XPO - Q1 2013

Transcript

Operator (participant)

Welcome to the XPO Logistics First Quarter 2013 conference call and webcast. My name is John, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings.

The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook. 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 Mr. Brad Jacobs. Mr. Jacobs, you may begin.

Brad Jacobs (CEO)

Thank you, operator, and good morning, everybody. Welcome to our call. With me today are John Hardig, our CFO, and Scott Malat, our Chief Strategy Officer. Since our last call, we've made significant progress on our plan, progress on acquisitions, cold starts, and optimizing our existing operations. On acquisitions, as you saw last night, we completed the purchase of Interide Logistics. Interide has $28 million of trailing 12-month revenue, and the purchase price was $3.1 million in cash +$600,000 in 3-year restricted stock. We expect the acquisition to be immediately accretive to earnings. Sean Snow will continue to lead the operations in Salt Lake City, Minneapolis, and Louisville. Sean is an industry veteran with a successful track record.

As president of England Logistics, he grew that business to approximately $300 million before taking control of Interide in 2009. He knows the business extremely well, and he's excited about growing fast with us. Between Interide, Covered Logistics, and East Coast Air Charter, we now stand at $98 million of acquired revenue so far in 2013. We're continuing to talk with a number of attractive acquisition prospects, and we're on track to meet our target of at least $300 million of acquired revenue this year. Our eight freight brokerage cold starts are ramping up nicely. Our total branch network is now up to 62 locations, and we have approximately 1,100 employees. That's up from 246 employees in April of last year.

We're on track to grow the workforce to at least 1,600 employees by the end of the year. I'm also very excited about our new strategic accounts team, which is led by Jeff Battle. Jeff is one of the key executives who led the growth of Turbo Logistics over the last 2 decades. He's joined by a talented group, including Greg Ritter, who many of you know. Greg started and was the president of Knight Brokerage before he joined XPO. The team also includes Dennis McCaffrey, who has 20 years in the industry and most recently ran all of outside sales for our expedited transportation group. Pat Gillihan is also on the team. Pat was one of the three former owners of Covered Logistics before we bought them. This team is offering a compelling value proposition to the largest shippers in North America.

We give customers access to a large and constantly growing network of carriers. We're continually developing cutting-edge technology, and most importantly, we have a passionate commitment to world-class service. Our customers want to deal with people who are intensely trained and are compensated for flawless execution. We're pursuing every avenue for growth, and you can see that reflected in our results. In the first quarter, revenue was up 156% year-over-year, and gross margin dollars were up 140%. In freight brokerage, revenue and gross margin were up almost tenfold from a year ago. We're right on target with our growth plan. We're acquiring scalable companies. Our cold starts are going strong. We're adding hundreds of salespeople, and we're building a top-notch, customer-centric organization.

We remain on track to reach our goal of an annual revenue run rate of $1 billion by the end of the year and to generate positive EBITDA in the fourth quarter. With that, I'll ask John to review the numbers.

John Hardig (CFO)

Thanks, Brad. I'll start by giving some details on the performance during the quarter and then provide some color on what we're seeing in the larger transportation market. Starting with freight brokerage, revenue and gross margin were both up nearly 900%. Of the $78 million in revenue in the quarter, $2.5 million came from the mid-quarter acquisition of Covered Logistics. The balance of the increase came from our acquisitions of Turbo, Kelron, Continental, and BirdDog in 2012, and from organic growth.

Freight brokerage gross margin percentage of 12.9% was essentially flat with the first quarter last year. March had the highest gross margin in the quarter. That positive trend continued into April, partially driven by margin expansion in our cold starts as we gain scale and benefit from our strong relationships with carriers. Our cold starts are progressing well, as Brad mentioned. In March, they reached a combined revenue run rate of approximately $78 million. That includes about $10 million of contribution from the acquisition of BirdDog and the two Turbo branches that we consolidated into our existing operation in 2012. The other $68 million is organic growth. We see a lot of opportunity to keep building up this business. In expedited transportation, our revenue increased 7% to $24 million for the quarter.

Roughly $2 million of that came from the mid-quarter acquisition of East Coast Air Charter. Gross margin percentage in expedited decreased to 15.9%, down from 18.6% last year. The softness in the expedite market that we saw in the fourth quarter has continued into 2013, and that's putting pressure on margin. Our freight forwarding segment had a solid quarter despite a weak market. Revenue in forwarding increased 5%, and gross margin increased 51% compared with the same quarter last year. We're continuing to gain market share by staying focused on our core competency of serving small and medium-sized freight forwarding customers. The revenue growth in our company-owned locations had a positive impact on margin, and as a result, we increased our freight forwarding operating income by 130%.

This was despite higher SG&A expense associated with opening company-owned locations in Charlotte, Atlanta, Los Angeles, Houston, Chicago, Minneapolis, and Montreal. For the company as a whole, EBITDA for the quarter was a loss of $9.8 million, which was consistent with what we had forecast on our last call. Net interest expense was $3.1 million for the quarter, which was primarily from the convertible notes. That included $1.4 million of non-cash amortization of bond discount. As expected, our effective tax rate was negligible for the quarter, and we expect that to be the case for the rest of the year. Earnings per share available to common shareholders was a loss of $0.85 for the quarter. Our liquidity position remains very strong. We had $206 million of cash on our balance sheet on March 31st.

Now turning to market conditions. Overall, transportation demand has been weak so far this year. Nevertheless, we can grow the business substantially, even in this kind of environment. We're adding salespeople and providing excellent service to our customers. We have strong relationships with carriers who are looking for freight, and these relationships will be increasingly valuable when capacity tightens. Now I'm going to turn it over to Scott, who will give you an update on our strategy, and then we'll go to Q&A. Scott?

Scott Malat (Chief Strategy Officer)

Thanks, John. I'll go over our strategic focus, especially with regards to our sales force and technology. So on recruiting, as you saw in the release, our headcount in freight brokerage was up 668 from just 40 a year ago. We're accelerating our hiring pace and planning to add at least 400 net new sales and carrier procurement people in our existing freight brokerage operations this year. To support our expansion, we want to thank the state of North Carolina, which agreed to provide us up to $3.6 million in tax incentives over the next several years if we meet certain growth targets. This is in addition to the award we received in 2012, which allows us to earn up to $3.2 million in incentives.

Those of you, those of you who have joined us in our investor meetings in Charlotte have gotten a chance to see how well things are going and how quickly we ramped up our operations. This additional round of incentives will help support our next phase of growth there. We continue to develop cutting-edge technology to drive more productivity from our salespeople. In April, we launched another major upgrade of our Freight Optimizer platform. The upgrade added to our capabilities in LTL, and we built new carrier rating engines that help us to better find the right carrier for each load. As we move through 2013, we're working on over 100 IT projects as we build out our proprietary systems. Two of the more notable goals for this year include adding additional carrier analytics, as well as upgraded customer and carrier portals.

For our expedite segment, we're increasing our sales and marketing efforts in what is still a soft market. Our sales team is now able to offer more to our customers with the added capability of expedited air charter, and sales is leveraging our relationships with truckload customers to generate more expedite opportunities. In freight forwarding, we continue to grow by adding new offices. We still have a very small share of the $150 billion global forwarding market, and that presents a lot of opportunity. Just this week, we opened a new company-owned office in Orlando. This is in addition to the offices we opened in Montreal and Nashville in the first quarter. We now have 29 locations in our forwarding network, 11 locations of which are company-owned. So we're delivering on all aspects of our strategy.

We're growing the sales force, and we're increasing the productivity of our existing sales force. We're investing heavily in our proprietary technology. We have attractive acquisition opportunities, and our cold starts are ramping up. We see a lot of runway for growth, and we feel confident in our 2013 targets and our long-term goals. With that, we'll open the floor for questions. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone.

If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using the speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Our first question comes from Justin Yagerman from Deutsche Bank. Please go ahead.

Rob Salmon (Associate Analyst)

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

John Hardig (CFO)

Morning, Justin.

Brad Jacobs (CEO)

Well, hi, Rob.

Rob Salmon (Associate Analyst)

Hey, Brad. You guys announced the acquisition of Interide last night. Could you give us a little bit more details in terms of the company? The purchase, you know, looked like a very good purchase price relative to revenue. Could you give us a sense of the company's net revenue margins, as well as overall, you know, EBITDA, in terms of what you had purchased that company for?

Brad Jacobs (CEO)

It had adjusted EBITDA of about $700,000. So we paid about 5x EBITDA, which is the market-going price for a company that size. Gross margin percentage is mid-teens. Super solid company, led by a super solid head of it, Sean Snow, who's well-known in the business, active member of TIA, built England Logistics up to $300 million, and is ready to do it again with us. We were speaking yesterday about how big we can get Salt Lake City, and he thinks he can do it to $250 million-$300 million over a number of years, no sweat. So we're happy to support him doing that.

Rob Salmon (Associate Analyst)

Yeah, sounds like a nice opportunity, particularly in Salt Lake, which is a, you know, a good trucking market. When I think about the, the freight brokerage segment, your net revenue margins were essentially flat year-over-year, you know, despite headwinds from the growth of the cold starts, which typically carry lower net revenue margins, as well as a tough brokerage environment that you guys had touched on in the prepared remarks. Could you talk about some of the internal initiatives that are helping improve or at least hold constant XPO's net revenue margins and kind of where you think those can go over time?

Brad Jacobs (CEO)

Yeah. Thanks, Rob. You're right, the cold starts are ramping up in terms of margin, and March was the best freight brokerage margin in the quarter, and it got better as we went through the quarter. That's being driven by a number of different things. Firstly, we're gaining scale. With each acquisition, we get their lane histories, we get the carriers that they've worked with and long-term and strong relationships with carriers. These are carriers we know well, that we've worked with for many years in a lot of cases. In addition to that, our technology continues to help us price better. We get more lane information, more information right up front to the sales people. On top of that, our training programs continue to develop as we develop our new people.

And then in our cold starts, some of our newer people are maturing, and as they grow into their roles, the margins tend to move up. So all those things together, we're just getting better at pricing the loads and finding the right truck for the loads.

Rob Salmon (Associate Analyst)

Great. Thanks very much for the time.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Scott Schneeberger (Managing Director)

Thanks. Good morning, guys. Could you give us a feel for contribution from acquisitions in the quarter and in previous quarters, in first quarter, and also specifically with regard to East Coast Air Charter and where that hits and that impact? Thanks.

Brad Jacobs (CEO)

Sure. East Coast Air Charter goes into our expedite division and was $2 million for the quarter. Organic growth in the company was about 46% year-over-year. So that should help you kind of back out, you know, in general, what we've been doing.

Scott Schneeberger (Managing Director)

Thanks. Could you speak a little bit to what you're doing on national accounts initiative there?

Scott Malat (Chief Strategy Officer)

National accounts. Okay, so we have two layers of large accounts, what we call strategic accounts, which are the 1,200 largest shippers in the United States, and then we have what we call national accounts, which are the next 5,000 largest shippers. On the strategic accounts, we've got a team that we've put together. So we've taken people from the organization who are very long in the tooth in this business and very experienced in dealing with Tier 1 accounts and all the idiosyncrasies that go with that, and we've made them a dedicated group. So it's a very, very strong, experienced group that's solely focused on penetrating those 1,200 accounts and doing it in a very intelligent way. And then we have. They're called strategic account managers.

And then we have a larger group that we're still assembling, called national account managers, that's going after the next 5,000 largest shippers. And then we have all the cold starts, who are going after the transactional business, and that's hundreds and hundreds of thousands of customers, and going after onesies and twosies there. So we're attacking the market on every level, all different-sized customers.

Scott Schneeberger (Managing Director)

Great. Thanks. Sorry, sneak one last one in. Could you, could you update us on IT developments in the quarter? Thanks, guys.

Brad Jacobs (CEO)

IT, there are developments every day. IT is the most exciting part of what's going on in the company. It's the only division that we never refuse a budget request. We rely on great technology. It's, it's all we got is people and technology. That enables us to have carrier relationships in an effective way and be able to market that to shippers. So we're always developing cutting-edge technology. It's a very fast-paced agenda. We have over 100 IT projects on the drawing board at various levels of productivity, and we introduced the proprietary Freight Optimizer software in December. This year, we put out another major release that includes a new carrier rating engine and also LTL upgrades. So lots of stuff going on in technology.

Scott Schneeberger (Managing Director)

Thanks very much.

Brad Jacobs (CEO)

Okay. Thank you.

Operator (participant)

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

Kevin Sterling (Managing Director and Equity Research Analyst)

Thank you. Good morning, Brad, John, and Scott.

Brad Jacobs (CEO)

Good morning, Kevin.

Kevin Sterling (Managing Director and Equity Research Analyst)

Yeah, congratulations on another nice acquisition.

Brad Jacobs (CEO)

Thank you.

Kevin Sterling (Managing Director and Equity Research Analyst)

Brad, it seems like you guys, you're really ramping up your sales force and other operational personnel, maybe faster than you may have initially thought. What's driving this ramp of personnel? Is it heavy recruiting by XPO? Maybe it's the XPO brand name or financial incentives that Scott mentioned from the state of North Carolina.

Brad Jacobs (CEO)

All of the above. We here's how we look at it. We have we're small. We have 1% of a $50 billion addressable market, and the $50 billion is the most conservative and smallest way to define the market. You could define it as much larger because we compete with truckload carriers all, all day long, particularly on the larger customers. So with only 1% of the market, why shouldn't we expand? We absolutely should. We should hire as many capable people who are able to be who have the necessary skill set and the personality and the motivation to be. And put them through our training program, which we put a lot of resources into, and then empower them with our technology and give them a performance-based compensation system, and they're off to the races.

They can make a good living, and we can make a good living with them. So I think the reason that we're hiring so many people is because we've got a good product to sell to recruits. Most of these people are young. It's their second or third job out of school, usually, and they see the opportunity, and they like the atmosphere. They like the energy. They come in, they visit the offices, they see how the excitement is there, and that they talk to other people, and they're doing well, and there's a big buzz about it. So I think we'll continue it on that pace. And we're hiring about 40 month or 50 a month to add, which is a significant number.

I think apart from the number one player in the field, I'm not aware of anyone else who's still in 2013, hiring at that kind of level. So a lot of growth from that hiring aspect.

Kevin Sterling (Managing Director and Equity Research Analyst)

Great. Now, is that mainly sales folks you're hiring or a combination of sales and operations people?

Brad Jacobs (CEO)

It's primarily salespeople and carrier procurement people. You need both ends of the equation. And some percentage of that, but a minority percentage of that also is the back office, which is more scalable.

Kevin Sterling (Managing Director and Equity Research Analyst)

Okay. And maybe this is kind of early into kind of the life of XPO, but, you know, as you've grown and you've hired these people, can you talk a little bit about the retention rate you're seeing and kind of the stickiness of, of kind of some of these new employees so far?

Brad Jacobs (CEO)

Yeah, Kevin, we've had a good experience so far. We are dealing with new salespeople, which is a hard job. So that's why we focus so intently on recruiting the right people and all the different things that John Tuomala and our talent management team has put into place to find the right people in the first place, from psychometric testing to multiple rounds of interviewing and interesting interviewing techniques that they employ, to training very effectively. Marie's team has put together a very impressive and world-class training program that lasts over several months, that has many different pieces to it, from classroom-based training to structured simulation, to mentorship programs, continuing education, and most importantly, direct coaching from our branch presidents, which are very experienced resources in each of our branches.

Then technology, and as we empower our people to produce more with our technology, that should help retention as well. So far, even with a new sales force, it's been relatively low.

Kevin Sterling (Managing Director and Equity Research Analyst)

Right. All right. Thanks, Scott. And, Brad, kind of shifting gears here. You highlighted in your press release a strong March from a revenue perspective, kind of despite general lumpiness, you know, in the market. So, you know, you guys are taking share, you're growing. Could you comment on April trends?

Brad Jacobs (CEO)

April is more or less flat, was more or less flat with with March. We didn't see a big uptick. Actually, we didn't see any uptick, but at least didn't degrade. You know, March was an important month for us because it reached a significant milestone, where we did $44 million, which is a record month for us. You multiply that times 12, that gets you to $525 million, and then we bought Interide with another $27 million, $28 million. So we're hovering around the $550 million run rate now, which we feel good about and puts us on a good path to and gives us confidence that we'll hit our billion-dollar revenue run rate by the end of the year.

Kevin Sterling (Managing Director and Equity Research Analyst)

Okay, great. And, you know, as you continue to do more acquisitions, are you seeing multiples rise?

Brad Jacobs (CEO)

Not really. There's not a lot of acquisition activity going on. There are a number of deals that are in the works and are being discussed, but it's pretty consistent. It correlates with size. The ones that are smaller go for lower multiples, and the ones that are bigger go for bigger multiples. So we look at all of those, the small, medium, and big, evaluate the pros and cons and factor in what the purchase price will be and see if it makes sense. If it makes sense, we go for it.

Kevin Sterling (Managing Director and Equity Research Analyst)

Okay. And last question here: You guys, you're, you're doing very well in freight forwarding, you know, in a market when others appear to be struggling. What's driving your success? Is it your focus on smaller, maybe underserved customers?

John Hardig (CFO)

Partly, but partly it's our dinkiness. You know, we're, we're under $100 million in a $150 billion market, so things can be going on in the larger global $150 billion world that still don't interfere with our ability to grow and take share, focusing on smaller and mid-sized customers. And, you know, we opened locations in freight forwarding in Chicago, Houston, L.A., Minneapolis, Charlotte, Atlanta, and most recently, Montreal. So we've been, we've been growing. We've, you know, it doesn't, it doesn't fall on your head. You got to go chase it.

Kevin Sterling (Managing Director and Equity Research Analyst)

Right. Right. Okay, gentlemen, thanks so much for your time this morning.

John Hardig (CFO)

Thank you.

Brad Jacobs (CEO)

Thanks, Kevin.

Operator (participant)

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

Bill Greene (Managing Director)

Yeah. Hi there. Good morning, guys. You know, Brad, I'm just curious if you can touch a little bit on the fourth quarter EBITDA targets. And is it as simple as, at this point, you've built out the corporate footprint such that you really just need to get the revenue now, and if the revenue is there, you feel very confident in that EBITDA target? I'm trying to think about puts and takes that might put you close to the, you know, zero numbers, such that maybe it's a little bit negative if the revenue is not there, but maybe there's another aspect of it I'm missing.

Brad Jacobs (CEO)

No, you're not missing anything. The only iffy part is the acquisitions. As long as we continue at the pace that we've been going at, and we buy another, say, $200 million, at least, revenue by the end of the year, we should be EBITDA positive.

Bill Greene (Managing Director)

Okay.

Brad Jacobs (CEO)

If we fail, if we fail at buying another $200 million of acquisitions, which I don't think we will, but if we were to fail, then we wouldn't be EBITDA positive.

Bill Greene (Managing Director)

Okay. Okay, great. And then when you look at, as you've grown the scale, when you look at the buy rates that you're getting, so your ability to source capacity, have you noticed or are there any data points you can share with us whereby we can see the price per transaction or the purchase transportation per load, or however you want to think of it, that it's actually been dropping?

Scott Malat (Chief Strategy Officer)

Yeah, Bill, it's Scott. This is the best way to look at that is out of lanes. When we take on new lanes, we don't necessarily have a good network of carriers that we've used to do that lane before, and what is our ecosystem of people that we turn to to move that lane? So we tend to have lower margins on new lanes that we pick up. Over a very short period of time, some one to months, you tend to see margins move up as much as 10%-12% on that specific lane. So that gives you an idea as we improve the buying power in those lanes.

With each acquisition that we bring on, it does bring lane history, and we work to identify specific lanes where XPO is buying at better rates and have good ecosystem of carriers that maybe the acquisition target does not have those relationships, and we can help the acquisition target improve their margins. And then on the flip side, relationships that the acquisition target that has, that XPO does not have, and we integrate them. We've been seeing benefits from there as well.

Bill Greene (Managing Director)

Great. All right. Thank you for the time.

Scott Malat (Chief Strategy Officer)

Thank you.

Operator (participant)

Our next question comes from David Tamberino from Stifel. Please go ahead.

David Tamberino (Analyst)

Good morning, gentlemen, thank you for taking my questions.

Brad Jacobs (CEO)

Morning.

David Tamberino (Analyst)

I wanted to start out with freight brokerage and kind of piggybacking off of what Bill was just asking there. Could you give us kind of what your increase in revenue per mile, kind of charge to customers was year-over-year? And then after that, the increase in cost per mile that you may have seen?

Brad Jacobs (CEO)

We don't have that, but we'll get it and get it back to you offline.

David Tamberino (Analyst)

Okay. And then circling back to Interide, obviously, took a look at the press release and heard the comments earlier. Just wondered if you could, you know, give a little bit more quantification around the, the headcount that they bring to XPO, the, the amount of customers they currently serve, what the mix of businesses and, and kind of what those industry verticals are.

Brad Jacobs (CEO)

Interide has about 35 people in three different offices. They have about 900 customers. The type of customers that they have is very diversified. The biggest chunk is oil and gas. When I looked at Sean's top 20 customers, I only recognized one customer, so it's not, it's not the large ones. It's more small and medium-sized customers.

David Tamberino (Analyst)

Okay. And that, and that mix of business, is that more shorter-haul LTL? Is that TL? What, what do you look at?

Brad Jacobs (CEO)

Oh, yeah. Yeah, they have a good chunk of LTL, particularly out of the Minneapolis office. And that's something that they're very excited about and I want to learn more about. And, you know, most LTL customers don't have full truckload, but a large percentage of truckload customers also do less than truckload. So there is an opportunity to take their LTL product and cross-sell it to our truckload customers at very little extra cost and energy, and grow something organically, very significantly.

David Tamberino (Analyst)

Mm-hmm. And then, is that kind of the plan for the Minneapolis or is that the Salt Lake branch you'll look to roll back?

Brad Jacobs (CEO)

That's Minneapolis.

David Tamberino (Analyst)

Okay.

Brad Jacobs (CEO)

Salt Lake is more truckload, but they do some LTL as well.

David Tamberino (Analyst)

Okay. And then as we're kind of thinking about this going forward with your goals through the fourth quarter and with the recent acquisitions and kind of the cold start revenue growth, that seems to be hitting a nucleus per office kind of faster than we would expected, as well as the build-out and operations in Charlotte. Do you kind of believe that first quarter thirteen is probably your EPS loss inflection point?

Brad Jacobs (CEO)

Yeah, probably. Yeah. Yeah, probably so.

David Tamberino (Analyst)

Okay. Well, thank you for the time.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Our next question comes from Peter Nesvold from Jefferies. Please go ahead.

Peter Nesvold (Managing Director)

Morning, guys.

Brad Jacobs (CEO)

Morning, Peter.

Peter Nesvold (Managing Director)

So, question on brokerage. Clearly very impressive ninefold increase in gross revenue over the last year. You know, when I look at the yields in that business, two things kind of jump out at me, and they kind of come at it from two different angles. First, on a year-over-year basis, it looks like the yields kind of flattened out here. I'm curious, on the one hand, are we getting to that point where the yield compression in the truck brokerage business is sort of leveling off, at least on a year-over-year basis? Then the other angle that I'm kind of thinking through on this is that when I look like 12 months, 18 months ago versus C.H. Robinson, you know, the spread between your yields and their yields were sort of 500 basis points-600 basis points.

And so, you know, maybe one could argue easier to grab some market share while the, the spread was so wide. Now the spread is maybe, you know, 300 basis points-400 basis points and probably getting tighter. You know, at what point do you does that 800-pound gorilla start to become a hindrance on your ability to grow organically? Thanks.

Brad Jacobs (CEO)

Okay, so two parts to that. First, on the net revenue margin, there's a couple aspects to that. Number one is we're getting better, which is expected. The maturity of our sales force is growing. The average tenure is, you know, people have been around longer, so they've gotten more experience in the business. And they're just getting better at negotiating and understanding the market and what loads to take and what not to take. So that's an internally generated improvement. But there's also an external aspect, and you can be great, and if the external market is lousy, it's tough to be great. And you can be mediocre, and if the external market is fantastic, you can still do very well.

So externally, where we see ourselves right now is, it's not the greatest world to be a broker. That's okay. We designed the business plan fully aware that there's cycles, and there'll be times when it's very conducive and times unconducive, and very supportive and not supportive. Brokerage right now, for the time being, is in a market that you have pretty good balance, and it's been balanced for a while now, a couple years, which is a long stretch. And for people who have been in the business for decades, people say that that's the longest they've seen it stay in this kind of equilibrium. Won't stay that way forever. Sooner or later, the seesaw will tip one way or the other. In the meantime, we can still grow, and we can still do well. We can still get margins that are decent.

With respect to, I didn't quite understand the second part of your question about the 800-pound gorilla.

Peter Nesvold (Managing Director)

Yeah. So, you know, my point there is that C.H. was kind of coming off almost 20% gross yields at one point. You were coming at the market with sort of 13% gross yields, and, and C.H. is down to sort of, I mean, it's coming down to, like, 16%-17%. And so as I'm thinking about it, you know, arguably, one could argue you were willing to do stuff at lower yields than C.H., and so therefore, it made it a little easier for you to grab share. So as C.H.'s yields start to get compressed down to levels that are closer to you, at what point does that start to inhibit your ability to grab market share organically?

Brad Jacobs (CEO)

I don't look at C.H. as our primary competitors, not like other industries where I've been in, where we had, you know, like in the last business, we had Hertz and RSC, and we were competing against them, like, all the time. Here, we're competing against just hundreds and hundreds of people every day that are all over the place, where people have different niches. Very, very fragmented. So if you look at truckload brokerage, you know, you got to look at truckload as a whole, which is a few $100 billion, and about $50 billion of that is going through brokerage at the moment. Our view is that $50 billion is going to increase over time for reasons that we've talked about in various forms in the past.

If you look at C.H., I'm not up to date on their latest numbers, but I think they have something like $7 billion-$8 billion of truck brokers, something in that, in that neighborhood.

Peter Nesvold (Managing Director)

Mm-hmm.

Brad Jacobs (CEO)

We have, you know, at the moment, a run rate of $550 million going to $1 billion. But even those two numbers together don't add up to a significant percentage of the whole market. So what is going on in one particular competitor of ours, even the largest one in the industry, isn't as positive to how our results are going to be. It's much the key determining factor for us is not competition, from our view. The key determining factor for us is how much freight is there to compete over. There's always going to be competition. There's 10,000 truck brokers out there. Who's got different market shares will keep changing. I mean, right now you see the top, call it 20 brokers, 30 brokers, grabbing a huge amount of market share from the smaller, tiny brokers.

That's a trend that was going on before we even entered the market and has been accelerating, in our view, in the last couple of years. So that's something that's changing. And how much freight is out there, that's either going to be good or bad. If the economy comes back and manufacturers are producing more freight that needs to be transported, retailers are selling more goods that have to be transported, the level of competition is not going to make it worse. It's going to be better for us.

Peter Nesvold (Managing Director)

Okay, great. Thank you.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Our next question comes from Ryan Bouchard from Avondale Partners. Please go ahead.

Ryan Bouchard (Senior Equity Research)

Hey, good morning, guys.

Brad Jacobs (CEO)

Good morning.

Ryan Bouchard (Senior Equity Research)

I'm just trying to get a sense of how the year-ago comp looked in brokerage gross margins. It was 11%, and that was down 430 basis points. Do you recall, did that start soft, or did it end soft, or was it consistently soft through that quarter?

Brad Jacobs (CEO)

Ryan, thanks. It, it was relatively consistent through the quarter, although what was driving that was the, cold starts, which were just getting going at the time. They really didn't even have the benefit of Charlotte, which was just getting started. It was, it was really just opening that in March of last year. And as, as that grew, as we started to grow our cold starts, those were in new lanes that we hadn't done before, and we didn't have great relationships with carriers back then. And straight through the quarter, the margins were, were lower on those new lanes, but it did grow as a percentage of the overall mix through the quarter as our cold starts grew.

Ryan Bouchard (Senior Equity Research)

Okay. And so then I imagine we're going to see a year-over-year improvement in brokerage gross margins, but I was wondering if you could kind of help us ballpark that figure. Can it get to 14%-ish, given your existing shift towards more acquisition mix? You know, excluding any other companies that you buy this quarter, can it get to a 14% level?

Brad Jacobs (CEO)

It could, but I want to make very, very clear, our goal and the KPI, the key performance indicators that we look at and measure ourselves and compensate people internally, is not the percentage of gross margin, it's the actual gross margin dollars. So there can be instances where the gross margin percentage is higher, but the total amount of business and profit isn't great. And there can be other instances where the gross margin percentage is lower, but you get a lot more business and you made more profit overall. So you can't. We look at that. We're sure we look at gross margin percentage, and all things being equal, you'd rather have a higher one than a lower one, but it's not the be all and end all KPI to look at.

Ryan Bouchard (Senior Equity Research)

Okay, makes sense. And then on the, in the corporate expenses, the purchase services number, sequentially, that was down by $1.8 million. Can you tell us what the biggest delta was there sequentially? Because it, it fell from $4.4 million-$2.6 million.

John Hardig (CFO)

Yeah, that was the this is John. The biggest change there was fees related to M&A transactions. So, you know, we had a big drop in that. We also had a drop in the auditing fees and accounting fees, in terms of that, you know, what we pay KPMG for the work that they do for us.

Ryan Bouchard (Senior Equity Research)

Okay.

John Hardig (CFO)

Most of it, the biggest piece was M&A-related transaction fees.

Ryan Bouchard (Senior Equity Research)

Okay, so that can tick back up whenever you guys, as you buy more companies throughout the rest of the year?

John Hardig (CFO)

It could.

Ryan Bouchard (Senior Equity Research)

Okay.

Yeah.

All right. Thanks, guys. That's all I have.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Tyler Brown (SVP of Equity Research, Transportation and Waste)

Hey, good morning.

Brad Jacobs (CEO)

Good morning.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

Hey, Scott, I'm just curious, can you help us bridge the 594 brokerage folks you guys ended 2012 with to the 668 you ended Q1? I guess my question, how many people came in from Covered?

Scott Malat (Chief Strategy Officer)

Covered added about 40 people.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

40 people. And then did you say about 35 from Interide?

Scott Schneeberger (Managing Director)

35 from Interide, that's included in second quarter, not first.

Interide just closed Monday.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

Right. Okay. And then, Brad, just quickly on the employee churn, I missed it. Did you give a kind of an employee churn number? And if not, can you talk about it broadly? And is that kind of tracking above or below your expectations?

Brad Jacobs (CEO)

Turnover is the enemy. If there's high turnover, it means we did not succeed at hiring the right people, or we did not train them well enough, or we did not give them enough of all the tools necessary to make a good living. We don't want high turnover. We want low turnover. Now, you don't want 0% turnover. You want you know, that's never going to happen. And the kind of turnovers that we're targeting depend on the level of growth and how we're doing. If we're hiring 40 employees or 50 employees a month, if we maintain that rate for the rest of the year, you could look at voluntary turnover in the low 20s employees.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

Low 20s employees, okay. Is that, you know, kind of above or below how you were kind of thinking about the model in the beginning?

Brad Jacobs (CEO)

About the same.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

Okay.

Brad Jacobs (CEO)

About the same. But, but we'd like to get it lower. If we get it lower, that'd be a, a beautiful thing.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

Okay. And then, Scott, just lastly, I'm just curious about the mechanics of actually bringing a new salesperson on. How long is the training period, and when does that person actually begin to generate revenues? And then what kind of productivity do you guys look for, say, a year out or two years out?

Scott Malat (Chief Strategy Officer)

You know, training is something that's very, very important to be done right and to be done not too quickly. Training is something that's several months in a formal basis and takes several different forms. There's classroom-based training, there's structured simulation and role plays, there's on-the-job training, there's mentorship programs, there's continuing ed classes, there's webinars. Probably the most important aspect of training, after all the formal training, is daily direct coaching from the branch presidents who have been there and done that over and over again for their careers and have been in every situation, are just great coaches.

Tyler Brown (SVP of Equity Research, Transportation and Waste)

All right, thanks.

Scott Malat (Chief Strategy Officer)

Thank you.

Operator (participant)

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

Ryan Cieslak (Associate Equity Analyst)

Hi, guys. Good morning. Thanks for taking my questions.

Brad Jacobs (CEO)

Good morning.

Ryan Cieslak (Associate Equity Analyst)

Brad, first up, I wanted to ask you. I think you had mentioned that overall, you know, freight trends were relatively flat into April. I wanted to get maybe your expectation, you know, for the coming months, as the weather starts to warm up here. Are you hearing the trends are seasonally strengthening? Are you still seeing some relatively flat trends here in the coming months?

Brad Jacobs (CEO)

Well, we'll get the seasonality, you know, that's this year is going to be no different than every other year in terms of seasonality, but I don't think the amplitude is going to be so high. We're not banking and counting on buoyancy coming back. It doesn't feel that way, anecdotally or intuitively. You don't feel a lot of, you just don't feel lots of freight coming out of everywhere. And where you see probably the most weakness is on the expedite. On expedite, where our profit was down significantly, it was a big disappointment for us. There's not too much we could have done about it, as you saw with our competitors, had similar poor results because the volatility isn't there. So on expedite, you need the volatility. So auto production is high, but it's not jerking around.

So, the just-in-time inventories are working just fine. There's not a lot of disruption, so let's expedite. And I always watch expedite, because expedite sometimes is a leader for the rest of the trucking business, although it's got a little different factor with the volatility being more important. On the general freight, on dry van. I think that it's modestly improving, but it's not improving enough that the routing guides are breaking down and bunches are spilling off over into the spot market. And I think that's the number one problem right now in the truck brokerage industry, by far, that there's just not enough freight coming out of the routing guides to and you have the same number of competitors competing over, you know, a measly amount of crumbs coming out, that's coming out.

That won't last forever. There'll be a time where it'll be the good old days again, and there'll be either a shortage or there'll be a glut, but there'll be an imbalance, and those disruptions will be a heyday for brokers again. I don't know when that's gonna be. I don't expect it in the next few months, barring some geopolitical event.

Ryan Cieslak (Associate Equity Analyst)

And then, Brad, with the expedited market, are you seeing any stabilization in the last couple of months, or is it the market that feels like it's still relatively mixed and could weaken, maybe potentially, you know, going forward?

Brad Jacobs (CEO)

I don't see expedite getting worse, the sense we have. But it's very difficult to predict expedite because by its nature, it's unpredictable freight. It's unplanned freight. I think it really comes, you know, the biggest contributor to expedite, but certainly not the only one, is auto. And as long as auto just stays stable or just slightly growing, you know, they, they avoid expedite. Why should they pay expedite if, if everything just goes, just goes normally? Life sciences, on the other hand, there is an increase in expedite, and a lot of that has to do with Mexico and the way they're designing their supply chains, and we're all over that. Another big supplier to user of expedite services is government-related.

Overall, government-related is actually probably down, although it's hard to get good numbers on that, but that's probably what we think. But again, it's something that we are a small market share in, 'cause it's something we didn't emphasize as much until last year, and now we've put a big full court press on it. We're able to grow that, but that's not the overall trend.

Ryan Cieslak (Associate Equity Analyst)

Okay, that's helpful. The other question I had is on some of the initiatives you guys have in place for the national accounts and, you know, getting some share there. Is that, in terms of the sales cycle there, is that something where we start to see benefits and incremental revenue over the next 12 months? Or is that sort of a shorter sales cycle where maybe you can start to see benefits from, from some of the sales initiatives you have in place there, maybe to the back half of the year?

Brad Jacobs (CEO)

It's a longer cycle, for sure, than transactional business. I mean, transactional business, on one extreme, can be a cold call, and they give a couple of loads right there on the first call. On the larger strategic account, national account business, is typically done by RFPs, which are done often a couple of times a year. There's a vetting process to get into to get qualified for the RFPs, and then you, you got to bid right. So we've put it together. We're doing this very methodically in the upfront, going for the Tier 1 accounts. The Tier 1 accounts demand very flawless execution. So if you have more than 2% or 3% service failures, you're out. They, they don't, they don't want to hear about it.

There's plenty of other people who will service the account with that kind of service, performance, and that's who they focus in on. So we only service the Tier 1 in about a half a dozen of our locations, which are very experienced handling national accounts. About 20% of our business right now, roughly, is with Tier 1 accounts, and that's mostly business that we inherited through acquisitions, with companies that were doing business with those large accounts already, and we're growing. Our plan is to continue to grow and penetrate further. We've gotten some wins of things that were in the hopper already, but the amount of growth and momentum in that is absolutely going to pick up and snowballs. No question about that.

As we go through this year, introducing ourselves, where we're not known yet with those 1,200 customers, and really getting to understand their needs and their supply chain and exactly what they value over and above the normal on-time pickup, on-time delivery, accurate billing, et cetera. What kind of technology requirements do they have? What kind of EDI do they work with? How can we mesh our EDI together with theirs? Once we really understand what they want and we position ourselves to fulfill their needs, I see that as being huge. I mean, when you look at our largest competitor, according to their public filings, they've got, I think it's 40,000 customers, 50,000 different customers, but only a few hundred of them account for, you know, roughly half of it.

I may have some of those numbers not exactly right, but generally speaking, that's the ballpark. So those few hundred largest customers are big customers. So you can get a Tier 1 account, maybe the first year, they'll start you out with $2 million, $3 million of freight to see if you're for real. You pass the test, you ingratiate yourself, you show, you show them that you're serious, you show them you take your losses when the market moves against it, you show them you perform well in terms of pickup, et cetera, et cetera. Next year, you can get $10 million or $15 million, and, you know, a few years out, those can grow into tens of millions of dollars just on a single account. So those are big accounts, slower sales cycle, but could represent literally billions of dollars of revenue in the outer years.

And as you know, our business plan is not about this quarter or next, next quarter. Obviously, we manage the business as best as we can on a daily and monthly and quarterly basis, but that's not where the big kill is. The big kill is to build up a company that several years from now is $5 billion or so in revenue, doing hundreds of millions of dollars of profit, that we're doing business with a good percentage of the Tier 1 accounts, a good percentage with the mid-size accounts, and a good percentage of the small and medium-sized enterprises as well. We've built out a branch network now. We've got 62 locations, 29 of them are freight brokerage, 29 are freight forwarding and expedite. We want to expand that branch network. We also want to grow.

Five or six of our locations into mega locations, mega branches, the ones like in Charlotte, where we didn't have anything a little over a year ago, and now we've got, you know, roughly 250 people. Chicago, Lake Forest, which we picked up with Covered, and it is excellent with customer service and large accounts. Gainesville, 175 or so people there now. We have. We're targeting 400. Salt Lake City, now with Interide, is absolutely can be a large branch with hundreds and hundreds of hundreds of employees and $100 millions of revenue. So we're having a multifaceted attack on the market, and it all comes down to, can we serve the customer well? And if we can, we'll get the business.

Ryan Cieslak (Associate Equity Analyst)

That's great color. I appreciate it. But the last one that I have is, I wanted to get your opinion, Brad, on the impact that the increase in bond requirements for the industry later this year can have on your acquisition strategy, and maybe just the number of potential acquisition candidates that could come to your desk, again, in the back half of this year.

Brad Jacobs (CEO)

It doesn't affect us too much on the acquisitions because, I mean, our view is, if you can't afford to put up a $75,000 bond, then we probably don't want to buy you in the first place. It's not like a huge amount, but you got to remember, there's 10,000 truck brokers out there, and the vast majority of them are small. Very, very small. So for them to put up a bond of that size is, is something significant. But I see the, those small brokers downsizing and some going out of business, not just because of the bond, it's because the freight world is evolving. Shippers are more demanding in the services that they need, particularly on the technology side. And carriers have pressures to become more and more efficient.

Therefore, the brokers, which are in the middle of the, the carriers and the shippers, have to be more sophisticated and need to invest in their infrastructure in order to perform, in order to differentiate themselves from others. The smaller ones just don't have the resources for that, but it's not because of the bond.

Ryan Cieslak (Associate Equity Analyst)

Okay, thanks for the time, Brad.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Jack Atkins (Managing Director and Analyst)

Good morning, guys. Thanks, thanks for taking my questions.

Brad Jacobs (CEO)

Morning, Jack.

Jack Atkins (Managing Director and Analyst)

Just to kind of go back to something we were talking about earlier on the sales training, and ramp cycle. Just sort of curious to sort of drill down on that a little bit more. You know, just to kind of be specific, how long is the typical training cycle, and then how long does it take before these new sales reps are profitable?

Scott Malat (Chief Strategy Officer)

Sure, Jack. It's Scott. The training program goes over several months, but that's including the on-the-job training. And then when you get the direct coaching from the branch presidents, you're doing shadowing and reverse shadowing. So there's different phases to it that go over several months, and then the continuing education classes that go. So really, it kind of comes out to eight to nine months in total, from a total program perspective. Usually, our sales reps are turning profitable after the first year. They tend to do $350,000 in revenue in the first year, and that's on a fully blended basis with the carrier procurement people and the operations people needed to support them.

Then by the end of the first year, they're doing about $600,000-$650,000 in revs by the end of the first year on a run rate basis.

Jack Atkins (Managing Director and Analyst)

Okay. Okay, that's, that's helpful, Scott. Thank you for that. Then, you know, when, when you guys, sort of look at the acquisitions that you've made over the last 12 months, 18 months, I know you gave up a run rate there on sort of acquired revenue over the last, revenue that you've acquired over the last year. But when you, when you look at the businesses that you've purchased, you know, can, can you maybe give us some color on how, how those businesses are performing, relative to expectations? Because I know that sometimes it can be hit or miss in the brokerage world with, with M&A. Just sort of curious if, if those are going according to plan, better than planned, or just, just any, any commentary there would be helpful.

Brad Jacobs (CEO)

Sure. But, you know, M&A in any industry can be hit or miss. Fortunately, the deals that we've done have all been hits so far and no misses, and I think that's partly because we've been going at a fairly measured pace. We, we, you know, we, we haven't done dozens of acquisitions. We've done a handful of acquisitions, and we've been very picky and choosy of which ones we've done. So let's just kind of walk through each one. So Continental Freight is beating budget. Kelron is profitable, which is something they couldn't say right before we bought them, and improving, so that's good. BirdDog is fully assimilated into Charlotte. They're a great contributor to Charlotte. It's, it's fully integrated and assimilated right there on the floor. You, you don't know who used to come from BirdDog and who didn't.

They were there in Charlotte, we just merged them together. Turbo is we're adding people there. We're adding salespeople in the legacy Gainesville business, but also what we call Atlantic, even though it's in Gainesville, just to separate it, meant psychologically from the legacy business, which is a cold start that we have Amanda Miller growing, and she's hiring people and training people, and they're on the phones and, and they're doing well. They're adding new accounts. When we bought Turbo, it was doing roughly $124 million-$125 million in revenue. I mentioned earlier in the call that their specialty is really these large Tier 1, Fortune 500 type accounts.

They added a couple of those, and so what was a $125 million-ish business is now a $135 million-$140 million business, so that's a good thing. East Coast Air Charter is good. It hasn't been performing fantastically since we bought it in February, through no fault of their own, but just because what's going on in expedite. And if you can even take it one further step along, air expedite is even more extreme than truck expedite because air expedite. The customer needs air expedite if they've got a real problem, and it's got to be solved so fast that a truck can't get there in a short amount of time it's needed. So that's avoided unless you really need it. So that prospers and flourishes when the supply chain is all messed up.

When it's kind of stable, doesn't do so well. So I guess from an economic point of view, in the two months we've had it, it's been a slight disappointment, but I'm not worried about that at all because that's a choppy business and something that can be doing really great one quarter, it can do real lousy the next quarter, and vice versa. What I am excited about is I spent a couple of days with, Rian and John, the two senior salespeople last week, and they've got a very careful plan, drawn up to cross-sell to our other 62 locations and to take advantage of the great relationships that we've got in the rest of our organization to market air expedite to them. So I'm, I'm bullish about that one. And then what else? Covered. So Covered, we bought in February.

It's in the final stages of integration, which is faster than we've integrated others. Of course, we didn't have currency issues or language issues like we had in some of the other ones. But the integration is in its final stage. Covered, I'm excited about. Covered in Lake Forest and in Dallas, these are experienced people who totally get what it takes to give passionate service to Tier 1 customers, and we're going to grow it. And we've taken Pat Gillihan, who's one of the three former owners there, and migrated him to a strategic account manager, and he's working with the people at Covered to get them more business, and there's plenty of business to go after. Interide, a little too early to judge.

We only bought it two days ago, but all the rest of them, that's the state of play.

Jack Atkins (Managing Director and Analyst)

Okay, that's a really helpful color, Brad. Thank you for that. And then the last question from me, I guess, it's a two-part question, but you know, when you think about your long-term goals that you set out at the beginning of this road, you know, $4 billion-$6 billion in annual revenue by 2016, and you think about the breakout between organic growth now and acquired growth or cold start versus acquired growth, has that mix changed any? Because it seems like you've sort of ramped the organic side of the business faster than originally expected. Just sort of would be curious to hear your thoughts on that.

Also, when you look at the cash on the balance sheet and the capital that you've got at your disposal, do you think, you know, $206 million is enough cash to hit the long-term bogeys that you put out there?

Brad Jacobs (CEO)

Yeah. So on the organic growth, I'm really proud that we had 45% organic growth, and that's, that's a heck of a lot of growth organically. So I'm real good about that. I'm very proud of the organization that we're able to deliver 45% organic growth. It's a huge amount of organic growth, and we're going to keep at it. Organic growth is the least expensive type of growth, and it's not buying someone for, you know, 6x EBITDA. It's, it's, you know, internally generated, and it's very, very sustainable. So I like it a lot. Having said that, acquisitions absolutely are going to be a big part of our life going forward. You're not going to be able to grow to $5 billion just organically in the timeframe we're talking about, without doing acquisitions.

So we will do acquisitions. The other reason we want to do acquisitions is it gives us lane density. It gives us. It makes us a player in, in more lanes, where we're more in the flow of what's going on. It's easier to find a truck, and it's easier to figure out what's the right rate to quote, because you're in it. You're in the game all day long. You're in the ebbs and flows of how it's going up and going down by the hour. So we want to get bigger and bigger, so we get better and better in more and more lanes. In terms of the financial capability, with a little over $200 million of cash, plus, an accounts receivable facility, which sooner or later will put in, and maybe one turn of debt.

We're not going to do huge amounts of debt, but, you know, maybe, maybe that's not our plan, but, you know, maybe another turn of debt. We could get up to the lower end of the $4 billion-$6 billion of revenue, but it wouldn't get us to the higher end. So somewhere along the line, whether that's sooner, medium, or later, we'll, we'll, we'll revisit what is the right timing to issue equity.

Jack Atkins (Managing Director and Analyst)

Okay. Thanks so much for the time, guys.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Our next question comes from David Campbell from Thompson Davis & Co. Please go ahead.

David Campbell (Founding Partner, SVP, and Research Analyst)

Hey. Hi, Brad, Scott, John. Just wanted to follow up on what you said, Brad, about a minute ago, about cross-selling, that the expedited division, not the expedite division, the East Coast Air Charter acquisition, was beginning to think about marketing their services through your other branches. I haven't heard a lot about cross-selling before from your company. And as I've seen I've heard other brokers and freight forwarders talk about cross-selling over the years, and I've heard about it, your former your predecessor, Express-1, talk about it, and cross-selling expedited, and it never seems to work. Do you think that's a viable way of getting organic growth? What's your attitude to cross-selling?

Brad Jacobs (CEO)

I do think cross-selling is a viable, viable way to grow, and it's, you know, a tried-and-true method of growing in, in many different industries. I think you need a certain critical mass in order to do that successfully. You need a certain depth of relationships and number of relationships. I know in the series of sales meetings that we've had over the last few months, it's a big theme where we have representatives. So we have a sales force that's just an expedite sales force. We have now a sales force that's just Tier 1 accounts. We have another sales force that does air expedite charter. So we have another sales force that does freight forwarding. Those sales forces had been operating more or less in silos independently. That's not the case anymore.

There's a lot of cross-sharing of information and introductions. So in our expedite group, we have long-term relationships with good, important customers that go back long lengths of time, and there's no reason why those people can't introduce their counterpart on one of the other, for instance, on the Tier 1 account sales force to those customers and get the benefit of the goodwill as opposed to just coming in cold. So that's a big plan and something we really wanna do. It's not a magical formula of, you know, cross-selling in a vacuum. It's more of a methodical plan to capitalize on relationships, great relationships that we have in parts of the company, to introduce the sales forces in other parts of the company to get the business, to get the foot in the door with credibility from day one.

David Campbell (Founding Partner, SVP, and Research Analyst)

So that you haven't had any success in it so far in the last 12 months, I guess, but that doesn't. That's because you haven't had the density and the teams and so forth.

Brad Jacobs (CEO)

But we haven't really started it in full force till a couple months ago.

David Campbell (Founding Partner, SVP, and Research Analyst)

Mm-hmm. Mm-hmm. Got it. Okay. Okay, great. And Scott, you mentioned about the tax incentives in North Carolina, the fact that you started with some, and now you have $3.6 million more. Could you just explain really what all that does?

Scott Malat (Chief Strategy Officer)

Sure. It's tax incentives based on the hiring plans and based on the number of employees, and it's yeah, our payroll tax will go down over time.

David Campbell (Founding Partner, SVP, and Research Analyst)

So it's a payroll tax that goes down?

Scott Malat (Chief Strategy Officer)

Yes.

David Campbell (Founding Partner, SVP, and Research Analyst)

You got some of that when you opened the Charlotte office, and now that you've added—you've gotten some more, and this payroll tax decrease will go on for, what, five years?

Scott Malat (Chief Strategy Officer)

Yeah. The original $3 point something million dollars that we got from the state of North Carolina envisioned us hiring a couple hundred people over several years, and obviously, we've blown through that in the first year. We went back to the well and said, "Hey, you know, we're doing what's great for the state. We're hiring people. We're creating jobs, good jobs, good-paying jobs. You know, can you help us support our growth going forward more?" Thankfully, they gave us another $3 point something million dollars, and we have the similar type hiring goals as we had in the past, and I'm pretty sure we're gonna hit them.

David Campbell (Founding Partner, SVP, and Research Analyst)

But you don't run the risk of your costs going up $5 million or $4 million?

Scott Malat (Chief Strategy Officer)

Well, we don't get the money unless we hire the people, but we're gonna hire the people.

David Campbell (Founding Partner, SVP, and Research Analyst)

Mm-hmm. Mm-hmm. Right. Right. Right. Right. Okay,

Brad Jacobs (CEO)

By the way, David—

David Campbell (Founding Partner, SVP, and Research Analyst)

Yes.

Brad Jacobs (CEO)

We really appreciate that money from the state, because in the first year, when we hire a salesperson, we don't make money on them. I mean, we're training them, we're teaching them the business, we're showing them the ropes, we're showing them parts of the business that they're not necessarily gonna be involved in, but for the sake of being, having a comprehensive education about the business and be able to sell intelligently to the customer, we wanna train them, train them. So we're really investing in them. It's a, it's a real out-of-pocket cost. Until they start making, like, you know, $11,000-$12,000 a month in gross margin, that's when we start breaking even, and it usually takes about a year.

I mean, hopefully, with our training programs, maybe we can pull that up a few months, but it's not gonna be after three or four months. So getting help from the state is really something that is highly appreciated. And we have other states that we're pursuing similar endeavors.

Scott Malat (Chief Strategy Officer)

Mm-hmm. Mm-hmm. Mm-hmm. Yeah, and then once those, once that productivity goes up substantially, obviously the loss of the tax incentive is not significant relative to that. Although you keep getting more, if you keep hiring people, so it sort of it never really ends.

It bleeds in over time.

Yeah, it bleeds in.

David Campbell (Founding Partner, SVP, and Research Analyst)

Right, right, right, right, right. Okay, well, the rest of my questions have been... Wait a minute, wait a minute, hold on. You mentioned organic growth of 45% in the first quarter. Was that the total company? What, what part of the country- company was that?

Brad Jacobs (CEO)

That was the total company.

David Campbell (Founding Partner, SVP, and Research Analyst)

That's the total company grew that much? Okay.

Brad Jacobs (CEO)

Not bad.

David Campbell (Founding Partner, SVP, and Research Analyst)

I mean, it's terrific. I mean, there isn't anybody else I know growing at 45%.

Brad Jacobs (CEO)

Yeah. We'll be able to do that forever, but as a young company in our early years, you know, it's, it's great to do that.

David Campbell (Founding Partner, SVP, and Research Analyst)

Right. Yeah, it's fantastic. Okay, thanks.

Brad Jacobs (CEO)

Thank you, David.

Operator (participant)

Our next question comes from Robert Hoffman from Princeton Opportunity Partners. Please go ahead.

Robert Hoffman (Founder and Managing Partner)

Yeah, thanks for extending the call. Just a quick question. You know, on the one hand, we have a transportation market that's a little punky, and on the other hand, you're pursuing an acquisition strategy. It strikes me that the fact that the transportation market is punky is actually good. I mean, are you seeing that acquisition targets are more amenable to discussion because of the way the market is?

Brad Jacobs (CEO)

You know, yes and no. I mean, generally speaking, these are businesses that have little, if any, debt. They're positive cash flow. Even if the external market is sluggish, they're making a little bit more this year than they were the previous year. They made, which is more than they made the previous, the year before that. So they don't have a gun to their head usually to sell right away. So it's I can't say that because it's sluggish, that, you know, people are lowering their prices dramatically. Maybe it's-

Robert Hoffman (Founder and Managing Partner)

Well-

Brad Jacobs (CEO)

You know, maybe it's a little bit lower prices because the profits aren't as high, so even if the multiple stays consistent, it's a lower purchase price. I guess in that way, I would agree with that.

Robert Hoffman (Founder and Managing Partner)

Yeah, I guess if it was going gangbusters, then people have the tendency to raise the multiple that they want, so.

Brad Jacobs (CEO)

Yep, yep, and, and it's off a higher, higher amount, too, so it gets a little euphoric.

Robert Hoffman (Founder and Managing Partner)

Right. Okay. Well, thanks.

Brad Jacobs (CEO)

Thank you. Okay, well, I see it's eight minutes past the start of the market. Sorry to go past the market open. Thank you very much for your time, everyone. We appreciate the interest. We'll be talking to you soon. Have a great day.

Operator (participant)

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