XPO - Q1 2014
May 2, 2014
Transcript
Operator (participant)
Good morning, and welcome to the XPO Logistics First Quarter 2014 Conference Call and Webcast. My name is Brandon, and I will 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. If you have a question, please dial star one on your telephone keypad. 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, 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 on the company's website at www.xpologistics.com. I will now turn the call over to Brad Jacobs. Mr.
Jacobs, you may begin.
Brad Jacobs (CEO)
Thank you, operator, and good morning, everybody. Thanks for joining our first quarter conference call. With me today are John Hardig, our CFO, Scott Malat, our Chief Strategy Officer, and Tavio Headley, our Head of Investor Relations. Last night, we reported a strong first quarter performance with significant growth in every major metric. We increased our gross revenue by 148%, and we grew net revenue by 259%. Our organic growth, which excludes acquisitions, was 51% company-wide, and in freight brokerage, we generated organic growth of 75%. At the same time, we continued to drive margin improvement. We increased net revenue margin company-wide by 640 basis points compared to the prior year quarter, primarily due to the acquisitions of 3PD and NLM.
In freight brokerage, we increased margin 90 basis points from a year ago, excluding the benefit of last mile margin, and that's our fourth consecutive quarter of year-over-year improvement in our core business margin. Excluding costs associated with the acquisition of Pacer, this was the second consecutive quarter of positive EBITDA, and we're solidly on track to reach an EBITDA run rate of $100 million by the end of the year. The integration of Pacer is going extremely well. Morale is very high. We now have one combined sales force under the strong leadership of our Chief Commercial Officer, Julie Luna, who was previously head of intermodal sales for Pacer. We have a lot of confidence in Julie. She's a 25-year industry veteran with a great track record of dealing with some of the largest shippers in North America.
At UP, she led Union Pacific's $1.2 billion automotive transportation business. We're getting a very positive response from our customers about our multimodal capabilities. A number of our brokerage customers are asking us to move long-haul freight on the rails. With about an hour of sending an email that we had bought Pacer, we received more than 300 responses from our customers, many of them requests for intermodal quotes. In addition to revenue generation, we made great progress in taking out costs in the Pacer acquisition, and our updated estimate of cost synergies has tripled from our initial expectations. We've now identified $15 million of synergies in technology, real estate, sales and administrative functions, public company costs, and duplicative personnel, and we've already executed on many of them. For example, we quickly implemented our plan to reverse the losses at Pacer's logistics business.
We closed or consolidated 16 offices and retained 10 profitable operations, now part of our XPO Global Logistics Freight Forwarding group. Dominick Luczy, who's done a superb job at ramping up our profitability in freight forwarding over the last three years, is now in charge of growing this combined organization. With brokerage, we put the former Pacer brokerage business under the leadership of Josh Allen, who fully integrated it with XPO. Josh is one of our regional VPs. He's been growing our brokerage offices in Louisville and Cincinnati at a fast clip, and we moved the operations onto our proprietary Freight Optimizer technology, which has allowed the team to serve customers better and price loads more effectively. They can do their job faster on a more user-friendly system with access to the more than 26,000 carriers we now have in our network.
So in sum, we reported a very strong first quarter and delivered sizable internal growth. We completed a transformative acquisition that made us the third-largest intermodal provider in North America and the largest cross-border Mexico intermodal player. We continue to achieve our milestones, and we're on track to generate 2017 revenue of $7.5 billion in EBITDA of $425 million. With that, I'll hand it over to John. John?
John Hardig (CFO)
... Thanks, Brad. The completion of the Pacer acquisition had a meaningful one-time impact on our results for the quarter. So I'll start by covering that, and then I'll turn to the very positive performance of our three business units. Because we completed the Pacer acquisition on the last day of the quarter, Pacer's first quarter results of operations were not reflected in our P&L. However, we did incur $4.6 million of transaction expenses, largely related to Pacer, and $6.4 million of one-time Pacer integration charges, consisting of severance and lease impairment costs. Our year-over-year top line growth was very strong. We increased freight brokerage revenue by 196% and increased net revenue dollars by 340%.
Within Freight Brokerage segment, we drove up revenue in our truckload, LTL, and intermodal operations by 85% year-over-year and achieved organic revenue growth of 75%. This demonstrates our ability to leverage our carrier network and technology to scale up our brokerage operations, especially in times of market volatility. Net revenue margin for truckload, LTL, and intermodal increased by 90 basis points to 13.8%. Also within brokerage, our Last Mile business grew its revenue by approximately 15% year-over-year. Net revenue margin for Last Mile declined by 210 basis points sequentially from the fourth quarter, primarily due to weather constraints. We're seeing a positive trend in demand for White Glove Delivery services, and we're continuing to capitalize on our position as the clear leader in this space. Our expedited Transportation business had a strong quarter.
We increased revenue by nearly 42% and increased operating income by 397% over last year. This reflects our acquisition of XPO NLM in December, as well as strong, a very strong expedited market during the first quarter. Net revenue margin increased to 34% from 16, 16% a year ago. Because XPO NLM recognizes revenue on a net basis, virtually all of its gross revenue goes to margin. Volume through the portal increased by 47% year-over-year. Our Freight Forwarding business achieved strong revenue and profit growth in the quarter. We increased revenue by 20% over last year and improved operating income by 48%. Excluding the one-time charge last year for rebranding it as XPO Global Logistics, this is the sixth consecutive quarter with year-over-year increases in revenue and operating income in Freight Forwarding.
We will, we will be rebranding two more of our businesses in the second quarter. We're changing Express-1 to XPO Express, and our 3PD business will become XPO Last Mile. They will be joining the rest of our XPO brand family, which currently includes XPO Logistics, XPO NLM, XPO Global Logistics, and XPO Air Charter. This will further harmonize our businesses under a common XPO banner. We expect to incur approximately $4.6 million of one-time charges in the current quarter related to the expedited and Last Mile branding changes, of which $3.3 million will be non-cash amortization of the old brands. Corporate SG&A expense was $21.7 million for the quarter.
This includes the $11 million of transaction and Pacer integration costs I mentioned earlier, $1.4 million of non-cash compensation expense, and $1.2 million of litigation costs. Net interest expense was $10.1 million for the quarter, consisting of $4.5 million for the Pacer debt commitment we received from Credit Suisse, $3.2 million of interest on our convertible notes, and $2.3 million related to early conversion of some convertible notes to common stock. On April first, we amended our ABL to upsize the facility to $415 million, with an additional $100 million accordion. The facility has an interest rate of LIBOR + 175-225. It is currently undrawn, and with our cash, it gives us liquidity to do acquisitions.
Our effective tax rate for the quarter was 10.5%. Our tax rate was lower than expected due to the intangible asset valuation of the Pacer acquisition. This resulted in a valuation allowance against our deferred tax assets. It has no effect on our ability to use our tax benefits in the future, and at the end of the quarter, we had $155 million of federal tax NOLs. Capital expenditures for the quarter were $3.9 million, consisting mainly of technology-related spending. With Pacer added, as of March 31, our planned full-year CapEx is approximately $30 million. Our liquidity position remains very strong. At the end of the quarter, immediately after completing the Pacer acquisition, we had $157 million of cash on our balance sheet, including $13 million of restricted cash.
Apart from our convertible notes, which are trading well in the money, we have just $2 million of debt and capital leases. So each of our business units is performing very well, our balance sheet is strong, and we have a lot of momentum going into the second quarter. Now I'm going to turn it over to Scott, and then we'll go to Q&A. Scott?
Scott Malat (Chief Strategy Officer)
All right. Thanks, John. A big part of our growth in the quarter was the fact that we were able to get our hands on capacity and move record amounts of freight during severe weather disruptions. I'm proud to say that we honored all of our commitments. Our customers very much appreciated that, and they rewarded us with a substantial amount of incremental spot business. The weather service caused problems for the rails, which drove more freight over the road. That tightened up truck capacity, which led to more expedite business, and then some of those expedite loads shifted to air charter. We were able to move freight through our brokerage network, through the owner-operators at Express-1, through our auction platform at XPO NLM, and through XPO Air Charter. While the weather impact was temporary, we gained new customers who had hit a wall with their usual capacity providers.
We were also able to build stronger relationships with our existing customers. This helped us grow the business, even as capacity loosened over the past few weeks. We're finding that customers of all sizes are very receptive to giving XPO some first-time freight. They're actively looking to partner with large multimodal 3PLs that have deep capacity and are in this for the long run. They can see that we're investing in growth and capacity and infrastructure. This resonates particularly with larger accounts who want stable supply chain relationships. Our strategic accounts team brought in business from 33, 33 new customers in the first quarter. Now, when we meet with our customers, the dialogue is not just about moving freight, but also about analyzing their supply chains. We're looking at where they have issues and where XPO can add value.
This is exactly why we bought Pacer, 3PD, Optima, and NLM. They all provide services that are rapidly growing in demand in the North American supply chain. Of our 24 cold starts, 11 are in freight brokerage, including our newest location in Kansas City, which we opened in March. Our brokerage cold starts already have an annual revenue run rate of over $190 million. A year ago, the run rate was roughly $78 million. So we've increased our brokerage cold start revenue by 2.5 times in about 12 months, and we'll continue to grow them fast. Looking ahead, we expect our profitability to ramp up through the second quarter and the rest of the year. Our last mile business is starting to see a bump from the spring season and new housing.
The positive impact of the Pacer acquisition will start to show up in our second quarter results, and we'll continue to drive organic growth, improve productivity, and gain operating leverage over our fixed costs. With the $400 million of revenue we expect to acquire between now and year-end, we're on track for a run rate of $2.75 billion by December 31st. We've delivered a strong start to the year, and we'll continue to push the pace on our many initiatives for growth. Now we're going to open up the call for your questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you have a question, please press star 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 a speakerphone, please pick up your handset first before dialing the numbers. Once again, if you have a question, please press star one on your telephone keypad. From Deutsche Bank, we have Rob Salmon online. Please go ahead.
Rob Salmon (VP and Senior Analyst)
Hey, good morning, guys.
Scott Malat (Chief Strategy Officer)
Morning, Rob.
Rob Salmon (VP and Senior Analyst)
You know, Brad or Hardig, could you, you guys had highlighted kind of the stepped up Pacer synergies. Could you give us a sense of how quickly you expect to achieve those cost synergies and how much of a benefit you guys are receiving from the adjustments you have made to Pacer Logistics segment?
John Hardig (CFO)
Hey, Rob, it's John Hardig. Yeah, you know, the Pacer synergies, we've set that up to about $15 million. That's made up of about a third of corporate overhead savings, about a third of public company and IT consolidation savings, and about a third from improvements in the logistics business. We expect to achieve about, roughly about $6 million of that by the end of this year, and then the rest kind of rolling into, you know, 2015 and 2016. Some of the IT savings are going to take a little bit of time to achieve.
Rob Salmon (VP and Senior Analyst)
Perfect. That's really helpful. And then when we're thinking about the Pacer Intermodal lane balance, I know that's been something which has been something that's constrained Pacer's profitability in recent quarters. Can you give us a sense how much you've been able to leverage your expedite and some of the automotive traffic that you guys handle in terms of balancing out that that two-way flow?
Scott Malat (Chief Strategy Officer)
Yeah, Rob, you're exactly right. That's a big opportunity for us to drive incremental savings on top of that $15 million. No, no benefit from there is included in those $15 million of cost savings. Right now, empty miles are roughly about 39%. If you look at peers, it's more like the mid-20s%. Every percentage point decline in those empty miles could drive about $1 million to the bottom line. So a lot of opportunity to drive additional savings. We're just getting going on those initiatives, and stay tuned.
Rob Salmon (VP and Senior Analyst)
Thanks so much for the time, guys.
Scott Malat (Chief Strategy Officer)
Thank you.
Operator (participant)
From BB&T Capital Markets, we have Kevin Sterling online. Please go ahead.
Kevin Sterling (Managing Director and Equity Research Analyst)
Good morning, gentlemen.
Scott Malat (Chief Strategy Officer)
Morning, Kevin.
Kevin Sterling (Managing Director and Equity Research Analyst)
Brad, let's kind of start with Pacer. Sounds like the integration is going well. How many... Maybe you could ballpark it for me. How many of Pacer's customers did not use truck brokerage, expedited or freight forwarding or last mile, any of your suite of services, that you've already been able to maybe cross-sell that to?
Brad Jacobs (CEO)
Well, most of Pacer's customers were using Pacer strictly for intermodal. Some of them, but a very small percentage of them, were also doing truck. Pacer didn't have last mile, so there was no last mile there. Pacer did have an expedite. They called it just in time, but an expedite group. They had a little bit of expedite business, and we've now merged that expedite business with ours. We've merged the truck brokerage business with ours, and intermodal is just one solid organization integrated throughout the United States now for us, and we merged the sales forces. So we had a three-day sales summit in the first week after we bought the company, and we had their top salespeople, our top salespeople.
They're now just XPO salespeople, one organized group, and we came up with a go-to-market strategy, and we redivided up the lists of customers, and we went through customers one by one, and we talked about what share of wallet we're getting in each of the different modes, and how can we be more of assistance to them, and how can we offer them more services, and what's the right way to go about them? We have had some wins, even in the first few weeks, but it's still early stages to that.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay, thanks. And I think you mentioned kind of within announcing the Pacer acquisition, a lot of your customers reached out to you guys asking about intermodal. So maybe how many of your customers in the past did not use intermodal and are now looking to XPO for intermodal?
Brad Jacobs (CEO)
So if you look at our customers, and you look at their moves that we're making for them, we're doing about 25,000 loads a day now. About—take out the last mile and look at just the truckload customers. About a third of them are going over 600 miles, and of that third of the volume, over half of it is business that could be and maybe should be converted to intermodal. We've got a big effort going on to do just that. Some of those loads aren't close enough to a spur. Some of that freight is a little too time sensitive or delicate to be going by rail, but a whole bunch of it is right for conversion to intermodal, and these are mostly small and mid-sized customers.
The large shippers have discovered intermodal, and they're still refining their networks and still, there's still more penetration to go. But from our view, the big, big penetration is with those small customers. So it's quite a large amount.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay. Thanks, Brad. And then I think in the press release, you mentioned your strategic accounts team had signed 33 new major accounts in the quarter. How do you define major accounts, and, you know, and where do you want to grow that major account base, say, a year from now?
Brad Jacobs (CEO)
In our definition, a strategic account is a company that has at least $1 billion of revenue in their business. Ideally, you'd like to categorize them by transportation spend, but it's hard to get that accurate information on every single customer. So we just benchmark it by the size of their business. So all those 33 companies that came on board as new customers for us, they are billion- or multi-billion-dollar companies. Now, where do we want to grow that? We want to grow that really big because there's a lot of, there's a lot of business out there. There's a lot of freight to move, and we have a very compelling value proposition on a multimodal capability to offer them. So that's something that should be billions of dollars over time.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay, great. And one last question from me, and I'll get back in queue. Scott, you talked about April, some capacity loosening up, kind of with anecdotes we've heard. Is there any other trends you could share with us, that have unfolded in April now that winter has stalled?
Scott Malat (Chief Strategy Officer)
Well, sequentially, you know, we're still tight. Overall, the market is still tight. Truckload capacity is relatively tight. Sequentially, it's loosened incrementally for the last five, six weeks. Produce season did get off to a little later start than usual. You started to see produce only in the last few weeks, and it's only out of the southern parts of Florida and southern Arizona. It'll make its way up, and you'll start to see some things coming out of South Carolina and Georgia. Produce season, like I said, just getting going and starting to tighten up capacity in the Southeast, certainly.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay, great. Thanks so much for your time, gentlemen.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
From KeyBanc Capital, we have Ryan Cieslak online. Please go ahead.
Ryan Cieslak (Associate Equity Analyst)
Hi, good morning, guys.
Brad Jacobs (CEO)
Morning, Ryan.
Ryan Cieslak (Associate Equity Analyst)
Congratulations, I guess, on the official closing of Pacer.
Brad Jacobs (CEO)
Thank you.
Ryan Cieslak (Associate Equity Analyst)
Brad, I guess just to dovetail off that last question, I just wanted to maybe get your perspective right now on the truck brokerage market. You know, following the first quarter, there's been, you know, some puts and takes of, you know, how much of it was weather related and how sustainable it is. But I just wanted to get your view on, you know, how you're looking at the market or how you view the market going forward. And if it's something that is sustainable in terms of a an unbalanced or tighter market now going forward, how we should be thinking about the earnings leverage within your core brokerage business, as you'll finally be, you know, in an environment that is certainly more favorable than it has been in the last couple of years.
Brad Jacobs (CEO)
So from our perspective, it was a real fun market to be in, after two years of a real boring market to be in. There was a lot of disruptions. There was a lot of chaos. There were a lot of people who had real urgent problems to be solved, that we could help them solve them, and that's, it's just a really nice situation to be in. So you had lots of supply chain disruptions, and rail was most disrupted of all of them. And then the freight from the rail that was going to go rail went onto the highway. There already was a tight capacity situation. That made it even worse. Rates went up a lot. A lot of freight that was regular highway moved to expedite. Some of the ground expedite even moved to air charter.
So we were pushing all the different levers that we've got on the supply chain there, and it worked really well, and the numbers show that. Now, fortunately, from an overall point of view, we won't have all that bad weather forever. That was an anomaly, and things are starting to get back to normal. Capacity is tighter than it was before all that crazy weather. It's not as tight as it was three or four weeks ago. You've seen a significant loosening in the market. It's not loose, but it's not this crazy, crazy tight market where you have to spend hours and hours to find a truck. The load truck ratios have gotten a little more reasonable. You can find a truck.
Southeast is a tight part of the country right now because produce season kicked in, albeit late, but it did kick in, and you'll see some more produce season tightness coming in, in the south, in Texas and other parts of the country as the normal seasonality of produce kicks in. But I don't think you're going to see this mega tightness come back.
... unless there's some unforeseen disruption. You'll see a generally tighter market than there was last year, and I don't know how much to attribute that to tightening capacity due to hours of service, due to demographics, due to all that, and how much to attribute that to the economy, just little by little coming back. Does that more or less give you the color that you're looking for?
Ryan Cieslak (Associate Equity Analyst)
No, that's actually, it's really helpful. I appreciate that. I guess the next question I had is just on the gross margin improvement within the truck brokerage line. And again, had a very nice quarter, to be able to show that here on a year-over-year basis. I want to get a sense of, you know, how much of that improvement you, I think, at this point is under your control, I guess, going forward. Meaning, you know, is there still a lot of opportunity to continue to see year-over-year improvement, aside from whatever the market gives you at this point? Or are we sort of getting to a point now where maybe it's a little bit more difficult?
Scott Malat (Chief Strategy Officer)
Well, we're getting better, as we should, as the tenure of our reps increases. I would say where we're most getting better is on procuring trucks, procuring capacity, because we have a bigger network. We've got 26,000 active vetted carriers that we're working with, and we've got better technology. We've got technology that's now processing all that information that we've got in our network around the country and quickly prompting our carrier reps of who the right carriers to call. So between the combination of those factors, there is some opportunity for more margin improvement, apart from what the market does as a whole.
Ryan Cieslak (Associate Equity Analyst)
Okay, great. And then on the acquisition market, maybe just any update there on what you have been seeing year-to-date, any relative to your expectations and sort of how the pipeline looks right now?
Scott Malat (Chief Strategy Officer)
We have a lot of discussions going on. There's a lot of talks, many of them serious. Stay tuned. There's nothing to announce today, but we definitely are in serious discussions with a number of very interesting and attractive acquisitions.
Ryan Cieslak (Associate Equity Analyst)
Great. Good to hear. And then just one last housekeeping question for John. The corporate expense line going forward, you know, now that we'll have Pacer fully baked in, how should we be thinking about that, maybe from a run rate perspective?
John Hardig (CFO)
Well, it's gonna. It's really not going to change a lot from where it is now, because we have, you know, we really have, in terms of the corporate spend, we've kind of built the infrastructure that we need to scale up the company according to our plans, and we should be able to leverage that corporate expense, you know, quite a bit as we grow the top line. So I would expect this quarter to be pretty representative of what we'll see the rest of the year.
Ryan Cieslak (Associate Equity Analyst)
Okay. Thanks, guys. Appreciate it.
Operator (participant)
From Credit Suisse, we have Allison Landry online. Please go ahead.
Allison Landry (Senior Equity Research Analyst)
Thanks. Good morning.
Scott Malat (Chief Strategy Officer)
Good morning.
Allison Landry (Senior Equity Research Analyst)
Scott, I think in your outlook comments, you mentioned that you expect to generate operating leverage in the business. I just wanted to clarify if you think you'll be able to generate positive EBIT in each of the remaining quarters, or was the comment more in reference to the full year?
Scott Malat (Chief Strategy Officer)
As we go through the year, our EBITDA will scale up. Our EBIT certainly will scale up, but with future acquisitions, you never know how the amortization is going to turn out.
Allison Landry (Senior Equity Research Analyst)
Okay.
Scott Malat (Chief Strategy Officer)
So, but our EBITDA will certainly be scaling up through the year.
Allison Landry (Senior Equity Research Analyst)
Okay, so operating leverage on an EBITDA basis, I guess, is what you're saying today?
Scott Malat (Chief Strategy Officer)
Yes.
Allison Landry (Senior Equity Research Analyst)
Okay.
Scott Malat (Chief Strategy Officer)
Yes.
Allison Landry (Senior Equity Research Analyst)
I guess thinking about the 33 strategic new accounts that were added, and I realize that Pacer didn't close until the end of the quarter, but do you think that any of those accounts were somehow related to Pacer? You know, for example, did it move certain discussions along further and push them over the hurdle rate? Can you give any color on that?
Scott Malat (Chief Strategy Officer)
Yeah, absolutely. Out of those 33, four came from Pacer, which we're really excited about. I mean, the deal closed only four weeks ago. We, we've won business with about 12 companies due to cross-selling with, with Pacer just in the last four weeks. Four of those started shipping and are part of those strategic accounts, and we've submitted another just, just now, we just submitted another 8 joint customer bids. We're submitting some more now. So off to a great start. I mean, Justin Garbrandt, one of our strategic account reps that we took from Pacer, closed what, just last week, was our largest, our largest award ever. It's a $51 million award, but it was with an existing customer. It wasn't a new customer, so that's not part of the, the 33 new accounts.
Allison Landry (Senior Equity Research Analyst)
Okay. And then, in terms of the productivity metrics that you saw improvement, could you give us any detail behind those? And is there any way to sort of parse out what you're seeing in terms of these metrics for the more mature employees?
Scott Malat (Chief Strategy Officer)
What we've seen is steady improvement in almost every single one of our productivity metrics that we look at since the first quarter of 2013. So as we added people, the new employees, up until that point, had taken down the metrics in terms of gross revenue and net revenue per employee up until first quarter of 2013. And even though we kept adding employees, we started to see a sequential uptick. And from there, we've had four consecutive quarter of improvement, and now we're up year-over-year on our productivity metrics in terms of gross revenue per person in freight brokerage, in terms of net revenue per person, in terms of number of loads per day per sales rep, in terms of outbound calls per rep.
If you look at all of our productivity rep, metrics, they're all up on a year-over-year basis now.
Allison Landry (Senior Equity Research Analyst)
Okay. Do you think at some point in the future, you'll provide some of these? I mean, you know, obviously, you can figure out the employee ones, but, you know, loads per day, per rep, outbound calls. Is that something you plan to share with us in the future?
Scott Malat (Chief Strategy Officer)
Sure. We can break out things in different ways.
Allison Landry (Senior Equity Research Analyst)
Okay.
Scott Malat (Chief Strategy Officer)
We'd love to break out some of those things.
Allison Landry (Senior Equity Research Analyst)
Sounds good. All right. That's all for me. Thank you.
Scott Malat (Chief Strategy Officer)
Thank you.
Operator (participant)
From Oppenheimer, we have Scott Schneeberger online. Please go ahead.
Scott Schneeberger (Managing Director)
Thanks. Good morning, guys. Just following up on that last question. How are the attrition trends, and how does that weigh into your productivity measures right now and what you expect over the balance of the year? Thanks.
Scott Malat (Chief Strategy Officer)
Well, we had attrition in the low 30s in 2013. We'd like to get that down. Product attrition for us is costly. It's expensive. We have a lot of initiatives in place to drive that down, one of which we'll get just by the tenure of the reps. As you start to see the tenure increase in the reps and the ones that have been there the longest, the attrition rates drop significantly. So a lot of that's for the, the new hiring. You know, in the low 30s, is that, is that good? We're with a lot of new reps, it's, it's okay. We'd like to be better.
Scott Schneeberger (Managing Director)
Great. Thanks. Switching it up, talk a little bit about the truck brokerage business, and intermodal weather impact in the first quarter and into April. Could you address last mile and what you were seeing there and how that's transitioning from first to second quarter? Thanks.
Scott Malat (Chief Strategy Officer)
Yeah, last mile is starting to see a spring bump, and usually going from first quarter to second quarter, they improve productivity and improve profitability, especially from a first quarter that had a lot of the weather impact. So with the weather impacts, you had retail stores closing in some cases. You had, more importantly for our business, we backfilled capacity with trucks, called rapid response teams, that we brought in to make sure that we provide very high levels of customer service, even during tough times in the weather. We'll pay up for that, and we took it in margin. That's where we saw a 28% margin. Since then, you've seen us move more towards our typical 30% margin in last mile business.
Scott Schneeberger (Managing Director)
Thanks. And then, Brad, you mentioned earlier, very active M&A pipeline. Yeah, we can guess at the base of truck brokerage, maybe some tuck in an Intermodal, tuck in, in last mile logistics. Is there anything outside of those categories that you're looking to build in the XPO portfolio going forward? Just any hints at things that you'd expand outside of that realm? Thanks.
Brad Jacobs (CEO)
We're looking at some contract logistics companies. They're a little different from each other. We're still getting to learn it more. We like the fact that they have large, sticky blue chip customers, and they have high margin and strong free cash flows and high return on capital. More importantly, from a strategic point of view, it could be some cross-selling opportunities and some synergies with the rest of our business. Some of them are leveraged to e-commerce, which is something that we believe in. We haven't decided to pull the trigger on any of them.
Scott Schneeberger (Managing Director)
Okay.
Brad Jacobs (CEO)
Other than that, almost all the rest of the acquisitions are in our standard old verticals, Intermodal, truck brokerage, last mile, expedite.
Scott Schneeberger (Managing Director)
Great. Appreciate that. And then one more housekeeping, John. The restricted cash, could you just elaborate how restricted that is, what that is, how restricted? Thanks.
John Hardig (CFO)
Right. So when we closed Pacer, you know, we had to terminate their credit facility, and they had about $11 million of letters of credit issued by that under that credit facility, mainly to support their insurance programs, their commercial insurance for their trucking operations. So once that facility was terminated, we were really forced to cash collateralize those LCs right at the closing. We haven't had an opportunity yet to get through all the paperwork to issue new LCs under our credit facility. Once we do that, $11 million of that cash will be released and freely usable by us. And then about the other $2 million is related to a captive insurance program that 3PD has.
And so we really don't have access to that cash until the end of the policy year, and then we see kind of what's left over in there. Sometimes we take distributions, but typically that $2 million would be considered locked up. And in terms of the LCs on Pacer, we should have that cash freed up, the $11 million, within the next couple of weeks.
Scott Schneeberger (Managing Director)
Great, thanks, and congratulations on a good start to the year.
John Hardig (CFO)
Thank you.
Operator (participant)
From FBR Capital Markets, we have [audio distortion] on the line. Please go ahead.
Jack Atkins (Research Analyst)
Hey, thanks. Good morning, everybody.
John Hardig (CFO)
Morning, John.
Jack Atkins (Research Analyst)
Hey, so let me ask on Pacer and just kind of a general broad industry question. Capacity additions this year, are y'all buying boxes? And what do you think, you know, to what extent you can forecast peak season now, how do you think your capacity and industry capacity lines up with expected demand?
Brad Jacobs (CEO)
I'll take the last part and let Scott take the first part. You know, in terms of capacity and pricing, you got to remember, in our Intermodal business, our capacity is lined up on long-term contracts, and the vast majority of our customers are on long-term contracts. So we have a kind of built-in spread there, and if the market is going up and going down, it's not really a big factor in what we're doing on that. There is some part of the business that's spot, that's transactional, that's out of the confines of the larger contract, and there, we try to play a role to help our customers and to get more demand for our rail partners. And I'll let Scott or John talk about the CapEx.
Scott Malat (Chief Strategy Officer)
In terms of the boxes, which we do lease, that don't show up in CapEx, we will... We're looking to increase the turns. We're looking to increase the productivity of our boxes. The empty miles, which we talked about before, being in the high thirties, every percentage point that we decline, we will drive about $1 million to the bottom line. So that's the big focus this year, rather than adding boxes, to increase in the productivity of the ones that we have available to us today.
Jack Atkins (Research Analyst)
... Okay, fair enough. And just, are you going to keep the Pacer brand, or are you going to roll it into, you know, XPO Intermodal?
Brad Jacobs (CEO)
We're definitely going to keep the Pacer brand in Mexico because everyone in transportation in Mexico knows Pacer, because Pacer's been there for something like 26 years and is the largest cross-border intermodal player, and just got a great, great reputation there. And to switch the brand from Pacer to XPO in Mexico, even, even the letter X is you don't say XPO in Spanish. So it wouldn't work. Then the rest of the business, we'll be switching to XPO Logistics in the fullness of time. We interestingly, when we had the town hall meeting in Dublin, right after we closed the transaction, we had already printed a logo that says XPO Intermodal, and I thought it looked pretty good, actually, but they, they didn't want to be XPO Intermodal.
They wanted to be part of XPO Logistics, part of the family, part of the organization, and completely integrated. And we said, "That's great, so we'll do that." With a few exceptions, with some specific contracts and customers. But in general, we're moving towards XPO Logistics.
Jack Atkins (Research Analyst)
Great. Great. All right. Well, thanks for the time.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
From Stephens, we have Jack Atkins on the line. Please go ahead.
Jack Atkins (Research Analyst)
Hey, good morning, guys. Thanks for the time.
Brad Jacobs (CEO)
Morning, Jack.
Jack Atkins (Research Analyst)
So, I guess just first going back to brokerage, you know, there was some nice year-over-year margin expansion there, which you guys pointed out, but we did see some sequential compression in net revenue margins on the truckload side of the brokerage business. And I think most of your peers have been seeing some modest expansion. Could you maybe comment on what drove that? Was there something specific, either in the market this quarter for you guys or maybe in the 4Q that you were competing against that sort of made that trend a little bit different?
Scott Malat (Chief Strategy Officer)
Yeah, Jack, it's Scott. Well, year-over-year, this is the fourth consecutive quarter we've expanded it. And when you look at it versus last quarter on a sequential basis, capacity was tighter. Revenue per load increased, so you'll see the net revenue margin per load increased sequentially. But at the same time, you had a lot higher revenue per load, you had a lot higher cost per load, and on a percentage basis, that comes down. But as we look out, these are good levels of margin. We had a good margin quarter in fourth quarter as well. We've been doing well on margin. We're looking to stay in this type of range, although we do have many initiatives to get improvement through pricing and procuring capacity.
As we add data to our database, we should be able to drive improvement beyond the market. But these, these are good ranges.
Jack Atkins (Research Analyst)
Okay, great. Thank you, Scott, for that. And then just kind of continuing on the brokerage side, I think we've seen a large merger in the space fairly recently between two of your bigger competitors over the last couple of months. You know, do you guys think that that will change the competitive landscape at all in terms of going after some of the, you know, the larger customer accounts?
Brad Jacobs (CEO)
I don't. I think you can expect M&A to continue in the truck brokerage sector because there's advantages to size, and you can serve customers better with size, and you can access capacity better when you have a bigger network, and you can afford better technology. So I think there'll be a trend of more M&A in truck brokerage.
Jack Atkins (Research Analyst)
Okay. Okay, thanks, Brad. And then, last question, John. Just kind of a housekeeping item. You know, you mentioned the tax rate in the quarter being lower because of a valuation allowance. But should we expect a little bit lower tax rate for the next couple of quarters? Or, I know in the past you guys have been kind of guiding us to a 30% tax rate. Just how should we be thinking about that from a modeling perspective?
John Hardig (CFO)
Right, Jack. So we... You know, part of why the tax rate ended up being lower is that our intangibles that we booked for Pacer ended up being less than we initially estimated. And so that's, you know, we got less, a smaller DTL came onto the balance sheet with that acquisition, so the tax rate was lower than we initially anticipated with the Pacer deal. The tax rate should be between 10%-15% for the rest of the year, so it's going to run about the same level.
Jack Atkins (Research Analyst)
Okay, John. Thanks so much again for the time, guys.
Brad Jacobs (CEO)
Thanks, Jack. And Jack, we were thinking about you watching the news the last few days. We're happy to hear that in Arkansas, the weather didn't hurt you. Glad to see you doing great.
Jack Atkins (Research Analyst)
Thanks, Brad. I appreciate it. Came through okay.
Brad Jacobs (CEO)
Good.
Operator (participant)
From Thompson Davis & Co., we have David Campbell on the line. Please go ahead.
David Campbell (Partner)
Good morning, Brad-
Brad Jacobs (CEO)
Good morning.
David Campbell (Partner)
And thank you very much for all of your comments. I'm absolutely amazed at the NLM revenues. I mean, Landstar never came close to getting that kind of growth, and you did it in the first month of acquiring it. So, it does lead me to say, you know, is it, was it a competitive factor that drove... Because I know that in the expedited space, there's been some, there's been some tough times, and some people have gone out of business or cut back. Was that a factor, or was it just your sales? And, of course, how much of it was the market, the market and all the disruptions with the supply chains?
Brad Jacobs (CEO)
Well, first of all, I'm glad you pointed out that, because of all the different things that happened in the first quarter, I agree that what happened at XPO NLM and expedite was just amazing, and it was really the most interesting thing. Here we bought a company that was managing about $500 million of gross transportation spend, and we managed more than half of that in the first quarter. So if you annualize the first quarter, you know, we'd be on a $1 billion run rate for managed transportation spend there. But having said that, I don't think we can pat ourselves on the back and say we're better operators than Landstar, because truth be known, we had two real favorable factors going for us in the first quarter.
Number one, the auto customers are very prolific right now and big users of expedite and just very active. Extremely, extremely active. Production is up, and just we're benefiting from that. And second... Because expedite hits the bottom or top of the food chain, depending on how you're looking at it, the end of the food chain, with all the weather disruptions, a whole bunch of freight turned into expedite.
David Campbell (Partner)
All right. So you don't think it was from competitive reasons?
Brad Jacobs (CEO)
I wish I could say we were just great, and we were fantastic, and we were very good, and people worked long hours. You know, I was out in Southfield and other places in our expedite group in the first quarter, and they were tired. They were working long, long, long hours servicing customers. Huge, huge amounts of volume coming in there. But I think the main reason why we did so great there was we were just in the right place at the right time. It's a good time to be in expedite. That's not always the case, but the first quarter, it certainly was.
David Campbell (Partner)
Well, that leads me to suggest it may not be sustainable.
Brad Jacobs (CEO)
Expedite is lumpy and clunky, and it's, you know, sometimes it's great, and sometimes it's not great. I think expedite, as a whole, we're going to do very well in because we've got the leading position in that sector, where we manage more expedite than anybody now. And we've got a nice integration between the expedite we've got in Gainesville, the expedite we've got in Buchanan, in Metro Detroit, and in Southfield and other places, and working together in a very coherent, organized way. But the external factors do affect that.
David Campbell (Partner)
Yeah, it just looked that without NLM, there wasn't a lot of sequential growth.
Brad Jacobs (CEO)
Well, we had growth. We had really good growth in Gainesville expedite. I don't have the number off the top of my head, but I know it was really substantial. We also had growth in Buchanan as well. But NLM is really where it soared, XPO NLM.
David Campbell (Partner)
Mm-hmm. Right. Well, thank you very much. That's amazing, amazing numbers.
Brad Jacobs (CEO)
Thank you, sir.
Operator (participant)
From Sage Asset Management, we have Barry Haimes online. Please go ahead.
Barry Haimes (Managing Partner)
Hi, guys. Great quarter. I got a couple questions. One is, you know, congrats on the better margins in brokerage. And as you point out, some of that is self-help and volume leverage. But I wonder if you could just characterize how pricing has been as you've moved through the year so far? And then, separately, but related, your ability to reprice, you know, how much volume do you have under long-term contract? I'm under the impression it's not that much, but, you know, what was your ability to, in a rapidly changing market, you know, reprice in a way that you were still making money?
Brad Jacobs (CEO)
Okay.
Barry Haimes (Managing Partner)
I have one more after that. Thanks.
Brad Jacobs (CEO)
Okay. Good morning, Barry. Thank you for the question. On the pricing, rates are up roughly 20% year-over-year. They were up a little more than that a few weeks ago, but they've, they've settled a little, settled a little bit down to up about 20. In terms of how much business we have under contract, we have fixed prices in truck brokerage. It's roughly about a quarter. And in terms of repricing that, we don't reprice it while we're still under contract. While it's under contract, that's the deal, and we perform with without any deviation from that. Sometimes that works in our favor, sometimes that works against us. So be it. A contract is a contract. We normally have somewhere between 4% and 8% of money-losing loads.
In the first quarter, we had about 12% money-losing loads, which is substantially more. Having said that, we got a whole bunch of extra freight that we wouldn't have gotten otherwise if we didn't have that contract business. So it deepened our relationship with those customers where they saw us performing.
Barry Haimes (Managing Partner)
Great. And then one other question. The Burlington Northern has had some pretty well-publicized issues with the weather in Chicago and so on. In terms of Pacer's ability to maybe get new business, sell new customers, has that been an opportunity for you guys? Thanks.
Brad Jacobs (CEO)
It's hard to say where business is coming from because it's a question you don't always... It's an indelicate question sometimes to ask customers, particularly when they're, when they're in a pinch. But I think in general terms, it's just, you know, mathematical. If a, if a certain vendor goes down, then that business goes somewhere else.
Barry Haimes (Managing Partner)
Great. Thanks very much. Thanks, Brad.
Brad Jacobs (CEO)
Thank you, Barry.
Operator (participant)
From Princeton Opportunity Partners, we have Robert Hoffman online. Please go ahead.
Robert Hoffman (Founder and Managing Partner)
Good morning, and thanks for taking the call. I just wonder, one of the challenges of cross-selling in any organization is getting the incentives right, because obviously, different people's commissions might be different, if they sell directly versus they pass the baton. Can you just talk a little bit about how you think about that? And obviously, it seems to be working in the first quarter because that's where a lot of your growth came from, the ability to pass from, you know, brokerage to expedite. Can you just flesh that out a little bit for us?
Brad Jacobs (CEO)
Yes. Good morning, Robert. So, we have a real simple philosophy about that. We pay the full commission to both sides. We don't split them, we don't deduct them. We pay the full commission. And why do we do that? Because we'll take the minor hit on the SG&A, but we want to promote cross-selling. We don't want people siloing their customers. We don't want people hoarding their opportunities. We want to be going to the market as one coherent, organized company that sells a multimodal solution of truck, intermodal, last mile, expedite, freight forwarding, LTL, managed trans. And for each customer, we want to be offering everything that we've got. So salespeople will sell for what's in their pocket, as the commercial said, and you know, what their incentive is.
So we don't want to disincentivize people to... We want them to share their customers.
Robert Hoffman (Founder and Managing Partner)
... That's interesting. Do you? Is that sustainable? I mean, do you think you can keep that, keep that going? I mean, how? It just seems like if there is a customer that normally uses both, how do you, how do you deal with that?
Brad Jacobs (CEO)
We have a single point of contact for every customer, for up to about 14,000 customers now. And a rep in XPO is literally assigned to that, and that he or she is the prime relationship manager for that account. But sometimes you'll bring in subject matter experts, or you bring in other, vertical experts or other people with more expertise to help fulfill the customer's requirements.
Robert Hoffman (Founder and Managing Partner)
Got it.
Brad Jacobs (CEO)
Everybody's on Salesforce.com, and every customer's in there, and it's a big, big sin to step on someone else's customer.
Robert Hoffman (Founder and Managing Partner)
Wonderful. Thank you.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
From Thompson Davis & Co., we have David Campbell online. Please go ahead.
David Campbell (Partner)
Hey, one thing I forgot to ask, John Hardig, you went over it kind of fast. I couldn't get it. You said there was $4.5 million. Is that a $4.5 million fee? And I assume... And I don't know where that fee is, and-
John Hardig (CFO)
David, that's a... That was the fee we paid to our bankers for the bridge commitment to close the Pacer deal, and that actually hits the P&L on the interest line.
David Campbell (Partner)
It's not gonna happen again in the second quarter?
John Hardig (CFO)
That's, well, you know-
Brad Jacobs (CEO)
Unless we do another deal, and we have another commitment letter involved.
John Hardig (CFO)
Right, right. Absent another deal, no.
David Campbell (Partner)
Right, right, right, right. That's what I meant. Yeah. Okay, great. Thank you very much.
John Hardig (CFO)
Thank you.
Operator (participant)
Thank you. We will now turn it back to Brad Jacobs for closing remarks.
Brad Jacobs (CEO)
Thank you, operator. Thank you, everyone, for participating in the call. We look forward to speaking to you at the next opportunity. Have a great day. Bye.
Operator (participant)
This concludes today's conference. Thank you for joining. You may now disconnect.