XPO - Q4 2013

Transcript

Operator (participant)

Welcome to the XPO Logistics fourth quarter 2013 conference call and webcast. My name is Dawn, and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of federal 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 are made on this call only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law. During this call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the Investors section 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. Good morning, everybody. Thanks for joining us on our fourth quarter conference call. With me today in Greenwich are John Hardig, our CFO, Scott Malat, our Chief Strategy Officer, and Tavio Headley, our Director of Investor Relations. Last night, we updated our financial targets. We're projecting an annual revenue run rate by year-end 2014 of $2.75 billion and an EBITDA run rate of $100 million. For 2017, we're updating our targets to $7.5 billion in revenue and $425 million in EBITDA. At the start of 2013, we were on an annual revenue run rate of just under $500 million, and we set a goal for the year of doubling that to $1 billion by the end of December, with positive EBITDA for the fourth quarter.

As you saw last night, our team did achieve those targets. We grew our total revenue by 137%, and we increased our gross margin dollars by 239% company-wide. We also improved our gross margin percentage in every one of our business units for the second quarter in a row. In freight brokerage, we continued to buck the industry trend and delivered 110 basis points of gross margin improvement from last year, excluding the additional benefit of our higher margin last mile business. We've now increased our freight brokerage gross margin in five of the last six quarters, and in the fourth quarter, we drove double-digit growth and profitability in both our expedited and freight forwarding units. With Pacer, we've started integration planning with Dan and his team, and we're concentrating on seven areas of potential synergies.

We're even more optimistic about the synergies now that we've been working together to examine the possibilities. In our recent meetings with customers, particularly the larger ones, we're getting very positive reactions to our ability to provide a unique range of multimodal solutions to their transportation needs. These meetings have validated the reasons why we wanted to buy Pacer, 3PD, Optima, and NLM. They all provide services that are rapidly growing in demand in the North American supply chain. With Pacer coming on board, we can work with our customers to identify intermodal conversion opportunities for long-haul freight. About a third of our current freight brokerage shipments travel over 700 miles, and a significant portion of that business is ripe for conversion.

Our sales force is excited to offer an improved intermodal solution to our 9,500, mostly small and mid-sized customers, and by the way, so are the rails. Pacer has fantastic relationships with several dozen of the largest shippers across North America. In most cases, Pacer is either their number one intermodal supplier or one of their top three. But the key point is that intermodal is typically less than 10% of a shipper's total transportation spend. So we have an enormous opportunity to sell these customers truckload, expedite, LTL, freight forwarding, managed transportation, and last mile. I'd also like to welcome a very strong addition to our management team. Chris Healy is now running all of our expedite operations in the U.S., Canada, and Mexico. I don't think there's anyone else in the industry with as much experience creating value in expedite as Chris Healy.

He goes all the way back to the Roberts Express days before it was bought by Custom Critical. Welcome aboard, Chris. With that, I'm going to turn it over to John, who's going to talk about our results.

John Hardig (CFO)

... Thanks, Brad. I'll cover the performance of our three business units during the quarter. Freight brokerage revenue was up 203% from last year, and gross margin dollars increased by 381%. Within brokerage, our truckload, LTL, and Intermodal revenue increased 71%, and gross margin increased by 110 basis points to 14.5%. Our brokerage Cold Starts continue to ramp up nicely. Last year, in the first quarter, our Cold Starts were on an annual revenue run rate of about $60 million. Today, we're at about 2.5 times that amount, roughly $150 million, and we're continuing to grow them fast. Gross margin is a good story here, too. We improved gross margin at our brokerage Cold Starts in all four quarters of 2013.

Organic revenue growth in the fourth quarter in our freight brokerage business was 57% over the prior year, and for the full company, it was 24%. Kelron is now included in our organic revenue, and as you may remember, when we purchased Kelron last year, we outlined our plans to pare back the low-margin business. We achieved this goal and have turned the Kelron business profitable at a lower but healthier revenue level. Excluding Kelron, our freight brokerage business had organic revenue growth of 100%. Within brokerage, our last mile business had a strong fourth quarter, with gross margins improving 170 basis points sequentially from the third quarter. 3PD continued to expand its business, driven by growth in housing activity, e-commerce sales, and outsourcing. We expect all three of these positive trends to continue well past 2014.

In expedited transportation, we increased our revenue by 19% and improved our gross margins by 100 basis points over last year. Our expedite business was able to reduce its transportation costs, and this benefit, combined with our acquisition of XPO Air Charter, led to a 54% increase in operating income. Our freight forwarding business achieved strong profit growth in the quarter. While revenue was flat, gross margin increased 80 basis points, and operating income increased 64% from last year. On the corporate side, fourth quarter SG&A expense increased to $11.6 million from $10.1 million a year ago. Included in corporate expense was $1.2 million of transaction-related costs and $1 million of litigation costs.

Net interest expense was $5.6 million for the quarter, which included costs related to the conversion of $10 million of our convertible notes to common shares. We incurred similar costs from additional conversions in the first quarter, and absent any more conversions, our interest expense will decrease sequentially in 2Q. Our accounts receivable facility is currently undrawn and gives us additional liquidity for acquisitions at an interest rate of LIBOR plus 175-225 basis points, depending on availability. As we previously discussed, we are in advanced discussions with a group of lenders to consider increasing the facility from $200 million to as much as $490 million, including an accordion. Our effective tax rate for the quarter was 26%.

We expect our effective tax rate in 2014 to be in the range of 28%-32%. At the end of 2013, we had $105 million of federal tax NOLs and will be acquiring over $20 million of federal tax NOLs with Pacer, which means we won't be a cash taxpayer for several years. Capital expenditures for the quarter were $5.1 million, consisting mainly of technology-related spending. Looking ahead, XPO's CapEx for 2014 is expected to be $22 million-$24 million, two-thirds of which is related to IT. This is in addition to our IT operating expense budget for 2014, which is approximately $21 million. These numbers exclude Pacer.

Pacer's 2014 IT budget, including both capitalized and operating expense, is close to $35 million, so XPO and Pacer combined will be spending more than $70 million on IT in 2014. Our liquidity position remains strong. We had $358 million of cash on February 21st, and our convertible notes that are trading well in the money. Other than those convertible notes, we have about $2.5 million of debt. Now I'm going to turn the call over to Scott, and we'll, after that, we'll go to Q&A.

Scott Malat (Chief Strategy Officer)

All right. Thanks, John. Let me start by talking about our operating environment. Weather is the big topic of conversation in freight right now. A lot of shippers have backlogs of at least one or two weeks or more. Between what continues to be strong demand and the weather disruptions, capacity has been tight since the second week in January, and it's gotten even tighter over the last few weeks. If the backlog isn't cleared soon, the start of produce season in mid-March will exacerbate the imbalance between supply and demand. There are opportunities and challenges for us in this environment, but on balance, we think it will have a positive long-term impact on our business. That's because shippers are looking outside of their traditional vendors for additional trucking capacity, and it's creating opportunities for us to bid on more freight.

We can showcase our technology and our growing network of carriers. The bottom line is, we have access to trucks. Our expedite unit is also benefiting from the tighter capacity as customers have more urgent freight, and it's been especially good for our air charter business. There's been some weather impact with 3PD in our last mile business, but 3PD has been growing at a strong clip in areas unaffected by the weather, and their pipeline of new business is robust. Our strategic accounts team is making significant progress. In the last three months of 2013, we did business with 26 new strategic accounts, and the pace has picked up in the first quarter. We're also improving the productivity of our sales reps, which is a credit to our training and technology, because we added over 300 net new customer and carrier sales reps in 2013.

We've increased our gross margin per employee in each of the last three quarters, and in the fourth quarter, freight brokerage gross margin per employee increased 11% sequentially from the prior quarter. With Cold Starts, we recently added two more offices to our Freight Forwarding network in Salt Lake City and Seattle. We're now growing 23 Cold Starts company-wide under experienced leadership, and we're planning to open at least three more freight brokerage Cold Starts this year. Our acquisition pipeline is full. Our outlook to acquire another $400 million in revenue this year, excluding Pacer, is well within our reach. The acquisitions we've made in the past six months have been particularly transformational for our company. 3PD and Optima have made us a leader in Last Mile logistics in North America, and Optima is now integrated into our 3PD operations.

NLM has catapulted us to a position of the largest manager of expedited shipments. NLM also gives us a foothold in managed transportation, which is another service that's, that's growing in demand. So we have many avenues for growth, and we're in a strong position to drive that growth in any operating environment. We've met or exceeded every major financial goal we've set for ourselves over the last 2.5 years. Given our growth trajectory, we're confident in our outlook for this year and our updated long-term targets. That wraps up the, our prepared comments, and now we'll take your questions. Dawn, if you could please start the Q&A.

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

Speaker 13

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

Scott Malat (Chief Strategy Officer)

Hey, Rob.

Speaker 13

Hey, you know, I guess touching base with regard to the updated guidance, as you look out to 2017 and the $7.5 billion top line goal, how much revenue do you guys expect coming from acquisitions and organic growth? And then as we think about the capital structure, should we still be thinking about a roughly 2x debt to EBITDA leverage ratio for the company?

Scott Malat (Chief Strategy Officer)

Hey, Rob, it's Scott. As you look forward to the next few years with the recent capital raise, we, we look like we have about $1.5 billion-$2 billion in dry powder to go out and buy acquisitions. That translates, when you look at the top line revenue growth, we're looking for low to mid 20s type of organic growth. When you look at that $1.5 billion-$2 billion, yes, a large portion of that is going to come from debt. That'll come from the accounts receivable facility that we're currently expanding. That could take up to 85% of our accounts receivable as we grow the company and as, as we acquire and grow the company and become larger, that expands. And then two turns of debt on our EBITDA on top of that.

Speaker 13

Got you. That's helpful, Scott. And then, you know, I guess kind of in terms of the near-term guidance, it sounded like from the prepared remarks, that was including Pacer in both the $2.75 billion revenue run rate as well as the $100 million of EBITDA.

Scott Malat (Chief Strategy Officer)

That's correct.

Speaker 13

How many companies are you guys expecting to acquire to reach that roughly $400 million of revenue? And can you talk a little bit more about that acquisition pipeline?

Brad Jacobs (CEO)

Sure, Rob, it's Brad. So we, we sent out yesterday, we cleared the SEC, and we sent out the filing materials, and we set the shareholder vote date for March 27th. And assuming we get the vote, which we believe we will, we'll close at the end of the month. So when you get to the $2.75 billion, we have about $1 billion now. We did over $250 million in the fourth quarter, and that only included less than a week of NLM. And we'll have some organic growth on that $1 billion. And then we're going to get Pacer's almost $1 billion of trailing revenue and some organic growth on that.

And then we're going to buy, base case scenario, about $400 million of revenue. And when you add those together, you get up to the $2.75 billion. But I think that's a good, solid base case scenario. In terms of your question about how many different companies, I don't know. It could be one, it could be five, it could be something between one and five. It all depends. We're talking to a bunch of different companies. Some of them are small, some of them are big, some of them are medium. It's very hard to predict that. But in aggregate, the base case scenario is we'll pick up about $400 million of revenue.

Speaker 13

Thanks a lot, Brad. That, that's really helpful. And what I'm thinking about, just in terms of the acquisition closing, I would imagine, given that the proxy is out, anything really kind of before April and even early April, would probably be very challenging. Is that a fair interpretation?

Brad Jacobs (CEO)

Oh, yeah. The first quarter for everybody in the industry, including ourselves, has been, you know, impacted by the weather quite a bit. But the $2.75 billion revenue run rate by year-end, that's a run rate, so that won't be reported. So we're going to close Pacer for nine months of the year. On a pro forma basis, we're counting the whole year as if we had owned Pacer from January 1st to get to the $2.75 billion revenue run rate.

Speaker 13

No, no, absolutely, Brad. I was kind of getting at in terms of timing of additional acquisitions, that just given that Pacer is on the table, it probably would be, you know, later in the second quarter would be the release, an incremental acquisition could be coming online. Is that fair?

Brad Jacobs (CEO)

Probably. Probably, yes. Yeah. Very hard to predict, very hard to predict timing of acquisitions. Sometimes acquisitions get really close to getting done, and then something kills them at the last minute, unfortunately. And sometimes deals are going slow, and suddenly everyone wants to hurry up and get them all done in two weeks. So hard to predict.

Speaker 13

All right. Well, good luck, I guess, kind of closing up the Pacer acquisition, and as you guys are in discussions with other interested targets.

Brad Jacobs (CEO)

Thanks, Rob.

Operator (participant)

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

Bill Greene (Global Director of Research)

Hello, good morning.

Brad Jacobs (CEO)

Hi, Bill.

Bill Greene (Global Director of Research)

Brad, can I ask you to just expand a little bit, if you can, and I know that this has sort of been an evolutionary process, but when we think about the longer term revenue targets, do you have a sense for how that'll kind of break out among the segments? Do you have a wish list, even, you know, I'd like this much in theory, from brokerage versus intermodal versus other logistics, et cetera?

Brad Jacobs (CEO)

Yes. We don't have it exactly. It's 2017, so we don't have it down to the T exactly how it's going to break out, but call it roughly about half in truck brokerage, and then the last mile business that we have, consider that to grow to get up to, call it $75-$80 million EBITDA, and, you know, assume 10x that roughly on the revenue level. Expedite is going to continue to grow, but it's only so big of a market, so, you know, that's not going to be the biggest chunk of the revenue mix. Freight forwarding, it'll depend quite a bit on what we end up doing with Pacer's international business.

The XPO Global Logistics division that we have, which we rebranded the, you know, the CGL business we bought originally, the freight forwarding business, that's growing steadily, but it's a less than $100 million business, and it's doing a few million dollars of EBITDA. Of course, intermodal, we have a big emphasis on, and that's something that we're gonna drill down very hard to grow very, very rapidly. Did that give you the-

Bill Greene (Global Director of Research)

Yeah.

Brad Jacobs (CEO)

- the broad parameters?

Bill Greene (Global Director of Research)

No, yeah, no, that's perfect. I mean, obviously, you, you don't know at this point, but, but just in terms of where the targets are, it's helpful to have. Another question I had, and you... I'm sure you get this at every conference you go to, is just about when you think about the evolution of the business, you guys have been bucking the trend on the net revenue margins, and that's good to see. How long do you think you can kind of continue to outperform? When we hear about, as Scott kind of mentioned in his comments, the tightness related to weather and whatnot, I've got to believe that that can create constraints on gross margins. So when you think about this, and even looking out to your 2017 targets, how has your gross margin in the brokerage business evolved, do you think?

Brad Jacobs (CEO)

There's a big debate about what the gross margin is going to be in truck brokerage as an industry in 2017, and it's a question that we ask ourselves internally a lot, and we ask our, our competitors and our vendors and, and industry players all the time, too. And you, you get answers back that are really all across the board, from 10%-16%. I, I am more in the bullish camp. I'm towards the higher end of that range. I think that, truck brokerage is going through a period now where there's a little inflection point, and you had two years of doldrums and balanced equilibrium, and now it's pure chaos for the last couple of months. And I think that's a good thing.

I think that shakes out some of the weaker players and the ones who are agile and the ones who have broad access to capacity and have great IT systems and are just hitting on all eight cylinders are differentiating themselves. Differentiating themselves in terms of the growth margin performance and differentiating themselves in front of the customer. I was in a customer's office a few weeks ago during the auto show in Detroit, and it was during that, one of those polar vortex days. And we got on the phone with our carrier procurement folks, and in two hours time, we dug up 120 trucks, and that really impressed the customer. And we've—I could give you several success stories like that.

That kind of ability to access capacity during the tough times is what's going to differentiate the ones who are able to generate improving businesses and not, and I'm very confident we'll be one of the ones that will be improving.

Bill Greene (Global Director of Research)

Okay, that makes sense. Let me ask you one last question, just because it got mentioned, just the first quarter and how difficult it is. So, can you give us any help or any thoughts just in terms of what to expect, whether it's a gross margin or a revenue trend? Is revenue actually not showing up because of the weather, so the gross revenue, or are we getting squeezed on the rates? Any sort of color you can help us on that first quarter would be great. Thanks for the time.

Brad Jacobs (CEO)

The weather is definitely the topic du jour, and it's what makes the business interesting to this quarter. The weather is affecting us positively in some of our business units, negatively in others, and doesn't matter in other ones. So why don't I just tick them down one by one. I start with the obvious one. Expedite, including NLM, is in big demand, and the horrible weather is great news for them. In January, NLM, for example, our XPO NLM division, moved 33,000 shipments as opposed to 22,000 shipments in January 2013. So a very big spike in volume in Expedite. Same for our other units in Expedite around the country that Chris Healy is now going to be leading up.

So big disruptions in weather pushes the freight towards the Expedite needs up, and this is very good for us. On the other end of the spectrum, our retail customers in our Last Mile, so our Last Mile business is mainly with the 30 big box retailers. Those customers have lost business. There were many days when people just couldn't go into a bricks-and-mortar store and shop for goods, and that business wasn't all that business wasn't lost forever. Some of it was made up, but some of it was lost forever. So the Last Mile business with the weather, the weather is a bad guy for that one. On Truck Brokerage, it's mixed. We have much more volume than we normally would have because the Routing Guide compliance has gone to pot and the Spot Market has exploded.

There's much more volume coming onto the spot market in the last six weeks than there was in similar periods last year. And that volume, however, is coming at a lower gross margin because capacity is extremely tight, the tightest it's been in memorable history, and rates have been going up and going up rapidly. Sometimes, you know, in the space of an hour, truck comes back to you and says, "Hey, I got a real problem. People are offering me freight at much, much higher prices, and they want to reprice it." So this is an opportunity, again, to show to customers what we can deliver when we've got access to 24,000 different carriers and 400 trucks driving for us exclusively at Express-1.

But overall, I would say the weather is a mixed bag for truck brokerage, may be slightly negative because the gross margin contraction is there. Freight, it's on the international business, on the air and ocean, the weather is obviously irrelevant. On the intermodal business, which we're tiny in right now, but are going to get huge in after Pacer, there's been disruptions and Chicago is a mess, and volumes are down there. I would say one positive thing, and a hugely positive thing that's come out of all this disruption is the industry as a whole, the truck brokerage industry as a whole, competitors are much more focused on pricing right now than on gaining market share.

You saw in 2013, and also in 2012, for that matter, competitors, and particularly some larger ones, really going aggressively after market share, regardless of price. That tone has changed, and the industry as a whole now in truck brokerage, seems to be much more focused on, we got to get a fair price for what we're doing here. We can't have a high percentage of money losing loads, much more than grabbing market share. So in that sense, there's a pretty good silver lining.

Bill Greene (Global Director of Research)

All right, thanks for the time.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from Allison Landry from Credit Suisse. Please go ahead.

Allison Landry (Senior Transportation Research Analyst)

Good morning. Thanks for taking my question.

Brad Jacobs (CEO)

Good morning.

Allison Landry (Senior Transportation Research Analyst)

I wanted to ask a couple of questions on Pacer. And specifically, if we think about the opportunities to fill some of the backhaul at Pacer and improving their underutilized container fleet. Have you already been engaged with your, you know, XPO existing customers in terms of the southbound intermodal lane to Mexico? And in that vein, what is XPO's exposure to the auto suppliers in the upper Midwest?

Brad Jacobs (CEO)

Okay, several topics there. Let's start with Pacer. Pacer, we cleared Hart-Scott-Rodino a few weeks ago. We started meeting with Dan and his team to go over the synergies, how we're going to put these companies together in the most intelligent way, and we've been focusing on seven different areas so far. The first category, obviously, is the revenue synergies, the cross-selling. So, as I mentioned in the prepared remarks, approaching the several dozen tier one customers that Pacer is very tight with, and marketing to them, these other services that we are very strong in.

And then taking the 9,500 small and mid-sized customers that we have at XPO, a third of which—a third of the truck brokerage volume that we have, going more than 700 miles, so a lot of ripeness for conversion to intermodal, and then marketing Pacer's product, which is a superior product than we had in intermodal to those small customers. And then on the cost side, we've had our IT people meeting with Pacer's IT people, having many constructive conversations. They preliminarily identified about $3 million-$5 million of easy synergies over a couple of years. These are obvious things like merging data centers and operating system consolidations, and what do you do with SAP versus Oracle, and getting all into one CRM, and all the typical things you do in an IT merger.

And then on brokerage, we're going to be bringing their brokerage group, which is a few dozen people, onto our Freight Optimizer very quickly after the closing, give them access to all of our capacity, give them access to our price guidance algorithms, and I can tell you with great confidence, I can tell you that they will be ecstatic with access to that technology and to that capacity. Obviously, we're going to tackle the public company expenses right away. The board of directors fees will go away. The auditing fees on a combined basis will come down. On the real estate, we're studying the lease terminations and all the details of the various leases that Pacer has, that we have.

We're at the very beginning of that process, and we're going to look at opportunities to co-locate where that makes some sense. On the freight forwarding and what Pacer calls logistics in their company, we're studying that, we're analyzing that, we're looking at profit improvement opportunities. There's some more meetings going on this week. We're trying to understand how can we turn that from the red to the black? And what kind of synergies do they have with our XPO Global Logistics division? And then the final area of synergies is the sales organization structure. Post Pacer, we will have a little over 100 outside sales reps, and some of those have been calling on the same customers for their respective customers, companies, prior to the closing.

So we're going to rationalize who makes most sense to be covering, who has the best relationship with each customer, and how can we reconfigure that? So lots and lots of planning. It's at the early stage, but moving at a very fast pace there. Now, you asked about Mexico.

Allison Landry (Senior Transportation Research Analyst)

Mm-hmm.

Brad Jacobs (CEO)

Mexico, and I couldn't quite get what your question is on that. You said something about exposure to... Are you talking about the legislation down there, or are you talking about the weather?

Allison Landry (Senior Transportation Research Analyst)

No, actually, not that at all. Just thinking about the, you know, intermodal is generally coming up from Mexico on northbound and the backhaul, thinking about southbound intermodal to Mexico.

Brad Jacobs (CEO)

Right.

Allison Landry (Senior Transportation Research Analyst)

I generally think of that as being auto parts. I was wondering, you know, if you guys, XPO, has the customers that, you know, they could, or you guys would be able to, you know, sell that product to Pacer to, you know, fill the backhaul southbound into Mexico. Does that make sense?

Brad Jacobs (CEO)

I got it. Absolutely, totally got it. So auto is a big industry segment for us. We started with auto way back in 2011 with Express-1, which serves the auto industry directly to auto companies and also to some of the 4PLs that manage the autos' supply chain. And then, when we bought Turbo, they have a big expedited division there as well in Gainesville, that services the auto to auto companies directly and the Tier One suppliers to the auto companies. And of course, NLM is a storied, well-recognized, highly decorated, highly awarded, has a lot of awards they've gotten for customer service for the auto company. So we have a lot of auto exposure, and I would say we're very good at that.

Now, on Pacer, that's only going to go deeper because a lot of intermodal business obviously is auto. When you look at the north-south lanes with Mexico, there's a lot of freight coming up from Mexico into the United States, and there's not a lot of freight going down into Mexico. So the whole trick on intermodal, north-south intermodal, is to get, whether you're looking at as the backhaul or the front haul, depending on which side of the border you're looking at, to get from going from north to south is the key there. Of course, auto has a bunch of parts that go down there and finished goods come back.

So yes, we have a real good synergy with Pacer in terms of taking the freight that we've got from our auto customers, a lot of which is going on truck right now, all the way from the upper Midwest down to Laredo and sometimes into Mexico, and that can be converted onto intermodal and putting that together with their capacity. But it's not just auto. There's other non-auto industries, and there's also a consumer package goods that we're strong in and that we can help with the north-south cycle. Does that answer your question?

Allison Landry (Senior Transportation Research Analyst)

That answers my question perfectly.

Brad Jacobs (CEO)

Good.

Allison Landry (Senior Transportation Research Analyst)

I guess, just as a follow-up, how would you rank, you know, sort of filling this underutilized capacity southbound in terms of all the different, revenue synergies that you have? Is it sort of like this is, you know, the golden goose here, or, you know, how do you think about all the different, you know, areas, including the seven that you mentioned? Where does this sort of fall in the-

Brad Jacobs (CEO)

I would say that's one of the golden geese, but there's not one golden goose.

Allison Landry (Senior Transportation Research Analyst)

Okay.

Brad Jacobs (CEO)

I think there's a lot of different avenues to synergize with Pacer, and that's one real good one, but I don't minimize the other ones either.

Allison Landry (Senior Transportation Research Analyst)

Okay. And I just have one quick follow-up question. On free cash flow, when should we expect free cash after CapEx to turn positive?

Brad Jacobs (CEO)

After CapEx, sooner, but when you include the investment in working capital, which is a great investment to make, it's great, we're sitting on capital, that'll take us to more negative free cash flow this year, turning to positive free cash flow in future years. So free cash flow in this business is pretty simple. We talked about what our EBITDA ranges that we're looking at. We talked about what CapEx is, interest expense, and we're not going to be a cash taxpayer for several years. So it really is that investment in working capital. And working capital is, let's say, roughly 8% of the organic growth, is what. So as we grow organically, we're putting in additional 8%. So the faster we grow, it'll take us a little longer to turn free cash flow on.

Allison Landry (Senior Transportation Research Analyst)

Okay, great. Thank you so much 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. I'll pick up on that last question. The it's kind of a two-parter. It sounds like a lot of CapEx this year with Pacer. Is that something that over time you can rationalize once you, once you find some synergies? And then the second part of the question is, Scott, you answered the question on free cash flow, 2014 into 2015. Just any thoughts, I'm not sure how much you want to quantify, but out into 2016 and 2017 with regard to free cash flow and what you're thinking there. Thanks.

Brad Jacobs (CEO)

I'll take the first. Good morning, Scott. By the way, it's Brad. I'll take the first part of the question. I'll, I'll give it to Scott or John for the second part. Look, on CapEx, compared to where I've come from, this is very low CapEx. You know, I'm used to CapEx budgets that are over $1 billion. To spend a few tens of millions of dollars on CapEx, primarily on IT, I'm really good with that. And, and IT, investing in IT is an investment. That's something that goes to the core of how we're differentiating ourselves from smaller brokerage firms and how we're able to add a whole bunch of value to our customers and to work more efficiently with our carriers.

It really is critical that we keep staying on the cutting edge of technology and that we are continually investing and reinventing our algorithms to get pricing just right and to be efficient at pricing, and to make sure that we're also refining our technological ways to find just the right carrier who needs a backhaul where we've got freight, and therefore, will take it at a reasonable rate and be happy about it because it's a perfect match. So we have so many different projects going on in technology, and I'm just so delighted to...

I mean, I was out at, in Detroit at NLM at XPO NLM, about six weeks ago, and I challenged the group to sit together and come up with ways that we can improve our IT system from three perspectives. One, how can we serve the customer better? Number two, how can we interact with carriers better? And number three, how can we be more efficient internally, communicating amongst ourselves? And I was just very delighted they came up with 96 different ways to do that, and we've got a time and responsibility chart, and we've gotten the go ahead, and we prioritize them, and that's just one example of the kind of creativity and dynamism that we're putting into the IT investment, and we're going to continue doing that.

I'm going to pass the mic over to Scott or John for the financial question.

Scott Malat (Chief Strategy Officer)

Yeah, on the free cash flow, Scott, from a longer-term perspective, we have pulled forward some free cash flow, more free cash flow than we had in the prior plan with the acquisitions. So the acquisitions come in and drive more free cash flow in the outer years than we had thought before, and that cash flow can then be used for acquisitions and as part of our dry powder of $1.5 billion-$2 billion.

Scott Schneeberger (Managing Director and Senior Analyst)

Great, thanks. And then, for a follow-up, it sounds like you're having really nice progress with sales rep productivity. I believe you said 11%, sequentially, for growth, and that sounds great. Could you give us an idea for the plans for the upcoming year of, you know, levels of hire, where you're going to hire, and how you're thinking about that? Thanks.

Scott Malat (Chief Strategy Officer)

Sure. Yeah, we added over 300, people, sales and carrier rep people this year. We're going to keep the pedal to the metal. There's two parts to that. It's evenly distributed between sales and carrier people, what we've been bringing on. We feel there's a lot of productivity improvements that we can have with our carrier and logistics coordinators, where we don't need to add as many on the carrier and logistics coordinators. We think we have more capacity to grow and to be more profitable with those people. So when you look at the numbers of people we added this year, the number of carrier and logistics coordinators will be down, and then we'll continue to add at a significant pace from the salespeople to continue the growth.

Scott Schneeberger (Managing Director and Senior Analyst)

Okay, great. Thanks very much.

Brad Jacobs (CEO)

Thanks, Scott.

Operator (participant)

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

Kevin Sterling (Managing Director)

Thank you. Good morning, gentlemen.

Brad Jacobs (CEO)

Good morning, Kevin.

Kevin Sterling (Managing Director)

Brad, I think a little bit, you talked about the combined revenue Run Rate in your brokerage Cold Starts. I think it's over $150 million, and that's up from $60 million a year ago. Is this better than your typical experience with Cold Starts, or is it in line with your expectations?

Brad Jacobs (CEO)

I would say the Cold Starts are performing in line. I, I don't think I could say, you know, they're performing, you know, twice as much as we expected to, but they're certainly not performing half of what we expected to. It's in line. This is healthy growth, but we expected healthy growth. A year ago, we were at $60 million, and now we're 2.5 times that at $150 million. That is spectacular growth, but we expected spectacular growth. What I'm equally proud of, besides the top line growth, is margins are up. So when you, when you're growing revenue and you're growing margins, that's a beautiful thing.

And in the fourth quarter, we doubled down even more and opened brokerage offices with two great leaders in Richmond, Virginia, a city you know well.

Kevin Sterling (Managing Director)

Yes, I like that.

Brad Jacobs (CEO)

There you go.

Kevin Sterling (Managing Director)

Okay. Well, great. And then maybe looking forward, where do you think this revenue run rate can go next year? What are your expectations?

Brad Jacobs (CEO)

[crosstalk] We can- Or maybe not exactly, just something pinpoint.

Scott Malat (Chief Strategy Officer)

I'm sorry, what was that?

Kevin Sterling (Managing Director)

Just kind of a ballpark, where do you think... What are your expectations for next year for your, from your brokerage Cold Starts, the revenue run rate?

Scott Malat (Chief Strategy Officer)

We can continue to grow at a very fast clip, now it's on both margin and revenue. With the new ones that we're starting, we opened up to three in 2013. We're opening up another at least three in 2014. The Cold Starts tend to do $5 million-$10 million in revenue in their first year, so we'll get the addition of the new Cold Starts, and then the existing Cold Starts will continue to ramp up at a fast clip.

Kevin Sterling (Managing Director)

Okay. Thank you.

Brad Jacobs (CEO)

Thanks, Kevin.

Kevin Sterling (Managing Director)

Yeah, thank you. And Brad, I know you touched on, you know, Expedite benefiting from the zaniness of the weather. How about, is Expedite benefiting from the growth we're seeing in e-commerce?

Brad Jacobs (CEO)

That's more in last mile. So Expedite, there, we're getting our freight. I mean, nobody wants to do Expedite. I mean, Expedite are loads that were non-expedite, and they turned into critical, urgent, unplanned shipments because something got messed up in the supply chain. And you're seeing expedite growing because of the just-in-time inventory. And people figure, well, I'm saving so much money having just-in-time inventory, you know, heck, I can spend more on the expedite, even though they don't want to, but they kind of have to. So that's where that's coming from. The e-commerce is really from, is really more directly related to our retail business, which is last mile.

There was a time, just a few years ago, where, you know, not a whole lot of people bought a refrigerator, or furniture, or a stove, or a television set on the internet, and you went to a store, and you bought it, and, you know, that was it. Now, a lot of people go to stores, and they come back, and they, or sometimes even in the parking lot, they go online, and, you know, they buy it online. We're getting a lot of that business. The e-commerce business is helping us in the last mile, and that's going to continue for a long time, in my opinion.

Kevin Sterling (Managing Director)

Yeah. No, I agree. Thank you. And, you guys, I know you briefly touched on your IT spend after the Pacer acquisition. After you close Pacer, will you run two separate IT systems, or will Pacer be folded into your into your existing IT system? And how long will that take?

Brad Jacobs (CEO)

So Pacer, let's divide it up. Pacer's truck brokerage group will go on to our system pretty immediately, because, you know, we have time to go ahead, and now that we've cleared Hart-Scott-Rodino, we can go in and do some training, and we can pull a trigger on that really quickly. Usually, it takes us about 90 days to transfer in a methodical way an acquired truck brokerage operation, put them onto our system. And every single one of our acquired truck brokers and all of our Cold Starts, they're on the same exact system. And they got to be, because they got to see the same load board, they got to be able to communicate with each other, they have to have the Freight Optimizer to guide them on the pricing.

You have to all be on Salesforce.com, so you're not tripping each other over each other, calling the same customers. So the brokerage will come onto our IT system quite immediately. On the freight forwarding side there, interestingly, they were in the middle of migrating to the same system that we were migrating to. So it looks like we'll be migrating to the same system, and that was purely coincidental. On the intermodal, it's a little trickier, and that's going to take a long time, and that could take up to two years. Because Pacer has developed a good, customized, intermodal software that's got a lot of good features on it that we do have to get them onto our Freight Optimizer.

We all have to be on the same system, but that's an instance where you want to go a little slower rather than faster, so you don't mess it up at all and don't show any disruption to the customers.

Kevin Sterling (Managing Director)

Right. Okay. Well, that's all I had today. Thanks so much, so much for your time this morning.

Brad Jacobs (CEO)

Appreciate it. Thanks, Kevin.

Operator (participant)

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

John Larkin (Managing Director)

Yes, good morning, and thanks for taking my questions.

Brad Jacobs (CEO)

Good morning, John.

John Larkin (Managing Director)

Hey, Brad. It seems to me as, as you know, as if perhaps you've now moved into the major leagues with the Pacer acquisition and the large-scale equity raise that was completed here recently. Have you found that folks that perhaps were not willing to talk as much to XPO about becoming acquisitions are now a little more open and viewing you a little bit differently here the last month or so?

Brad Jacobs (CEO)

I wouldn't say that's so much with acquisitions, because acquisitions have always been willing to talk to us. I do see that with customers, there's no question about that. The reception that we're getting with customers, particularly the larger customers, is very, very good. Where, as you know, the RILA trade show is going on out in San Diego right now, and obviously, we couldn't be at it because we're here. We have a delegation out there, and we've been in constant contact with them, and it's, there's a lot of buzz about what we're doing at XPO, and there's a lot of... From a shipper's point of view, what are they thinking about? They're thinking about two things: access to capacity and performance. That's it. I mean, those are the two main big buckets.

Because we've grown in size so much, and because we've got a multimodal service offering, we're scoring very big on those two. So a lot of customers are interested in us because of our size now and because we can be a meaningful partner of theirs, and because sooner or later, people can disagree, but who knows whether it's sooner or later, but sooner or later, the cycle is going to turn to one of a shortage and access to having vendors like us who have access to capacity is a big plus. So with customers, they like it.

The other thing they like is, we started the company right from the get-go with an intense focus on world-class service, so on-time pickup, on-time delivery, prompt problem resolution, and sophisticated EDI technology interface with the customers. All these things that we've set as goals and part of our culture and is embedded into our organization, that resonates with customers quite a bit. So I would answer your question that it hasn't changed our receptivity with acquisitions much one way or the other, but it certainly has with customers.

John Larkin (Managing Director)

Thank you. With a fairly big step up in IT investment, or at least it appears to be the case for 2014—do you move the company a little further towards being able to more fully automate, which at many brokerages has been a largely manual process?

Brad Jacobs (CEO)

In baby steps. The industry will be automated someday in the future. That's not around the corner, in my opinion. The reason it's not around the corner is it's not a fungible commodity. It's not like gold or oil or 100 shares of IBM. There's, you know, 200,000 OD pairs, and there's so many different types of freight with different requirements and so many different types of trucks, and there's so many service issues, and it's just a complicated thing. Now, someday, computers will be sophisticated enough to do all that stuff, but they're certainly not there to do it yet. That said, someday there will be a way to track online where every truck is across North America, and that'll be available, hopefully in an open source way, and that'll disrupt the entire industry. But that's a ways off.

I mean, that's just not, that's just not in the, the next few years. What we are having success on is something more in, in the immediate near-term reality, is automating little things, lots of little things, like, dial, push the- click-to-dial. So instead of having to, you know, look up someone's phone number and then dialing it, and then one out of 10 numbers, you dialed it wrong and have to dial it again, and you killed 20 seconds dialing it. Just clicking it on the screen, and boom! It starts dialing. And that may sound like a little thing. It saves 10 seconds here, 20 seconds here. But it saves 10 or 20 seconds, thousands of times a day, all across the, all across the company. That makes us more productive. That makes us more efficient.

Ways that we can find who's the right truck to call. We have 24,000 carriers. Well, who's the right truck? Who, who's got a truck right there where we need it right now for that load? Ways to automate that, which makes us do two things. Number one, it makes us more likely to get the, get the load covered, and number two, in, in a timely way. And number two, it helps with, with the margin. It just makes the business more productive, more efficient. We have tons of stuff going on like that, just tons and tons of stuff to become more effective.

John Larkin (Managing Director)

Thank you. Scott talked a little bit about the working capital earlier, and as you're growing quickly, obviously, you've got to fund that. Is part of that a function of the fact that you have a what I'll call a quick pay option, where carriers are in some cases attracted to XPO because you're willing to settle with them in a day or two, and often in exchange for that, you'll get a discount? How much of your business transacts that way, if any? And then, what kind of return do you think you earn on that working capital investment?

John Hardig (CFO)

Hey, John, it's John Hardig. You know, we do offer a quick pay option for our carriers, and you know, that's certainly something that some carriers will take advantage of. You'd be surprised at how few don't. When you think about the carriers that we deal with primarily, you know, these are small and medium-sized companies that really, you know, the discount is a bigger deal than you think. So, you know, our take-up rate on quick pay has been relatively low, less than 10%. And so, you know, that's, it's not been a huge driver of our working capital need. I mean, generally, you know, working capital is driven by the brokerage business.

You know, and that business, generally, we, we, you know, we, we don't get paid. You know, we pay the carriers about 30 days before we, we get paid by the customers. In some of our other businesses, it's a little bit different. So, you know, depending on what the mix is over time, you know, that, that could shift. But, you know, if you look at 3PD's business, they, they bill their customers weekly. And so they get, you know, they get paid very, very quickly. They don't have to wait for paperwork and process paperwork and things like that. NLM actually has negative working capital because they don't pay the carriers until they get paid by the customers. So it's a little bit, it's a little bit different in each business across our, our different business units.

John Larkin (Managing Director)

Thank you. Then there was mention of $1 million in legal fees, I guess, in the fourth quarter. Is that related to just the one situation where a competitor is carrying a lawsuit against you all for perhaps recruiting some of its employees, or is there something else going on there?

Brad Jacobs (CEO)

That was primarily our favorite competitor's favorite lawsuit. Yes.

John Larkin (Managing Director)

Okay. Thank you.

Brad Jacobs (CEO)

Thank you.

John Hardig (CFO)

Thanks, John.

Operator (participant)

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

Tyler Brown (Associate VP)

Hey, good morning.

Brad Jacobs (CEO)

Hey, Tyler.

Tyler Brown (Associate VP)

Hey, John, I was hoping if you could help me conceptualize some of the accounting, the acquisition accounting. So you guys have done and call maybe a dozen acquisitions under your belt or so, but can you conceptualize how much of these purchase prices are generally getting put towards intangibles, and then kind of how you are amortizing those?

John Hardig (CFO)

Sure. Well, it's different for each acquisition because each... You know, you have to look at each business independently and make an evaluation of what the valuation, you know, what the intangible amount is going to be. And it depends on the nature of the business. I think, you know, in businesses where we've acquired lines of service that are new to XPO, you know, we tend to have a little bit higher value attributed there because they've got unique relationships with carriers like Pacer, for instance, their relationships with the railroads, you know, much different scale than what we have today at XPO. That ends up driving a little bit different, you know, result in terms of the intangibles.

As we buy more truck brokerage acquisitions, you know, that'll tend to have a lower intangible, you know, proportion of the total value. So, because those are... You know, we have a lot more overlap with carriers, a lot more overlap with customers on the truck brokerage side.

... So it depends a little bit on each, on each business. You know, even, even with Pacer, you know, our relationship with the UP, you know, is, is looked at a little bit differently than, than other, you know, relationships. So, so really, it, it really varies. I'd say that, that intangibles, as a percent of total purchase price, is going to run anywhere from, you know, 20%-40%. You know, 20% being more oriented towards the truck brokers, where there's, there's not as much overlap in the business lines and, and, and higher for, for businesses that, that are unique to us. And then there are all kinds of company specific scenarios that factor in there as well.

Tyler Brown (Associate VP)

Okay, and on the life, is it, you know, a 6-8 year type life generally?

Brad Jacobs (CEO)

Well, the biggest portion of the intangible is typically the customer relationships, and those are, those are amortized over, you know, 10-12 years, generally.

Tyler Brown (Associate VP)

Okay, perfect. That's good.

Brad Jacobs (CEO)

Yeah, and then everything else is a lot shorter.

Tyler Brown (Associate VP)

Okay, perfect. And then on the Pacer integration, I kind of appreciate that the intermodal piece won't come on quickly to your system. But is the idea that they're going to simply show up as a preferred supplier in the Freight Optimizer, which should happen pretty quickly? And then how are you going to, or how do you plan to incentivize sales to sell Pacer?

Brad Jacobs (CEO)

It's really... It'll be a toggle, so there'll be access to the screen, but you're going to have to toggle to get from the Optimizer to the Pacer software. Which is, you know, on the surface, it goes back to the question we were answering before about the technology investment. It seems like, well, what's the big deal? It just takes a couple seconds to toggle. But it's a couple seconds times, you know, many to many times a day across the whole country. So we've got to get and we've just got to get fully integrated, and it's easy to scrape the data, too, because one big part of our IT thrust is to get comprehensive, real-time pricing information.

So all the information we're getting about rates as they're changing in real time across the whole country, we have to get that shared throughout the whole country. So that's why it helps to eventually have the Pacer technology fully integrated onto our Freight Optimizer.

Tyler Brown (Associate VP)

Okay, and then is there a different incentive structure for sales to sell Pacer?

Brad Jacobs (CEO)

We haven't fine-tuned the comp plans yet. We just haven't drilled down to that yet. It's just too early stage.

Tyler Brown (Associate VP)

Okay. Okay, that's fine. And then, Brad, just big picture, though, you know, over the last 12 months, you know, you've taken on this more multimodal flavor, and some of that may be by circumstance and some by design. But from a bandwidth perspective, can you just give us some color on how you kind of ensure that all those moving pieces stay put, that nothing gets neglected with everything that's kind of going on?

Brad Jacobs (CEO)

We have fantastic people in charge of those business lines. I mean, give me 10 Karl Meyers and we'll end up being a $50 billion company instead of a $7.5 billion company in a few years. We just have just fantastic people. We have, you know, Scott Taylor and Mike O'Donnell running XPO NLM for us, and we've got Sean Snow, and we've got Josh Allen running Interide, and we've got... We just have just great people. So if you have the right organizational chart in place, which I believe we do, and if you have the right leaders in those spots in the organizational chart, and you have the right systems and processes and controls, both financial and operational, you can accomplish a lot.

Tyler Brown (Associate VP)

Okay. Yeah, no, that's perfect. Thanks.

Brad Jacobs (CEO)

Thank you.

Operator (participant)

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

Ryan Cieslak (Equity Research Analyst)

Thanks. Good morning, everyone.

Brad Jacobs (CEO)

Hey, Ryan.

Ryan Cieslak (Equity Research Analyst)

You know, Brad, I wanted to just go back a little bit to Pacer, and you gave a lot of really nice color on, you know, the areas you're targeting from a synergy standpoint. I just wanted to see if you can maybe, if you have any sort of any quantitative ideas of where you think those actually shake out from a synergy standpoint going forward, maybe even directionally. You know, if you, if you think about the $100 million of EBITDA runway you're targeting at the end of the year, how much, or if, if any, is related to synergies from Pacer?

Brad Jacobs (CEO)

We do have some general ideas, but I don't want to put them out there because we're such early stage in the planning. I could be wrong. But let me say it by this way: we're encouraged by the amount of synergies that we can have by putting a billion-dollar company with another billion-dollar company. It's more than we originally thought. It wasn't what we were planning on. And as we now ramp up the integration planning, now that we've passed Hart-Scott-Rodino, we're spending more time with each other. I think that's going to become a bigger, bigger plus. But we're not count... If implicitly, your question is, are we counting on some outsized, huge synergy that's off the charts in order to get to the $25 million of EBITDA in the fourth quarter?

The answer is no. We're counting on a reasonable amount of synergies. We're basically counting on our existing businesses growing organically at a reasonable pace and buying $400 million of acquisitions between now and the end of the year.

Ryan Cieslak (Equity Research Analyst)

Okay, but there is some baked in from a synergy standpoint, it sounds like?

Brad Jacobs (CEO)

Yes, but, but a reasonable amount.

Ryan Cieslak (Equity Research Analyst)

Gotcha. Okay, that's helpful.

Brad Jacobs (CEO)

There's certain synergies that are just no-brainers. I mean, you know-

Ryan Cieslak (Equity Research Analyst)

Right.

Brad Jacobs (CEO)

We're not, you know, we're not going to be paying board fees to their board members anymore, for example. And the audit fees will be coming down on an aggregate basis, and there will be some closures on the real estate, and, you know, there's some things that are, you know, definite.

Ryan Cieslak (Equity Research Analyst)

Okay. Similar type of question then on just the general freight environment, in terms of, you know, what you are expecting, you know, this year, excluding obviously the weather-related challenges or, you know, what we're seeing with weather. But what are you sort of thinking from a freight environment standpoint within those goals you've laid out for 2014, but then also, you know, longer term? I know, you know, 2017 is a way, a way out and things can change, but what do you assume in those targets when you think about volume and overall capacity and just the overall freight environment?

Brad Jacobs (CEO)

I think the economy is coming back, and I think the economy has been coming back across the board... with retail, with manufacturing, with—it's really, really all across the board at a slightly faster pace than it was last year. We base that on, and we just base that anecdotally on our own experience with what customers are telling us and what customers are showing us in terms of the amount of freight they got. I don't know whether this is, that's going to continue the whole year. I mean, January and February are not the biggest months of the year, obviously. Let's see what March is, and let's revisit that question at the end of March. But the tone in general is, we've been meeting with lots of customers recently. The general tone is, there's going to be more freight.

People are optimistic about their own businesses, and capacity is certainly tighter. How much of that's from hours of service versus how much of that is from what's going on with some bankruptcies? There's a lot of different factors that could be contributing to that. But in any case, capacity is definitely tighter, much tighter than it was in recent memory, and rates are going up. People are disagreeing about whether they're going to go up 2%, whether they're going to go up 6% or 3%, but everybody agrees they're going up. This is a different tone in the market right now.

Ryan Cieslak (Equity Research Analyst)

Okay, that's helpful. Last couple ones here. On last mile, I know obviously, weather is having an impact, but when you look at that business today versus when you first acquired into it, how does it look relative to your expectation? Maybe a little bit of commentary on what the business pipeline does look like and what you're expecting out of that business going into this year.

Brad Jacobs (CEO)

I'm very, very pleased with what's going on in Last Mile, and that business is just great. I mean, it's just great. It's well positioned with its customers. When we meet with the customers, they rave about the 3PD product. They very much value the investment in technology that, Karl and his team made prior to us, and we don't take credit for this. They invested in that before we bought them, and they've got just a cutting-edge customer experience software that measures customer experience right at the point of sale, right at the time of sale, and puts that into metrics, and then uses those metrics for compensation, uses those metrics for winnowing the carrier base, and it all translates into very satisfied customers.

And I when the customers are really happy and are, you know, effusive in their praise for what we're doing, I'm very happy about that because everything else falls into place. There's a lot of cross-selling opportunities that we've already started capitalizing in. Those will take time to develop, but I see the momentum there. So the business is growing. It's got a strong pipeline. They've got a phenomenal reputation for customer service. There's cross-selling. A lot of good stuff. They're contributing a lot of money to the company. I love it. I love everything about the 3PD product. We're going to be changing the name, sometime in the next few months. We're going to be migrating to a name that starts with XPO, just like we rebranded NLM to XPO NLM.

We'll migrate the Pacer name into something that's got XPO in it as well. We haven't finalized that yet. So we're building up a brand, and the Last Mile group is an important part of that brand.

Ryan Cieslak (Equity Research Analyst)

Okay, that's helpful. Then, John, on the corporate expense going into this year, just maybe any sort of color on, you know, what the expectation is. I think, you know, in the fourth quarter, it was around $11.5 million or so of corporate expense. Does that go up incrementally into 2014, or how should we be thinking about the general corporate expense in 2014?

John Hardig (CFO)

Yeah, Ryan, well, the vast majority of that, of that expense is fixed, so it doesn't really scale up with, with the business. There, there are a couple of small components of corporate that, that will increase with activity. You know, mainly, we're going to be spending just a little bit more in IT in terms of what hits the corporate line. And then we have some accounting resources and, you know, credit collections and things like that, that, that hit the corporate, PNL, that will scale up a little bit with the business. So you, you might see a little bit of, of expansion, very, very slight amount in corporate in 2014, but it's going to be, you know, just a, you know, nothing like our revenue growth, in, in the year.

So it's not going to scale anything close to the revenue growth.

Ryan Cieslak (Equity Research Analyst)

Okay. Thanks for your time, guys. Appreciate it.

John Hardig (CFO)

Thank you, Ryan.

Operator (participant)

Thank you. Our next question comes from Donald Broughton from Avondale Partners. Please go ahead.

Donald Broughton (Managing Director and Chief Market Strategist)

Good morning. Thank you for taking my question. We've talked about the spot rate, and wondering whether or not it's capacity, it's demand, it's weather-driven, et cetera. But can you help me think about as we go through this tighter capacity period, can you help me understand how you think about balancing the ability to find a truck, be a solution provider for the customer, and balancing that with the ability to drive the best margin by essentially auctioning off each truck you can get control of?

Brad Jacobs (CEO)

Well, Donald, you're hitting... Good morning, by the way, it's Brad. I mean, you're hitting it right on the nail, right on the head. That is the balancing act. On the one hand, we want to give almost flawless service to the customer. Flawless doesn't happen in the real world, but almost flawless service, very high 90% on-time pickup and delivery. That's very important to us that our entire company is laser focused on giving over 97% on-time pickup and delivery. And in our expedite division, over 99%, because there it's critical shipments. So that's very important to us. And at the same time, we've got a duty to shareholders to try to make a profit here, try to make an honest buck.

So there's a balancing act, but in the final analysis, if we serve the customer passionately, the marginal will follow. And even if the margin on the percentage gets hit a little bit here and there, because it will in a tight capacity market, we'll make it up in volume. More volume we'll attract more volume, and we'll have more loyalty and stickiness from the customers.

Donald Broughton (Managing Director and Chief Market Strategist)

Great. Thank you.

Brad Jacobs (CEO)

Thank you, Donald.

Operator (participant)

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

David Campbell (SVP and Research Analyst)

Morning, Brad and Scott and John. I appreciate all of your comments, and, but Brad, you expressed in written, written reports that you've been interested in Pacer for a long time. I'm just curious, what... I know that, I know that intermodal is growing. I know it's an important solution for shippers, but I don't see the growth of Pacer. I mean, Pacer's stabilized in the last 12 months, but, since 2009, its revenues are flat to down. So I'm curious as to why, I mean, what are you going to do differently?

Brad Jacobs (CEO)

Okay, a couple things. Very, very good topics. So why is the revenue down? The revenue is down is because they had a reclassification of how they handle revenue from an accounting point of view, because when the UP contract expired or got renegotiated to the new one, that the certain gross revenue got booked as net revenue, and I think they lost, like, $400 million of accounting revenue. They, they lose the revenue revenue, but they did from the accounting treatment because it was booked as net revenue. So that's, that's why the revenue looked like it was, it was going down, at least in, in my understanding and, and in Prime. In terms of the, the business there, I'm much more concerned about how people do on, on the bottom line than the top line.

On the bottom line there, you know, when Dan came in there and, you know, they weren't making a whole lot of money at all. And, I think it bottomed out at, like, you know, several million dollars of EBITDA, and he built it up to close to $30 million of EBITDA. So that seems to me to be a pretty darn good trajectory. So I think from the profit point of view, he's really changed the course of the ship there and, got it pointed in the right direction, the profitability has increased. I mean, you mentioned Pacer's, you know, I've wanted to buy that for a long time. I mean, if you read through the proxy, and you know, the history of the transaction reads like, Brad called Dan, tried to get by him.

Dan said, "No. Come back later." Six months later, Brad called Dan. Dan said, "Go away." And that's... This went on for several years. Intermodal is extremely important to us. When, when you look at the, the charts, the slides, David, that we put out when we bought Express-1, you might remember we had four modes, and the fourth one was intermodal. And the reason is that this is one of... This is the fastest growing part of transportation, if you look at the stats back to 1980, and I don't think that is, is going to change very much going forward. So we've got to be in intermodal, and we want to also grow on, we want to take advantage of this cross-border Mexico growth as well.

David Campbell (SVP and Research Analyst)

Mm-hmm. Right. And, on another subject, you haven't said much about less than truckload business. I know it's part of your long-term strategy, but it's nothing right now. Is that going to be acquired by buying asset-based companies, or do you have a lot of choices in non-asset-based LTL operations?

Brad Jacobs (CEO)

Our present strategy for LTL is to grow it primarily organically. I mean, if some acquisition comes our way, that's great, but at present, we're all set up. Once we bought Interide, we got their software, which was a leading software for LTL, and we, over a period of a few months, integrated that into our Freight Optimizer, and we negotiated tariffs with most of the 100 biggest LTL providers. We rolled out the training program to our sales reps to make sure we're all professional in how we're marketing LTL. That business is growing organically. It's still a rounding error in terms of our entire business, but it's something that could grow real fast.

David Campbell (SVP and Research Analyst)

Hmm. And my final question is, Pacer International has been, as you know, doing nothing for years. What... And I don't know, they don't break out how much of that is freight forwarding, how much of it is warehousing and other, et cetera. If some of it's freight forwarding and it's not reporting any earnings, what's the problem?

Brad Jacobs (CEO)

Give me a little time to get into the weeds on that. We've just started getting under the hood. On Pacer, our prime focus was on that wonderful intermodal franchise and the cross-border franchise that they've got. On the logistics and the freight forwarding and the NVOCC and all that business that they've got, we're just at the beginning process of really deeply understanding it. It's a global business. There's a lot of locations. There's a lot of moving parts. I want to understand it fully, and once. And we're not going to take us a long time to do that, but we don't own the company yet. Once we understand it fully, we'll have a plan, and that plan will improve its profits one way or the other.

David Campbell (SVP and Research Analyst)

Hmm. Okay. Okay, thank you very much.

Brad Jacobs (CEO)

Thank you, David. So, we've gone an hour and 15 minutes, but I apologize we took so long and went into the training time, but I'm happy that we're able to answer all the questions of people who cover us, who had questions. Have a great day. Thank you for your support. Talk to you in 90 days.

Operator (participant)

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