XPO - Q3 2013

Transcript

Operator (participant)

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

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

Brad Jacobs (CEO)

Thank you, Dawn, 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 our Last Mile business, 3PD. We're also joined by Will O'Shea, the Chief Sales and Marketing Officer of 3PD, and Tavio Headley, our new Director of Investor Relations. Tavio was most recently an analyst at Jefferies, covering transportation, and before that, he was an economist for the ATA, the American Trucking Associations. We're happy to have Tavio on the team, and I'm sure he's going to be a huge help for all of you. As you saw in the numbers last night, we delivered exceptionally strong revenue growth in the quarter. Our revenue was up 173% year-over-year.

Some of that came from our acquisition of 3PD, which we completed in August, but our organic revenue growth was also very solid. Company-wide, we had 42% organic growth in the quarter, and in brokerage, we delivered 146% organic growth. We also increased our margins. Gross margin dollars were up 251%, and we increased gross margin percentage in each of our business segments. In freight brokerage, we bucked the industry trend and delivered 100 basis points of gross margin improvement year-over-year. And sequentially, our brokerage margin was up 40 basis points. As expected, we reported a loss in the third quarter. The largest contributor to the loss came from the strategic investments we've made in long-term growth, including salespeople and technology.

These investments are paying off, and I'm happy to say that we're on track to report positive EBITDA in the fourth quarter and expect to exceed our plan for $1 billion of revenue run rate by the end of December. Our latest acquisition, 3PD, has made a seamless transition to XPO. As you know, we became the largest provider of heavy goods Last Mile logistics when we bought 3PD. Last Mile is one of the fastest-growing areas of logistics. Our 3PD team is working on a sales pipeline that's the most robust it's been in years. We're actively bidding on Last Mile business in appliances, furniture, electronics, and building materials. The integration of 3PD is off to an excellent start. There's some strong tailwinds driving growth in Last Mile. Retailers and manufacturers are making strategic investments in direct sales channels.

Right now, for example, we're talking to a large potential customer that's a major electronics manufacturer. They're building out a national fulfillment network, and they need Last Mile services. E-commerce growth is even more of a factor. E-commerce has been growing at 3x-4x the rate of traditional retail shopping in brick-and-mortar stores, and heavy goods purchases on the internet are on the rise, too. Our acquisition pipeline is full. We currently have several truckload brokers in our sites, and we're also looking at attractive opportunities in Last Mile, expedite LTL, and managed transportation. Our cold start program is also on track. Our initial eight freight brokerage cold starts are on a combined annual revenue run rate of over $120 million. At the same time, we've been increasing the margins at these locations.

Gross margin at our freight brokerage cold starts as a group increased sequentially in each month of the third quarter, and it increased again in October as well. We currently have brokerage cold starts underway in Houston and Richmond. This brings us to three freight brokerage cold starts opened in 2013 and 11 opened over the last two years. We also recently opened a freight forwarding cold start in Dallas. So that's 22 cold starts total across freight brokerage, freight forwarding, and expedite. We're very happy with the progress we've made across a number of fronts. We've become one of the leading freight brokerage companies in North America, and that's up from just one brokerage location two years ago. We're the largest provider of last mile logistics. We're a top five player in expedite, and we have growing businesses in LTL, intermodal, and freight forwarding.

Company-wide, we're currently handling over 17,000 deliveries a day. We've been executing our strategy very precisely with a lot of discipline, and it's enabling us to grow at a fast clip. With that, I'll ask John to review the numbers. John?

John Hardig (CFO)

Thanks, Brad. I'll cover the performance of our three business units during the quarter. Freight brokerage revenue was up 374% from last year to $152.6 million, and gross margin dollars increased by 583%. Our mid-quarter acquisition of 3PD added $46.5 million to the revenue increase in the quarter. The balance of the increase came from our acquisitions of Turbo, Covered, and Interide, and from the organic growth of our cold start locations. Our freight brokerage cold starts are now on a combined revenue run rate of over $120 million, and our freight brokerage business overall had strong organic growth in the quarter, up 146% year-over-year. Freight brokerage gross margin percentage increased to 18.1% for the quarter.

This increase was driven in large part by the 3PD acquisition, but even excluding 3PD, gross margin was higher, both sequentially and year-over-year. This trend carried over into October, when we saw another nice pickup in gross margin versus September. In last mile, our 3PD business continued to benefit from strong retail sales of heavy goods, as well as an increase in e-commerce. 3PD's revenue increased 18% year-over-year. Gross margin in last mile was 28.4%, which is lower than it had been in prior quarters. This was due to higher than seasonally normal delivery volumes for several retail customers in September that resulted in higher carrier costs. So far in October, volume growth in last mile continued to be strong, and our margin has trended back up.

In expedited transportation, our revenue increased 6% to $25.1 million for the third quarter. Revenue increased due to the contribution of Air Charter, partially offset by a decrease in revenue in our over-the-road expedite business. Gross margin percentage for expedite was 18.1%, which is up 220 basis points sequentially and up 150 basis points from a year ago. Using lane analysis and selection, we strategically focused our fleet on more profitable lanes, and as a result, we increased operating income to $1.7 million for the quarter from $1.4 million last year. Our freight forwarding business achieved strong growth despite a continued soft freight forwarding market.

We grew revenue by 10.5% and improved gross margin by 270 basis points compared with the third quarter last year. This business is performing well. Excluding the one-time $3.1 million non-cash charge to amortize the CGL trade name, we increased operating income 165% from last year. On the corporate side, SG&A expense increased to $14.2 million from $8.7 million in the third quarter a year ago. The increase was primarily due to an increase in headcount in our corporate shared services and an increase in purchase services. Purchased services included $3.2 million of transaction costs, primarily related to the acquisition of 3PD, and $1.5 million of litigation costs. Corporate SG&A also included $1.2 million in non-cash share-based compensation expense.

Net interest expense was $6.4 million, which was primarily from our convertible notes and the $3 million bridge commitment fee related to the acquisition of 3PD. Our tax benefit for the quarter included a $10.3 million release of the valuation allowance against our deferred tax assets due to the deferred tax liability generated by our acquisition of 3PD. We expect our effective tax rate for the fourth quarter to revert to a range of 32%-34%. Our liquidity position remains strong. We had $67 million of cash on our balance sheet at September 30, and last month, we entered into a $125 million ABL facility, with the potential to increase the borrowing capacity to $200 million through an accordion.

With the ABL, we can borrow against our receivables at a rate of LIBOR plus 175 to 225 basis points, depending on availability. Now I'm going to turn it over to Scott, who will give you an update on our growth initiatives, and then we'll go to Q&A. Scott?

Scott Malat (Chief Strategy Officer)

Thanks, John. I want to start by adding some color about our operating environment. From a macro perspective, the market continues to be relatively steady and balanced. Truck pricing in the third quarter was up only slightly on a year-over-year basis, which is how it's been going for most of this year. Business picked up over the last few weeks after a slow beginning of October, possibly due to the government shutdown.

...In this type of low growth environment, coupled with balanced capacity, it's no surprise that brokerage margins in the industry have been pressured. Despite this, we're improving gross margins consistently as we execute our plan. We're pricing better, and we're purchasing transportation better as our sales reps gain experience and the algorithms in our Freight Optimizer have more data to mine. At the same time, we're growing organically at a rate in excess of 40%. In a more favorable brokerage environment, when the market's no longer balanced, we should get an additional boost. Within brokerage, as Brad noted, the Last Mile sector has been strong. Home goods retailers and manufacturers have posted solid results.

Black Friday is not for several weeks, but the first November promotions hit the stores this week, and with our growing exposure to internet sales, we expect Cyber Monday to be a big driver for us. Looking further out, favorable housing trends have given retailers and manufacturers the confidence to invest in going direct to market. As a result, we're participating in a lot of national bids. Seasonally, the fourth quarter is typically slower than the third quarter for brokerage. That includes last mile. Given everything we have going on, we still expect to have sequential revenue growth in freight brokerage in the fourth quarter. Here's some key strategic areas that are driving our growth. One of the most exciting things going on at XPO right now is the traction we're gaining with the 1,200 largest shippers in North America.

We started our Strategic Accounts program in April. Our strategic accounts team is highly experienced, and they understand the nuances of working with large shippers. In the third quarter, we did business with 36 new strategic customers, and we're actively bidding on business with 164 new strategic accounts. We expect to see the significant benefits from our strategic accounts program as we move through 2014. Another major growth opportunity for us is less-than-truckload. LTL is a $50 billion market, and we do only about $25 million a year in LTL revenue. Virtually all of the more than 9,500 truckload customers we do business with now have some LTL needs, so we have thousands of warm leads to grow that business.

In the third quarter, we rolled out a customer internet portal, and shippers have been quoting and dispatching LTL loads on the site. We've trained each of our offices on LTL, and we've rolled out an LTL certification program for our salespeople. In the last four months, over 800 customers have shipped LTL loads with us, and last month, we onboarded some major LTL customers. We're excited by how much progress we made in a short time, just scratching the surface of the LTL opportunity. I also want to mention the rebranding of our freight forwarding division that we announced last night. We used to call this division Concert Group Logistics, or CGL. It's now called XPO Global Logistics, with a new website at xpogloballogistics.com. This brand is more in line with our positioning as a complete supply chain partner.

We want our freight forwarding customers to know that XPO stands ready to help them with brokerage, LTL, expedite, and last mile needs as well. We currently have 28 freight forwarding locations operating under the new brand, including our latest company-owned cold start in Dallas, where the team is focusing on international exports. We're growing this business under the strong leadership of Dominick Muzzi. So there are a lot of different ways we're executing on our plan. We're driving significant organic growth through our cold starts, our strategic accounts, LTL, last mile, and acquisitions. We're improving gross margin through investments in recruiting, training, and technology. We're rapidly approaching a billion-dollar revenue run rate and positive EBITDA. Morale is high, and we have a lot of momentum. We're excited about the growth embedded in our model as we head into 2014.

I'd now like to turn the call over for Q&A. Operator?

Operator (participant)

Thank you. We will now begin the question-and-answer session. If you do have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the 10-Q, please press the pound sign or the hash key. If you're 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 touch-tone phone. Our first question comes from Justin Yagerman from Deutsche Bank. Please go ahead.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Hey, good morning, guys.

Brad Jacobs (CEO)

Good morning, Justin.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Hey, just a couple of housekeeping items, and then I'll ask a strategic question. What do you, John, do you have an estimate for what you think D&A is going to be in the fourth quarter?

John Hardig (CFO)

It should be basically what we did in the third quarter, plus another $2.3 million for a full quarter of 3PD.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay. All right. I just wanted to get that out of the way. And then the 125, the ABL that you put into place, what's your current availability under that facility?

John Hardig (CFO)

Well, we can borrow up to 85% of our AR on that facility. So our current eligible AR is just about $115 million. So we can borrow up to 85% of that, in terms of availability.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay. And, the litigation that you guys have been reporting, is that still C.H. Robinson, or is there other litigation that's going on, concerning the business?

Brad Jacobs (CEO)

No, it's primarily C.H. Robinson.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay. All right. And then I guess as we think about acquisitions on a go-forward basis, you know, you listed a bunch of different silos that you're considering. How do you think about those and prioritize them on a go-forward basis? Obviously, 3PD was a big step in what appears to be a good direction. Just curious, Brad, how you're thinking about the opportunities right now.

Brad Jacobs (CEO)

... We're thinking of the opportunities opportunistically. So we are looking at deals in last mile. We are looking at deals in expedite, in LTL. We're dabbling in some opportunities in managed transportation and obviously, truckload. So most of our acquisitions over time will be truckload, because that's going to be the biggest part of our business going forward. But we're also looking at these other ancillaries as well, and it really depends on when the stars line up for which kind of transactions.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

I'm assuming that applies to size as well?

Brad Jacobs (CEO)

Size, we're looking at big, small, and medium. So it's, we're really all over the board. Our approach to acquisitions is to cast a wide net, look at lots of acquisition opportunities at the same time, and be very disciplined with making sure we dot all the I's and cross all the T's before we get to the finish line.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Yep. And last one. On the margin, I actually have the same phrasing as you used in your prepared remarks, that you bucked the trend of the industry so far, you know, on 100 basis points of improvement in freight brokerage. You know, you did talk about LTL becoming a bigger part of the mix in the quarter. How much of this do you think is technology-driven, and how much of it do you think is mix-driven in terms of what's going on in your business as it evolves?

Brad Jacobs (CEO)

Well, it's hard to nail that down, but I can hypothesize with you. But I am very proud that despite what most of our competitors are showing in terms of margin compression, our freight brokerage had 100 basis points margin improvement year-over-year and had 40 basis points margin improvement sequentially. What's causing that, I think, is internal actions. I think we're hiring the right people to begin with. We're giving them proper training. We're empowering them with technology that's getting increasingly better at pricing and at truck finding. And I think all those factors together are showing margin improvement. And plus, the maturation of the sales force. We, you know, hired lots of people over the last couple of years, and the experience maturation is getting higher and higher as they have more months under their belt.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay, great. Thanks for the time, guys. Appreciate it.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

William Greene (Managing Director and Senior Transportation Analyst)

Hi there. Good morning.

Brad Jacobs (CEO)

Good morning to you.

William Greene (Managing Director and Senior Transportation Analyst)

Hey, Brad, can you comment at all on some of the dynamics in the quarter, hours of service, did that affect you? What are you kind of seeing in the markets as we look out in the fourth quarter now relating to changes in the regulatory landscape?

Brad Jacobs (CEO)

We're not seeing much from hours of service. I mean, the main thing we hear about hours of service is our carrier base complaining about it, and saying that it wasn't thought through very carefully and wasn't designed by anyone who's ever driven a truck, and it's hurting their productivity. But, you know, you really can't say that it's, at least we can't really say in our observations and experience, that it's tightening up capacity in any appreciable, noticeable measure. Because if it is, it must be something else that's creating supply. Because we're not, apart from some pockets of tightness, our boards are getting cleaned up pretty consistently by mid-afternoon, which to us is the main measure to know that whether there's tight or loose capacity.

So right now, it's we would categorize it as the same old, same old it's been for about two years now. Very balanced equilibrium, not extraordinarily difficult to find a truck, and we don't see that changing, barring some unexpected new circumstance anytime real soon.

William Greene (Managing Director and Senior Transportation Analyst)

When you look at kind of how you just described the market, and you think about the differences in the market, maybe excess supply or even excess demand in that world, is this a good market for you, or do you prefer a market where more demand is just always good for everybody?

Brad Jacobs (CEO)

Let's be clear. This is a lousy market for us, and it's a lousy market for truck brokers all across the board. And the last couple of years have been lousy. And we've had the situation where we're growing a business in its early stages, in the lousiest part of the cycle, where shippers don't really desperately need you to find capacity. They need you because they don't want to have a room full of 500 people calling trucks all day long, but they're not desperate to find capacity. And on the trucking side, you know, they can find freight. It's not impossible to find freight. So you don't have either of your constituents on either side, the shippers or the truckers, really urgently needing your services. So you really got to hustle a lot.

William Greene (Managing Director and Senior Transportation Analyst)

Okay, good. I have a question on some of the longer-term guidance metrics. So, near term, we've got the fourth quarter comment on EBITDA. Do you think that EBITDA comment is dependent on more acquisitions, or you're run rate at a point where you feel very confident you're going to get there anyway? And then I have one sort of longer-term one after that.

Scott Malat (Chief Strategy Officer)

Hey, Bill, it's Scott. We're on track to do the positive EBITDA. We could potentially close acquisitions or not. Acquisitions are very hard to figure out when they'll close, as Brad said. When you look at the quarter from the third quarter to fourth, we'll improve our productivity. Our people have become more productive over the same number of salespeople. 3PD will be in the results for the full quarter, as you think about it sequentially. We had almost $5 million in costs from litigation and M&A. Now we're continuing on M&A activity, but that sounds like a high number. I would expect that to move down. So if you think about the productivity improvements and all the other things we have going on, we're heading in the right direction.

William Greene (Managing Director and Senior Transportation Analyst)

... Okay, very helpful. And then when we look longer term, and we're trying to see when we'll kind of normalize in terms of getting the steady state sort of EBITDA targets we've talked about, how soon does this start to translate into a net earnings number? Like, when, when could we see positive earnings, not just EBITDA?

Scott Malat (Chief Strategy Officer)

We haven't given guidance yet for either EBITDA or earnings next year. We've barely started the budgeting process, but we're definitely going to keep the focus on the EBITDA rather than the net income, because we think that's a more meaningful measure, because like all acquisitive companies, not just companies in transportation, making acquisitions, because of the way the accounting rules have evolved over the last few years, you have a huge amount of depreciation, amortization on the purchase price. So it kind of decreases the net income a lot more than it does the EBITDA.

William Greene (Managing Director and Senior Transportation Analyst)

Okay. All right. Thanks for the time.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks. Good morning.

Brad Jacobs (CEO)

Good morning.

Scott Schneeberger (Managing Director and Senior Analyst)

Brad, in your quote in the press release, it says, you know, "Momentum is resonating with large shippers." Could you just give us a little bit more commentary on what you're alluding to there? And then just some discussion of your strategic and national accounts. Thanks.

Brad Jacobs (CEO)

Sure. So I was at CSCMP in Denver, the big trade show for shippers, a couple weeks ago, and we had our strategic accounts team, and we had Will O'Shea out there, too, from 3PD, and we had a booth, and we met with a few dozen shippers over a period of several days, and it was a very, very positive response. And what resonates with shippers are a few things about XPO. Number one, that we got a lot of capacity. I mean, we have a lot of capacity. We're moving 17,000 deliveries a day. Number two, we sort of come out of nowhere. I mean, two years ago, XPO Logistics didn't exist. Now we've made a real statement that we're committed to being one of the largest capacity providers and to continue to grow so that we'll have more capacity going forward.

And thirdly, I think what resonates with them is the culture of the company is passionately focused on delivering world-class service. So everybody from top to bottom is very acutely aware of how we're doing with each customer on on-time pickup, on on-time delivery, on rectifying problems when they inevitably come up. And shippers like to hear that. They like to see that, and they like the experiences of a team that's really hungry for their business and really wants it bad.

Scott Schneeberger (Managing Director and Senior Analyst)

Thanks. On you know, I know you guys mentioned that 3PD would kind of run on its own out of the gate, but could you speak to synergies you're seeing between XPO legacy and 3PD thus far, and maybe some synergistic goals you have over time? Thanks.

Karl Meyer (CEO of Last Mile 3PD)

Hey, Scott, this is Karl. You know, our focus right after completing the deal was to go after the low-hanging fruit, and that was really in two areas. One was introducing the XPO national accounts team to some of our large retailers, and we've done that. We've been able to get core carrier status with some of our retailers. Then on the other side, it was in using the XPO relationships to bring in last-mile capabilities, and we've been able to do that as well. I think longer term, we're focused on integrating electronically into the system so that all of the offices across the XPO brokers network can quote last-mile services in real time and book those orders, and we expect to have that, I think, you know, mid-first quarter next year.

Scott Schneeberger (Managing Director and Senior Analyst)

Great, thanks. That's helpful. It segues into my last question. Could you give us an update, just overall XPO, on IT developments and what you're seeing as that's one of your areas of you know focus optimizing operations? Thanks.

Brad Jacobs (CEO)

Thanks, Scott. Yeah, we have literally over 100 projects, so I can go on this topic for a long time, which I'm very passionate about and enjoy. The Freight Optimizer continues to improve the algorithms on pricing and carrier. We actually just, we're rolling out new releases on a very fast clip. So every 3-4 weeks, a new release comes out for the Freight Optimizer. Latest things have improved the algorithms on the pricing and the carrier side, so we'll continue to improve those as we get more data. LTL, which we rolled out across the entire network more recently, we opened up carrier, customer, and portals so that our customers go online, they dispatch loads, and they can do all their business in LTL right on the website.

So we've launched carrier and customer portals. We're continuing to, for the rest of the year, work on order input and other parts of the platform, in addition to continuing to improve how we find a truck and how we price. So there's a lot going on at IT.

Scott Schneeberger (Managing Director and Senior Analyst)

Great. Thanks for taking all the questions.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Brad Jacobs (CEO)

John, you might be on mute. We don't hear you.

Operator (participant)

John, can you please unmute your line? I'll go on to the next person. We have Ryan Cieslak from KeyBanc. Please go ahead.

Ryan Cieslak (Associate Equity Analyst)

Thanks, and good morning.

Brad Jacobs (CEO)

Good morning.

Ryan Cieslak (Associate Equity Analyst)

Brad, maybe if you could just talk a little bit about, you know, really nice organic growth here in the quarter, and, you know, you've been putting up obviously some strong organic growth the last couple quarters. Obviously, the comps are going to get more difficult, but, you know, what type of organic growth run rate or, you know, level do you think is sustainable over the next couple quarters? Or how should we be thinking about, you know, organic growth in the current freight environment?

Brad Jacobs (CEO)

Well, we think we continue to grow organically, very fast. If you think about freight brokerage, which is our fastest growing part of the business, even if that were to decrease from the 140 and 150% growth that we've been seeing organically on a quarter basis, that becomes a larger piece of the mix. Our fastest growing parts of the business are becoming a larger part of the mix, which can continue to sustain the organic growth. When you think about over the next several years, we're going from a little under $1 billion today to 2017, we're about $5 billion in revenue. About $1.5 billion-$2 billion of that will come from acquisitions. The rest will come organically.

Ryan Cieslak (Associate Equity Analyst)

Okay, thanks. And then, I'm sorry if I missed this, but did you guys give an EBITDA figure for 3PD in the quarter, or did I miss that?

Brad Jacobs (CEO)

No, we didn't give out EBITDA for 3PD. We did give out revenue, and gross margin, and then, 3PD is included in our freight brokerage segment, and you can see operating income and EBITDA for our freight brokerage segment.

Ryan Cieslak (Associate Equity Analyst)

Okay. Then maybe just directionally, I mean, is there an expectation that there's... I mean, you know, what level of EBITDA or profitability do you guys expect in the fourth quarter from 3PD? Just trying to get a sense of what type of accretion, if any, you know, was in this quarter or maybe into next quarter.

Brad Jacobs (CEO)

3PD contributed low single-digit millions of EBITDA in the third quarter because we only closed on it midway through the quarter in August 15th, on August 15th. It'll obviously be in the quarter for the whole quarter, in the fourth quarter, and the EBITDA contribution seasonally is roughly about the same, within $1 million of EBITDA on a quarterly basis. So for the whole quarter, it'll be high single-digit millions of contribution to EBITDA.

Ryan Cieslak (Associate Equity Analyst)

Okay. And then, you know, Brad, it sounded like, you know, when talking about 3PD, you know, things are running on track. Even maybe, you know, this is maybe my words, but maybe a little bit ahead of what you guys were thinking from a top-line perspective. But, you know, how should we be thinking about, you know, the level of revenue into the fourth quarter? I know, Scott, you had mentioned, typically, seasonally it does decline, but it sounds like there's a lot going on. There's new business opportunities. Should we see, you know, sequentially that ramp into the fourth quarter? Obviously, you know, when normalizing for a full quarter, this in the third quarter.

I'm just trying to get a sense of what aspect of the sequential trend in 3PD is seasonal, and what aspect is actually, you know, some potential synergies or new business you guys are currently gaining.

Brad Jacobs (CEO)

Well, we'll continue to grow, like we said, sequentially, third to fourth, like you said. So if we break up the different parts of the business, expedite and freight forwarding typically move down from third quarter to fourth quarter. Now, in expedite, we'll see if we can buck the trend. We'll see if we can, if we can do just as much or hopefully a little more in, in revenue, but usually third quarter, fourth quarter is down. Freight forwarding is, is third quarter, fourth quarter is typically down a bit. And then in, in, in freight brokerage, we're growing very quickly. So if we talk a few years from now, three, four years from now, third quarter is probably going to be higher than fourth quarter.

That, excluding last mile and 3PD, we'd expect to continue to tick up as our cold starts continue to ramp up and we continue to grow. 3PD typically does a little less revenue in the fourth quarter in last mile than they do in other quarters. That's been moving a little bit in the direction where fourth quarter is catching up. Second quarter and third quarter usually are stronger, but we have a stronger internet presence. Cyber Monday is becoming more important to us, Black Friday promotions. So fourth quarter has been increasing, but there's still that time at the end of December where there's not much going on.

Ryan Cieslak (Associate Equity Analyst)

Okay, and the last one I have, I'll get back in line, is, you know, longer term, your goals that you guys have laid out, you know, following the 3PD acquisition and maybe the potential impact mix is going to have on your margins, maybe versus your original plan. You know, how should we be thinking about, you know, what, what is the right margin type profile, you know, longer term when you, when you hit those goals? You know, I think, you know, you guys have laid out more of a mid-single digit EBITDA margin, but does that change now with final mile in there and potentially some, some other mix impacting going forward? Thanks.

Brad Jacobs (CEO)

We're still modeling about 6% EBITDA margin long term, if you go out a few years. When you layer in all the different mix of the different business segments that we are in and will be in, that's probably where it'll shake out.

Ryan Cieslak (Associate Equity Analyst)

Okay, thanks, guys.

Brad Jacobs (CEO)

Thank you, Ryan.

Operator (participant)

Thank you. Once again, if you do have a question, please press star, then one on your touchtone phone. Our next question comes from Jack Atkins from Stephens. Please go ahead.

Jack Atkins (Research Analyst)

Good morning, guys. Thanks for the time.

Brad Jacobs (CEO)

Hey, Jack.

Jack Atkins (Research Analyst)

I guess a couple of housekeeping items here first. You know, John, what's the correct share count that we should be using for the fourth quarter?

John Hardig (CFO)

You know, Jack, it was in the back of the press release. If you look at the table that's there, it'll kind of, it kind of lays out all the, all the relevant, you know, relevant share counts that you need.

Jack Atkins (Research Analyst)

Yep.

John Hardig (CFO)

If you have any, if you have any questions about that, about that table, then, you know, feel free to reach out to me, and I can talk to you about it in more detail, but-

Jack Atkins (Research Analyst)

I guess the question that I had from that, though, is that, you know, there was a transaction, I guess, a conversion from the convertible securities into common stock, and I just didn't know if, you know, how that 600,000 or 700,000 shares should be treated. Is that already in the share count, or is that, you know, additive?

Brad Jacobs (CEO)

Yeah, it'll be the same because those are converted to shares, and we already include them in our fully converted. So it'll just shift from the shares that you see now under the line of convertible securities over to common shares.

Jack Atkins (Research Analyst)

Okay, so those were already in diluted share count for the third quarter?

Brad Jacobs (CEO)

They were, yes.

Jack Atkins (Research Analyst)

Okay. Okay. And then what was the total revenue from acquired businesses in the, over the last 12 months in the quarter, not just from 3PD? Do you have that, John?

John Hardig (CFO)

I don't. You know, Jack, we're not, you know, we really haven't been giving out specific company, you know, revenue numbers. So I mean, all of that is included in our brokerage segment.

Jack Atkins (Research Analyst)

I got you. I'm just, you know, you broke out an organic growth number, and I'm just trying to understand what's sort of included in that base. And so if you could just kind of give me a total acquired revenue number, not for each specific company, I think that would be helpful.

Brad Jacobs (CEO)

Yeah. Okay, that makes sense. From an organic perspective, what is included in there is only our first acquisition that is that had a full quarter last year, was Continental. All of our other acquisitions are all within a year of buying them or were only part of the quarter of last year, so that's not an organic growth base yet. Next quarter, Kelron will be in our organic growth base, and then it'll continue on from there.

Jack Atkins (Research Analyst)

Oh, okay. Okay. And then last couple questions. You know, in your investor presentation in the last couple of months, you've noted, I think, the revenue and EBITDA targets have been pushed out, I think, to 2017 from 2016. Could you maybe talk about what drove that, that extension of the time frame for those long-term goals?

Brad Jacobs (CEO)

That really wasn't as big a change as you may think it was. I mean, the original goal was to end 2016 on run rates of $5.3 billion, and calendar 2017 would be the reported.

Jack Atkins (Research Analyst)

Okay.

Brad Jacobs (CEO)

So it's really six of one, half a dozen of the other.

Jack Atkins (Research Analyst)

Okay. Then, just kind of digging into that a little bit more. On the $1.5 billion-$2 billion of required revenue, you know, I guess, can you clarify what you mean by that, in that, you know, is that a contribution from acquired businesses in total, or is that just the revenue run rate that you acquired at the time of the purchase?

Brad Jacobs (CEO)

That is the revenue from those acquired businesses as of 2017.

Jack Atkins (Research Analyst)

Okay. And that, and that's, incremental to what you've already purchased, or that's total acquired from the date that, Brad, you made your initial, capital investment?

Brad Jacobs (CEO)

That's incremental to what we've already purchased.

Jack Atkins (Research Analyst)

Okay. Okay, that's great. Thanks for the time.

Brad Jacobs (CEO)

Thank you, Jack.

Operator (participant)

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

David Campbell (SVP and Research Analyst)

Yes, thank you very much. Good morning, everybody. I just curious about the 42% Jack was trying to get to, the 42% organic growth rate. That's the growth rate for the company, excluding one acquisition, which the first acquisition, which has now been in there for 12 months. Is that the way you look at it?

Brad Jacobs (CEO)

That's right. That's right.

David Campbell (SVP and Research Analyst)

Yeah, and the freight brokerage is largely cold starts when you call it organic. Is that correct?

Brad Jacobs (CEO)

That's right. Yeah. Organic, cold starts are included in our organic base.

David Campbell (SVP and Research Analyst)

Right. Right, right.

Brad Jacobs (CEO)

Including acquisitions.

David Campbell (SVP and Research Analyst)

Right, right, right. And someone, I think, mentioned interest costs in the fourth quarter versus the $6.4 million. There's something non-recurring in that $6.4 million.

John Hardig (CFO)

Yes, it was, there was a $3 million fee that we paid to support the 3PD acquisition. So we had a, we had a debt commitment from a group of investment banks to finance the 3PD acquisition.

David Campbell (SVP and Research Analyst)

Mm-hmm.

John Hardig (CFO)

And we ended up not drawing on that facility, but we did pay the commitment fee, and that fell on the interest line.

David Campbell (SVP and Research Analyst)

Mm-hmm. So going forward, it should be more like $3.4 million on a quarterly basis?

John Hardig (CFO)

Ex-exactly.

David Campbell (SVP and Research Analyst)

Right. Okay. And, in the expedited, Scott, you were pretty optimistic about expedited in the fourth quarter. It's usually a seasonal decrease. I mean, is that, is that based upon what's happened in October? Because, you know, December, really nothing goes on in the last week of December.

Scott Malat (Chief Strategy Officer)

That's right. And expedite in the back half of December is very weak. It's a combination of the factor of things have been picking up in expedite, and expedite is a good business. That's a business we like a lot. It's a business we're a top five player in, and shippers need us. As people move to just-in-time inventory, they need to use expedite services. When you think about their cost to carry inventory, it's so much larger than the cost of expedite. So we've seen a slow environment for expedite in the past. It has been getting incrementally better. We're dealing with it better as well. We've been doing better lane selection.

We still had, we made a decision to improve profitability, and we had lower volumes in the third quarter, as a result, and that's continued to pick up into the fourth quarter. So you know, maybe something in line with the third quarter, where you typically see it move down, hopefully it could be in line.

Brad Jacobs (CEO)

You know, David, you might have noticed the gross margin in expedite was up 210 basis points over Q2.

David Campbell (SVP and Research Analyst)

Well, it used to be 21%.

Brad Jacobs (CEO)

The good old days.

David Campbell (SVP and Research Analyst)

You've got a ways to go.

Brad Jacobs (CEO)

That's right.

David Campbell (SVP and Research Analyst)

Knowing you, you'll get there.

Brad Jacobs (CEO)

We'll try our best.

David Campbell (SVP and Research Analyst)

Just one more question. The freight brokerage revenue in the fourth quarter, what you mentioned would be up because of the 3PL, 3PD. What about the rest of it? Would that be down from the third quarter?

Brad Jacobs (CEO)

Oh, no, actually, that should be up. But that should be up, not due to any specific thing going on in the external market, just because we've hired more people. And a lot of people are coming out of the training programs, and they're getting the phones, and a lot of people have been, you know, working for a few months, and now their Gross Margin production is increasing. So, because of the internal measures we're taking, that we're doing, the fourth quarter will show more revenue than the third quarter, in all likelihood.

David Campbell (SVP and Research Analyst)

Mm-hmm, mm-hmm. Great. Right, right. Okay, great. Thank you.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from David Tamberrino from Stifel. Please go ahead.

David Tamberrino (Equity Research Analyst)

Thank you, and good morning, gentlemen.

Brad Jacobs (CEO)

Morning, David.

John Hardig (CFO)

Hey, David.

David Tamberrino (Equity Research Analyst)

Just maybe we'll just stay with where you just ended in terms of headcount. It looks like you've been growing headcount after adjusting for 3PD for the quarter by about 100, give or take, heads sequentially for the past couple of quarters. What are the hiring plans look like for the fourth quarter of the year? And is that kind of a good number, about 400 people per year, that you're going to be bringing in to freight brokerage?

Brad Jacobs (CEO)

300-400, in that band, 300, 350, 400, all depending on the quality of people that we find and how we feel about integrating them and training them and putting them on the phones. But in that range, yeah, that's, that's a good number. We're up to 1,950 employees now.

David Tamberrino (Equity Research Analyst)

That's just under 2,000. So in terms of hiring plans for the fourth quarter, are you, you ramping that up? Is another 100, probably a good idea for where you're, you're looking to end the year?

Brad Jacobs (CEO)

We're ramping up a bit from the third quarter. It has been a little accelerated, so we should do a bit more than we did in the third quarter.

David Tamberrino (Equity Research Analyst)

Okay. Do you have larger training classes now? Do you expect a larger amount of people to be coming on to the sales pool, or is it kind of, you know, a steady run right now, where you have, you know, the same 30 or 40 people per week or whatever it may be coming on? It's not necessarily accelerating?

Brad Jacobs (CEO)

You know, we actually had our largest training class ever, starting just recently, 50 people, in one shot. So we're testing the system. We're pushing the envelope on that.

David Tamberrino (Equity Research Analyst)

Okay. And do you think that that's at capacity? Do you think you can add five or 10 more, or how does that...?

Brad Jacobs (CEO)

I'm sorry, I couldn't hear the 5-10 more. What was that about?

David Tamberrino (Equity Research Analyst)

Yeah, if, if you have 50 going in now, and that's your largest size class, how many more people do you think you could layer on to that before you kind of don't have enough space or can't fit any more people in the room for the class?

Brad Jacobs (CEO)

You know, it's hard to say. We got to go incrementally on that. What's really important is that we keep the quality of the people real high, which we've been able to do, and that we keep the quality of the training really high, which we're also doing as well. So I mean, as long as we can maintain the quality control on both those facets, there's no reason other than psychological ones, why we can't increase the number of people.

David Tamberrino (Equity Research Analyst)

Okay.

Brad Jacobs (CEO)

There's a big country out there, and there's a lot of people to hire. Hiring a few dozen people here, a few dozen people there, it's really a question of just getting organized and approaching it with the right psychology.

David Tamberrino (Equity Research Analyst)

Mm-hmm. Okay, maybe one last one. How was your turnover rate from Q2 to Q3? Was it flat? Did it tick up? Did it come down at all?

Brad Jacobs (CEO)

You know, our turnover rate for the last 12 months has been relatively steady. Our voluntary churn has been in the low 20s. And I would add to that, David, no matter what it is, even if it were less than that, it's too much. I mean, turnover is the enemy because you invest in people, you put them through a couple of months of training, put them on on-the-job training after that, you chew up resources to mentor them and to teach them and to... And they really don't contribute to the company on a profitable basis until month 12, month 13, when they're contributing $12,000-$13,000 gross margin a month. So anybody who quits or gets fired in the first year, that's not good.

David Tamberrino (Equity Research Analyst)

That's a lot.

Brad Jacobs (CEO)

Our goal is to-

David Tamberrino (Equity Research Analyst)

It's a lot.

Brad Jacobs (CEO)

Our goal is to reduce that as much as possible.

David Tamberrino (Equity Research Analyst)

Okay. Well, thank you very much for your time.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Barry Haimes, from Sage Asset Management. Please go ahead.

Barry Haimes (Managing Partner and Senior Portfolio Manager.)

Thank you. Thanks, guys. Had a couple of questions related to cold starts. You know, saw in the press release that you did in the quarter and the one planned for Louisville. And how many cold starts in total does that bring you to, since inception? Is there any sort of, I know everyone is different, but is there sort of a mean or median, you know, revenue per cold start we should think about? And then, for the fourth quarter and 2014, do you have any plans yet in terms of, you know, number of cold starts we should be thinking about? Thanks.

Brad Jacobs (CEO)

Okay, Barry. Cold starts, the first question, we've done 22 so far. So 10 in freight forwarding, 11 in freight brokerage, including the three we talked about today, one in expedite, one in Birmingham. So 11, 10, and one. Revenue on Cold start will depend, depends what city it's in and what the demographics are and how strong the leader is. But if you look at the ones we've done so far, they got up to about, rough numbers, about $10 million-$11 million in aggregate per month, after a little over a year. In terms of number of Cold starts that we'll do over the time, you know, we're going to have to improvise on that, and it'll depend on the quality of the people and our appetite.

Something in the magnitude of three or four cold starts a year feels right. What we're mainly focusing on is there's about a dozen cities that we did some research on, where the demographics look really good, both for hiring people from the industry and hiring people who want this type of a job. They have the capability in those cities to be mega locations that could be much larger than your typical cold start, ones that could be hundreds of people rather than dozens of people. That's a larger focus for us. Having said that, we're happy to work on onesies and twosies as well.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Great. Thank you.

Brad Jacobs (CEO)

Thank you, Barry.

Operator (participant)

Thank you. Our next question comes from Jim Lee from JPMorgan. Please go ahead.

Jim Lee (Equity Research Analyst)

Hi, good morning, guys.

Brad Jacobs (CEO)

Good morning.

Jim Lee (Equity Research Analyst)

You guys exchanged some of your converts for stock. Can you just talk a little bit about how that process came about? And is there any more appetite for these transactions going forward?

Brad Jacobs (CEO)

That came about in a reverse inquiry way, where we had, convert holders who said, you know, the converts are trading at $140 or whatever, and, and do you want to exchange that, for, for common? At a reasonable premium, it made sense to, from a financial engineering point of view. It's not something we're actively going out and tendering for. We're not -- we, we looked at it a little bit once we got a few of these inquiries in terms of doing it, maybe tender form. But it didn't make any sense to do that with stock, because we'd be putting common stock into hands that weren't natural long-term holders for that common stock, and we want to do everything we can to protect the common stockholders.

But to the extent that it makes sense from a math point of view, to do a common exchange with ones who are already short the common, then basically, it's not creating any oversupply, any new supply, for the common, so it makes some sense to do that. So that's not a large number of our convert holders. It's a small number. With those small number, the ones who approach us, we listen to them.

Jim Lee (Equity Research Analyst)

Okay. You mentioned there was a cash premium that was paid. Can you tell us how much that was?

Brad Jacobs (CEO)

It was small, but it was consistent with what is normally paid in those. But we didn't disclose it publicly.

Jim Lee (Equity Research Analyst)

Okay. Will, will it be disclosed in the queue?

Brad Jacobs (CEO)

I don't think so. I don't think we're required to disclose that, and for commercial and competitive reasons, I don't think we'd want to disclose it. It wasn't a lot.

Jim Lee (Equity Research Analyst)

Okay. Great. Thank you so much.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Thank you. We have a follow-up question from Justin Yagerman from Deutsche Bank. Please go ahead.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Hey, two quick ones. Timing on Louisville for the Cold Start, or Louisville, I guess, is the right way to pronounce it?

Brad Jacobs (CEO)

Yeah, Louisville is actually part of our Interide acquisition. They had an office in Louisville, and it's already opened, and we're going to continue to scale that up and grow. We were fortunate enough to work with the state and getting some tax incentives for that. So that's already open, and we'll continue to scale up. So we don't count Louisville or however you want to pronounce it, Justin, as a cold start because we acquired it. But we are real happy that the state of Kentucky supported us with the tax incentives to grow it more.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay. Are those taxes going to be a help in the fourth quarter?

Brad Jacobs (CEO)

Not a whole lot. I mean, it's a couple million bucks over 10 years.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Over 10 years. Okay, that, that's-

Brad Jacobs (CEO)

That's okay. 10 years goes by, and we'll take the $2 million bucks.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

I'll, if you want to give me $2 million over 10 years, I'd gladly take it from you.

Brad Jacobs (CEO)

I'm sure you will. I'm sure.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Last question. How much was the increase in intangibles at 3PD in the quarter, and what's that going to look like in the fourth quarter?

John Hardig (CFO)

It was the total intangible book for the transaction was $148 million.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Yep.

John Hardig (CFO)

The annual amortization on that is going to be about $22 million a year. Some—there are some big pieces of that that are going to roll off pretty fast. There's a $12 million carrier valuation that has a two-year life. So $6 million of that 22 will roll off after the first two years. And then there's $18 million of technology that has a four-year life, and so 4.5 will roll off at year four.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay, so the carrier portion was $12 million, and that's two years. The $18 million technology was how? Was four years, you said?

John Hardig (CFO)

Four years, that's right.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay, great. And then the rest is over what period of time?

John Hardig (CFO)

There's a customer, you know, relationship piece. It's a 10-year, has a 10-year life. That's $110 million. And, and Justin, this will all be in the 10-Q, so you can see it-

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Okay.

John Hardig (CFO)

- in excruciating detail. But, and then there's two—there's a trade name that is a short one also. It's 3.5 years, and that's about $6 million.

Justin Yagerman (Director and Senior Transportation and Shipping Equity Research Analyst)

Great. That, that just helps for modeling purposes. Thanks, guys. Appreciate it.

John Hardig (CFO)

Sure.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Brad Jacobs (CEO)

Okay, well, thank you, everyone, for participating in the call. The numbers that I would highlight ending the call would be the 42% organic growth in the quarter company-wide, the 146% organic growth in brokerage, and the fact that we increased gross margin percentage in every single one of our business segments. And most proud of all is that the margin, the gross margin in freight brokerage increased 100 basis points year over year and sequentially. And the final number I'd highlight is 17,000, the number of deliveries we're moving a day. So the company has really grown substantially over the last two years. Thank you very much, and we'll be seeing you soon.

Operator (participant)

Thank you, ladies and gentlemen. This concludes the XPO Logistics third quarter, 2013 conference call and webcast. Thank you for participating. You may now disconnect.