XPO Logistics, Inc.
Q4 2013 Earnings Call Transcript

Published: 25 Feb 2014

[Operator:]

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

[Bradley S. Jacobs:]

Thank you, Dawn. Good morning everybody. Thanks for joining us on our fourth quarter conference call. With me today in Greenwich are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Director of Investor Relations. Last night we updated our financial targets. We're projecting an annual revenue run rate by year end 2014 of $2.75 billion, and an EBITDA run rate of $100 million. For 2017, we’re updating our targets to $7.5 billion in revenue and $425 million in EBITDA. At the start of 2013, we were on an annual revenue run rate of just under $500 million and we set a goal for the year of doubling that to $1 billion by the end of December with positive EBITDA for the fourth quarter. And as you saw last night, our team did achieve those targets. We grew our total revenue by 137% and we increased our gross margin dollars by 239% company-wide. We also improved our gross margin percentage in every one of our business units for the second quarter in a row. In freight brokerage, we continue to buck the industry trend and delivered 110 basis points of gross margin improvement from last year, excluding the additional benefit of our higher margin last mile business. We’ve now increased our freight brokerage gross margin in five of the last six quarters. And in the fourth quarter, we drove double-digit growth and profitability in both our expedited and freight forwarding units. With Pacer, we started integration planning with Dan and his team, and we're concentrating on seven areas of potential synergies. We are even more optimistic about the synergies now that we’ve been working together to examine the possibilities. In our recent meetings with customers, particularly the larger ones, we’re getting very positive reactions to our ability to provide a unique range of multimodal solutions to their transportation needs. These meetings have validated the reasons why we wanted to buy Pacer, 3PD, Optima, and NLM. They all provide services that are rapidly growing in demand in the North American supply chain. With Pacer coming on Board, we can work with our customers to identify intermodal conversion opportunities for long-haul freight. About a one-third of our current freight brokerage shipments travel over 700 miles, and a significant portion of that business is ripe for conversion. Our salesforce is excited to offer an improved intermodal solution to our 9,500 mostly small and midsized customers and by the way so are the rails. Pacer has fantastic relationships with several dozen of the largest shippers across North America. In most cases, Pacer is either their number one intermodal supplier or one of their top three. But the key point is that intermodal is typically less than 10% of a shipper's total transportation spend. So, we have an enormous opportunity to sell these customers truckload, expedite, LTL, freight forwarding, managed transportation, and last mile. I'd also like to welcome a very strong addition to our management team. Chris Healy is now running all of our Expedite Operations in the U.S., Canada, and Mexico, and I don't think there is anyone else in the industry with as much experience creating value in expedite as Chris Healy. He goes all the way back to the Roberts Express days before it was bought by Custom Critical. Welcome aboard Chris. With that, I'm going to turn it over to John who's going to talk about our results.

[John J. Hardig:]

Thanks Brad. I’ll cover the performance of our three business units during the quarter. Freight brokerage revenue was up 203% from last year and gross margin dollars increased by 381%. Within brokerage, our truckload, LTL, and intermodal revenue increased 71%, and gross margin increased by 110 basis points to 14.5%. Our brokerage cold starts continue to ramp up nicely. Last year in the first quarter, our cold starts run an annual revenue run rate of about $60 million. Today we’re at about 2.5 times that amount, roughly $150 million and we are continuing to grow them fast. Gross margin is a good story here too. We improved gross margin in our brokerage cold starts in all four quarters of 2013. Organic revenue growth in the fourth quarter in our freight brokerage business was 57% over the prior year and for the full company, it was 24%. Kelron is now included in our organic revenue, and as you may remember when we purchased Kelron last year, we outlined our plans to pare back the lower margin business. We achieved this goal and have turned the Kelron business profitable at a lower, but healthier revenue level. Excluding Kelron, our Freight Brokerage business had organic revenue growth of 100%. Within brokerage, our last mile business had a strong fourth quarter, with gross margins improving 170 basis points sequentially from the third quarter. 3PD continues to expand its business driven by growth in housing activity, ecommerce sales, and outsourcing. We expect all three of these positive trends to continue well past 2014. In expedited transportation, we increased our revenue by 19% and improved our gross margins by 100 basis points over last year. Our expedite business was able to reduce its transportation costs, and this benefit combined with our acquisition of XPO Air Charter, led to 54% increase in operating income. Our freight forwarding business achieved strong profit growth in the quarter. While revenue was flat, gross margin increased 80 basis points and operating income increased 64% from last year. On the corporate side, fourth quarter SG&A expense increased to $11.6 million from $10.1 million a year ago. Included in corporate expense was $1.2 million of transaction related costs and $1 million of litigation costs. Net interest expense was $5.6 million for the quarter, which included costs related to the conversion of $10 million of our convertible notes to common shares. We incurred similar costs from additional conversions in the first quarter. And absent any more conversions, our interest expense will decrease sequentially in Q2. Our accounts receivable facility is currently undrawn and gives us additional liquidity for acquisitions at an interest rate of LIBOR plus 175 to 225 basis points depending on availability. As we previously discussed, we’re in advanced discussions with a group of lenders to consider increasing the facility from $200 million to as much as $490 million, including an accordion. Our effective tax rate for the quarter was 26%. We expect our effective tax rate in 2014 to be in the range of 28% to 32%. At the end of 2013, we had $105 million of federal tax NOLs, and we'll be acquiring over $20 million of tax NOLs with Pacer, which means we won't be a cash taxpayer for several years. Capital expenditures for the quarter were $5.1 million consisting mainly of technology-related spending. Looking ahead XPO's CapEx for 2014 is expected to be $22 million to $24 million, two-thirds of which is related to IT. This is in addition to our IT operating expense budget for 2014, which is approximately $21 million. These numbers exclude Pacer. Pacer's 2014 IT budget, including both capitalized and operating expense is close to $35 million. So XPO and Pacer combined will be spending more than $70 million on IT in 2014. Our liquidity position remains strong. We had $358 million of cash at February 21st, and our convertible notes that are trading well in the money -- other than those convertible notes we have about $2.5 billion of debt. Now, I’m going to turn the call over to Scott and after that we’ll go to Q&A.

[Scott Malat:]

All right, thanks John. Let me start by talking about our operating environment. Weather is the big topic of conversation in freight right now. A lot of shippers have backlogs of at least one or two weeks or more. Between what continues to be strong demand and the weather disruptions, capacity has been tight since the second week in January and it's gotten even tighter over the last few weeks. If the backlog isn't cleared soon, the start of produce season in mid-March will exacerbate the imbalance between supply and demand. There are opportunities and challenges for us in this environment, but on balance, we think it will have a positive long-term impact on our business. That's because shippers are looking outside of their traditional vendors for additional trucking capacity, and it’s creating opportunities for us to bid on more freight. We can showcase our technologies and our growing network of carriers. The bottom line is we have access to trucks. Our expedite unit is also benefiting from the tighter capacity as customers have more urgent freight, and it has been especially good for our Air Charter business. There has been some weather impact with 3PD and our last mile business, but 3PD has been growing at a strong clip in areas unaffected by the weather, and their pipeline of new business is robust. Our strategic accounts team is making significant progress. In the last three months of 2013, we did business with 26 new strategic accounts and the pace has picked up in the first quarter. We’re also improving the productivity of our sales reps, which is a credit to our training and technology because we added over 300 net new customer and carrier sales reps in 2013. We increased our gross margin per employee in each of the last three quarters. And in the fourth quarter, freight brokerage gross margin per employee increased 11% sequentially from the prior quarter. With cold starts, we recently added two more offices to our freight forwarding network in Salt Lake City and Seattle. We’re now growing 23 cold starts company-wide under experienced leadership, and we are planning to open at least three more freight brokerage cold starts this year. Our acquisition pipeline is full. Our outlook to acquire another $400 million in revenue this year, excluding Pacer, is well within our reach. The acquisitions we've made in the past six months have been particularly transformational for our company. 3PD and Optima have made us a leader in last mile logistics in North America, and Optima is now integrated into our 3PD operations. NLM has catapulted us to a position as the largest manager of expedited shipment. NLM also gives us a foothold in managed transportation, which is another service that’s growing in demand. So, we have many avenues for growth, and we're in a strong position to drive that growth in any operating environment. We've met or exceeded every major financial goal we've set for ourselves over the last 2.5 years. Given our growth trajectory, we're confident in our outlook for this year and our updated long-term targets. That wraps up our prepared comments and now we’ll take your questions. Dawn if you'll please start the Q&A.

[Operator:]

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Justin Yagerman from Deutsche Bank. Please go ahead.

[Rob Salmon:]

Hey, good morning guys. It’s Rob Salmon on for Justin.

[Bradley S. Jacobs:]

Hey Rob.

[Rob Salmon:]

Hey, I guess touching base with regard to the updated guidance, as you look out to 2017 and the $7.5 billion topline goal, how much revenue do you guys expect coming from acquisitions and organic growth? And as we think about the capital structure, should we still be thinking about a roughly two times debt-to-EBITDA leverage ratio for the company?

[Scott B. Malat:]

Hey Rob, it's Scott. As you look forward to the next few years with the recent capital raise, we look like we have about $1.5 billion to $2 billion in dry powder to go out and buy acquisitions. That translates -- when you look at the topline revenue growth, we're looking for low to mid 20% type of organic growth. When you look at that $1.5 billion to $2 billion, yes, a large portion of that is going to come from debt. That will come from the accounts receivable facility that we're currently expanding, that could take up to 85% of our accounts receivable. As we grow the company and -- as we acquire and grow the company and become larger, that expands and then two turns of debt on our EBITDA on top of that.

[Rob Salmon:]

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

[Scott B. Malat:]

That's correct.

[Rob Salmon:]

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

[Bradley S. Jacobs:]

Sure Rob, its Brad. So, we sent out yesterday -- we cleared the SEC and we sent out the filing materials and we set the shareholders vote date for March 27. And as soon as we get the vote, which we believe we will, we'll close at the end of the month. So, when we get -- to get to the $2.75 billion, we have about $1 billion now, we did over $250 million in the fourth quarter and that only included less than a week of NLM and we'll have some organic growth on that $1 billion. And then we're going to get Pacer's almost $1 billion of trailing revenue and some organic growth on that. And then we're going to buy, base case scenario, about $400 million of revenue, and when you add those together, you get up to the $2.75 billion. I think that is a good solid base case scenario. In terms of your question about how many different companies, I don't know, it could be one, IT could be five, it could be something between one and five. It all depends. We’re talking to a bunch of different companies, some of them are small, some of them are big, some of them are medium. And it's very hard to predict that. But in aggregate, the base case scenario is we will pick up about $400 million of revenue.

[Rob Salmon:]

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

[Bradley S. Jacobs:]

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

[Rob Salmon:]

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

[Bradley S. Jacobs:]

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

[Rob Salmon:]

Well, good luck I guess closing of the Pacer acquisition and as you guys were discussions with other interested targets.

[Bradley S. Jacobs:]

Thanks Rob.

[Operator:]

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

[William J. Greene:]

Hi there, good morning.

[Bradley S. Jacobs:]

Hi Bill.

[William J. Greene:]

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

[Bradley S. Jacobs:]

Yes. We don't have -- its 2017. We don't have it down to the teeth exactly how it’s going to break out, but roughly about half in truck brokerage and then the last mile business that we have consider that to grow to get up to, call it, $75 million, $80 million and EBITDA and assume 10 times that roughly on the revenue level. Expedite is going to continue to grow, but it's only so big of a market, so we know that's not going to be the biggest chunk of the revenue mix. Freight forwarding, it will depend quite a bit on what we end up doing with Pacer’s international business, the XPO global logistics division that we have which we rebranded the CGL business we bought, originally the freight forwarding business. That's growing steadily, but it's a less than $100 million business and its doing a few million dollars of EBITDA. Of course, intermodal, we have a big emphasis on and that's something that we’re going to drill down very hard to grow very, very rapidly. Does that give you the broad parameters?

[William J. Greene:]

No, yeah -- no that's perfect. I mean obviously you don't know at this point, but just in terms of where the targets are is helpful to have. Another question I had -- and I'm sure you get this at every conference you go to, is just about when you about the evolution of the business, you guys have been bucking the trend on the net margins, and that's good to see. How long do you think you can kind of continue to outperform? When we see about -- as Scott kind of mentioned in his comments, the tightness related to weather and whatnot, I got to believe that that can create constraints on gross margin. So when you think about this and even looking out through 2017 targets, how is your gross margin in the brokerage business evolved do you think?

[Bradley S. Jacobs:]

There is a big debate about what the gross margin is going to be in truck brokerage as an industry in 2017 and it’s a question that we ask ourselves internally a lot. And we ask our competitors and vendors and industry players all the time too. And you get answers back that are really across-the-Board from 10% to 16%. I’m more in the bullish camp. I'm towards the high end of that range. I think that truck brokerage is going through a period now where there’s a little inflection point and you had two years of doldrums and balanced equilibrium and now its pure chaos for the last couple of months and I think that's a good thing. I think that shakes out some of the weaker players and the ones who are agile and ones who have broad access to capacity and have great IT systems and are just hitting on all eight cylinders are differentiating themselves. Differentiating themselves in terms of the gross margin performance and differentiating themselves in front of the customers. I was in a customer’s office a few weeks ago during the Auto Show in Detroit and it was during that one of those polar vortex days, and we got on the phone with our care procurement folks, and in two hours’ time, we dug up a 120 trucks and that really impressed the customer and I can give you several success stories like that. That kind of ability to excess capacity during the tough time is what's going to differentiate the ones who are able to generate improving businesses and not. And I'm very confident we’ll be one of the ones that will be improving.

[William J. Greene:]

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

[Bradley S. Jacobs:]

The weather is definitely the topic du jour and it's what makes the business interesting this quarter. And the weather is affecting us positively in some of our business units, negatively in others and it doesn't matter in other ones, when I take them down one by one. So I start with the obvious one. Expedite including NLM is in big demand. And the horrible weather is great news for them and in January and NLM, for example, our XPO-NLM division moved 33,000 shipments as opposed to 22,000 shipments in January of 2013. So, a very big spike in volume in expedite. Same for other units in expedite around the country that Chris Healy is now going to be leading up. So, big disruptions in weather pushes the freight towards expedite needs up and this is really good for us. On the other end of the spectrum, our retail customers in our last mile businesses mainly with the 30 big box retailers, those customers have lost business. There were many days when people just could not go into a brick-and-mortar store and shop for goods and that business wasn’t -- all that business wasn't lost forever. Some of it was made up but some of it was lost forever. So, the last mile business with the weather, the weather is a bad guy for that one. On truck brokerage, it’s mixed. We have much more volume than we normally would have because the routing guide compliance has gone to pot and the spot market has exploded. There is much more volume coming onto the spot market in the last six weeks then there was in similar period last year. And that volume however is coming at a lower gross margin because capacity is extremely tight, the tightest it's been in memorable history. And rates have been going up and going up rapidly, sometimes in the space of an hour truck comes back to you and says, hey I've got a real problem. People are offering the freight at much; much higher prices and they want to reprice it. So this is an opportunity again to show to customers what we can deliver when we've got access to 24,000 different carriers and 400 trucks driving force exclusively Express-1. But overall, I would say the weather is a mix, bad for truck brokerage, may be slightly negative because the gross margin contraction is there. Freight, on international business on air and ocean the weather is obviously irrelevant. On the intermodal business, which we're timing right now, but are going to get huge in after Pacer, there's been disruptions and Chicago is a mess, and volumes are down there. I would say one positive thing and a hugely positive thing that's come out of all this disruption is the industry as a whole, the truck brokerage industry as a whole, competitors are much more focused on pricing right now than on gaining market share. And you saw in 2013 and also in 2012 for that matter, competitors and particularly some larger ones, really going aggressively after market share regardless of price. That tone has changed and the industry as a whole now in truck brokerage needs to be much more focused on. We have got to get a fair price for what we're doing here. We can't have a high percentage of money loosing loads, much more than grabbing market share. So in that sense there's a pretty good silver lining.

[William J. Greene:]

All right. Thanks for the time.

[Bradley S. Jacobs:]

Thank you.

[Operator:]

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

[Allison Landry:]

Good morning. Thanks for taking my question.

[Bradley S. Jacobs:]

Good morning.

[Allison Landry:]

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

[Bradley S. Jacobs:]

Okay. Several topics there. Let's start with Pacer. Pacer, we cleared Hart-Scott-Rodino a few weeks ago. We started meeting with Dan and his team to go over the synergies, how we're going to put these companies together in the most intelligent way? And we've been focusing on seven different areas so far. But first category obviously is the revenue synergies, the cross-selling. So as I mentioned in the prepared remarks, approaching the several dozen Tier 1 customers that Pacer is very tight with and marketing to them these other services that we are very strong in. And then taking the [knife] out to 500 small and mid-sized customers that we have at XPO, a third of the truck brokerage volume that we have, going more than 700 miles. So, lot of rightness for conversion to intermodal, and then marketing Pacers, a product which is superior product than we had in intermodal to those small customers. And then on the cost side, we've had our IT people meeting with Pacer's IT people having many constructive conversations. They preliminarily identified about $3 million to $5 million of easy synergies over a couple of years. These are the obvious things like merging data centers and operating system consolidations and what you do at SAT versus Oracle and getting all into one CRM, and all the typical things you do in an IT merger. And then on brokerage, we're going to be bringing their brokerage group which is a few dozen people on to our freight optimizer very quickly after the closing, give them access to all of our capacity, give them access s to our price guidance algorithms. And I can tell you with great confidence; I can tell you that they will be ecstatic with access to that technology and to that capacity. Obviously, we're going to tackle the public company expenses right away, the Board of Directors fees will go away, the auditing fees on a combined basis will come down. On the real estate, we're studying the lease terminations and all the details of the various leases that Pacer has that we have with the very beginning of that process. And we're going to look at opportunities to co-locate where that makes some sense. On the freight forward and what Pacer calls logistics in their company, we're studying that, we're analyzing that, we're looking at profit improvement opportunities, there's more meeting going on this week, we're trying to understand how can we turn that from the red to the black and what kind of synergies do they have with our XPO Global Logistics division. And then the final area of synergies is the sales organization structure. Post-Pacer we will have little over 100 outside sales reps and some of those have been calling on the same customers for their respective customers -- companies prior to the closing. So we're going to rationalize who makes most sense to be covering, who has the best relationship with these customers; how we can figure that, so lots and lots of planning. It's at the early stage, but moving at a very past pace there. Now you asked about Mexico. Mexico and I couldn't quite get what your question is on that. You said something about exposure to -- are you talking about the legislation down there, or you're talking about the weather?

[Allison Landry:]

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

[Bradley S. Jacobs:]

Yeah, absolutely. Totally got it. So auto is a big industry segment for us. We started with auto way back in 2011 with Express-1 which serves the auto industry directly to auto companies, and also some of the 4PLs that manage the auto's supply chain. And then we bought Turbo. They have a big expedited division there as well in Gainesville that services the auto companies directly and the Tier 1 suppliers to the auto companies. And of course, NLM is a story, is a well-recognized, highly decorated, highly awarded and has lot of awards they've gotten for customer service for the auto companies. So we have a lot of auto exposure. And I would say we're very good at that. Now, on Pacer, that's only going to go deeper, because a lot of intermodal business obviously is auto. When you look at the north south lanes with Mexico, there's a lot of freight coming up from Mexico into United States. And there's not a lot of freight going down into Mexico. So the whole trick on intermodal north south intermodal is to get what you're looking at as the backhaul or the front-haul depending on which side of the board you're looking at, to get from going from north to south is the key there. Of course, auto has a bunch of parts that go down there and finished goods come back. So yes, we have a real good synergy with Pacer in terms of taking the freight that we've got from our auto customers, a lot of which is going on truck right now all the way from upper-Midwest, down to Laredo and sometimes into Mexico and that can be converted on to intermodal and putting that together with their capacity. But it's not just auto. There's other and there's non-auto industries and there's also a consumer packaged goods that we're strong in and that we can help with the north-south cycle. Does that answer your question?

[Allison Landry:]

That answers my question perfectly.

[Bradley S. Jacobs:]

Super.

[Allison Landry:]

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

[Bradley S. Jacobs:]

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

[Allison Landry:]

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

[Bradley S. Jacobs:]

After CapEx sooner, but when we include the investment in working capital which is a great investment to make, it's a great return on capital that will take us to more negative free cash flow this year turning into positive free cash flow in future years, so free cash flow in this business is pretty simple. We talked about what our EBITDA range is that we're looking at. We talked about what CapEx is, interest expense. And we're not going to be a cash tax payer for several years. So really is that investment in working capital? And working capital is, let's say, roughly 8% of the organic growth is what -- so as we grow organically we're putting an additional 8%. So the faster we grow it will take us little longer to turn free cash flow positive.

[Allison Landry:]

Okay. Great. Thank you so much for your time.

[Bradley S. Jacobs:]

Thank you.

[Operator:]

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

[Scott Schneeberger:]

Thanks. Good morning. I'll pick up on that last question. It's kind of a two-part. It sounds like a lot of CapEx this year with Pacer, is that something that over time you can rationalize once you find some synergies? And then the second part of the question is, Scott, you answered the question on free cash flow 2014 into '15. Any thoughts, I'm not sure how much you want to quantify, but out into '16 and '17 with regard to free cash flow what's you're thinking there? Thanks.

[Bradley S. Jacobs:]

I'll take the first. Well, good morning, Scott. By the way it's Brad.

[Scott Schneeberger:]

Hi Brad.

[Bradley S. Jacobs:]

I'll take the first part of the question. I'll give it to Scott or Johnson second part. Look, on CapEx compared to where I've come from, this is very low CapEx. I'm new to CapEx budgets that are over $1 billion, spent a few tens of millions of dollars on CapEx primarily on IT. I'm really good with that. And IT, investing in IT is an investment that's something that goes to the core of how we're differentiating ourselves from smaller brokerage firms and how we're able to add a whole bunch of value to our customers and to work more efficiently with our carriers. It really is critical that we keep staying on the cutting edge of technology and that we are continually investing and reinventing our algorithms to get pricing just right, and to be efficient at pricing, and to make sure that we're also refining our technological ways to find just the right carrier who needs a backhaul where we've got freight. And therefore, we'll take it at a reasonable rate and be happy about it because it is a perfect match. So we have so many different projects going on in technology. And I'm delighted. I mean we are -- I was out in Detroit at XPO NLM about six weeks ago and I challenged the group to sit together and come up with ways that we can improve our IT system from two -- from three perspectives. One, how can we serve the customer better? Number two, how can we interact with carriers better? And number three, how can we be more efficient internally communicating amongst ourselves? And I was just very delighted they came up with 96 different ways to do that. And we've got a time and responsibility chart and we've gotten the go ahead and we prioritized them. And that's just one example of the kind of creativity and dynamism that we're putting into the IT investment. And we're going to continue doing that. And I'm going to pass mic over to Scott or John for the financial question.

[Scott B. Malat:]

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

[Scott Schneeberger:]

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

[Scott B. Malat:]

Sure. Yeah, we added over 300 people, sales and carrier rep people this year. We want to keep the pedal to the metal. There's two parts that -- it's evenly distributed between sales and carrier people what we've been bringing on. We feel there's a lot of productivity improvements that we can have with our carrier and logistics coordinators where we don't need to add as many on the carrier and logistics corner as we can. We have more capacity to grow and to be more profitable with those people. So from -- when you look at the numbers of people we added this year, the number of carrier and logistics coordinators will be down, and then we'll continue to add at a significant pace from the sales people to continue to grow.

[Scott Schneeberger:]

Okay. Great. Thanks very much.

[Scott B. Malat:]

Thanks Scott.

[Operator:]

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

[Kevin Sterling:]

Thank you. Good morning, gentlemen.

[Bradley S. Jacobs:]

Good morning, Kevin.

[Kevin Sterling:]

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

[Bradley S. Jacobs:]

I would say the cold starts are performing in line. I don't think it could say they are performing twice as much as we expected to, but they're certainly not performing half what we expected. It's in line. This is healthy growth, but we expected healthy growth. A year ago we were at $60 million and now we're 2.5 times that at $150 million. That is spectacular growth, but we expected spectacular growth. What I'm equally proud of besides the top line growth is margins are up. So when you're growing revenue and you're growing margins that's a beautiful thing. And in the fourth quarter we doubled down even more, and opened brokerage offices with two great leaders Richmond, Virginia, a city you know well, and Houston, Texas.

[Kevin Sterling:]

It does help us.

[Bradley S. Jacobs:]

There you go.

[Kevin Sterling:]

Okay. Well, great. And then, maybe looking forward, where do you think this revenue run rate can go next to and what are you expectations? Is that just from 10 points?

[Bradley S. Jacobs:]

I'm sorry what was that?

[Kevin Sterling:]

You just have a ballpark what do you think expect -- what are you expectations for next year from your brokerage cold starts on revenue run rates?

[Bradley S. Jacobs:]

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

[Kevin Sterling:]

Okay. Thank you. Yeah, thank you. And Brad, I know you touched on expedited benefiting from the zaniness of the weather, but is expedite benefiting from the growth we're seeing in ecommerce?

[Bradley S. Jacobs:]

That's more in last-mile. So expedite there we're getting our freight. I mean, nobody wants to do expedite. I mean expedites are loads that were not expedite and they turn into critical urgent unplanned shipments because something got messed up in the supply chain. And you're seeing expedite growing because of the just-in-time inventory. And people figured when saving so much money having just-in-time inventory, heck I can spend more in the expedite, even though if they don't want to but they kind of have to. So that's where that's coming from. The ecommerce is really from -- is really more directly related to our retail business which is last-mile. There was a time just a few years ago where not a whole lot of people bought our refrigerator or furniture or stove or a television set on Internet. And you went to store and you bought it that was it. Now, a lot of people go to stores and they come back and they are, sometimes even in the parking lot, they go online and they buy it online. And we're getting a lot of that business. So ecommerce business is helping us in the last-mile. And that's going to continue for a long time in my opinion.

[Kevin Sterling:]

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

[Bradley S. Jacobs:]

So Pacer, let's divide it up. Pacer's truck brokerage group will go in to our system pretty immediately because we have time to go ahead and now that we've cleared Hart-Scott-Rodino we can go in and do some training and we can pull a trigger on that really quickly. Usually, it takes us about 90 days to transfer in a methodical way an acquired truck brokerage operation, put them on to our system. And every single one of our acquired truck brokers and all of our cold starts, they are on the same exact system, they've got to be because they've got to see the same load board, they've got to be able to communicate with each other, they have to have the freight optimizer that guide them on the pricing. You have to have -- you have to go, be on salesforce.com so you're not tripping each other or each other condensed customers. So the brokerage will come out of our IT system quite immediately. On the freight forward side there, interestingly, they were in the middle of migrating to a same system that we were migrating to. So it looks like we'll be migrating to the same system. And that was purely coincidental. On the intermodal, it's little trickier and that's going to take a long time. And that could up to two years because Pacer has developed a good customized intermodal software that's got a lot of good features on it that we do have to get them on to our freight optimizer. We all have to be on the same system. But that's an instance where you want to go a little slower rather than faster, so you don't mess it up at all and don't show any disruptions to the customers.

[Kevin Sterling:]

Right. Okay. Well, that's all I had. Thanks so much for your time this morning.

[Bradley S. Jacobs:]

Appreciate it. Thanks Kevin.

[Operator:]

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

[John Larkin:]

Yes. Good morning, and thanks for taking my questions.

[Bradley S. Jacobs:]

Good morning, John.

[John Larkin:]

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

[Bradley S. Jacobs:]

I wouldn't say that's so much with acquisitions because acquisitions have always been willing to talk to us. I do see that with customers there's no question about that. The reception that we're getting with customers, particularly the larger customers, is very, very good. As you know the RILA trade show is going on out in Santiago right now, and obviously we couldn’t be at it because we're here. We have a delegation out there and we've been in constant contact with them. And its -- there's a lot of buzz about what we're doing at XPO and there's a lot of -- from the shippers point of view what are they thinking about. They are thinking about two things; access to capacity and performance. That's it. I mean those are two main big buckets. And because we've grown in size so much and because we've got a multi-modal service offering, we're scoring very big on those two. So, a lot of customers are interested in us because of our size now, and because we can be a meaningful partner of theirs, and because sooner or later people can disagree -- who knows whether it's sooner or later -- but sooner or later the cycle is going to turn to one of a shortage and access to -- having venders like us who have access to capacity is a big plus. So customers, they like it. The other thing they like is we started the company right from the get go with an intense focus on world-class service, so on-time pickup, on-time delivery, prompt problem resolution, and sophisticated EDI technology interface with the customers, all these things that we set as goals and part of our culture and embedded into our organization that resonates with customers quite a bit. So I would answer your question that it hasn't changed our receptivity with acquisitions much one way or the other, but certainly has its customers.

[John Larkin:]

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

[Bradley S. Jacobs:]

In baby steps. The industry will be automated some day in the future. That's not around the comer. In my opinion, the reason it's not around the corner is it's not a fungible commodity, it's not like gold or oil or a 100 shares of IBM. There's couple of hundred thousand OD payers and there's so many different types of freight with different requirements and so many different types of trucks, there's so many service issues and it's just a complicated thing. Now, some day computers will be sophisticated enough to do all that stuff, but there's certainly not that will do it yet. That said, some day there will be a way to track online where every truck is across North America and that will be available hopefully in an open source way. And that will disrupt the entire industry. But that's a ways off. I mean that's just not -- this is not in next few years. What we are having success on is something more in the immediate near-term reality is automating little things, lots of little things like push -- click-to-dial. So, instead of having to look up someone's phone number and then dialing it and one out of 10 numbers you dialed it wrong and you have to dial it again and you killed 20 seconds dialing it. Just clicking it on the screen and boom it starts dialing. And that may sound like a little thing, but that saves 10 seconds here, 20 seconds here, but it saves 10 or 20 seconds thousands of times a day all across the company that makes us more productive, that makes us more efficient. And ways that we can find who is the right truck to call. We have 24,000 carriers. Who is right truck? Who's got a truck right there when we need it, right now for the load? Ways to automate that which makes us do two things. Number one, it makes us more likely to get the load covered, and number two -- in a timely way. And number two, it helps with the margin. It makes the business more productive, more efficient. We have tons of stuff going on like that, just tons and tons of stuff to become more effective.

[John Larkin:]

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

[John J. Hardig:]

Hey, John, it’s John Hardig. We do offer a quick payout option for carriers. And that's certainly something that some carriers will take advantage of. You’d be surprised at how few don't. When you think about the carriers that we deal with primarily, these are small and medium-sized companies that really -- discount is a bigger deal than you think. So, our take-up rate on quick pay has been relatively low, less than 10%. And so -- it has not been a huge driver of our working capital need. I mean, generally, working capital is driven by the brokerage business. And that business generally we don't get paid, we pay the carriers about 30 days before we get paid by the customers and some of our other businesses a little bit different. And so depending on what the mix is over time that could shift. But if you look at 3PD’s business, they build our customers weekly and so they get paid very quickly. They don't have to wait for paperwork and process paperwork and things like that. And NLM has actually negative working capital, because they don't pay the carriers until they get paid by the customers. So, it's a little bit different in each business across our different business units.

[John Larkin:]

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

[Bradley S. Jacobs:]

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

[John Larkin:]

Okay. Thank you.

[Bradley S. Jacobs:]

Thanks John. Thanks John.

[Operator:]

Thank you. Our next question comes from Tyler Brown from Raymond James. Please go ahead.

[Tyler Brown:]

Hey good morning.

[Bradley S. Jacobs:]

Hey Tyler.

[Tyler Brown:]

Hey John I was hoping if you could help me conceptualize some of the accounting -- the acquisition accounting. So, you guys have done and called may be a dozen acquisitions under your belt or so, but can you conceptualize how much of these purchase prices are generally getting put towards intangibles and then kind of how you are amortizing those?

[John J. Hardig:]

Sure. Well, it’s different for each acquisition, because each -- if you look at each business independently and make an evaluation of what the valuation -- what is tangible amount is going to be, and it depends on the nature of the business. I think in businesses where we have acquired lines of service that are new to XPO, we tend to have a little bit higher value attributed there because they've got unique relationships with carriers like Pacer, for instance, the relationships with the railroads, much different skill that we have today at XPO. That ends up driving a little bit different -- results in terms of the intangibles as we buy more truck brokerage acquisitions. That will tend to have a lower intangible proportion of the total values. So -- because those are -- we have a lot more overlap with carriers, a lot more overlap with customers on the truck brokerage side. So, it depends a little bit on each business. Even with Pacer, our relationship with the UP is looked at a little bit differently than other relationships. So, it really varies. I’d say that intangibles as a percentage of total purchase prices going to run anywhere from 20% to 40%. 20% being more oriented toward the truck brokers where there is not as much overlap in the business lines and higher for businesses that are unique to us. And then there are all kinds of company-specific scenarios that factored in there as well.

[Tyler Brown:]

Okay. And on the life is it six to eight year type life generally?

[John J. Hardig:]

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

[Tyler Brown:]

Okay, perfect. That's good.

[John J. Hardig:]

And everything else is a lot shorter.

[Tyler Brown:]

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

[John J. Hardig:]

It’s really -- there will be a toggle. So, there will still be access to the screen, but you’re going to have toggle to get to the Optimizer to the Pacer software, which is on the surface it goes back to the question we were answering before about the technology investment. What's the big deal, it just takes a couple seconds to toggle. But a couple seconds times, many to many times a day across the whole country. So, we’ve to give fully integrated, it’s easier to scrape the data to. Because one big part of our IT thrust is to get comprehensive real-time pricing information. So, all the information we’re getting about rates as they are changing in real-time across the whole country. We have to get that shared throughout the whole country. So, that's why it helps to have -- eventually to have the Pacer technology fully integrated onto our Freight Optimizer.

[Tyler Brown:]

Okay. And is there a different incentive structure for sales to sell Pacer?

[John J. Hardig:]

We haven’t fine-tuned the comp plans yet. Just haven’t drill down to that yet, it’s just too early stage.

[Tyler Brown:]

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

[Bradley S. Jacobs:]

We have fantastic people in charge of those business lines. I mean give me him 10 Karl Meyers and we’ll end up being a $50 billion company instead of a $7.5 billion company in a few years. I mean we have just people. We have Scott Taylor and Mike O'Donnell running XPO-NLM for us and we’ve got John Snow and Josh Allen running Interide. And we have got -- we just have this great people. So, if you have the right organizational chart in place which I believe we do, and if you have the right leaders in those spots in the organizational chart and you have the right systems and processes and controls, both financial and operational, you can accomplish a lot.

[Tyler Brown:]

Okay. That's perfect. Thanks.

[Bradley S. Jacobs:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ryan Cieslak from KeyBanc Capital Markets. Please go ahead.

[Ryan Cieslak:]

Thanks. Good morning everyone.

[Bradley S. Jacobs:]

Hey, Ryan.

[Ryan Cieslak:]

Brad I wanted to just go back a little bit to Pacer in -- you have a lot of really nice color on the areas you're targeting from a synergy standpoint. I just wanted to see if you can may be -- if you have any sort of any quantitative idea where you think those actually shakeout from a synergy standpoint going forward? And even directionally if you think about the $100 million of EBITDA run rate you’re targeting at the end of the year, how much or if any is related to synergies from Pacer?

[Bradley S. Jacobs:]

We do have some general ideas, but I don't want to put them out there because we're such early stage in the planning. I could be wrong. Let me say it by this way. We’re encouraged by the amount of synergies that we can have by putting a $1 billion company with another $1 billion company. It’s more than we originally thought. It wasn’t what we were planning on. And as we now ramp-up the integration planning now that we have passed Hart-Scott-Rodino, we’re spending more time with each other. I think that's going to become a bigger plus. But we’re not -- implicating your question is are we counting on some outsized huge synergy that's off the charts in order to get to the $25 million of EBITDA in the fourth quarter? The answer is no, we’re counting on a reasonable amount of synergies. We’re basically counting on our existing businesses growing organically at a reasonable pace and buying $400 million of acquisitions between now and the end of the year.

[Ryan Cieslak:]

Okay. But there’s some baked in from a synergy standpoint, it sounds like.

[Bradley S. Jacobs:]

Yes. But a reasonable amount.

[Ryan Cieslak:]

Got you. That's helpful.

[Bradley S. Jacobs:]

There are certain synergies that are just no-brainers. I mean we’re -- their board members, for example. And audit feed will be coming down on an aggregate basis and there will be some [co-los] and the real estate. There’s some things that are definite.

[Ryan Cieslak:]

Okay. A similar type of question then on just the general freight environment, in terms of what you’re expecting this year excluding obviously the weather-related challenges or what we're seeing with weather. But what you think you from a freight environment standpoint within those goals you laid out for 2014? But then also longer-term, I know 2017 is a way out and things can change, but what you assume in those targets when you think about volume and overall capacity into overall freight environment?

[Bradley S. Jacobs:]

I think the economy is coming back and I think the economy has been coming back across-the-Board with retail, with manufacturing, really all across-the-Board at a slightly faster pace than it was last year. And we base that on -- and we just base that anecdotally on our own experience with what customers are telling us and what customers are showing us in terms of the amount of freight they got. I don't know whether that's going to continue the whole year. I mean January and February are not the biggest months of the year. Obviously, let's see what March is and let's revisit that question at the end of March. But the tone, in general, is -- we have been meeting with lots of customers recently. The general tone is there’s going to be more freight. People are optimistic about their own businesses and capacity is certainly tighter. How much of that from hours of service versus how much of that is from -- what's going on with bankruptcies? How much of that is going on -- there's a lot of different factors that could be contributing to that. But in any case capacity is definitely tighter, much tighter than it was in recent memory. And rates are going up and people are disagreeing about whether they’re going to go up 2%, whether they’re going to go up 6%, or 3%, but everybody agrees they're going up. This is a different tone than the market right now.

[Ryan Cieslak:]

Okay, that's helpful. Last couple ones here. On last mile, I know obviously weather is having an impact, but when you look at that business today versus when you first acquired into it. How does a look relative to your expectations? May be a little bit of commentary on what the business pipeline looks like and what you’re expecting out of that business going into this year?

[Bradley S. Jacobs:]

I’m very pleased with what's going on in last mile. And that business is just great; I mean it’s just great. It’s well-positioned with its customers. When we meet with the customers, they rave about the 3PD product. They very much value the investment and technology that Karl and his team made prior to us and we don't take credit for this. They invest in that before we bought them and they've got just a cutting-edge customer experience software that measures customer experience right at the point of sale, right at the time of sale and puts that into metrics and then uses those metrics for compensation, uses those metrics for what a windowing the carrier base and it all translates into very satisfied customers. When the customers are really happy and are effusive in their praise for what we’re doing. I’m very happy about that, because everything else falls into place. A lot of cross-selling opportunities that we have already started capitalizing in. It take time to develop, but I see the momentum there. So, the businesses growing, it's got a strong pipeline. It has got a phenomenal reputation for customer service, cross-selling, lots of good stuff; they’re contributing a lot of money to the company. I love it; I love everything about the 3PD product. We’re going to be changing the name sometime in the next few months. We're going to be migrating to a name that starts with XPO, just like we branded NLM to XPO NLM. And we’ll migrate the Pacer name into something that's XPO in it as well. We haven’t finalized that yet. So, we're building up a brand and the last mile group is an important part of that brand.

[Ryan Cieslak:]

Okay, that's helpful. And then John on the corporate expense going into this year, just any sort of color on what the expectation is? I think in the fourth quarter it was around $11.5 million of corporate expense, does that go up incrementally into 2014? Or how should we be thinking about the general corporate expense in 2014?

[John J. Hardig:]

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

[Ryan Cieslak:]

Okay. Thanks for your time guys. Appreciate it.

[John J. Hardig:]

Thank you, Ryan.

[Operator:]

Thank you. Our next question comes from Donald Broughton from Avondale Partners. Please go ahead.

[Donald Broughton:]

Good morning. Thank you for taking my question. I think you talked about the spot rate and wondering whether that its capacity demand, its weather driven et cetera, but can you help me think about as we go through this tighter capacity period, can you help me understand think about balancing the ability to find a truck, be solution provider for the customer? And balancing that with the ability to drive the best margin by essentially auctioning off each truck you can get control of?

[Bradley S. Jacobs:]

Well, Donald you’re hitting -- good morning by the way, it’s Brad. I mean you’re hitting it right on the nail right on the head. That is a balancing act. On the one hand, we want to give almost flawless service to the customer. Flawless doesn't happen in the real world, but almost flawless service. Very high 90s percent on-time pickup and delivery, that's very important to us that our entire company is laser focused on giving over 97% on-time pickup and delivery, And in our expedite division, over 99%, because it’s critical shipments. So, that's very, very important to us. At the same time, we've got a duty to shareholders to try make a profit here, try to make an honest buck. So, there is a balancing act, but in the final analysis, if we serve the customer passionately, the margin will follow. And even if the margin on the percentage gets hit a little bit here and there because it well in a tight capacity market. We’ll make it up and volume, more volume will attract more volume and we’ll have more loyalty and stickiness from the customers.

[Donald Broughton:]

Great. Thank you.

[Bradley S. Jacobs:]

Thank you, Donald.

[Operator:]

Thank you. Our last question comes from David Campbell from Thompson Davis. Please go ahead.

[David P. Campbell:]

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

[Bradley S. Jacobs:]

Okay, couple things very good topic. So, why is the revenue down? The revenue is down because they had a reclassification of how they handle revenue from an accounting point of view because when the UP contract expired or got renegotiated to the new one, certain gross revenue got booked at net revenue. And I think they lost like $400 million of accounting revenue. And the revenue they did from accounting booked as net revenue. So that's why the revenue looks like it was going down, at least in my understanding, and in prime. In terms of the business there, I'm much more concerned about how people do on the bottom line and the top line. On the bottom line when Dan came in there and they were making a whole lot of money at all, and I think it bottomed out like several million dollars of EBITDA and he's built it up to close to $30 million EBITDA. So that seems to me to be a pretty darn good trajectory. So I think from the profit point of view, he's really changed the course of the ship there and got it pointing in the right direction, the profitability has increased. And when you mentioned Pacer, I wanted to buy that for a long time. And if you read through the proxy the history of the transaction is like Brad called Dan, tried to buy them, Dan said no, come back later. Six months later Brad called Dan, Dan said go away. That's went on for several years. Intermodal is extremely important to us. When you look at the charts, the slides, David that we put out when we bought Express-1, you might remember we had four modes and the four of them was intermodal. And the reason is that this is the fastest growing part of transportation if you look at the stats back till 1980. And I don't think that is going to change very much going forward. So we've got to be in intermodal and we want to also grow on -- we want to take advantage of this cross-border Mexico growth as well.

[David P. Campbell:]

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

[Bradley S. Jacobs:]

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

[David P. Campbell:]

And my final question is the patient logistics has been, as you know, doing nothing for years, what -- I don’t know -- and if they don't break out how much of that is freight forwarding, how much of that is warehousing and other, etcetera. Its some of the freight forwarding and it's not reporting any earnings, what's the problem?

[Bradley S. Jacobs:]

Give me a little time to get into the weeds on that. We just started getting under the hood on Pacer. Our prime focus was on that wonderful intermodal franchise and the cross-border franchise that they've got. On the logistics and the freight forwarding and NVOCC and all that businesses they've got. We're just at the beginning process of really deeply understanding it. It's a global business, its lot of locations, its lot of moving parts. I want to understand it fully. And once -- I think it's a long time to do that but we don't own the company yet. Once we understand it fully, we'll have a plan and that plan will improve its profits one way or the other.

[David P. Campbell:]

Okay, okay. Thank you very much.

[Bradley S. Jacobs:]

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

[Operator:]

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