XPO - Q3 2014
November 6, 2014
Transcript
Operator (participant)
Welcome to the XPO Logistics Third Quarter 2014 conference call and webcast. My name is Jeanette, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you have a question, please dial star one on your telephone keypad. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements.
A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law. During the call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and related financial tables. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the Investors section on the company's website at www.xpo.com. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.
Brad Jacobs (CEO)
Thank you, operator, and good morning, everybody. Thanks for joining our call. With me today are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Director of Investor Relations. The third quarter was transformational for us on many fronts. We raised $1.2 billion of capital to fund our growth. We completed our largest acquisition so far, New Breed, which established XPO in the top echelon of contract logistics and gave us critical mass. We drove a year-over-year increase in gross revenue of 242%, and an increase of more than 400% in net revenue. These reflect the benefit of acquisitions and 48% organic growth company-wide. We generated strong adjusted EBITDA of $24 million for the quarter, which was a swing from a $7 million EBITDA loss a year ago.
We owned New Breed for only 29 days in the quarter, so the full contribution of that acquisition will come in the fourth quarter. We continue to be on target to achieve an EBITDA run rate of $150 million by the end of the year. New Breed has made a seamless transition to XPO. Its performance has been ahead of plan in the first month out of the gate for both net revenue and operating income. Some of the relationships with our contract logistics customers go back 10 or 20 years. These customers spend a significant amount on other types of transportation services, and we intend to capture that business. There's also a sizable opportunity to sell contract logistics and related transportation management services to our 15,000 customers. In fact, we've already had many positive meetings with tier one customers about these capabilities.
Moving to intermodal, our integration of Pacer is largely complete. Our intermodal team is doing a great job of meeting customer requirements in a congested rail market, and I'm happy to report that we've made substantial gains in customer satisfaction and proprietary IT development for this business. Looking at the company as a whole, our strategic accounts group is ramping up very substantially, and we're getting an excellent reception from large shippers. Some of this is because XPO's profile is much higher now than a year ago, but there's also a market dynamic working in our favor. Shippers are concerned about tight capacity and about driver shortages. They're looking to develop relationships with 3PLs like XPO that have deep access to capacity and are strongly committed to investing in technology and offer a broad range of services.
In only a short time, we've had a great amount of success selling multimodal services to our customers. We're already generating revenue from multiple lines of businesses with 36 of our top 50 customers, and half of those 36 customers are using 3 or more of our services. To sum it up, we've attained critical mass with leading positions in the fastest-growing areas of logistics. We've built a strong and scalable foundation, and now we're gelling as one integrated organization with a single-minded focus on customer service. We have substantial liquidity to take advantage of a very lively acquisition pipeline, and we continue to meet or beat every one of our strategic goals. With that, I'll ask John to review the numbers. John?
John Hardig (CFO)
Thanks, Brad. Turning to the results, we delivered very strong revenue growth and margin improvement in the quarter ahead of expectations. We increased gross revenue 241% to $662 million, and we increased net revenue by 403% to $175 million.
Adjusted EBITDA was $24 million in the third quarter, up from $14 million in the second quarter, and compared to a loss of $7 million a year ago. Revenue from our freight brokerage segment increased 240% year-over-year to $519 million. Net revenue from truck brokerage, excluding the contribution from last mile and intermodal, increased 81% year-over-year. This was largely driven by the continued growth and margin expansion of our truck brokerage cold starts, which are now on an annualized revenue run rate of over $250 million. That's up from $120 million a year ago. Truck brokerage net revenue margin increased by 55 basis points from last year. This was our sixth consecutive quarter of year-over-year margin improvement.
Excluding the impact from the brokerage business we acquired with Pacer, this increase would be even higher. In our intermodal business, we increased revenue 9.6% year-over-year. However, we experienced higher drayage costs due to the rail network disruptions. Our last mile business continued strong revenue growth, driven by increased volumes with existing and new accounts and continued growth with e-commerce customers. The market for last mile carriers remained tight during the quarter, and we maintained high service levels by procuring short-term capacity during surges in demand. In expedited transportation, we continued strong year-over-year top-line growth and profitability, driven by cross-selling synergies between our four expedited services and strong market demand during the quarter. We're making good strides in improving recruitment and utilization of owner-operator capacity by implementing new route optimization and carrier selection software.
This is allowing us to offer better service to our customers and more miles to our carriers. In freight forwarding, we made significant strides toward consolidating the former Pacer operations. We completed the consolidation of three freight forwarding offices and substantially improved our operating margin over the second quarter. Corporate SG&A was $23 million, which included $10 million of transaction and integration costs, $1.8 million of non-cash share-based compensation, and $1.5 million of litigation costs. Interest expense was $17.8 million in the quarter, which included $9.8 million of commitment fees to fund the New Breed acquisition. We expect that interest expense in the fourth quarter will be in the range of $14-$15 million. Excluding future acquisitions, depreciation and amortization will be approximately $34-$35 million in the fourth quarter.
Our tax rate for the quarter was 63.2% due to the full release of the valuation allowance on our deferred tax assets as a result of the acquisition of New Breed. This gave us a significant non-cash tax benefit in the quarter. Without the release of the VA, the tax rate would have been 36.1%. We expect our tax rate in the fourth quarter will be in the range of 30%-33%. We have significant tax carryforwards and don't expect to be a federal cash taxpayer for several years. We ended the quarter with $690 million of cash on the balance sheet, including $10 million of restricted cash, and we generated positive free cash flow for the quarter.
As an accounting note, we expect to record a $41 million non-cash charge in the fourth quarter related to our recent $700 million equity private placement. The amount of the charge is equal to the difference between the amount allocated to the preferred shares we issued and the fair value of issuance of the underlying common. The charge will be recorded when shareholder approval for the conversion of the preferred stock to common shares is received, which we expect will be in the fourth quarter. We expect our fourth quarter weighted average diluted share count to be approximately 66 million shares, assuming we convert the PIPE preferred to common on December 19th. The share count could be slightly higher or lower, depending on the exact date of the conversion. Now I'll hand it over to Scott for comments on our strategy. Scott?
Scott B. Malat (Chief Strategy Officer)
Thanks, John. From a macro standpoint, the holiday season is top of mind, and there's a lot of internal debate as to how and when the peak will come. Holiday got off to a late start, although the L.A. ports have tightened up quickly in recent weeks. This could mean we're in the calm before the storm. There's no debate about capacity. Although it's not as tight as it was earlier this year, it's still relatively tight, and it would take only a little increased demand to tip the market over into imbalance. It's a good time to be a broker, and at XPO, we're particularly well positioned to take care of any surges. That's because we're continuing to grow our business as one integrated company and can utilize our increasing scale and resources to serve our customers.
For example, we have relationships with over 28,000 carriers, representing 667,000 trucks, which is over 3 times the number of carriers we worked with only 18 months ago. This increased density enables us to do a better job at finding the right truck for each load. This is in addition to the 4,000 trucks we have under contract through our subsidiaries, our auction-based XPO NLM system, and our air, rail, and shipping capacity. The strategy is clearly working as we delivered 48% organic growth. A major contributor to this outsized growth is our cold start program. We're adding at least one more brokerage cold start in the fourth quarter in Denver. It will be led by an experienced leader with a successful track record. The outlook for last mile continues to be exciting.
We've won over $70 million in annualized new sales so far this year, with accounts tied to e-commerce making up a significant portion of the growth. We'll see the full contribution from these wins in 2015 and beyond. We're continuing to invest in proprietary technology to support our growth in e-commerce and drive up our industry-leading last mile service levels, and we're beginning to benefit from our acquisition of ACL. In 3 major markets served by ACL, more than half of the last mile contract carriers are taking advantage of additional overnight business associated with e-commerce. The additional income is a big plus to many contract carriers and attracts them to XPO, while at the same time leveraging capacity to add to our margin. We have a similar strategy for intermodal. We're becoming even more customer-centric by building on the platform we inherited from Pacer.
We've tied compensation to customer satisfaction. We've revamped the training programs, and we've completed technology enhancements that provide greater real-time visibility to key metrics on the floor. We're getting great feedback from customers regarding how well we communicate and plan, and on our issue resolution. Overall, we have a lot of avenues for growth. We're just scratching the surface of a much larger opportunity. For example, we're winning business from many of the largest shippers in North America, and three years into our growth, we've still only met with about a third of the over 2,000 strategic account prospects, so we have years of growth ahead of us. At the same time, we're creating significant potential for incremental revenues with our existing large customers. We're providing high levels of service to these, who typically have individualized needs and exacting service requirements.
We're taking the time to make sure we meet or exceed all of their requirements to earn more of their transportation spend. With this type of opportunity, coupled with our multimodal solutions, we have significant scalability already embedded in the business. Looking out over the next few years, we have clear line of sight to exceptional growth. With that, operator, we'll turn it over to questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Our first question comes from Rob Salmon of Deutsche Bank. Please go ahead.
Rob Salmon (Associate Analyst)
Hey, good morning, guys. How you doing?
Brad Jacobs (CEO)
Good morning. Good.
Rob Salmon (Associate Analyst)
You know, Scott, in your prepared comments, you had highlighted about $70 million of new business that, that you guys have annualized new business that you've won that's related to e-commerce. Can you give us a sense of how much of that you guys are currently moving, and kind of how that will kind of scale up in 2015 and beyond?
Scott B. Malat (Chief Strategy Officer)
Okay, thanks, Rob. The last mile business has been, has been won through the year. It usually takes a few quarters for that business, the new business, to get ramped up, and it takes some time for it to become profitable as you're set up and have, have setting up costs in the markets. Some of it rolled in in the third quarter. More of it will roll in, in the fourth quarter, and then a, a, a majority of that $70 million will be rolling in in the first quarter of next year.
Rob Salmon (Associate Analyst)
Okay, you know, that, that's really helpful. Can you talk a little bit more about kind of how ACL is integrating in with the rest of your last mile business? It sounds like there's a lot of opportunity to better leverage the owner-operators who are providing capacity here. You know, any sort of additional color would be really helpful as we think about that business and how it kind of supplements the rest of your last mile businesses.
Scott B. Malat (Chief Strategy Officer)
Yeah, that, that's gotten off to a great start. So ACL, since we've taken over, has signed up a large new contract, and we're not only getting last mile business from that new contract, but we're also getting truckload business and expedites. There's been a lot of cross-selling. The nature of ACL's business is they're moving goods and doing zone skipping from 12:00 A.M. to 6:00 A.M. So what that enables us to do is contract carriers that we work with in our last mile division, that are running things for us from, let's say, 8:00 A.M. until 7:00 P.M. at night, we can offer them freight overnight. So a lot of the contract carriers are taking advantage of that capacity.
More than half of them in the markets that we're doing business in with ACL are taking advantage by putting a different driver in that truck and having the truck run overnight. That does a lot of different things. One, the biggest advantage we have in last mile is our customer satisfaction. Our customer service scores are well above the industry, and the reason they are is because we work with the best contract carriers. We can work with the best contract carriers because we have great freight. We can get them 10-12 stops a day, and we can pick and choose and make sure we're using the best contract carriers. This gives us another advantage because we now can offer them freight round the clock, and it makes it even more of an advantage to work with XPO versus one of our competitors.
Rob Salmon (Associate Analyst)
Thanks, Scott, and, I guess, Brad, I'll turn it over to you for a quick question with regard to New Breed and, you know, what do you see as the cross-selling opportunity across the different XPO platforms, as well as, you know, can you give us a sense of what their TMS spend is that could potentially go into either last mile or truck brokerage as well, that you guys could manage internally over time?
Brad Jacobs (CEO)
Sure. This is Brad. I'll take the first part of it Scott will take the TMS part. So the cross-selling opportunity is big. It's big both ways. Contract logistics, those contract logistics services are very highly engineered, complex, sophisticated types of contract logistics services that New Breed offers and does very well, is applicable to somewhere between 100 and 200 of our 15,000 customers. And we are doing a very systematic approach to those customers to make sure we understand their needs, and we're going to pitch it. And, we've already started doing that, and there's a receptivity. Now, contract logistics, you don't sign up a $50 million contract in two weeks. That's, there's a lead time on that. It takes a while. There's a lot of studying the situation and customizing.
So, there'll be some lead time on that, but I'm very, very optimistic. And I'm reflecting the optimism of our strategic sales team, that we have identified the right customers to pitch that to. Now, looking the other way, New Breed has some amazing relationships that go back as much as 20 years with a core group of Fortune 100 customers, where they've lived and breathed and been in the trenches together for a long time. There's a lot of mutual trust there, based on experience. Those customers do a lot more than just contract logistics. They do truckload, they do expedite, they do intermodal, they do TMS. They do all the other services that we've gained leading positions in.
We have begun, but just a little bit, to approach those customers for those services, and in the coming months, we'll approach them more intensively, and I'm optimistic we'll get a lot of business from that. That business will come up faster than the other way because it's a shorter sales cycle.
Scott B. Malat (Chief Strategy Officer)
On the TMS platform, we're doing a little less than $100 million in transportation management services through the New Breed platform. That's an area that we're selling very fast. That's an area that we're getting a lot of interest from customers. If you look at our transportation customers, they're looking at that new platform we bring from transportation management, combined with what XPO NLM has in terms of an online auction capability. And we're marketing that new platform to our transportation customers.
Rob Salmon (Associate Analyst)
Perfect. Thanks so much for the time, guys.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our next question comes from Allison Landry of Credit Suisse. Please go ahead.
Allison Landry (Senior Equity Research Analyst)
Good morning. Thanks for taking my question. So first, maybe if you could talk a little bit about the rollout of the track and trace technology and what percentage of your truckload freight is currently utilizing this offering. And then, you know, what has the customer and carrier response been, since you've rolled it out?
Scott B. Malat (Chief Strategy Officer)
Oh, thanks, Allison. Yeah, the track and trace capability we rolled out in this last quarter is an ability for us. It's a great tool for us from track and trace perspective. It's an ability for us to send out a text message to the carrier when they've accepted a load. And as long as they write back to us, "Yes," we can then track and trace through their mobile phone without calling them and know where the truck is at any given time and provide that information to the customer. So it increases visibility, it improves efficiency at XPO because you don't have as many people calling every two, four hours to make sure the freight is going in the right direction and where it needs to go. That has gotten off to a great start.
We're up to about 15% of the freight is being tracked, and it's an education process with our carriers in getting comfortable with using the technology and approving the request to track their phone. But it's certainly a great tool that's been warmly receptive by some carriers, and other carriers have to go through an education process.
Allison Landry (Senior Equity Research Analyst)
Okay. That's helpful. Thanks. And my follow-up question: so, you know, New Breed looks like it's tracking better than your initial expectations. Cross-selling really appears to be gaining some traction. So I just wanted to gauge whether you think that there is potential upside to your 2014 EBITDA target?
Brad Jacobs (CEO)
No, I would- I wouldn't go there. I mean, we're co- we're very comfortable with the, the $150 million EBITDA run rate for the fourth quarter. That's-- we feel good about that.
Allison Landry (Senior Equity Research Analyst)
Okay.
Brad Jacobs (CEO)
Done a lot of bottoms-up, bottoms-up planning for that, but we wouldn't want to guide you to, to more than that.
Allison Landry (Senior Equity Research Analyst)
Okay. Fair enough. Thank you for the time.
Brad Jacobs (CEO)
Thank you, Allison.
Operator (participant)
Our next question comes from Chris Wetherbee of Citi Research. Please go ahead.
Prashant Nair (Deputy Head India Research)
Good morning. This is Prashanth in for Chris.
Brad Jacobs (CEO)
Good morning.
Prashant Nair (Deputy Head India Research)
Good morning, guys. I guess my first question, you talked a little bit about, you know, the change in the market for the core truckload brokerage and capacity still being good, but, you know, in terms of dynamics for you guys. But as we're crossing here from 3Q into 4Q, I just wanted to kind of get an updated thoughts you have, you know, rough sense of maybe things, how things are trending, and especially as we go into the holiday season. And also, if you could maybe touch upon, you know, how the interplay with intermodal is looking, you know, as we go into, especially with the e-commerce boom that we expect this year.
Brad Jacobs (CEO)
So we have an interesting view on this because, you know, we're looking at patterns in contract logistics and last mile and intermodal and in expedite and in truck. And overall, taking all that data in aggregate, it's been a late holiday season start. I mean, it really didn't start in force until a week, 10 days ago, it was really quite quiet. And now it's gotten very big in certain pockets of the country, versus the West Coast has come up alive in the last two weeks, and it's, you know, it's right off the chart. Whether that's this has been the quiet before the storm, and now there's going to be a big crunch, which is what some of our people think, or whether it's just lost business from a late start, it's too early to tell.
So we have to see how the quarter is going to play out. I, my personal feeling is truck brokerage might slow down a little bit in the fourth quarter. It slowed down a little bit in October, but that's one month out of three. It could come back roaring in November and December. And some of the other businesses, business is looking up, business is looking good. With respect to intermodal, so intermodal, the theme on intermodal, the big, big issue has been service levels, and the service levels are still congested. There's no question about that. They do look like they bottomed out a couple of months ago, and things have gotten better in the last couple of months.
It certainly looks to us that the rails across the board have come a long, long way in terms of being aware and sensitive to the service issues than they were even six months ago and nine months ago. And they staffed up and the communication levels are better, and there's just more witness in the rails in terms of the service levels. Now, some of those things will take time. Some of those things of hiring people and training people and doing the capital investments, some of that stuff, won't, you won't see the full benefit from that impact to the middle of next year. But I think it's bottomed and it's getting better now.
In terms of the overall trends, what surprises me the most is that, and it's very, very instructive, is that despite the service levels, the volumes are up. I mean, our volumes in intermodal this quarter are up 6%. Our revenues were up 9.6%, and it wasn't great service levels. And it's, it tells you something. What it tells you is there is a real trend from over-the-road to intermodal for long haul. And our hypothesis for that is it sure is saving the money, that the price differential, but there's something changing in the supply chain patterns, not necessarily from the shipper side, but from the capacity provider side. So because of hours of service and because of lifestyle changes, truckers don't want to do those long hauls anymore.
I mean, a much smaller percentage want to be away from home for longer periods of time. Even those who do, it's more expensive because the hours of service restrictions, so a lot... That's helping the conversion to intermodal. We're agnostic about that, where we have a big over-the-road presence, we have a big intermodal presence, but there definitely is a trend towards conversion that's taking place even in these non-optimal service times.
Prashant Nair (Deputy Head India Research)
Okay, great, guys. And just a quick follow-up about cold starts. Just any sense of, you know, how many we could see in the coming quarters and maybe sort of a geographic distribution, where you're thinking the best strategic opportunities are?
Brad Jacobs (CEO)
Well, we just opened one in Denver with a real fantastic branch leader there. We almost had one in Boston, and then the person we recruited chickened out at the last minute, but we're still talking to her. We still want to recruit her. In terms of locations, we don't look at it as we have certain places on the map that we want to open up a cold start. What we look at it as, we want to recruit fantastic branch presidents who are experienced, who are charismatic, who are leaders, who are ambitious, who get people to follow them, who get customers to follow them, who really understand the value of technology, you know, really strong, strong truck brokerage veterans.
Wherever they are, as long as there's enough people to hire, we'll back them, and we'll open a cold start. So it's more reactive to where we can find talent than geographic locations. It's all done on the phone, on the internet anyways.
Prashant Nair (Deputy Head India Research)
Great. Thanks, guys. I appreciate the time.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our next question comes from Bill Green of Morgan Stanley. Please go ahead.
William Bill Greene (Managing Director)
Thanks. Hey, Brad, I wanted to ask you about sort of the pipeline and the priorities, right? So, you know, you've got a lot of different aspects now, through multimodal. Maybe you can talk about what needs to be built up from here, or is it really just adding to the scale that you're building organically anyway?
Brad Jacobs (CEO)
It's adding to the scale. So on contract logistics, we've got a very rich infrastructure with New Breed that can be scaled. So those several hundred IT professionals and all the back office and all the engineers and all the PhDs that Louis has assembled, that whole organization can handle a lot more. So that's why buying another contract logistics company, one plus one will equal more than two. Last mile, we have a bunch of stuff going on as well. And last mile is primarily to get the density that Scott was referring to earlier in his remarks, and to be able to... When the bids come out from the retailers, and we service 29 of the top 30 retailers in the United States, and in most of those cases, we're their number one outsourced last mile provider.
They bid on the whole country, but we want to be able to have presence across the whole country. So with last mile, unlike what I was just answering, the earlier question about, truck brokerage, last mile, it is a geographic play where the acquisitions we're doing do have a sense of geography. And the kinds of companies we're looking for in last mile, and the kinds of companies we're talking to, are ones that have similarities to ACL, where it brought something we weren't doing, brought relationships, really important and fast-growing customers that we were only doing a small amount of business with.... That's the kind, and it comes with great management. We got Rob Humes out of that. So it's, those are the kind of companies we're looking for in last mile.
Intermodal, we have a very few number of conversations going on, but they're good conversations. There's just not a lot of intermodal companies to buy. So, you know, we've got the third largest intermodal company ourselves, and, you know, we're just gonna, we'll just continue discussions and see if anything comes about that. On Expedite, there's a few companies that have capacity in the form of asset-light capacity in terms of owner-operators on Expedite, that, you know, there's always the conundrum. Do you wanna buy a company with owner-operators, or you wanna just throw money on the table and recruit owner-operators? And our decision, we wanna do both. So there it is, it's a capacity play because Expedite is all about capacity.
In truck brokerage, Bill, it's, it's really about scale and getting lane density and getting, becoming more of a player in more power lanes throughout the country so that we can serve our customers better. So that's, that's how we're looking at it. Is that what you're looking for?
William Bill Greene (Managing Director)
Yeah. Well, so in other words, you've kind of built out the key segments now. So there's not a missing piece. You've got the multimodal aspect down, so it's not like you'll go into a new segment from here?
Brad Jacobs (CEO)
We have almost no discussions going on with anyone who's not in our existing segments. I won't say none, but almost none.
William Bill Greene (Managing Director)
Let me ask you this, because we didn't really, we don't talk about this a lot, but freight forwarding, sort of on the international side, does it make sense to even keep that? I mean, I suppose it's not really a distraction 'cause it's still pretty small, but maybe that's a source of funds if you divested it.
Brad Jacobs (CEO)
No, we're not gonna sell freight forwarding. Freight forwarding is up and to the right. Their numbers are good. It allows us to touch customers that we wouldn't have otherwise been in contact with, and we can do cross-selling with them. It, we're kind of a, you know, sort of a sizable small freight forwarder now. We're up to over $200 million in freight forwarding between what we had acquired in the very first acquisition we did, the CGL subsidiary of Express-1, and the Pace, the part of the Pacer International Freight Forwarding that we didn't close down. It adds up to, you know, over $200 million. The numbers are in the right direction, so there's absolutely no reason to divest that. It's part of our service offering.
William Bill Greene (Managing Director)
Okay. And then just last question, Brad, can you remind folks about the incentive targets you have in place? So, how do the management targets relate to the long-term targets that you have out there for the company?
Brad Jacobs (CEO)
So we have two strata of compensation plans, or two buckets in general. One is for the senior management team, which might be what you're referring to. The senior management team, we have, you know, as you know, I got everybody to take salary cuts, when they hired and came on board, in exchange for healthy chunks of equity that vests over time and also vests, in terms of specific targets. So the tranches we gave out earlier this year were set on, correct me if I'm wrong, Scott, I think it was $2.50 of cash earnings per share-
William Bill Greene (Managing Director)
Yep.
Brad Jacobs (CEO)
in 2017.
William Bill Greene (Managing Director)
Yep.
Brad Jacobs (CEO)
And the stock trading at $60 a share anytime between now and March 2018 for 20 days consecutively. So those two triggers, people get their RSUs. And on the field level, I you know, we don't give out too much equity to the field, because we don't want the field looking at XPO as a stock. We want them looking at as a company that serves customers and deals with carriers and is in the "real world," quote, unquote. So for there, we tie compensation to profit management, to growth margin dollars improving and profit improving. So we try to keep base salaries reasonable, and we are happy to pay people large sums of money, but only if they've performed. And if they perform, God bless them. Let's let them make a lot of money.
William Bill Greene (Managing Director)
Yeah. Okay, great. Thanks for the time. I appreciate it.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our next question comes from Brandon, I'm sorry, Brandon Oglenski of Barclays. Please go ahead.
Brandon Oglenski (Director and Senior Equity Analyst)
Yeah, good morning, everyone.
Brad Jacobs (CEO)
Good morning.
Brandon Oglenski (Director and Senior Equity Analyst)
Brad, I wanna follow up through Bill's question there on, you know, the deal pipeline. Has the recent volatility we've seen in the marketplace slowed down the pace of discussions or, you know, caused people to walk away from the table? Or how should we think about timing of where you're looking at the next deal, and is it in the next 12 months, or should we be thinking by the end of next year, we'll have something else done?
Brad Jacobs (CEO)
Oh, no, much more compressed time on that. I mean, we could announce another, I mean, it's very hard to predict deals because, you know, sometimes you get right up to, you know, 5 or midnight, the deal falls apart. But generally speaking, we've got enough conversations going on right now at a fairly serious stage, that we could announce a deal in as early as three weeks from now or three months from now. But there's a lot of conversations going on. And over the next three or four months, it could be more than one deal. We have a lot of financial capacity. We have almost $700 million of cash on the balance sheet. We've got the ABL that's got $550 million of unused capacity, including the accordion.
We've got leverageability even more so over and above that. We've got an operations team that is eager to build up their parts of the organization. The finance and accounting group is functioning very, very well, closing the books right on time, clean numbers, able to take on more business. The IT that we've been rolling out is very scalable and leverageable, and the acquisition team has a larger number of discussions going on today than at any time in the company's history. And that's our style. Our method is to have multiple discussions going on at any one time, so that we don't fall in love and get undisciplined on any particular acquisition. We stay responsible. And there's more active discussions going on in acquisitions right now than ever before. So I would just pull up all the dates you meant, but you mentioned by a significant amount.
Brandon Oglenski (Director and Senior Equity Analyst)
Well, I just wanted to make sure, you know, we had the right time frame expectations out there, but it sounds like the confidence level is pretty high, that you're gonna get something done.
Brad Jacobs (CEO)
Oh, very high. We have a lot of conversations going on. I mean, I'm sorry, we might have disappointed some by not, by not being able to announce an acquisition, you know, coincidentally, right on earnings date, but stay tuned.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay, no problem. You know, now that you've had New Breed on the property for a little bit, and I think this comes back to some of the earlier discussion, but do you feel more comfortable now that that business can grow 15% over the long run? And I think that's the target you laid out last time you spoke.
Brad Jacobs (CEO)
I do. I do. You know, I loved New Breed before we bought it. I loved it even more after we bought it. I'm very impressed with the quality of management. When we did the tours last month in Memphis and Dallas, it's very impressive. It's just run really, really, really well, and we'll be down there next week again. And, it's just a really great shop. I mean, it's well planned out. They think like engineers, they're very much in planning, and they're very meticulous and careful and thoughtful about everything they do, including their financial planning.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay, and maybe the last one's for Scott, but, you know, I do have to nitpick here. It looks like in your truckload and LTL and intermodal results, you, you did have 2% sequential growth, but, you know, sequentially, the margins were down a little bit. Can you talk to, you know, the type of sequential growth expectations we should be thinking about for the fourth quarter and where margins could trend, especially with the impact of the new cold start in Denver?
Scott B. Malat (Chief Strategy Officer)
Yes. On freight brokerage, our margins year-over-year on the truckload side were up 55 basis points. That's the sixth consecutive quarter we were up. And we continue to expect margins to improve over time, just because we're pricing better and we're finding better capacity. We have more relationships, and we have more, better access to trucks. On the intermodal side, there you had a tight drayage market. You still had some rail disruptions, albeit improving. We did see improving price through the quarter. As you ended the quarter in September and on into October, we've started to see some more price in the intermodal network. We've got a lot of initiatives that Brad laid out in terms of intermodal and all the things we're doing to improve our service levels and our efficiency levels. We would expect margins to improve in the intermodal business going on into the fourth quarter.
Brandon Oglenski (Director and Senior Equity Analyst)
Okay, thanks a lot.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our next question comes from Kevin Sterling of BB&T Capital Markets. Please go ahead.
Kevin Sterling (Managing Director and Equity Research Analyst)
Thank you. Good morning, gentlemen.
Brad Jacobs (CEO)
Good morning, Kevin.
Kevin Sterling (Managing Director and Equity Research Analyst)
Brad, you talked about the intermodal conversion trend you're seeing, you know, over the highway and the opportunity you see there going forward. It sounds like you're very excited about that. Do you need more scale in intermodal? And what I mean by that is, you know, Pacer has a great north-south business. Do you need more east-west scale? Maybe, do you need more drayage, containers? How should we think about that?
Brad Jacobs (CEO)
We could use some more drayage, and we are talking to a few different drayage companies as possible acquisition targets, although they're small, but strategically, they, it would help quite a bit. In terms of east-west versus north-south, we are much stronger in north-south than east-west. We'd like to get more east-west business, and we'll chase it, and we're going to continue to grow that. It's an interesting thing what happened this year, we bought Pacer, and then all the weather issues and the rail issues, you know, that intermodal market, the service wasn't spectacular. So our sales force was all geared up, and they're ready to push intermodal to our then 14,000 customers, now 15,000 customers, and we put the brakes on that.
We said, "Look, we're not gonna burn our truckload customers or expedite customers or other customers with introducing a new mode that they're gonna be upset about right away, and we want to get the service levels up." But they're chomping at the bit to sell it, and it's still selling despite us pushing it because of the issues we mentioned before. Interestingly, in intermodal, we saw pricing accelerate in September and October. Volumes are healthier than they are in truckload. Just interesting, at this moment, the intermodal seems to be accelerating more than truckload brokerages. I don't know what to make of that, but that's just what we're seeing internally.
The other thing I would mention is, on intermodal, there's a lot of things that we're doing ourselves, that we take, we're taking control, that we do control. There's some things we don't control in intermodal, there's a lot of things we do. So we revamped the whole intermodal business reporting process, so we have more actual data. We've created regional dispatch functions in the larger metro areas, so we can do big schedule pickups better and help balance the street better and just improve efficiencies in general. We've rolled out new owner-operator recruiting and retention programs. We've rolled out new training modules. We've rolled, we've tied compensation to the key employees, in part, to customer satisfaction and on-time performance to motivate behavior more on that.
We rolled out a proprietary IT platform, what we call the XPO Rail Optimizer. That's in beta now. It's gotten good, it's getting good reviews now, and it should be fully launched by the end of the first quarter. So there's a lot of things going on in intermodal right now, so I'm bullish about that long term.
Kevin Sterling (Managing Director and Equity Research Analyst)
No, thank you. That's very interesting about your commentary regarding pricing accelerating September, October. I know you're excited to hear that.
Brad Jacobs (CEO)
Good.
Kevin Sterling (Managing Director and Equity Research Analyst)
And lastly here, you know, you talked about the West Coast, I think, recently picking up steam. Had you been impacted at all prior to that from some of the congestion we've heard and read about in L.A., Long Beach, the chassis issue? Has that impacted you at all?
Brad Jacobs (CEO)
It has. I mean, intermodal has been a challenging market, and our team has done a great job, and our service levels have improved through the quarters, through the quarter. Incidentally, California has just gotten tighter recently. I mean, it's much, much tighter than it was. And all those things do affect rail service, but that's not to say there's not a lot we can do. And Brad laid out a bunch of different things that XPO can do, that we can do to improve service levels, improve the efficiency of our fleet, but certainly the environment, especially on the West Coast, and then some as well in terms of the chassis availability going into Mexico as well, that does impact us.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay, well, that's all I had. Thanks so much for your time this morning.
Brad Jacobs (CEO)
Thank you.
Scott B. Malat (Chief Strategy Officer)
Thank you.
Operator (participant)
Our next question comes from Scott Schneeberger of Oppenheimer. Please go ahead.
Scott Schneeberger (Managing Director and Senior Analyst)
Thanks. Good morning. As continued strength in organic growth, I think 48% for total company, 58% in freight brokerage, could you speak to really what are the main drivers of that across your segments? I imagine sales productivity and truck brokerage is one of those elements. If you could elaborate on that, too, please.
Brad Jacobs (CEO)
Well, Scott's raising his hand to take that question. Let me preface it by saying, I'm really super proud of 48% organic growth, but that's not sustainable for years and years and years as we get bigger. Just that the law of big numbers will bring that down. But there are a lot of factors that are contributing to us growing really fast organically right now, and that is we have confidence in our business plan, and we're executing on it. So we feel we've cracked the nut of how to do truck brokerage, and as a result of that, we're hiring people. We're putting them through our training programs. We're empowering them with great technology, and they're getting more mature. They're getting more tenured.
Lots of the people we hired in 2011, in 2012, in 2015, they've had more experience under their belt. We're getting more acceptance from customers. I mean, we, we've signed up so many new customers. We signed up a few dozen new customers of tier one large customers just in the last 3 months, that those customers grow. And those tier one customers that we signed up earlier this year and signed up a year ago and 2 years ago, they grow, and they don't grow in increments. They grow in big increments, not small ones. So, but a tier one customer that starts you off with $2 million of freight to see if you're for real, a year later, they like your customer, they like your, your on-time scores.
You know, that can be a $5-$10 million customer. Two years later, that can be a $20 million customer or more. The cross-selling is contributing to organic growth quite a bit. We've had a lot of success selling truck brokerage to our last mile customers, to our intermodal customers. We've had a lot of success. Well, I shouldn't say we have a lot of success. We've had an early amount of success that should lead to more later, selling intermodal to our expedite and truck brokerage customers. So there's a lot of different things that are going on internally in truck brokerage that's helping there. Last mile, we're to some extent. There's just two things. There's some things that are in our control that contributes organic, but some things, it just depends on the retail market.
Depends on how much our customers are shipping and how big the holiday season is and so forth. But we're taking share on that, no doubt, because our customer service levels are extremely high in last mile, extremely high. And that's a result, I believe, of two things. One is this huge investment in technology we've made there, and number two, our business model of having, contract carriers that we're measuring their service, service scores, and we're being very responsive to those service scores. And we've instilled inside the XPO last mile culture, which, which incorporates the former 3PD, ACL, Optima, that original last mile credo, essence of their culture of, it's all about passionate commitment to customer service, no matter what. No matter what!
No matter what, we've got to succeed on that last mile because our customer's brand is at stake. On every single one of those 7 million shipments we do a year, and the technology really allows us to put meat behind those words. Scott, did you want to add anything about what's fueling the organic growth?
Scott B. Malat (Chief Strategy Officer)
I don't, I think you hit the main points. I think in general, we added a little under $300 million in organic growth on an annual revenue run rate business. And a little less than half of that was from the cold starts, and we have the strategic accounts growing very quickly and cross-selling, and the end markets are growing. So we have a tailwind from the end markets, and it's been a good year for brokerage and for our other businesses. It's a good time to be a broker, so I think you hit on most of the key points.
Scott Schneeberger (Managing Director and Senior Analyst)
Great, thanks for that color. And then you mentioned in the prepared remarks that Pacer is largely integrated. Could you remind us the cost savings, synergy potential that, you've kind of been talking about since that was announced. Has that changed since last update? Where is it now, and how far are you through it? Are there incremental potential benefits you might derive there? Thanks.
Brad Jacobs (CEO)
When we first announced Pacer, we estimated there'd be about $10 million, I think was the number we put out there for synergies. Some of that was a WAG. Some of that we hadn't done our due diligence, we were just kind of guesstimating. And we later, once we got under the hood, and worked with the team, raised it to $15 million, and that's what it's gonna be. And that breaks out in rough buckets of, off the top of my head, about $1.5 million of public company costs, about $5 million each of corporate headcount reductions and savings from the international freight forwarding locations that were not profitable, that were closed, and the balance of about $3.5 million from IT savings, from merging some of the IT functions.
That adds up to $15 million, and we're about two-thirds through that. The other $5 million is clear line of sight to it. So that's, that was the good news. That was the good guy that came out of the Pacer acquisition, that wasn't predicted.
Scott Schneeberger (Managing Director and Senior Analyst)
Excellent. Thanks so much.
Operator (participant)
Our next question comes from Ryan Cieslak of KeyBanc Capital Markets. Please go ahead.
Ryan Cieslak (Senior Equity Research Analyst)
Morning, guys. Congratulations on a good quarter.
Brad Jacobs (CEO)
Thank you, and good morning.
Ryan Cieslak (Senior Equity Research Analyst)
Let's see. First question I had is on intermodal, with regard to maybe some of the impact from the rail service issues in the quarter. Is there a number or a way to think about what the impact was maybe to the numbers, maybe on the EBITDA standpoint or maybe a net revenue margin standpoint within intermodal?
Brad Jacobs (CEO)
It's so hard to quantify it. And frankly, we haven't spent a huge amount of time focusing on that. We've been using that time to do what we can do to serve the customer better, to communicate more between ourselves, to communicate better with the rails, to communicate better with the customers. And if there's always a silver lining in these kind of crises kind of things. And this year, with the intermodal situation, what's happened is all coming, not just ourselves, our competitors as well. I think everybody's gotten their game up. Everybody's gotten their act together a lot more in terms of identifying problems before they exist, communicating what's on the horizon, coming up with alternatives in terms of ground and, in some cases, even air, of solutions.
I know one of the reasons that, you know, we could have had better numbers in the quarter in intermodal than we did is, we stepped up to the plate with a handful of customers where they were impacted by some of the rail service issues, and we had no recourse to the rails under our contracts for that. But we stepped up, and we found other ways to get their freight where they needed to go, and we ate that. And that was in terms of either ground or in many cases, expedite, and in two cases, air expedite, which was expensive.
But those are the kind of things you do if you really value a long-term relationship. And it was a mess earlier part of the year. There's just no other words to describe it in the early, in the very beginning of the year, when everybody was kind of caught by surprise. It's gotten a lot, lot better.
Ryan Cieslak (Senior Equity Research Analyst)
Okay. That's good color. And then, Brad, you know, the top line within intermodal, you know, looking good, and it sounds like pricing has accelerated. I just wanted to get your sense of, you know, the pricing opportunity within intermodal next year for you guys. Just what is your expectation going into 2015?
Brad Jacobs (CEO)
I don't know yet, and that's... I don't know yet. We have to see how the rest of this quarter plays out. We have to see what demand's like, and most importantly, we got to see how the bid season goes at the beginning of next year. So it's a little too early to make a call on that.
Ryan Cieslak (Senior Equity Research Analyst)
Okay, fair enough. And then, you know, lastly, the one question I had is on the cross-selling opportunity. I think there was a couple questions asked earlier, but I wanted to see maybe if there's a, you know, a way you guys are thinking about what that opportunity is as a whole now, with the different verticals that you've brought on and, you know, certainly now with the scale. Is there a dollar amount longer term that you guys are looking at to target, where you think, you know, the cross-selling opportunity can be, or just maybe some color around that would be great?
Brad Jacobs (CEO)
Well, Scott or John can put a financial figure on it, but conceptually, here's what we've been doing. We've been going to our best customers, customers that we have the closest relationships with and are doing a lot of business with and have been doing business with the longest amount of time, and showing them the other services that we provide, and that's been our strategy. A real simple strategy for cross-selling, and it's been working very well. If you look at our top 50 customers, 72% of them are using at least two of our verticals, and half of those are using at least three of our services. So it's happening, it's working.
We've had several wins in managed transportation, and we're cross-selling the managed transportation platform that came with New Breed, very powerful technology platform they developed, and they were doing it with a handful of customers. There's no reason to do that, but they can't do that with much larger amount of customers. I'll give you a couple examples if you want, of cross-selling. We had a recent cross-sell win with a tier one auto supplier that Pacer had been doing business with, and it had been about a $6 million intermodal customer for Pacer before we acquired them. It's now a $20 million customer for us because we've sold them truck brokerage, we sold them expedite.
We have several large retailers that were last mile customers with 3PD and with ACL, by the way, and we're now doing a significant amount of truck brokerage business with them. There's one large company in oil and gas that I can think of, where we're in the middle of doing joint bids right now for truckload, intermodal, LTL, and expedite, all at the same time, as part of a package. So this is our approach to the market. Our approach to the market is, we're not just a truck broker, we're not just a contract logistics company, we're not just an IMC. We're a full-service, end-to-end, comprehensive supply chain partner, and we want to be an integral part of your supply chain and save you money. Scott, do you want to put any color on the numbers?
Scott B. Malat (Chief Strategy Officer)
Yeah, in terms of how to think about the opportunity, if you look in the first quarter of this year, we were getting about 5% of our revenue from cross-selling. We've taken that up to about 14% of our revenue. That 14% of our revenue is coming today from cross-selling a secondary or third or fourth service to an existing customer.
Ryan Cieslak (Senior Equity Research Analyst)
Okay, that's, that's great color. And just to follow up on that, I mean, just to be clear, the expectation, I would think, you know, going into next year or, you know, particularly with the bid season, is that number should continue to accelerate for you guys?
Scott B. Malat (Chief Strategy Officer)
We believe so, yeah. We think it'll be a larger and larger piece of our business, the secondary, third, fourth service that we sell to those customers.
Ryan Cieslak (Senior Equity Research Analyst)
Is there a target, Scott, that, you know, you should be thinking about, you know, by the end of next year? Or would you care to maybe just give some color around that?
Scott B. Malat (Chief Strategy Officer)
We haven't set a target for specific cross-selling. We want to continue to see the increases.
Ryan Cieslak (Senior Equity Research Analyst)
Okay, fair enough. Thanks, guys.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our next question comes from John Mims of FBR Capital Markets. Please go ahead.
John Mason (Managing Director)
Hey, thanks, guys. Thanks for squeezing me in at the end. Had just one quick question to go back to the acquisition front. You know, Brad, when you look at some of the bigger guys, you look at, just say, Hub Group, and I know you're not going to, you know, comment specifically on any one company, and that's fine. But they're right now at $1.5 billion in enterprise value, trading at, you know, 12x trailing EBIT. You know, I guess, you know, if you were to look at something that large, if you were, you know, you put in a takeout premium, let's say you pay 14x-15x EBIT, you know, it's a really big deal, and a higher multiple than you've paid historically.
So I guess two questions, like, one, do you have the capital now, the dry powder, to do a deal that big, if it made sense? And two, would you be comfortable paying that sort of multiple for the right company, if it scratched the right itch, strategically? Thanks.
Brad Jacobs (CEO)
A few things there. So number one, we have a lot of respect for Hub. We, we've had several people who work for us, who used to work at Hub, and they have people who used to work at Pacer, and there's a lot of respect going both ways between those two organizations there. They're just great, great company that we have a lot of respect for on a professional basis. In terms of buying them, nobody's told us they're for sale, so I, I don't know what to react to on that. In terms of, in general, apart from Hub, just anybody, we believe that we have the access to capital to buy any acquisition that makes sense, and on terms that make sense, even much larger than the one you're referring to.
Look, we're here to make money for our shareholders. That's our job. That's why we get paid a salary. That's why we have equity in the company. Our job is to create value, is to create shareholder value long term and substantial shareholder value. And we keep an open mind, and we are rational, and we think strictly in those ways of it. If it's something we're going to do, whether it's an acquisition, whether it's a financial transaction, any activity that we take, is this going to create or destroy shareholder value?
If it's going to create significant shareholder value, and it's something that is high up, we only have so much bandwidth in general in life, so if it's something that's going to create a substantial amount of shareholder value, we'll look at it, and we'll look at it seriously. If something is sexy and exciting but doesn't create shareholder value, that's not sexy and exciting for us. So, you know, that's our mentality of how we look at things. Did that answer your question?
John Mason (Managing Director)
Yeah. Yeah, it does. It does. No, and it makes sense. But well, I guess, you know, on the valuation part of the question, though, is, are there general ranges where you feel comfortable? And I know it all depends on growth and how it fits in and everything as well. But when you look at public versus private targets, you know, I think of a multiple above 10, pretty high from what for versus what you've paid historically. So, you know, I don't know if that's a deal killer from the beginning or if you're entertaining things where you would pay, you know, in the teens of EBITDA.
Brad Jacobs (CEO)
I agree with what you said a second ago, that the multiple you pay is a relationship to the growth rate. It shouldn't just be because of the size. If you look at a deal, whether it's a small deal, a medium deal, a large deal, you want to see what's that going to turn into? And, what's that going to be contributing a year from now, and two years from now, and three years from now, and five years from now. And it's a pretty simple analysis to figure out what makes sense in terms of what you want to pay for it. But it's really about growth rate going forward for us. It's not so much about size.
John Mason (Managing Director)
Sure. So anything's on the table?
Brad Jacobs (CEO)
Anything that makes sense is on the table, as long as it creates value for, for the shareholders. If it doesn't create value, it's not interesting to us.
John Mason (Managing Director)
No, absolutely. Cool. All right. Thanks so much.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our next question comes from Casey Deak of Wells Fargo. Please go ahead.
Casey Deak (Vice President and Logistics Equity Analyst)
Hey, thanks, guys. Just wanted to go back to brokerage gross margins. I believe I heard it correct that you said it was truckload brokerage was up 55 basis points sequentially. Is that right?
Brad Jacobs (CEO)
Yes. It was, it was up year-over-year of 55.
Casey Deak (Vice President and Logistics Equity Analyst)
Yeah. So that was year over-
Brad Jacobs (CEO)
Yeah, which would be the sixth consecutive quarter where we've expanded our margins on a year-over-year basis as we price better, as we get bigger and procure capacity better, as our sales force gets more tenured, as our technology gets populated with more information, that feeds the algorithms. All these things make us able to, and plus, we've got a great market, a great truck brokerage market, that's enabled us to grow margins.
Casey Deak (Vice President and Logistics Equity Analyst)
Sure. So I don't know if you want to, if you want to comment on how those trended Q2 into Q3. Just trying to get a sense of what you're seeing, purchase transportation increases versus the pricing increases, and kind of how much of that is driven by mix versus your ability to purely price above what you're seeing in, spot market truckload pricing.
Brad Jacobs (CEO)
It's a good point, that some of it definitely is mix, and the mix in terms of average length of haul.
Casey Deak (Vice President and Logistics Equity Analyst)
Yep.
Brad Jacobs (CEO)
There is a trend towards shorter length of haul on the truck for all the reasons we menMioned before.
Casey Deak (Vice President and Logistics Equity Analyst)
Mm-hmm.
Brad Jacobs (CEO)
On truck brokerage, we did notice that business got softer in October versus the third quarter. That may very well come back, but it may not in November, December. We'll have to see how that one plays out.
Casey Deak (Vice President and Logistics Equity Analyst)
Okay. Well, that's great. And, I guess one more from me on going back to Pacer. The way I see it, when would you guys be expecting to kind of go full steam on that volume front? I'm looking at it more, and I believe this is the way you're framing it, that it's more the rail service issues, it's not an integration issue anymore. They're pretty much fully integrated, and once rail service gets better, you'll go more aggressive on the volume front. Is that the right way to look at that?
Brad Jacobs (CEO)
Yes, the integration is not what held us back from selling intermodal for small and mid-sized customers.
Casey Deak (Vice President and Logistics Equity Analyst)
Okay.
Brad Jacobs (CEO)
We didn't want to disappoint our small and mid-sized customers. They're a big part of our bread and butter, and we didn't want to sign them up for something to save 10% and lose the freight, or, you know, have the freight get there delayed and, you know, suddenly they're upset with us, and it puts their other modes that we're working with them on in jeopardy. And now that that's improving and hopefully will improve over the next couple of quarters, we'll do what our original plan there was, which is to fill up that sales PIPE with intermodal. But the integration of Pacer is substantially complete. The truck brokerage is fully integrated into the XPO organization. They're on the same XPO technology, on the Freight Optimizer.
They have access to our entire nationwide capacity, which is now about 28,000 carriers and about 670,000 trucks. The international air and ocean groups have been fully integrated with our XPO global logistics division. The ones that were, were going to get closed, got closed. The ones that are open are thriving. We've fully integrated the Pacer outside sales group with our sales group. All of these things have had a positive effect on morale. You know, anytime you do an acquisition, there's a certain unease and queasiness when you first do it, and, you know, that's way, way behind us. The intermodal team has a new spring in their step, and, as I mentioned earlier, we're right on schedule for the $15 million in cost savings that we identified.
Casey Deak (Vice President and Logistics Equity Analyst)
Great. Thanks for the time, guys.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
Our last question comes from Jack Atkins of Stephens. Please go ahead.
Jack Atkins (Research Analyst)
Great. Thanks, thanks for squeezing me in here, guys. Two questions from me. You know, I guess first off, you know, we've talked about rail service quite a bit, but, you know, are there any internal initiatives that you guys are trying to tackle in an effort to sort of improve the profitability, you know, of that intermodal business, you know, until we start seeing improvements, improved service from the rails?
Brad Jacobs (CEO)
Yeah, absolutely. I tried to explain something earlier in the call, maybe not very articulately or maybe too fast, but the kinds of things that we're doing are communication. So getting more information on track and trace and location and forward planning in real time, sharing that with everyone, making, we've assigned very specific people to accounts only for service. Of course, that adds cost. That's okay because that's necessary cost in order to please the customer. We've got a lot of good feedback about that. Communicating better with the rails, communicating better with our customers as well. We need the rails. The rails need us. There's a good long-term need for a relationship there, and we have to work together.
We have to work together in a very professional and efficient way, and I think that's improving quite a bit. We've also put out regional dispatch functions in the cities around the country, and we've beefed up substantially our recruiting and our retention programs. So we have about 800 and some over 800 owner-operators that work with us on the dray. We're trying to get that up. We want that up even more. And we've done a lot in training. We've taken the XPO training group and put them onto intermodal and gotten all the things that need to be cross-pollinated.
What we found was there were silos of expertise that were great expertise and really great, well-trained people with lots of experience, and we want to cross-fertilize that across the organization, so we've been doing that. We tinkered with the compensation plans for the senior people, so we included an element for the things that matter to the customer, to the customers.
Jack Atkins (Research Analyst)
Okay. Okay, Brad, thanks so much for that. That makes sense. And then last question is on, you know, the portion of your business that utilizes owner-operator capacity. You know, we've started to see, you know, core decisions here from, from others in the space that, that have, you know, sort of challenged, you know, prior owner-operator models. Do you, do you guys, you know, feel like your owner-operator models across your various business lines are, you know, sort of to, you know, beyond challenged, or is that something that you guys are maybe taking a look at to make sure you're, you're good to go there?
Brad Jacobs (CEO)
Well, beyond challenge doesn't exist in America, because anybody can file a lawsuit, and a lot of people do just file a lawsuit. But we do believe that we've taken good legal advice, we followed the legal advice, and we continue to follow all that advice. We have good programs and procedures and processes in place that are accurate and truthful in terms of characterizing them as owner-operators.
Jack Atkins (Research Analyst)
Okay. Okay, thanks so much, guys.
Brad Jacobs (CEO)
Thank you, Jack. Thank you, everybody. Sorry we went a little long today, and have a great day. Bye-bye now.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.