XPO - Q2 2013

Transcript

Operator (participant)

Welcome to the XPO Logistics Second Quarter 2013 conference call and webcast. My name is Dawn, and I will be the operator for today's call. 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 security laws, which, by their nature, involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings.

The forward-looking statements in the company's earnings release and made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law. During this call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliation of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial table. You can find a copy of the company's earnings release, which contains additional information regarding the forward-looking statements and non-GAAP financial measures in the Investors section of the company's website at www.xpologistics.com. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

Brad Jacobs (CEO)

Thank you, operator, and good morning, everybody. Welcome to our call. With me today are John Hardig, our CFO, Scott Malat, our Chief Strategy Officer, and Karl Meyer, the CEO of 3PD, which, as you probably know, we recently agreed to acquire. Karl will be available during Q&A to answer your questions about Last Mile. As you saw in the numbers we reported last night, we delivered some exceptional growth. Revenue was up 151% year-over-year, and gross margin dollars were up 128%. Some of this came from acquisitions, and we're also driving outsized organic growth in our freight brokerage business. Organic growth in brokerage was up 65% year-over-year. The investments we're continuing to make in long-term growth, particularly sales headcount, resulted in a loss, as expected.

Our results were also negatively affected by a soft expedite market, higher than expected transaction-related and litigation costs, and most important, the timing of acquisitions. We expect to close 3PD in the third quarter, and we remain on track to be EBITDA positive in the fourth quarter. Now I'd like to review the quarter in the context of five avenues of growth that are embedded in our existing business. First, we're continuing to scale up our current network of 62 locations. We're doing this by adding salespeople, giving them world-class training, and empowering them with cutting-edge technology to make them as productive as possible. In freight brokerage alone, we've increased our customer-facing headcount to 788 people, up from just 92 in the second quarter of last year.

You can see the benefit of scale in the robust organic growth we reported in our freight brokerage business last night. In addition, our salespeople now have more services to offer our customers. LTL, less than truckload, is a great example of a huge growth opportunity staring us in the face. Currently, we're doing only about $20 million of annual revenue in LTL company-wide. Yet almost all of our 8,500 truckload customers have LTL business, and we're taking steps to tap into that. Our acquisition of Interide in May brought us Sean Snow and a lot of LTL expertise, as well as an LTL technology platform that we've just rolled out in all of our sales offices. Now that we've combined Interide's carriers with our own network, we're already getting better LTL rates from carriers.

The second avenue of growth embedded in our model is our strategic and national accounts program. Our strategic accounts team is one of the most experienced in the industry, and they're getting a great response from large shippers. We recently won business from 26 large accounts, representing the potential for over $75 million in annual revenue. This includes some major wins, not just in truckload, but also in cross-border, less than truckload, and expedite. The team is actively bidding on 82 additional accounts right now, and we're just getting started. The third avenue of growth, we're continuing to ramp up our cold starts. The eight cold starts we've opened to date are on a combined annual revenue run rate of over $90 million, and we're in the process of opening our ninth freight brokerage cold start in the Cincinnati metro area.

Cincinnati is designed to be our fifth mega branch, which means it has the potential for exceptional growth because we can recruit from a large pool of sales talent in the area. Fourth is our acquisition pipeline, which is very active. Most of the targets we're working on are in truckload brokerage, but we're also looking at attractive opportunities in expedite, managed transportation, intermodal, LTL, and Last Mile. And the fifth avenue is our acquisition of 3PD, which will immediately accelerate our growth rate. 3PD serves an end market that's growing extremely fast. Combination of the outsourcing trend by retail shippers and the growth of e-commerce is creating strong demand for logistics providers with 3PD's specific type of expertise. In addition, 3PD provides a service that's within our core competency of non-asset logistics, and it's complementary to the services we offer now.

We'll be able to move freight all the way from the factory to the final destination. Our value to customers will be based on a complete cradle-to-grave supply chain solution and constant growth in our carrier base. These capabilities make us uniquely attractive to large shippers who want to consolidate their supply chain relationships into fewer providers. In sum, we're very bullish about the opportunities embedded in each of these five avenues of growth. We're currently on an annual revenue run rate of about $550 million, and we remain on track to achieve our outlook for a billion-dollar revenue run rate by year-end, with an EBITDA positive performance in the fourth quarter. More importantly, we're right on plan for our long-term goal of creating a world-class company with several billion dollars of revenue and several hundred million dollars of EBITDA.

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 of our three business units during the quarter, starting with Freight Brokerage. Freight brokerage revenue was up 587% from last year to $95.4 million, and gross margin dollars increased by 726%. $3.5 million of the revenue increase came from the mid-quarter acquisition of Interide on May 6th. The balance of the increase came from three sources: our acquisitions of Turbo, Kelron, Continental, and BirdDog last year, the organic growth of our cold starts, and our acquisition of Covered Logistics in the first quarter. Freight brokerage gross margin percentage increased to 13.2% in the quarter, which was higher both year-over-year and sequentially. The margin improvement was largely due to higher margins from our cold starts.

We're seeing a nice pickup in gross margin percentage again in July, and we expect gross margin on our cold starts to continue to improve as we scale up the sales force and build our presence with customers and carriers at each location. The organic growth in freight brokerage continues to be powerful. The second quarter increase in organic growth year-over-year was a robust 65%, as Brad said, and the eight cold starts are on a combined revenue run rate of over $90 million. We're encouraged by the trajectory of our cold starts as a whole, both in terms of revenue and margin improvement, and we see a lot of opportunity to keep building them up. In Expedited Transportation, our revenue increased 3% to $26.4 million for the quarter.

XPO Air Charter, which we acquired in the first quarter, is included in our expedite numbers. The higher revenue contribution from Air Charter was partially offset by a year-over-year decrease in revenues from our over-the-road expedite business in the quarter. Expedited gross margin percentage was 15.9%, which is unchanged from the first quarter and down from 20% a year ago. The year-over-year decline in margin reflects continued softness in the expedite market during the quarter, as well as the addition of expedite air charter. Air charter has much higher revenue per transaction than over-the-road expedite, but at a lower margin. Expedite truck capacity tightened somewhat in early July, and we're pleased that margins have expanded in recent weeks. Our Freight Forwarding business achieved strong growth, despite what continues to be a flat freight forwarding market.

Revenue increased 17%, and gross margin was up 230 basis points compared with the same quarter last year. The revenue increase was driven primarily by growth at our company-owned locations and an increase in international shipments. Gross margin percentage in freight forwarding increased to 13.3% in the quarter, up from 11% last year. The increase in gross margin percentage was driven by our investments in company-owned locations. On a year-over-year basis, operating income in the freight forwarding business increased 119%, and this was despite higher SG&A from the investments we made in opening new locations in Los Angeles, Houston, Chicago, Minneapolis, and Montreal. On the corporate side, SG&A expense increased to $10.7 million from $5.4 million in the second quarter of last year.

The increase was primarily due to a larger headcount in corporate shared services and an increase in purchased services. Purchased services included $1.8 million of transaction-related costs, $1.5 million of litigation costs, and corporate SG&A also included $1.1 million in non-cash share-based compensation expense. For the company as a whole, EBITDA for the quarter was a loss of $12.4 million, reflecting the investments we've made to build the foundation for a multibillion-dollar company. Net interest expense was $3.1 million for the quarter, which was from the convertible notes that we issued last September. This included $1.4 million of non-cash amortization of bond discount.

As expected, our effective tax rate in the second quarter was negligible. In the third quarter, however, as a result of the 3PD acquisition, we expect our effective tax rate to revert to a normal level in the range of 35%-38%. The acquisition will also cause a one-time tax benefit of approximately $10 million in the third quarter, and this will be on top of the benefit from the quarter's pretax loss. Of course, we won't be a cash taxpayer for some time, given our NOLs. Earnings per share available to common shareholders was a loss of $1 for the quarter. We had $178 million of cash on our balance sheet at June thirtieth, and we're in the process of putting in place an accounts receivable facility to supplement our liquidity.

Now I'm going to turn it over to Scott, who will give you an update on the market conditions and 3PD, then we'll go to Q&A. Scott?

Scott Malat (Chief Strategy Officer)

All right, thanks, John. From a macro perspective, we see steady transportation demand. Truckload capacity has been relatively balanced for about two years now. We haven't experienced any material change in that equilibrium, despite the Hours of Service regulations that went into effect July 1st. At XPO, our gross margin dollars improved sequentially in July, which was encouraging in what is typically a slower seasonal month. In August, we expect to see demand from back-to-school retail, a pickup in auto business, and the produce season in the Northwest. From a long-term perspective, we're growing the business in tune with secular trends in the market. Many shippers are choosing to consolidate 3PL services with fewer and larger providers that have deep capacity and a broad range of services. 3PD is a major step forward for us in this regard.

When we completed the 3PD acquisition, we'll now be one of the only few 3PLs that can provide an end-to-end solution. We've positioned ourselves to sell freight brokerage, freight forwarding, expedite services, and now last mile logistics, all through XPO as a single source. We already have an extensive carrier pool and service range, but more importantly, we've shown that we're committed to growing our capacity and scaling up our customer-facing operations. This resonates with shippers who want to consolidate their supply chain partners. We've spent a lot of time with 3PD management over the last few weeks, and both organizations are excited about the growth potential of the combined company.

Karl and his team have started working with our strategic accounts group to meet with some of the largest retailers in North America, and we have 925 customer-facing employees at XPO who are eager to offer last-mile logistics as soon as 3PD comes on board. We also continue to differentiate in technology. 3PD has strong proprietary technology that we'll use throughout XPO, especially for customer experience management. They have 4 patents pending, all related to their customer-facing IT. One feature that we particularly like is their Electronic Customer Satisfaction Scorecard, which they use to continuously improve their service levels in last mile. We can apply this same technology to other areas of our business. We plan to integrate 3PD's platform with ours over the next 18 months. Our own IT team at XPO continues to stay at the leading edge of the industry.

We recently added sophisticated carrier rating engines that help our branches find the optimal truck for each load, and we'll be rolling out new customer and carrier portals and other enhancements in the coming months. In summary, we've established a differentiated value proposition for XPO with multiple avenues of growth. We're poised to take advantage of both cyclical and secular industry trends. We've built a prominent brand in a short period of time, and it's getting us business with customers and carriers. Morale is high at XPO, and we've entered the back half of the year with a lot of momentum. I'm going to open up the call for Q&A. Operator?

Operator (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 are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you do 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.

Speaker 14

Hey, good morning, guys. It's Rob Salmon-

John Hardig (CFO)

Morning.

Speaker 14

-for Justin.

John Hardig (CFO)

Hey, Rob.

Speaker 14

Hey, Brad, clearly, we saw a very favorable response to the 3PD acquisition in the equity markets. Could you discuss a little bit more about how XPO and 3PD customers, their response to the acquisition? And if your thoughts about the cross-selling opportunity between these two services has changed at all since these meetings?

Brad Jacobs (CEO)

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

Karl Meyer (CEO)

Yeah, I think the customer response has been extremely positive. We were proactive in reaching out, as we went through the process to ensure that they understood the broader service level that we were going to be able to bring to the table, and it was very well received. I think from the synergy standpoint, the two areas that we're going to focus on first are, first, implementing our rate tariff for our transactional business into the selling infrastructure that exists at XPO. Within the current 3PD structure, we've only got six salespeople. As we implement and integrate, that tariff with XPO, we'll have, you know, over 850 people selling that service.

The other piece of it is really working with XPO's national accounts team to penetrate the large retailers and the manufacturers where we have very strong relationships. And we've already seen some movement there, and we expect by the end of the year that we'll have significant opportunities in front of us with the large retailers and manufacturers.

Speaker 14

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

John Hardig (CFO)

Sure, Rob, it's John. So, as we mentioned on the call, for 3PD a few weeks back, you know, we have a debt commitment from Credit Suisse for a term financing to fund the acquisition of 3PD. You know, we have our current cash balance. You know, once we do that transaction, once we close 3PD, we'll be down to about, you know, right around $20 million, a little less cash on the balance sheet. And, you know, I mentioned on the call that we're doing, you know, an asset borrowing facility, an AR facility, that we can use to borrow against our receivables.

You know, that basically will certainly fund any organic growth and also can support acquisitions as well. So, that's where we'll stand from a capital standpoint. You know, as far as the pipeline goes, you know, we are, our sweet spot really hasn't changed a lot. We're still looking at, you know, deals that are $20 million-$200 million, but we're also looking at some acquisitions that are larger than that. So, you know, we're staying opportunistic. There are lots of opportunities out there to do accretive transactions, and, you know, we'll definitely go after those if we think we can create shareholder value by doing the deals.

Speaker 14

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

John Hardig (CFO)

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

Speaker 14

All right. That, that's helpful. Thanks a lot for the time.

Brad Jacobs (CEO)

Thank you, Rob.

Operator (participant)

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

William Greene (Managing Director)

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

Brad Jacobs (CEO)

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

William Greene (Managing Director)

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

Brad Jacobs (CEO)

Not really, no.

William Greene (Managing Director)

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

Brad Jacobs (CEO)

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

William Greene (Managing Director)

Yeah. It's, can you tell it with your comments in expedited? Was that a supply comment, or did you mean to say demand got better in July?

Brad Jacobs (CEO)

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

William Greene (Managing Director)

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

Brad Jacobs (CEO)

I think it's unique to expedite. Well, other truckload also had some slight tightening, but I don't know if you can trace that to Hours of Service.

William Greene (Managing Director)

Yeah.

Brad Jacobs (CEO)

I think that's just kind of normal ups and downs around the edges.

William Greene (Managing Director)

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

John Hardig (CFO)

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

William Greene (Managing Director)

Okay, so it's basically the scale argument.

Brad Jacobs (CEO)

And tenure.

William Greene (Managing Director)

Tenure. Oh, productivity of the sales force. Okay, great. Thanks for the time.

Brad Jacobs (CEO)

Thank you, Bill.

Operator (participant)

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

Scott Schneeberger (Managing Director)

Thanks. Good job. You got it. Hey, good morning, everyone. Yeah, you guys highlighted in the press release the productivity per brokerage employee improved quarter-to-quarter, and obviously, you added a lot of new hires, net new hires. Could you speak to that dynamic if you expect it to persist? Also, what type of productivity measures do you guys track internally to get a look at the sales force? Thanks.

Brad Jacobs (CEO)

So we look at a lot of productivity measures. That's a real key part of the business model. I personally look at three things. I look at gross margin dollars per sales rep per month. I look at gross margin dollars per load. I look at number of customers served, and each one of those metrics is going up into the right, so it's good. So if you look at December to July numbers, gross margin dollars per sales rep per month in the cold starts has increased 79%. And also in the cold starts, the gross margin dollars per load from December to July increased 53%, and the number of customers served in the cold starts increased 64%.

So that tells you that even though that we're hiring more people, and we've been hiring lots and lots of people, and the pool has a significant component, component of people who are new, the productivity is still kicking in. So that means the people who have tenure, the people who are a little longer in the tooth, they're, they're maturing very quickly, which is gratifying.

Scott Schneeberger (Managing Director)

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

Scott Malat (Chief Strategy Officer)

Scott, it's Scott. On gross margin, absolutely, 3PD has double the margins that we have in the rest of the business. They tend to have 30% gross margins and EBITDA margins that are north of 10%. We haven't made a decision whether or not we'll combine that with our freight brokerage business. We'll be working with KPMG on it. It certainly falls most within our freight brokerage. They'll be working with a lot of the same customers. They're working together on a lot of accounts, but we haven't made the decision yet on how that'll be reported on an external basis. From SG&A, we're going to continue to hire.

So in a freight brokerage standpoint, our gross margins will be increasing with tenure, with the technology we put in, with our, as we just mature and our cold starts improve. But SG&A will continue to increase because we expect to continue to add headcount. We added about 97 people on a net basis through hiring just within freight brokerage that are client-facing personnel, in the second quarter, and I think that trend will continue.

Scott Schneeberger (Managing Director)

Thanks, guys. Thanks for taking the question.

Scott Malat (Chief Strategy Officer)

Thank you, Scott.

Operator (participant)

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

Speaker 14

Thank you. Good morning, gentlemen.

Brad Jacobs (CEO)

Hey, Kevin.

Kevin Sterling (Managing Director)

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

Brad Jacobs (CEO)

Sure. I think it's a few things. First of all, that's Jeff Battle's group, who's heading up the strategic accounts. He's got some fantastic guys on that team. He's got Greg Ritter, who I'm sure you know, and Dennis McCaffrey and some others who are just very, very experienced people in the truckload business. And they have a very compelling value proposition that we're able to put in front of large shippers in that we are young, we are hungry, we are very service-oriented, we are completely committed to world-class service. We are totally committed to on-time pickup, on-time delivery. We don't give back loads, and we have a significant amount of capacity. XPO Logistics didn't exist two years ago. We were the seventeenth largest truck broker last year.

We'll probably be the sixth or seventh largest this year when the survey comes out, and in a few years, we'll be number two after Robinson. So we have capacity that's growing, and a few years from now, we're going to have more capacity when capacity may be tight. So it's a long-term relationship that makes a lot of sense. Now, do the acquisitions help? Absolutely, they help because some of the acquisitions come in with relationships with tier one accounts that now can be grown, and we can get greater share of wallet from those. And we've had several examples of customers that companies we've bought were doing business with, and the volume has literally doubled or tripled. So it's promising. That whole strategic accounts tier one effort is doing very well.

Kevin Sterling (Managing Director)

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

Brad Jacobs (CEO)

You know, the problem with intermodal acquisitions, there's not a lot of them. So, you know, of our, of our list of a 100 shortlist of acquisition targets we're looking at, I would say about 80 of them are in truckload brokerage, and the other 20 are spread out between, well, well, now it's five. There were six that were a last mile, with 3PD, now it's five, and there's just a handful of others that are in the other categories. So you do the math, it's only, you know, it's one handful of intermodal ones. So the way we've gone about that is we, we are talking to some, some IMCs, haven't been able to put something together that works for, for both sides.

Kevin Sterling (Managing Director)

So in the meantime, we've gone an organic route where we've gotten contracts with two of the large rails, and we're plugged in right on their EDI, and it's working. We don't have containers, we don't have boxes, but we've got access to the fleet, and it's working.

Okay, great. That's all I had today. Thanks so much for your time.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Tyler Brown (Managing Director)

Hey, good morning.

Brad Jacobs (CEO)

Morning.

Tyler Brown (Managing Director)

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

Brad Jacobs (CEO)

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

Tyler Brown (Managing Director)

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

Brad Jacobs (CEO)

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

Tyler Brown (Managing Director)

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

Karl Meyer (CEO)

Hey, hey, Tyler, it's Karl. You mean employees?

Tyler Brown (Managing Director)

Yeah.

Karl Meyer (CEO)

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

Tyler Brown (Managing Director)

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

John Hardig (CFO)

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

Tyler Brown (Managing Director)

Okay, perfect. I appreciate it, guys.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Ryan Bouchard (Senior Equity Research Analyst)

Hey, good morning, guys.

Brad Jacobs (CEO)

Good morning, Ryan.

Ryan Bouchard (Senior Equity Research Analyst)

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

John Hardig (CFO)

Sure. So, you know, we definitely had an uptick in the second quarter, and, as we said in the release and repeated again on the call this morning, you know, a lot of that had to do with the M&A transaction costs and the litigation costs. And so it's gonna be a little bit hard to predict because, you know, the M&A costs will be related to, you know, our M&A activity for the rest of the year, and the litigation is litigation. It's just, you know, it's completely unpredictable. So that's the biggest variable in really kind of giving an estimate for what we're gonna do for the rest of the year. You know, if you look at...

If you take out those items for both the first and second quarter, we're running at a pretty steady level without those costs, you know, included. And so we would expect it to stay pretty much level at, you know, probably about $30 million without those additional costs, and then trying to figure out what the, what the M&A and litigation costs are gonna be on top of that is the, is the hard part.

Ryan Bouchard (Senior Equity Research Analyst)

Okay, so-

John Hardig (CFO)

It'll be at the high end of that range or maybe slightly above, just based on, again, based on the M&A activity that we incur during the rest of the year.

Ryan Bouchard (Senior Equity Research Analyst)

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

John Hardig (CFO)

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

Ryan Bouchard (Senior Equity Research Analyst)

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

John Hardig (CFO)

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

Ryan Bouchard (Senior Equity Research Analyst)

So a larger part in the third quarter?

John Hardig (CFO)

Yes.

Ryan Bouchard (Senior Equity Research Analyst)

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

John Hardig (CFO)

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

Brad Jacobs (CEO)

These are primarily related to our friends in Minnesota.

Ryan Bouchard (Senior Equity Research Analyst)

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

Brad Jacobs (CEO)

No.

Ryan Bouchard (Senior Equity Research Analyst)

Okay. Okay, well, that's all I have. Thanks, guys.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from John Mims from FBR Capital Markets. Please go ahead.

Speaker 14

Hey, good morning, guys.

Brad Jacobs (CEO)

Good morning, John.

Speaker 14

How are you?

Brad Jacobs (CEO)

Good.

Speaker 14

I got on a little late, so I'm sorry if you talked about this. I had to jump off for a call. But when you look at the EBITDA positive guidance for fourth quarter, and Scott, a couple of your comments that I did catch on, you know, that you're continuing to ramp up SG&A spend as far as bringing new people on and hiring the right people. How do we get there? And what's the risk of not being there? You know, do you need to scale back the amount of investment you're putting in the new branches? I mean, is it just purely a scale thing now that you've gotten critical mass with some of the existing cold starts plus acquisitions?

Or just, you know, and then again, can that carry into, you know, first and second quarter of 2014? Or, I'm just trying to get my arms around this EBITDA goal a little bit better.

Brad Jacobs (CEO)

Sure. On the fourth quarter, it'll be a measure of productivity. So we increased sequentially, our revenue and our gross margin dollars per rep from one Q to two Q. We expect that to continue because we're getting more productivity out of our reps, despite the fact that we're adding more employees. So we'll get some more productivity out of our existing base while we're, we're hiring. We're not going to give up on hiring. Hiring is the best use of cash for us.

Speaker 14

Mm-hmm.

Brad Jacobs (CEO)

It's -- we're going for the big kill over the next several years, and that's a great present value investment for us. On 3PD, it adds $40 million in EBITDA this year, and it's been growing, and they've done very well in June and July, and everything's looking up and looking good. The one thing that you can break out is, say, well, are there one times? Are there integration costs and closing costs that could shift around in 4Q and catch you by surprise? That could always happen. So that's the wild card a bit on the one times in integration and closing. But in general, we feel pretty good about the guidance.

Speaker 14

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

Brad Jacobs (CEO)

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

Speaker 14

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

Brad Jacobs (CEO)

Oh, right, right.

Speaker 14

Mischaracterized that.

Brad Jacobs (CEO)

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

Speaker 14

Yeah, sure. So I guess the question is-

Brad Jacobs (CEO)

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

Speaker 14

Okay. Okay, that's fine. We'll do the rest of it offline. That's all I have for now. Thank you.

Brad Jacobs (CEO)

Thanks, John.

Operator (participant)

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

Ryan Cieslak (AVP)

Hey, guys. Good morning. Thanks for taking my call.

Brad Jacobs (CEO)

Hey, Ryan. Good morning.

Ryan Cieslak (AVP)

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

Brad Jacobs (CEO)

No, that's more ramping up in third quarter and into fourth quarter. The national accounts team, we expect to be a significant contributor over the next several years. It's a very experienced team. We've been getting great receptivity, obviously, from some of the biggest, the biggest, shippers out there, but it's, it's really a 2014 story to make a significant impact, and then 2015 and 2016. But, it's just getting going now.

Ryan Cieslak (AVP)

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

Brad Jacobs (CEO)

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

Ryan Cieslak (AVP)

Okay, great. And then on the cold starts, you know, you guys have shown some nice, you know, ramping in there in terms of the overall productivity and, and the revenue you're generating from, from the 8 that you currently have established. You know, what's, what's the expectation of that ramp into the back half? Should it be, you know, similar type ramp that we've seen the last couple of quarters? Maybe, maybe what—where do you see the annualized revenue from those 8 cold starts by year-end, if you'd be willing to give some of that color?

Scott Malat (Chief Strategy Officer)

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

Ryan Cieslak (AVP)

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

Brad Jacobs (CEO)

Somewhere between August fifteenth and September fifteenth.

Ryan Cieslak (AVP)

Okay, great. That's all I had. Thanks, guys.

Brad Jacobs (CEO)

Thank you, Ryan.

Operator (participant)

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

John Larkin (Managing Director)

Hey, good morning, gentlemen. Thanks for taking my questions.

Brad Jacobs (CEO)

Hey, John.

John Larkin (Managing Director)

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

Karl Meyer (CEO)

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

John Larkin (Managing Director)

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

Karl Meyer (CEO)

Correct. Correct.

John Larkin (Managing Director)

All right.

Karl Meyer (CEO)

Um.

John Larkin (Managing Director)

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

Karl Meyer (CEO)

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

John Larkin (Managing Director)

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

Can you talk a little bit about your philosophy in terms of how you ramp up those cold starts so rapidly?

Brad Jacobs (CEO)

Sure. So there's two parts to that question. Carrier procurement people and customer sales reps. On the carrier procurement, we have a larger percentage of people who are industry veterans, who have been in the business. On the customer sales part, I'd say roughly about a third come from the business, people who've been doing it for five or 10 years and have relationships and, you know, know the business real well. They still go through the training program. It's an abbreviated part to, you know, just get synced up with the way we do things, but, you know, they obviously know the business very well. The other two-thirds or so are mostly recent college grads, but we tend to hire people who've already had a job or two after college.

We tend not to hire people, although we make some exceptions, kids right out of school, so people have some experience in the job workplace. With respect to the training program, yeah, I mean, training, you want to go on for as long as possible. I mean, you can't train. There's no harm in overtraining, and the more mentors you have in the company and the more different facets to the training program, the better. When someone representing XPO Logistics is talking to a customer, whether they're a shipper with a billion-dollar transportation spend or whether it's a small customer, they got to represent the company well. They got to represent the company professionally, they got to know what they're talking about, and they got to value that customer's freight.

John Larkin (Managing Director)

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

Brad Jacobs (CEO)

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

John Larkin (Managing Director)

Thanks. That's, that's very helpful. And then, you know, the-

Brad Jacobs (CEO)

I would add one thing. They did come into Charlotte before we went into Cincinnati.

John Larkin (Managing Director)

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

Brad Jacobs (CEO)

Well, Charlotte's a good place to recruit from. I mean, there's several competitors in Charlotte.

John Larkin (Managing Director)

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

Brad Jacobs (CEO)

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

They prefer to sell to a strategic.

John Larkin (Managing Director)

Got it. And then maybe just one last question, probably for Karl. The last mile world is really a huge land of opportunity, and I guess there are kind of two segments of it. One is kind of the package delivery world, and one is the sort of larger items, appliances, televisions, things of that nature, which I guess is more your specialty. As the model for e-commerce changes and folks like Amazon take on a bigger and bigger role and try to be increasingly more responsive to what their customers need, how do you see that changing your business? You know, for example, do you see same-day delivery being a factor in your sector?

Is there a way to adapt your model for delivering more than just the large items that require installation and that are not really suitable for moving through what I would call the conveyorized parcel delivery companies?

Karl Meyer (CEO)

Sure, sure. I mean, if you, if you... You know, holistically in the space, what we see is the brick-and-mortar retailers are trying to pivot, you know, static supply chains to move from delivering, you know, truckload quantity and pallet quantity to each end consumers. And the virtual players are building out their infrastructure to focus on, on the drivers in that space, which is velocity and free shipping. You know, holistically, that just create- that's, that's opportunity in the last mile, because all of it means more disintermediation of retail stores and more volume going straight to the end consumer, job site or, or business.

Kind of on the second part of your question there, historically, we have focused on larger than parcel, high service, the high service market, because, one, it's our core competency, and two, it's a great margin business. As we continue to grow out our transactional business, which today is only 10% of our revenue, we see opportunities in the future to move into parcel and be differentiated.

John Larkin (Managing Director)

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

Karl Meyer (CEO)

Yeah, definitely. We definitely see opportunity there.

John Larkin (Managing Director)

Sounds great. Thank you very much.

Brad Jacobs (CEO)

Thanks, John.

Karl Meyer (CEO)

Thanks, John.

Operator (participant)

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

Jack Atkins (Research Analyst)

Hey, good morning, guys. Thanks for squeezing me in here.

Brad Jacobs (CEO)

Hey, Jack.

Jack Atkins (Research Analyst)

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

Scott Malat (Chief Strategy Officer)

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

Jack Atkins (Research Analyst)

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

Brad Jacobs (CEO)

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

Jack Atkins (Research Analyst)

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

Brad Jacobs (CEO)

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

Jack Atkins (Research Analyst)

Okay, great. Thanks again for the time, guys.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

David Campbell (SVP)

Morning, everybody. Glad to hear, talk to you, and thank you for taking my questions. The freight forwarding gross margin target, do you have a target that we can use there in freight forwarding for 2014?

Scott Malat (Chief Strategy Officer)

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

Brad Jacobs (CEO)

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

David Campbell (SVP)

It's a huge market. I mean, Express-1 was actually growing very nicely in that business before you bought them. They acquired the company in Tampa, Florida, which put them in the sea freight business. So you know, it's a huge potential. It's a huge potential, and of course, it's growing faster right now than air freight, which isn't growing.

Brad Jacobs (CEO)

Yeah. Right.

David Campbell (SVP)

I think, you know, you're in the right place there. Tampa, is Tampa still the leading source of a lot of your sea freight business?

Scott Malat (Chief Strategy Officer)

We're doing a lot in Tampa. We're doing a lot in Miami. That also came with the acquisition. Miami has been growing pretty significantly. And then Houston, so Houston's a cold start that we got going, and their import-export business has been extremely strong, especially in the oil and gas sector.

David Campbell (SVP)

Yeah.

Brad Jacobs (CEO)

Dan McNutt has been running that business for us, and I, I got to tip my hat to him. He's doing a good job.

David Campbell (SVP)

Yeah, yeah. And if, did I miss it, but you haven't talked about 3PD's revenues. Is that, is that correct?

John Hardig (CFO)

No, 3PD's trailing twelve-month revenue is about $325 million, in 2013, it'll be around $350 million.

Brad Jacobs (CEO)

Correct. I think for the first half, you know, the business is, is doing extremely well. Revenue is up 12.5%, EBIT is up 36.3% for the first half.

David Campbell (SVP)

Right. Well, obviously, extremely well managed because we have another one of your competitors, Forward Air, is continually having trouble with the last mile of business. Is there anything, is it just management? Is that basically it, that the difference is?

Brad Jacobs (CEO)

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

David Campbell (SVP)

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

Brad Jacobs (CEO)

It is. It is.

David Campbell (SVP)

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

Brad Jacobs (CEO)

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

David Campbell (SVP)

Uh-huh. Right. Right. But so far in July, there hasn't been any stock or debt sold. That's correct, right? Except for the Credit Suisse financing.

Operator (participant)

That's right.

Brad Jacobs (CEO)

That's correct.

John Hardig (CFO)

There's been no stock issuance.

David Campbell (SVP)

Right. Right. Right. Right. Right. Right.

John Hardig (CFO)

Yep.

David Campbell (SVP)

Okay. Right. Well, you know, I think, most of my other questions have been asked and, and answered. Thank you, thank you very much.

Brad Jacobs (CEO)

Thank you, David.

John Hardig (CFO)

Thanks, David.

Operator (participant)

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

Brad Jacobs (CEO)

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

Operator (participant)

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