow it. It's another way to touch our customers and we want to do that.

Okay. And a quick follow-up on that is do you see that in the pipeline yet, or these things tend to be pretty sticky sorts of arrangements with customers. So I was just wondering, if you're actually seeing any sort of inflection in the activity, now that you're devoting a bit more focus on it?

Little bit, but not imminent because that's a long sell. It is something we're absolutely more focused on now than we were last year.

Okay. And just 1 quick housekeeping. Just cash taxes in the quarter and where do you expect them to be in '17 and '18 based on your free cash flow guidance?

Sure. I'll answer that question. The cash taxes for the quarter were $19 million. And our cash tax forecast for this year remains $80 million to $90 million for 2017. And then it will go up -- '18 will go up to more mid-30% tax rate range in that year, but we've not given the dollar estimate for that year yet.

Our next question comes from Allison Landry with Credit Suisse.

In the last mile business, you obviously have a really good toehold in that market. But we've been increasingly hearing from truckers, brokers, intermodal companies that they're all trying to capture some share of this business and then pursue growth. So I was just wondering, first, could you give us a sense of how fast the last mile market is growing, if the pace is actually accelerated in the last year or 2? And then longer term, how you think about the size of the market relative to the $13 billion I believe you've talked about historically? And then second, just given what I assume to be rapid growth, have you seen increased competition in like broadly and, in particular, in sort of the white glove niche that you operate in?

I think it was Shakespeare who said imitation is the sincerest form of flattery. So we're flattered, if people want to get into that business to grow that business. But to put in perspective, in Q1, our revenue growth in last mile was 16%. So we're clearly taking share. We're clearly growing that business very, very, very well. And in the quarter, it accelerated throughout the quarter. In March, our organic growth was 17.1%. So this is reflective that we do a really good job. We got a great team of operators in that business. And our scale, we're 7x the size of the next biggest last mile player. If you take the next 3 and put them together, we're 3x the size of them combined. We have proprietary technology that's unique in the industry that we have patents on. We just do that very well. So I don't see any -- the competition is great. It's what makes the world go around. But we're doing very well in that business. And we expect to continue to do very well for the -- many, many years.

Okay. And any comments on the sort of $13 billion that you've referenced? And how big you think that it could grow to long-term?

Well, the $13 billion is the total addressable heavy goods market, which is growing along with GDP. But what's growing much, much faster is the only 1/3 of that $13 billion that's outsourced, that's done to outsourced providers like ourselves where we've done the business. That is increasing very, very fast and that's growing at 5x to 6x GDP in general.

Okay, got it. And then just more of a modeling housekeeping question. When should we expect the integration and rebranding costs to sunset? It's been, I think, about 6 quarters since you did an acquisition, and this quarter we saw, I think, $21 million excluded from EBITDA or 7%. So just wanted to get a little bit of clarity on how we should be modeling that going forward?

The rebranding is finishing off right -- it's finished off in the second quarter. So you'll see that reduced. In integration cost, we'll do about $40 million to $50 million of integration cost in this year in 2017. So it'll trail off through the year.

Okay. And could you give us a sense of the split of the $21 million that was integration versus rebranding?

Yes, I'll take that one. The rebranding was about $11 million and the rest was integration cost.

Our next question comes from Amit Mehrotra with Deutsche Bank.

So first, a quick one for John. The organic growth number of 3.4% in transportation. I'm assuming, I think correctly, that it's not adjusted for the business that you're walking away from culling in the LTL business. So if that's the case, can you just give us some color on how much revenue that kind of amounts to on a quarterly basis, so we can maybe just get a sense -- even a better sense of the true underlying growth in the transportation business?

Sure. So the organic growth rate in transportation that we gave of 3.4% is only adjusted for fuel and foreign exchange and that's it. So there's no adjustment for LTL, revenue culling or anything else. So there's no number to give you. So the 3.4% is fuel and FX only.

Right, I know. But the question was, can you give us some sense of the amount of revenue that you did cull in LTL kind of proactively, so we can get a sense of what the actual underlying beyond just FX and fuel business that you effectively walked away from?

Not really because our growth in LTL is positive. We're adding more customers and adding more -- the mix has been moving more towards local accounts. The national accounts and large accounts are still down year-over-year from where we were a year ago. But that process is almost complete, and we're moving forward and growing the entire business.

Okay. The second question is just a follow-on on the LTL pricing environment. I mean, LTL yields in the quarter were down a bit excluding fuel. I think some of that may be just a way how pricing works as weight per shipment moves up, I think you mentioned that earlier. Just would have imagined that, as you do cull some business and then walk away from some unprofitable business that would be a counterforce to some pressure on the yield per hundredweight. Can you just talk about the net effect of those 2 things? And maybe how we should think about yields going forward in an improving weight per shipment environment, just given some of the offsetting factors there?

So the yield on existing business is going up, it's not going down and the contract renewals are just shy of 3% yield improvement. The heavier weight, more dense freight that we're targeting to get the trailer utilization up does dilute the yield. But in terms of operating income, it's very additive. So operating income was up 49% year-over-year in this quarter. So it's a major success story in LTL. The OR was improved by 390 basis points. It's a fifth quarter in a row that LTL beat budget. And we've dramatically improved the profitability of LTL since we bought it in October 2015. When we bought it, LTL had trailing 12-month EBITDA of $387 million. If you look at the end of March and look at TTM EBITDA, it's up 50%. It's about $585 million. So it's increased almost $200 million of EBITDA in 5 quarters. The OR was in the mid-90s. We have improved it by more than 500 basis points. How did we improve that? How did we do that? A bunch of different things. First of all, we put P&Ls into the business. So instead of having just 1 P&L for the whole company. We put hundreds of P&Ls for every different location. We tied compensation to the P&Ls. We put in new performance metrics, new KPIs. Tony instilled the culture of a high level of accountability. The whole organization chart was revamped. We put into the culture the concept of being thoughtfully frugal, so very good cost controls. We rebid the line haul, it hadn't been rebid for years. We've been managing the yield. On balance, we've been raising yields to take out these dense accounts. We're almost done, but not completely done, culling the money-losing customers that you were talking about. We don't want to leave customers high and dry. We have a lot of other business with most of these customers. So it's a deep relationship, we want to work with them. We rolled out lots of new technology, the handhelds, on the docks, all kind of technology to improve productivity, to improve efficiency. We achieved $175 million of cost savings 3 quarters earlier than when we first announced the transaction. We rebid tractors and trailers and tires and all kinds of other procurement. We improved P&D productivity by 5.5%. We in-sourced the IT. So -- I mean, I could go on and on of all the many, many we've been doing, but it's been quite a lot of things.

Well, let me get one more in here. Okay. So it just seems like with yields, your yields per -- revenue per hundredweight coming down in LTL. I agree, it's kind of a positive and maybe revenue per shipment going up is kind of a positive profitability indicator. You guys talked about 100 to 200 basis points of year-on-year margin expansion in LTL. I would imagine, just based on your first quarter performance and all the stuff you're talking about, it seems like it could be at the higher end of that this year in terms of margin expansion in LTL. Is that maybe too bullish this early in the year or you're kind of thinking that it could be more towards the higher end versus the 100 to 200 basis point that prior guidance?

Well, for the moment, we want to stick with our guidance. We're not raising guidance. We'll revisit that as the year goes on. But you got to go back to what Scott was saying before. If you look at our trucks and, hopefully, you're seeing more and more XPO branded trucks on the road, your typical truck is only -- is less than 2/3s full. They're only 65% utilized. This is wasted money. This is wasted efficiency. Every 1% of increased utilization is another $9.5 million of profit. To get from where we are just to bridge the gap halfway to best-in-class, it's almost $100 million profit improvement opportunity. Now to do that, the best freight to take, by our analysis, is that heavier freights. Right now, our average weight per shipment is about 1,350 pounds. If you look at best-in-class, they're 1,600 pounds. So we definitely are targeting that denser freight to improve the profitability in the network. Looking out -- let's not comment on this year, but look out 5 years. In 5 years, LTL should be $1 billion EBITDA business. It should be $1 billion EBITDA generator in 5 years, that's our goal.

Our next question comes from Donald Broughton with Broughton Capital.

It is actually Charles Caleb Colton that said imitation is the most sincere form of flattery. You've, obviously, had some real success in cutting costs and you've had some success in cross-selling to your customers. I wonder how much success you've begun to have in cutting costs by, what I would say, cross-selling your operating divisions? I know, for example, when you acquired XPO, LTL used intermodal less for line haul than any of the major LTLs. And remember, when you first closed that transaction, I asked you about it, and you said that was really more about the second chapter, third chapter part of the story. So I wonder, are you beginning to cross-sell your operating divisions? And if so, could you give us examples? Or is that still another chapter or 2 later in the story?

Well, we're definitely cross-selling our business lines, no question about that. We haven't done it enough. We need to do it more, and we have to make sure that our divisions cooperate with each other and we have the right compensation and incentives to do that. In some of -- between some of our business lines, we've done better jobs than others. The momentum is definitely in the positive direction. If you look at Europe, Europe when Norbert -- before we bought it, the 2 business units were really run separately, even the sales forces haven't met before and they literally were run completely, completely separately. Now there is a lot more cross-selling. Just last month, we signed a new $20 million customer between supply chain and transportation in Europe, that didn't happen in the past. So there is momentum there, but I can't say we should get a gold star for our progress for cross-selling within our business lines yet. We're still using lots of other competitors for services that we provide ourselves, because sometimes their network -- the freight is just better in their network and they can provide at a cheaper price. So in order to be competitive with our customer, we use another party. We're not proud to take the business for our own business line and then not help the customer, and maybe even lose the business.

Fantastic. So still early in that story?

Yes.

Our next question comes from Brian Konigsberg with Vertical Research Partners.

I just wanted to touch a little bit more on the organic growth profile. So good performance in Q1. You're expecting a bit of acceleration as we progress through the year. I'm just curious, how much of that outlook is based on the work that you actually had booked to date versus how much you expect to win going forward? And then maybe could you just follow on, how has your win rate developed in Q1? I know that was fairly strong in the pipeline. I think that was last quarter's comment that was specific to supply chain, but how did the win rate develop in the first quarter? And what do you expect for the rest of the year as well?

Well, it is those 2 factors. The business we've already signed up, which we project, which was much higher in the first quarter this year than last year, as well as a pipeline that's very large. We're winning about 23% of the business in our supply chain pipeline today, which is towards the high end. It ranges from 20% to 23% over time.

And if I could just ask one more on the pipeline. I think you said the supply chain logistics came down to $1.1 billion. Correct me if I'm wrong. I think that was $1.3 billion in Q4. Is that just a function of the strong wins that you reported in the quarter and just weren't able to fill it as quickly in Q1?

It is the function of the wins we have in the quarter. We did win some very large pieces of business and now the pipeline is being replenished.

And our final question comes from Tyler Brown with Raymond James.

Scott, quick question on intermodal. Do the 2 new contracts require an investment in containers? And can you kind of update us on where your container fleet is today?

It's John Hardig. I'll handle that question. The new business that we won does not require any incremental investment in containers or chassis or anything else. Our container fleet right now is right around 9,500 containers. And we are investing in that fleet. We're buying new containers this year, we bought some last year. So we're trying to keep that fleet fresh.

Okay, okay. Good. And then I am just curious, are those contracts more trans-con, maybe locally it's cross-border or maybe all of the above?

It's more into intra-U. S. business, it's not necessarily cross-border. And some of it is trans-con and some of it is shorter haul.

Okay. And then maybe my last one here, but -- and maybe Scott or John, but it sounds like the fleet age is coming down, which I guess, indicates to me that you are spending CapEx, I'll call it, at a greater rate than maintenance. I'm just curious, if you could break down what percent you think your CapEx budget is for growth and maintenance? And then how should we think about that CapEx profile over the next couple of years, either as a percentage of revenue or in total dollars?

Our total CapEx budget for this year is $430 million to $455 million. Of that, our maintenance CapEx runs around $225 million. And really the growth is going into, not so much the fleet. We're maintaining the fleet at its current age, that's the plan, but more went into investment and new business opportunities, especially in supply chain and very heavy investment in IT. So a lot of that investment -- the growth capital is going into the IT systems that we're building. And we don't expect that profile between growth and maintenance to change a lot over time because the fleet is going to stay about the same as where it is today. And as we grow on the transportation side, we'll look more to using non-asset-based service delivery models.

Okay. So as a percentage of revenue, though, we should think about it staying relatively static or dollar staying static over the next few years?

No, CapEx will come down as a percentage of revenue over time because it is not going to -- it's going to grow much, much slower than revenue.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Jacobs for any closing remarks.

Thank you, operator. So it was a very positive quarter. There were nice beats on a slew of metrics. On the top line, we had excellent progress in sales, lots of wins. You saw in last mile, we delivered 16% revenue growth. You saw in Europe supply chain, we had 12% revenue growth. The sales organization, the SAM team, the strategic account manager team are really jelling. All the business units are being run very tightly, delivering the numbers. We saw a nice 120 basis point of margin improvement company-wide. We are right on track to get to the 10% margin that we've telegraphed for next year. LTL was a standout with operating income up 1.5x on a year-over-year basis. Why are we having all the success? It's not luck. It's by design. We've got very strong positions in the fastest-growing parts of the industry, especially e-commerce. And I would like to pivot from the shareholder -- from investors to our employees, thank you to the 89,000 employees worldwide. There are lot of people in a lot of places working very hard, and have been working very wisely over the last 5 or 6 years, thank you very much. All of this snowballing is to your credit. Thank you very much. Have a good day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.