XPO Logistics, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Welcome to the XPO Logistics Second Quarter 2013 Conference Call and Webcast. My name is Dawn, and I will be the operator for today's call. [Operator Instructions] Please note that the this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law. During this call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliation of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables. You can find a copy of the company's earnings release, which contains additional information regarding the forward-looking statements and non-GAAP financial measures in the Investors section of the company's website at www.xpologistics.com. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

[Bradley S. Jacobs:]

Thank you, operator, and good morning, everybody. Welcome to our call. With me today are John Hardig our CFO; Scott Malat, our Chief Strategy Officer; and Karl Meyer, the CEO of 3PD, which, as you probably know, we recently agreed to acquire. Karl will be available during Q&A to answer your questions about last-mile. As you saw in the numbers we reported last night, we delivered some exceptional growth. Revenue was up 151% year-over-year, and gross margin dollars were up 128%. Some of this came from acquisitions, and we're also driving outside organic growth in our freight brokerage business. Organic growth in brokerage was up 65% year-over-year. The investments we're continuing to make in long-term growth, particularly sales headcount, resulted in a loss, as expected. Our results were also negatively affected by a soft expedite market, higher-than-expected transaction-related and litigation costs, and most important, the timing of acquisitions. We expect to close 3PD in the third quarter, and we remain on track to be EBITDA positive in the fourth quarter. Now I'd like to review the quarter in the context of 5 avenues of growth that are embedded in our existing business. First, we're continuing to scale up our current network of 62 locations. We're doing this by adding salespeople, giving them world-class training and empowering them with cutting-edge technology to make them as productive as possible. In freight brokerage alone, we've increased our customer-facing headcount to 788 people, up from just 92 in the second quarter of last year. You can see the benefit of scale in the robust organic growth we reported in our freight brokerage business last night. In addition, our salespeople now have more services to offer our customers. LTL, less-than-truckload, is a great example of a huge growth opportunity staring us in the face. Currently were doing only about $20 million of annual revenue in LTL company-wide, yet almost all of our 8,500 truckload customers have LTL business and we're taking steps to tap into that. Our acquisition of Interide in May brought us Sean Snow and a lot of LTL expertise, as well as an LTL technology platform that we've just rolled out in all of our sales offices. Now that we've combined Interide's carriers with our own network, we're already getting better LTL rates from carriers. The second avenue of growth embedded in our model is our strategic and national accounts program. Our strategic accounts team is one of the most experienced in the industry, and are getting a great response from large shippers. We recently won business from 26 large accounts, representing the potential for over $75 million in annual revenue. This includes some major wins, not just in truckload, but also in cross-border, less-than-truckload and expedite. The team is actively bidding on 82 additional accounts right now, and we're just getting started. The third avenue of growth, we're continuing to ramp up our cold-starts. The 8 cold-starts we've opened to date are on a combined annual revenue run rate of over $90 million, and we're in the process of opening our ninth freight brokerage cold-start in the Cincinnati Metro area. Cincinnati is designed to be our fifth mega-branch, which means it has the potential for exceptional growth because we can recruit from a large pool of sales talent in the area. Fourth is our acquisition pipeline, which is very active. Most of the targets we're working on are in truckload brokerage, but we're also looking at attractive opportunities in expedite, managed transportation, intermodal, LTL and last-mile. And the fifth avenue is our acquisition of 3PD, which will immediately accelerate our growth rate. 3PD serves an end market that's growing extremely fast, a combination of the outsourcing trend by retail shippers and the growth of e-commerce is creating strong demand for logistics providers with 3PD's specific type of expertise. In addition, 3PD provides the service that's within our core competency of non-asset logistics and is complementary to the services we offer now. We'll be able to move freight all the way from the factory to the final destination. Our value to customers will be based on a complete cradle-to-grave supply chain solution and constant growth in our carrier base. These capabilities make us uniquely attractive to large shippers who want to consolidate their supply chain relationships into fewer providers. In sum, we're very bullish about the opportunities embedded in each of these 5 avenues of growth. We're currently on an annual revenue run rate of about $550 million, and we remain on track to achieve our outlook for a $1 billion revenue run rate by year end, with an EBITDA of positive performance in the fourth quarter. More importantly, we're right on plan for our long-term goal of creating a world-class company with several billion dollars of revenue and several hundred million dollars EBITDA. With that, I'll ask John to review the numbers.

[John J. Hardig:]

Thanks, Brad. I'll start by giving you some details on the performance of our 3 business units during the quarter, starting with freight brokerage. Freight brokerage revenue was up 587% from last year, to $95.4 million, and gross margin dollars increased by 726%. $3.5 million of the revenue increase came from the mid-quarter acquisition of Interide on May 6. The balance of the increase came from 3 sources

[Scott B. Malat:]

Thanks, John. From a macro perspective, we see steady transportation demand. Truckload capacity has been relatively balanced for about 2 years now. We haven't experienced any material change in that equilibrium, despite the hours of service regulations that went into effect July 1. At XPO, our gross margin dollars improved sequentially in July, which was encouraging, in what is typically a slower seasonal month. In August, we expect to see demand from back-to-school retail, a pickup in auto business and the produce season in the Northwest. From a long-term perspective, we're growing the business in tune with secular trends in the market. Many shippers are choosing to consolidate 3PL services with fewer and larger providers that have deep capacity and a broad range of services. 3PD is a major step forward for us in this regard. When we've completed the 3PD acquisition, we'll now be one of the only -- few 3PLs that can provide an end-to-end solution. We've positioned ourselves to sell freight brokers, freight forwarding, expedite services, and now, last-mile logistics, all through XPO as a single source. We already have an extensive carrier pool and service range, but more importantly, we've shown that we're committed to growing our capacity and scaling up our customer-facing operations. This resonates with shippers who want to consolidate their supply chain partners. We've spent a lot of time with 3PD management over the last few weeks, and both organizations are excited about the growth potential of the combined company. Karl and his team have started working with our strategic accounts group to meet with some of the largest retailers in North America, and we have 925 customer-facing employees at XPO who are eager to offer last-mile logistics as soon as 3PD comes on board. We also continue to differentiate in technology. 3PD has strong proprietary technology that we'll use throughout XPO, especially for customer experience management. They have 4 patents pending, all related to their customer-facing IT. One feature that we particularly like is their electronic satisfaction scorecard, which they use to continuously improve their service levels in last-mile. We can apply this same technology to other areas of our business. We plan to integrate 3PD's platform with ours over the next 18 months. Our own IT team at XPO continues to stay at the leading edge of the industry. We recently added sophisticated carrier rating engines that help our branches find the optimal truck for each load, and we'll be rolling out new customer and carrier portals, and other enhancements in the coming months. In summary, we've established a differentiated value proposition for XPO, with multiple avenues of growth. We're poised to take advantage of both cyclical and secular industry trends. We've built a prominent brand in a short period of time, and it's getting us business with customers and carriers. Morale is high at XPO, and we've entered the back half of the year with a lot of momentum. I'm going to open up the call for Q&A. Operator?

[Operator:]

[Operator Instructions] Our first question comes from Justin Yagerman from Deutsche Bank.

[Robert H. Salmon:]

It's Rob Salmon on for Justin. Brad, clearly, we saw a very favorable response to the 3PD acquisition in the equity markets. Could you discuss a little bit more about XPO and 3PD customers -- their response to the acquisition and if your thoughts about the cross-selling opportunity between these 2 services has changed at all since these meetings?

[Bradley S. Jacobs:]

I'm going to pass it over to Karl because Karl just flew up from Gainesville yesterday, where he was meeting with his team, his sales team and our sales team, and there a was a lot of positive energy.

[Karl Meyer:]

Yes, I think the customer response has been extremely positive. We were proactive in reaching out, as we went through the process, to ensure that they understood the broader service level that we were going to be able to bring to the table, and it was very well-received. I think, from the synergy standpoint, the 2 areas that we're going to focus on first are, first, implementing our rate tariff for our transactional business into the selling infrastructure that exists at XPO. Within the current 3PD structure, we've only got 6 salespeople. As we implement and integrate that tariff with XPO, we'll have over 850 people selling that service. The other piece of it is really working with XPO's national accounts team to penetrate the large retailers and the manufacturers where we have very strong relationships. And we've already seen some movement there and we expect, by the end of the year that we'll have significant opportunities in front of us with the large retailers and manufacturers.

[Robert H. Salmon:]

That's helpful. I guess you guys had highlighted a real strong pipeline of acquisitions on the call with roughly 100 targets. Could give us a sense of where XPO's cash and availability under the revolver are, on a pro forma basis, post the 3PD acquisition? As well as give us a size, in terms of the range of targets you guys are currently analyzing.

[John J. Hardig:]

Sure, Rob, it's John. So, as we mentioned on the call for 3PD a few weeks back, we have a debt commitment from Credit Suisse for a term financing to fund the acquisition of 3PD, and then we have our current cash balance. Once we do that transaction, once we close 3PD, we'll be down to about right around $20 million, a little less, of cash on the balance sheet. And I mentioned on the call that we're doing an asset borrowing facility, an AR facility, that we can use to borrow against our receivables. That, basically, will certainly fund any organic growth and also can support acquisitions as well. So that's where we'll stand from a capital standpoint. As far as the pipeline goes, our sweet spot really hasn't changed a lot. We're still looking at deals that are $20 million to $200 million, but we're also looking at some acquisitions that are larger than that. So we're staying opportunistic, there are lots of opportunities out there to do accretive transactions, and we'll definitely go after those if we think we can create shareholder value by doing the deals.

[Robert H. Salmon:]

And, John, in terms of availability under an AR facility, once that's finalized should we be thinking about kind of roughly 85%, in terms of receivables that can be borrowed against under a facility like that?

[John J. Hardig:]

That's right. So we're looking at an 85% advance rate against the AR.

[Operator:]

Our next question comes from William Greene from Morgan Stanley.

[William J. Greene:]

Maybe we could just do a quick follow-up on that. If you look at the 3PD acquisition, a little bit more expensive than some of the deals you've done. Do you feel like the market's a bit more competitive or is that just sort of a unique aspect of this transaction?

[Bradley S. Jacobs:]

I don't it has changed, gotten better or gotten worse. In the last couple of years, multiples have stayed very steady. It depends on size. It's a 5x to 10x multiple kind of world, with the smaller deals towards the lower end and the bigger deals towards the high end. I mean 3PD wasn't that expensive when you look at the growth rate. Here you got -- it was basically about 10x trailing, about 9x this year and about 7x, 7.5x, 7.6x next year.

[William J. Greene:]

Yes. No, that's fair. And a lot of these depend on the specific transaction anyway. I just didn't know if you felt like you could see more competition out there in terms of auctions or something that would drive prices up.

[Bradley S. Jacobs:]

Not really. No.

[William J. Greene:]

Brad, can you talk a little bit about hours of service. There's been, obviously, a lot of press on this. Do you see any tightening going on when you look at your carrier base in the month of July? So far, is it too soon to tell? How do you think about that?

[Bradley S. Jacobs:]

We've seen some slight tightening, particularly in expedite, which is unusual for July, because usually volume is off. But I don't know whether we can trace that to hours of service or not. It's probably a little too early to tell for that. As I'm sure you know, I mean, hours of service -- a lot of carriers don't have electronic onboard recorders yet, it can take time to phase that all in.

[William J. Greene:]

Yes. Can you tell, with your comments on expedited, was that a supply comment or did you mean to say demand got better in July?

[Bradley S. Jacobs:]

Demand got better. Usually in July, in expedite is a bad month because you've got the turnarounds and the auto companies kind of slow down. And that didn't slow down as much as we expected, it actually picked up a little bit.

[William J. Greene:]

And you're suggesting that, that could be some spillover because folks are having trouble finding capacity or was that just something unique to expedited?

[Bradley S. Jacobs:]

I think it's unique to expedite. Well, truckload also has some slight tightening. I don't know if you can trace that to hours of service. That's just kind of normal ups and downs around the edges.

[William J. Greene:]

Yes, okay. And then just last question, John, I was hoping to get a point of clarification because I want to make sure I understood you correctly. I think you said, in the second half, in the freight brokerage side, you expect gross margins to go up. First, did I understand that right? And, if so, is that just scale that's driving that or what causes the gross margin to go higher?

[John J. Hardig:]

Well, it's really being driven by our cold-starts. So, as our cold-starts -- they're growing quite rapidly, and the margins are also rising at the same time. So one of the things that we're seeing is that as that business gains scale, we can really start to leverage our relationships with carriers. We've been able to increase margins over time, and as that business becomes a bigger mix of the total freight brokerage, it's having a positive impact on the margins.

[William J. Greene:]

Okay. So it's basically the scale argument?

[Bradley S. Jacobs:]

And tenure.

[William J. Greene:]

And tenure. Productivity of the sales force.

[Operator:]

Our next question comes from Scott Schneeberger from Oppenheimer.

[Scott A. Schneeberger:]

You guys highlighted in the press release that productivity for brokerage employee improved quarter-to-quarter, and obviously, you've added a lot of new hires. Could you speak to that dynamic, if you expect it to persist? Also, what type of productivity measures do you guys track internally to get a look at the sales force?

[Bradley S. Jacobs:]

So we look at a lot of productivity measures. That's a real key part of the business model. I personally look at 3 things

[Scott A. Schneeberger:]

You just addressed gross margins, John, in the back half, improving on scale and tenure. I assume that, that excludes any 3PD impact, if you even put that in the freight brokerage segment. And I assume that does not include acquisitions. If you can just clarify that. And then, also, with regard to SG&A in the freight brokerage business, what should we think about for trends in the second half?

[Scott B. Malat:]

It's Scott. On gross margin, absolutely. 3PD has doubled the margins that we have in the rest of the business. They tend to have 30% gross margins and EBITDA margins that are north of 10%. We haven't made a decision whether or not we'll combine that with our freight brokerage business. We'll be working with KPMG on it. It certainly falls most within our freight brokerage. They'll be working with a lot of the same customers. They're working together on a lot of accounts, but we haven't made the decision yet on how that'll be reported on an external basis. From SG&A, we're going to continue to hire. So in a freight brokerage standpoint, our gross margins will be increasing with tenure, with the technology we put in, as we just mature and our cold-starts improve. But SG&A will continue to increase because we expect to continue to add headcount. We added about 97 people on a net basis through hiring just within freight brokerage that are client-facing personnel in the second quarter, and I think that, that trend will continue.

[Operator:]

Our next question comes from Kevin Sterling from BB&T Capital Markets.

[Kevin W. Sterling:]

Brad, can you expand a little bit more on some of your recent business wins? I think you said you guys have participated, I think, at 26 national bids, $75 million in brokerage revenue, maybe an 80 or so more bids in the pipeline, you're targeting national accounts. It sounds like they tend to be more national in nature, therefore larger. These bids, are they coming from your some of your acquisitions? What's driving kind of your foray with some of these national accounts? Is it your service offering, your product offerings? Is it your recent acquisitions, the Rolodex getting into these accounts? Maybe you could expand on that a little bit more?

[Bradley S. Jacobs:]

Sure. I think it's a few things. First of all, that's Jeff Battle's group, who's heading up the strategic accounts. He's got some fantastic guys on that team, he's got Greg Ritter, who I'm sure you know, and Dennis McCaffrey and some others who are just very, very experienced people in the truckload business. And they have a very compelling value proposition that we're able to put in front of large shippers in that, we are young, we are hungry, we are very service-oriented, we are completely committed to world-class service, we are totally committed to on-time pickup, on-time delivery, we don't give back loads and we have a significant amount of capacity, we had -- when XPO logistics didn't exist 2 years ago, we were the 17th largest truck broker last year. We'll probably be the sixth or seventh largest this year when the survey comes out, and in a few years we'll be #2, after Robinson. So we have capacity that's growing, and a few years from now we're going to have more capacity when capacity may be tight. So it's a long-term relationship that makes a lot of sense. Now, do the acquisitions help? Absolutely they help, because some of the acquisitions come in with relationships with tier 1 accounts that now can be grown, and we can get greater share of wallet from those. And we've had several examples of customers that -- companies we've bought, we're doing business with, and the volume has literally doubled or tripled. So it's promising. That whole strategic accounts tier 1 effort is doing very well.

[Kevin W. Sterling:]

Okay. Great, Brad, that was very helpful. Lastly, on the acquisition front, you talked about the M&A pipeline being full, you're looking at a lot of things. I think you said earlier, growing your LTL business. But it seems maybe there's -- when you look at your product service offerings, maybe if there's one hole, it's intermodal. Could you talk about your thoughts on intermodal and maybe possible opportunities you see there?

[Bradley S. Jacobs:]

The problem with intermodal acquisitions, there's not a lot of them. So, of our list of -- 100 shortlist of acquisition targets we're looking at, I would say about 80 of them are in truckload brokerage, and the other 20 are spread out between about -- well, now it's 5. There were 6 that were last-mile, with 3PD now it's 5. There's just a handful of others that are in the other categories. So you can do the math, there's one handful of intermodal ones. So the way we've been gone about that is we are talking to some IMCs. We haven't been able to put something together that works for both sides. So in the meantime we've gone an organic route where we've gotten contracts with 2 of the large rails, and we're plugged in right on their EDI. And it's working, we don't have containers, we don't have boxes, but we've got access to the fleet and it's working.

[Operator:]

Our next question comes from Tyler Brown from Raymond James.

[Patrick Tyler Brown:]

Now that we're a little further along in the story, you brought on a lot of people. I'm just curious if the productivity curves that you're seeing from the sales people are maybe above, below or kind of in line with what you were expecting with, whenever you originally put the business plan together.

[Bradley S. Jacobs:]

Yes, they're right on line. If you look at what we said about the cold-starts, we said we'd be on a $5 million to $10 million annual revenue run rate after year 1. Well, right now, they're about a year old, on average. It's a little tricky because some of the larger headcount increases came in a later year. So, on average, tenure is a little less than a year, in terms of how old they are. And they're doing $90 million over 8 offices. So they're doing a little over the range that we thought they'd do at this point. So everything's been ramping up as we expected.

[Patrick Tyler Brown:]

Okay, good. So do you believe that the improvements in the productivity -- is that more a function of training or do you guys think you're doing a really good job picking the right people?

[Bradley S. Jacobs:]

It's a combination of factors. You've got to hire the right people to begin with, because you can have great technology, you can have great training, you can have great leads and great mentors, great culture, but if you don't have the right people to begin with, they don't have the right personality to sit there and bang out calls all day long to service customers really passionately. So, getting the right people is a big, big, big component of that and that's helping us manage the turnover as well. But you can have the great people but you have to have the other components as well. So it's several things altogether. It's hiring the right people, giving them good training, giving them great technology, giving them good sales and marketing tools.

[Patrick Tyler Brown:]

Okay, perfect. And then just a couple of quick housekeeping items, particularly on 3PD. But I may have missed it on the 3PD call, but how many people do you expect to on-board as a result of 3PD?

[Karl Meyer:]

Pat, this is Karl. You mean employees?

[Patrick Tyler Brown:]

Yes.

[Karl Meyer:]

We have about 650 employees geographically positioned across North America, U.S. and Canada.

[Patrick Tyler Brown:]

Okay, perfect. And then, John, just as we've progressed a little further on the purchase accounting, can you give us an update maybe on what the intangible amortization expense might be?

[John J. Hardig:]

Well, we're still working on that with our auditing firm, and we have some outside advisors doing a lot of heavy lifting on the valuation. So we're not quite there yet in terms of a number, but we'll be giving folks an update as soon as we have some sense of what it's going to be.

[Operator:]

Our next question comes from Ryan Bouchard from Avondale Partners.

[Ryan T. Bouchard:]

I wonder if you could give us an update kind of on the range for corporate expenses? The last time that you had kind of guided us, you said maybe $33 million to $37 million for the year. And, so far, year-to-date, you're tracking just a touch higher than that range. So if you could help us out there that'd be appreciated.

[John J. Hardig:]

Sure. So we definitely had an uptick in the second quarter, and as we said in the release and repeated again on the call this morning, a lot of that had to do with the M&A transaction costs and the litigation costs. And so it's going to be a little bit hard to predict because the M&A costs will be related to our M&A activity for the rest of the year, and the litigation is litigation, it's completely unpredictable. So that's the biggest variable in, really, kind of giving an estimate for what we're going to do for the rest of the year. If you look at -- if you take out those items for both the first and second quarter, we're running at a pretty steady level without those costs included. And so we would expect it to stay pretty much level at probably about $30 million without those additional costs. And then trying to figure out what the M&A and litigation costs are going to be on top of that is the hard part. It'll be at the high end of that range or maybe slightly above, again, based on the M&A activity that we incurred during the rest of the year.

[Ryan T. Bouchard:]

Okay. So, on the $1.8 million in transaction-related costs. Was that due to 3PD due diligence or was that something else?

[John J. Hardig:]

It was partly 3PD but it was also other transactions that we were involved in that haven't closed yet, but we put a significant amount of work and effort into during the second quarter.

[Ryan T. Bouchard:]

I see. So then should we see something related to 3PD also in the third quarter or was that all booked in the second quarter?

[John J. Hardig:]

It was just a little bit of it in the second quarter and you'll see the fees related to the capital raising and advisory fees for 3PD in the third quarter when we close the deal.

[Ryan T. Bouchard:]

So a larger part in the third quarter?

[John J. Hardig:]

Yes.

[Ryan T. Bouchard:]

And then the $1.5 million in litigation costs, there weren't any litigation costs talked about in the last conference call. Was that -- are these -- the $1.5 million this quarter, was that something new or was that a continuation of a prior event?

[John J. Hardig:]

We actually did talk about litigation expenses in the first quarter, but we said they were about $1.1 million in the first quarter and then that was $1.5 million in the second.

[Bradley S. Jacobs:]

These are primarily related to our friends in Minnesota.

[Robert H. Salmon:]

That's what I thought. I Just wanted to make sure. I didn't know if there was something new.

[Bradley S. Jacobs:]

Yes.

[Operator:]

Our next question comes from John Mims from FBR Capital Markets.

[John R. Mims:]

I got on a little late, so I'm sorry if you talked about this, I had to jump off for a call. When you look at the EBITDA positive guidance for fourth quarter, and Scott, a couple of your comments that I did catch on -- that you're continuing to ramp up SG&A spend as far us bringing new people on and hiring the right people. How do we get there? What's the risk of not being there? Do you need to scale back the amount of investment you're putting in the new branches? I mean, is it just purely a scale thing now that you've gotten critical mass with some of the existing cold-starts plus acquisitions or just -- and then again, can that carry into first and second quarter of 2014? I'm just trying to get my arms around this EBITDA goal a little bit better.

[Scott B. Malat:]

Sure. On the fourth quarter, it'll be a measure of productivity. So we increased, sequentially, our revenue and our gross margin dollars per rep from 1Q to 2Q. We expect that to continue because we're getting more productivity out of our reps, despite the fact that we're adding more employees. So we'll get some more productivity out of our existing base while we're hiring. We're not going to give up on hiring -- hiring is the best use of cash for us. We're going for the big kill over the next several years, and that's a great present value investment for us. On 3PD, it adds $40 million in EBITDA this year, and it's been growing, and they've done very well in June and July, and everything's looking up and looking good. The one thing that you can break out and say, well, are there one-times? Are there integration costs and closing costs that could shift around in 4Q and catch you by surprise? That could always happen. So that's the wild card, a bit, on the one-times, and integration and closing. But, in general, we feel pretty good about the guidance.

[John R. Mims:]

Now, excluding 3PD, which is a little bit of a different animal, but a lot of the earlier acquisitions took a fair bit of -- I mean, I guess you can technically call it integration cost. But, really, it was buying sub-performing, slightly underperforming brokerages and making them better and putting a lot -- investing over the long-term. I mean, are you just at a scale issue where you're still doing that but it's not as a big a deal on the overall piece? Or when you look at other SG&A running at 20% to I guess 17% to kind of 20% of quarterly revenue, does that start to scale back in the next couple of quarters?

[Bradley S. Jacobs:]

I'll let Scott answer the bulk of that question. One part of that I would take issue with, and that is, on the acquisitions -- Kelron was a fixer-upper, no question about that. We bought it at a price that reflected that. The others were fine companies when we bought them. We can't take credit for taking companies that were mediocre or subpar and fixing them up hugely, because they were great companies to begin with. I mean, Continental Freight, great company, just gotten greater by having access to Charlotte. Turbo, fantastic company, 25-year-old company with amazing relationships with Fortune 500 companies. Covered out in Lake Forest, again, fantastic company, guys who really get the business. And Interide, fantastic company. So if you go down list -- if you just take out Kelron, they're all blue chip companies.

[John R. Mims:]

Right. No, I get that. But, still, there is a period of time of investment, of getting them ramped up on the new system, of training them to use it and whatnot. So if I mischaracterized that...

[Bradley S. Jacobs:]

Right, right. So, yes, when you buy a company, you close it, yes. There's a little bit of upheaval for a few months there when you're putting them onto the new IT system, and getting them onto the HR platform and so forth. But they're all great companies, I just want to make the record clear about that.

[Scott B. Malat:]

We're investing in each of those acquisitions, we'll be adding people to those acquisitions and growing them. So I wouldn't expect -- I think we'll get leverage over the SG&A over time, but I think we're going to make those investments in SG&A to grow them.

[Operator:]

Our next question comes from or Ryan Cieslak from KeyBanc Capital Markets.

[Ryan Cieslak:]

The first question I had is going back to the recent account wins on the national and strategic initiatives. Congratulations with that, but the $75 million that you highlighted, how should we thinking about that rolling into the back half of the year? Is that something that you have an opportunity, gradually, as it's ramped up? Was there any of that here in the second quarter? Just trying to think of the cadence of that revenue going forward.

[John J. Hardig:]

No, that's more ramping up in third quarter and into fourth quarter. The national accounts team, we expect to be a significant contributor over the next several years. It's a very experienced team. We've been getting great receptivity, obviously, from some of the biggest shippers out there. But it's really a 2014 story to make a significant impact, and then 2015 and '16 ? But it's just getting going now.

[Ryan Cieslak:]

Okay. And then, Brad, you commented a little bit about what the value prop has been to win some of these, to get some of this new business. Has it been a little bit easier than you would have thought, in terms of going into some of these larger accounts and getting some of this business? Just maybe talk a little bit about the experience and how you feel about it going forward.

[Bradley S. Jacobs:]

It has been. I didn't know what to expect, really. Because we started off with the company going after small and midsized shippers. We wanted to have enough size and be a player in enough lanes and have our chops together enough that we could genuinely make a value proposal to the large shippers saying we can actually service these accounts. I'm very impressed with the receptivity that we've gotten and I'm excited about it.

[Ryan Cieslak:]

Okay, great. And then on the cold-starts, you guys had thrown some nice ramping in there, in terms of the overall productivity and the revenue you're generating from the 8 that you currently have established. What's the expectation of that ramp into the back half? Should it be a similar type ramp that we've seen the last couple of quarters? Where do you see the annualized revenue from those 8 cold-starts by year end? If you're willing to give some of that color.

[Scott B. Malat:]

Yes, we haven't given out that much yet. It'll depend on the timing and we're just getting going Cincinnati -- that will also be contributor towards the end of this year. We expect the ramp to continue. The tenure of the employees continues to improve so we expect to continue along the pace you've been seeing already.

[Ryan Cieslak:]

Okay, great. And the last question I had for you is just -- any idea exactly when the 3PD acquisition can close? I think you had initially said sometime in the third quarter. From a timing perspective, should we may be thinking about later in the quarter at this point?

[Scott B. Malat:]

Somewhere between August 15 and September 15.

[Operator:]

Our next question comes from John Larkin from Stifel.

[John G. Larkin:]

Karl, you mentioned that 3PD has 650 employees. I assume that does not including the owner-operators. Is that a fair assessment?

[Karl Meyer:]

John, that's true. Our network is with 900 carrier partners, and they represent, from a resource standpoint, between 1,750 and 2,000 units running for us on a daily basis.

[John G. Larkin:]

Some of those folks have more than 1 unit, I presume.

[Karl Meyer:]

Correct, correct.

[John G. Larkin:]

Now, are they viewed as owner-operators or independent contractors? And are you at all concerned about some of the legislation that's been proposed in New Jersey and New York? Do you feel like your relationship, pretty much, is rock solid in terms of defining these folks as independent contractors?

[Karl Meyer:]

I do. I think we've worked really hard to ensure that we're operating the absolute best model we can. All of our carrier partners operate under their own motor carrier authority, their own EIN or entity, they bring their own tools of the trade, and they provide their own insurance. So our relationship with our carriers is no different than XPO's brokerages with their truckload carriers.

[John G. Larkin:]

That is very helpful. On the notion of ramping up the cold-starts rapidly and hiring folks. Could you maybe give us a little more granular detail on the philosophy with respect to the kinds of people you go after? Are you looking at experienced transportation brokers that have a book of business that you can bring in, train briefly, turn them loose on your system and they're off to the races? Or are there a certain number of people coming in that might have the right psychological profile that require more in-depth training? One of your public competitors recently extended their training program out from something like 6 weeks to 6 months, in order to ensure that those folks were more productive and that the turnover rate was diminished. Can you talk a little bit about your philosophy in terms of how you ramp up those cold-starts so rapidly?

[Scott B. Malat:]

Sure. So there's two parts to that question, carrier procurement people and customer sales reps. On the carrier procurement, we have a larger percentage of people who are industry veterans who have been in the business. On the customer sales part, I'd say roughly about 1/3 come from the business -- people who have been doing it 5 or 10 years, and have relationships and know the business really well. They still go through the training program; it's been a abbreviated part to just get synced up with the way we do things, but they obviously know the business very well. The other 2/3 or so are mostly recent college grads, but we tend to hire people who've already had a job or 2 after college. We tend not to hire people -- although we make some exceptions -- kids right out of school. So people who have some experience in the job workplace. And with respect to the training program, yes, I mean training, you want to go on for as long as possible. I mean, you can't train -- there's no harm in overtraining, and the more mentors you have in the company and the more different facets to the training program, the better. When someone representing XPO Logistics is talking to a customer, whether they're a shipper with a billion-dollar transportation spend or they're just a small customer, they got to represent the company well. They got to represent the company professionally, they got to know what they're talking about and they got to value that customer's freight.

[John G. Larkin:]

That's very helpful. You talked about opening a mega branch in Cincinnati, which just coincidentally happens to be the headquarters location of probably the current #2 in the truck brokerage arena. I thought that was an interesting city to focus on as your new super branch. What makes you think that there's a large number of good people to recruit in Cincinnati, given that one of the big competitors has already, in theory at least, picked over the folks that are positioned to be the best truck brokers in that region.

[Scott B. Malat:]

That one particular competitor is one that we have extreme respect for, and admiration for. And we think they're fantastic. And we think they've grown really well under the radar, kind of stealthily, and just done a fantastic job. We don't intend to hire a whole bunch of people from them, partly because we honor competitors' non-compete and they tend to have strong non-competes with their employees. But also because the types of people that we hire are generally a little bit different than their model -- although their model's working great for them. They tend to go for the people right out of school. We tend to go for people who have already had a couple of jobs out of school. So we won't exactly be competing head-on for the people.

[John G. Larkin:]

That's very helpful. And then...

[Scott B. Malat:]

John, I would add one thing. They did come into Charlotte before we went in to Cincinnati.

[John G. Larkin:]

That's correct. But I think the reason they went to Charlotte was that they felt like they were maybe running out of the recent college grads, to your point. But they, historically, have not gone after the folks with a little more experience in other industries.

[Scott B. Malat:]

Charlotte is a good place to recruit from. I mean there are several competitors in Charlotte.

[John G. Larkin:]

Okay. And then the other thing that was a big event during the quarter, there was a large transaction of a transportation management company that does have some transactional brokerage capability, and that company traded from one private equity firm to another private equity firm. I'm sure that you all looked at that in a lot of detail. Do you worry at all that private equity, because of their willingness to kind of lever transactions up quite heavily is sort of a difficult group to compete against, especially when you're looking at some of the larger strategic acquisitions as you look to grow your business over the next couple of years.

[Bradley S. Jacobs:]

Well, I don't want to comment on that specific transaction because we like to respect the privacy and confidentiality that we agreed to when we look at companies. But that happened to be a real fine company, we didn't happen to get it. Private equity, sometimes, will play in this space and be aggressive competitors, and other times they won't. I think it's kind of semi-random. You won't see private equity in the smaller deals, that's our bread-and-butter. They just don't like to do little deals, they like to do big deals. On the bigger deals, they often will be in the mix. A lot of times sellers don't want to sell to private equity. If they're going to, particularly, stay on afterwards. It's a little bit of oil and water, they prefer to sell to a strategic.

[John G. Larkin:]

Got it. And then maybe just one last question, probably for Karl. The last-mile world is really a huge land of opportunity, and I guess there are kind of 2 segments of it. One is kind of the package delivery world and one is the sort of larger items, appliances, televisions, things of that nature, which I guess is more your specialty. As the model for e-commerce changes, and folks like Amazon take on a bigger and bigger role and try to be increasingly more responsive to what their customers need, how do you see that changing your business? For example, do you see same-day delivery being a factor in your sector? And is there a way to adapt your model for delivering more than just the large items that require installation and that are not really suitable for moving through what I would call the conveyorized parcel delivery companies.

[Karl Meyer:]

Sure, sure. I mean, ballistically, in this space, what we see is the brick-and-mortar retailers are trying to pivot static supply chains to move from delivering truck load quantity and pallette quantity to each's 10 consumers. And the virtual players are building out their infrastructure to focus on the drivers in that space, which is velocity and free shipping. Holistically that's opportunity in the last-mile, because all of it means more disintermediation of retail stores and more volume going straight to the end consumer, job site or business. Kind of on the second part of your question there, historically, we have focused on larger-than-parcel, the high-service market. Because, one, it's our core competency, and two, it's a great margin business. As we continue to grow out our transactional business, which today is only 10% of our revenue, we see opportunities in the future to move into parcel and be differentiated.

[John G. Larkin:]

I think that's just a massive opportunity for the company, and to the extent you can utilize some of the great systems and so forth you have in that market, you could really differentiate yourself, I would think.

[Karl Meyer:]

Definitely, we definitely see opportunity there.

[Operator:]

Our next question comes from Jack Atkins from Stephens.

[Jack Atkins:]

So I guess just going back to 3PD for a minute. Do you expect 3PD to be able to bridge the gap on cash flow to cash flow breakeven or do you still expect to be sort of at a negative cash flow for the next couple of quarters until you build your scale out more?

[Scott B. Malat:]

So our cash flow will turn positive after our EBITDA does. CapEx is relatively minimal. I mean, if you look at the free cash flow conversion, especially at 3PD, it's off the charts. They have 80% to 90% free cash flow conversion with low CapEx, $2 million to $3 million in CapEx kind of rate, on a run-rate basis. And then their working capital is only 4.5% of sales, versus XPO we're more 7.5% to 8% of sales. So their working capital investment is not as high. But as we grow, we'll be investing in the working capital of both XPO and 3PD. So, excluding working capital will be sooner, and then with working capital on the growth, it'll be sometime a little later.

[Jack Atkins:]

Okay, okay. Thanks for that detail, Scott. And then I know we talked about the revolving credit facility, John, but I'm just curious if you could maybe walk us through some of the other funding alternatives here. Brad, when would you consider maybe exercising your warrants? Would that be sometime over the next 12 months or is that something later on in the plan? And if I remember correctly, on the 1Q call you all said you would not need to access the equity market for additional capital to get to the bottom end of that $4 billion to $6 billion revenue range. Is that still the case here?

[Bradley S. Jacobs:]

So, on the warrants -- they're 10-year warrants and they just started less than 2 years ago, so there's 8 more years on that. In terms of accessing the equity capital markets, we'll be opportunistic on that, and we'll keep an open mind and we're actively looking at various capital market alternatives. We have a board meeting coming up later this week and we'll see where we come out on what and when. There are several different capital markets that are open to a company like us at the moment.

[Jack Atkins:]

Okay, okay. And, Brad, just one last clarification from your prepared comments. You said, I think, in your opening statement, that you expect to be a several-billion-dollar revenue company. I think the stated goal in the past has been $4 billion to $6 billion. Is that $4 billion to $6 billion range by 2016 still the goal or has that changed any? Just any clarification you could give on that would be helpful.

[Bradley S. Jacobs:]

Thank you for pointing that out. I didn't mean to signal anything other than the exact same thing I've been signaling all along. $4 billion to $6 billion within a few years. Same exact goal. Nothing has changed whatsoever, and we're right exactly on track where we want to be.

[Operator:]

Our last call comes from David Campbell from Thompson Davis.

[David P. Campbell:]

The freight forwarding gross margin target, do you have a target that we can use there, in freight forwarding for 2014?

[Scott B. Malat:]

In freight forwarding, specifically, we do expect the general trend to move up from where we are. There's two dynamics going on there. One, we're growing our company-owned locations, which have higher gross margins. So that will be moving it up. That'll be partially offset by the growth we're continuing to have in international. International, we're doing a lot of import and export ocean. Those come at a much higher ticket on a revenue per transaction basis, but the gross margins on that dollar will be a little lower. So, in general, we'll work our way up in the mid-teens range, into that 14%- to 15%-type range. Hopefully, we can go above that someday, but that's kind of a good range for now.

[Bradley S. Jacobs:]

Dave, you've been covering the company longer than, well, literally, than anybody. You were covering it for years before we took control of it. It was still called Express-1 Expedited Solution. So you have a good context on this. I mean, freight forwarding is actually a bright spot in the company. Their revenue was up 17%, their gross margin was up 230 basis points, EBITDA was up 150-something percent. So it hasn't always been that case. I'm sure you must be smiling seeing that.

[David P. Campbell:]

It's a huge market. I mean, Express-1 was actually growing very nicely in that business before you bought them. They acquired the company in Tampa, Florida, put them in the sea freight business. So it's a huge potential. It's a huge potential and of course it's growing faster right now than airfreight, which isn't growing. I think you're in the right place there. Tampa is still the leading source of a lot of your sea freight business?

[Bradley S. Jacobs:]

We're doing a lot in Tampa, we're doing a lot in Miami. That also came with the acquisition. Miami had growing pretty significantly. And then Houston, so Houston is a cold-start that we've got going and their import/export business has been extremely strong, especially in the oil and gas sector. John [indiscernible] has been running that business for us and I got to tip my hat to him, he's doing a good job.

[David P. Campbell:]

Did I miss it? But you haven't talked about 3PD's revenues, is that correct?

[John J. Hardig:]

3PD's trailing 12-month revenue is about $325 million. In 2013, it'll be around $350 million.

[Karl Meyer:]

Correct. I mean, for first half, the business is doing extremely well. Revenue is up 12.5%, EBITDA is up 36.3% for the first half.

[David P. Campbell:]

All right. Well, obviously, extremely well-managed because we have one of your competitors, Forward Air, is continually having trouble with their last-mile business. Is it just management, is that basically it, the differences?

[Karl Meyer:]

Yes, I think it's management, our geographic presence, scale, experience. And then a big piece of it is technology. I think we differ in our space, in that we measure every single thing we do in real time. And it drives quality processes in real time that hold everyone organizationally accountable, our employees as well as our contract carriers. Huge differentiator for us.

[David P. Campbell:]

Right. Earnings in the first quarter of 2014, is it too soon to talk about -- I mean, we know that fourth quarter is going to be cash positive, EBITDA cash positive. Is it too soon to tell about the first quarter next year?

[Bradley S. Jacobs:]

It is. It is.

[David P. Campbell:]

Okay. And shelf registration, you had one in May. You didn't use it in the second quarter. Was that really to cover the financial things for 3PD?

[Bradley S. Jacobs:]

Not really, because we're not paying with a whole lot of shares. The share component of 3PD is less than $10 million, and a big chunk of that is Karl, actually, and 2 entities that rolled over their shares. The shelf is there for when and if we tap the equity market, it's available to us to use.

[David P. Campbell:]

Right, right. But, so far, in July, there hasn't been any stock or debt sold, is that correct, except for the Crédit Suisse financial?

[John J. Hardig:]

That's right, there's been no stock issuance.

[Operator:]

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

[Bradley S. Jacobs:]

Well, thank you everybody, appreciate your participation in the call and we'll be seeing you soon. Have a great one. Bye.

[Operator:]

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