XPO - Q4 2014
February 19, 2015
Transcript
Operator (participant)
Welcome to the XPO Logistics fourth quarter 2014 earnings conference call and webcast. My name is Ellen, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you have a question, please dial star one on your telephone keypad. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of Non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements.
A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law. During this call, the company also may refer to certain Non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such Non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and Non-GAAP financial measures, in the Investors section on the company's website at www.xpo.com. I will now turn the call over to Brad Jacobs. Mr.
Jacobs, you may begin.
Brad Jacobs (CEO)
Thank you, operator. 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 Head of Investor Relations. As you saw last night, we delivered extremely strong fourth quarter results. We exceeded our year-end targets for an annual revenue run rate of $3 billion and an EBITDA run rate of $150 million. We more than tripled our total revenue in the quarter, and we increased our net revenue by more than five and a half times. We achieved robust organic revenue growth of 39% company-wide, led by our Truck Brokerage business, which grew organically by 59%. And we generated $42 million of EBITDA in the quarter, which was ahead of the plan.
The beat was broad-based across our operations, with noteworthy strength in our Truck Brokerage and Contract Logistics businesses. Last night, we issued our 2015 outlook for an annual run rate at year-end of more than $5.25 billion in revenue and an EBITDA run rate of over $300 million. We're right on track to achieve our long-term targets of $9 billion in revenue and $575 million in EBITDA in 2017. Two weeks ago, we pre-funded our growth by issuing $400 million of high-yield bonds. We now have approximately $1.5 billion in available capital to execute on the acquisition pipeline. As you know, our most recent acquisition was UX Specialized Logistics, which we completed last week.
UX had 2014 revenue of $113 million. We bought it for $59 million, which is about 7x the 2014 adjusted EBITDA of $8.2 million. UX, which we're rebranding as XPO Last Mile, is highly scalable. They facilitate home delivery and installation of heavy goods, where we're already number one in North America. It was founded in 1978 and has long-term relationships with blue-chip retailers and e-tailers. With this acquisition, we gained another 1,600 contracted carriers and installers, which adds more density to our Last Mile footprint. In summary, 2014 was a busy and productive year for us. We're ahead of plan, and we're still in the early stages of our growth. Now I'll turn it over to John to review the numbers. John?
John Hardig (CFO)
Thanks, Brad. I'll cover the performance of our business segments during the quarter, then provide our outlook for certain financial measures in 2015. We had very strong performance in the quarter. We increased revenue 223% over last year through our acquisitions of Pacer, New Breed, and 3PD, and by driving strong organic growth across every one of our businesses. In conjunction with our bond issuance two weeks ago, we pre-announced our expectations for adjusted EBITDA in a range of $39 million-$42 million. I'm happy to report that we came in at the top of the range at $42 million. We modified our external reporting segments to reflect how we're managing our expanded range of services under the XPO umbrella. Our Transportation segment includes our Truck Brokerage, Intermodal, Last Mile, expedited, Freight Forwarding businesses.
Our Logistics segment consists of our New Breed Contract Logistics business, and our corporate segment remains unchanged. On a year-over-year basis, revenue in our Transportation segment was up 158%, primarily from our acquisitions of Pacer and 3PD, as well as organic growth. Transportation net revenue increased on a year-over-year basis by 150%. Transportation net revenue margin was 20% versus 20.6% in the prior year quarter. The decrease in margin was primarily due to our acquisitions of 3PD Last Mile and Freight Forwarding operations, both of which have lower margins than our legacy businesses. We're very pleased with the performance of our Logistics segment. Our New Breed business was hitting on all cylinders during the quarter, driven by a high level of activity from our core customers....
increased volumes from our seasonal customers during the holiday peak, as well as disciplined operating management and cost controls. On the corporate side, fourth quarter SG&A expense increased to $17.8 million from $11.6 million a year ago. Included in corporate expense was $2.7 million of transaction and integration-related costs, $1.8 million of non-cash compensation expense, and $1.5 million of litigation costs. We expect our 2015 corporate SG&A expense, excluding one-time transaction costs related to future acquisitions, to be in the range of $55 million-$60 million. Net interest expense was $16.7 million for the quarter. Interest expense included $3.1 million related to the conversion of $14 million principal amount of the convertible notes to common shares during the quarter.
In January, we incurred $3.5 million of interest related to the conversion of an additional $19 million of converts to equity, and this will hit our interest line in the first quarter. Following these conversions, the face amount of the convertible notes has been reduced to $88 million. In 2015, we expect interest expense to be in the range of $82 million-$87 million. Our effective tax rate was 8% for the quarter and 29% for the full year. Excluding the impact of future acquisitions, we expect our effective tax rate for 2015 to be in the range of 15%-20%. This range could change materially based on the accounting for 2015 transactions.
At the end of 2014, we had $195 million of federal tax NOLs, which means we don't expect to be a cash taxpayer for some time, depending on the timing of future acquisitions. Capital expenditures for the quarter were $23 million. We incurred $8 million of early equipment lease buyouts in connection with our acquisition of New Breed. The rest of our capital expenditures consisted mainly of technology-related spending. Looking ahead, our 2015 CapEx is expected to be about $70 million, the vast majority of which is IT-related. Depreciation and amortization for the quarter was $34.6 million. In 2015, excluding future acquisitions, we expect D&A to be in the range of $135 million-$140 million.
We ended the quarter with $653 million of cash on our balance sheet, including restricted cash. Earlier this month, we completed a tack-on offering of $400 million of face amount of our existing 7 7/8 senior notes, which were issued at a 6.9% yield to maturity. Following the debt offering, our cash balance is approximately $1.1 billion. Our undrawn accounts receivable facility gives us up to an additional $415 million of liquidity, for a total liquidity position of $1.5 billion for acquisitions. Now I'm going to turn the call over to Scott, and then we'll go to Q&A.
Scott Malat (CSO)
Thanks, John. From a macro standpoint, the year concluded on a very positive note. Demand accelerated through the fourth quarter, leading to growth across all of our businesses. This put us on a strong trajectory going into 2015. In our Transportation unit, we've been in a seasonal slow period ahead of the Chinese New Year, which is today, and produce season, which typically starts in mid-March. In the last week and a half, things have picked up, and we expect it to trend upward from here. It's clear midway through the first quarter that access to dependable capacity remains top of mind for our customers. The tight Transportation market of 2014 was a challenge for the industry, so our deep access to capacity is very compelling to shippers.
We currently have 4,900 trucks under contract, and we work with our network of another 30,000 independent carriers every day. In Intermodal, service levels are improving, and we're increasing our pricing. This quarter, we're rolling out our new Rail Optimizer system. This proprietary technology increases visibility across our organization, and we expect it to drive significant efficiencies. In Last Mile, the demand for home delivery of heavy goods remains strong. We're growing this business with our existing and new customers, and through strategic acquisitions like UX, that builds our presence with e-commerce companies and traditional bricks-and-mortar retailers. Technology is an important differentiator for us in Last Mile. No one else in this sector invests as much in improving customer satisfaction through innovation. We've honored all customer commitments in Last Mile, despite rising Transportation costs.
Our intense commitment to shippers and their end customers, together with our industry-leading service levels, have created a strong differentiation for the XPO brand in Last Mile. Our margins in this business trended positively through the fourth quarter and have increased again into the first quarter. Our Contract Logistics business continues to execute well for its customers. We have opportunities to grow this business organically with new and existing customers, and we're looking at several medium to large-sized acquisitions in Contract Logistics to build on this platform. Our strategic accounts team is continuing to make significant inroads with large customers. In the fourth quarter, we won business with 19 new strategic accounts, and now that we're in bidding season, the pace is accelerating. Our profile is much higher in the industry today than it was just a year or two ago.
Our penetration opportunity is huge, and it's threefold. We can expand many of our existing customer relationships to multiples of their current size by earning a greater share of spend.
...We can capitalize on our higher profile and broad resources to gain new business, and we can leverage our leading positions in fast-growing areas of Logistics to capture share as our end markets expand. In every case, our not-so-secret sauce is service. We're zealously committed to giving our customers world-class service that's as close to flawless as possible. Our employees prove our commitment thousands of times a day in the way they rise to the challenges inherent in this business, like port disruptions or tight capacity or inclement weather. We're cementing the reputation of our XPO brand as a customer service leader. Another major contributor to our growth is our Cold Start program. We opened a brokerage Cold Start in Nashville in the fourth quarter and Freight Forwarding location in Jacksonville last month. We plan to continue to open Cold Starts in talent-rich areas and grow them quickly.
In the fourth quarter, the revenue run rate for our brokerage Cold Starts was in excess of $270 million. On the technology front, our IT budget this year is approximately $125 million, which we believe is among the highest in the industry. Right now, we have more than 200 projects under development with a team of over 600 IT professionals. That gives you an idea of the massive importance we put on innovation. Our M&A pipeline is full, with potential acquisitions in all of our lines of business, most notably in Contract Logistics, Last Mile, and Truck Brokerage. We see a clear path to acquire at least $1.5 billion of revenue this year.
We're continuing to scale up our business as one integrated company with constant growth and capacity, cutting-edge technology, and increasing depth in a broad range of services. These are attributes that resonate strongly with shippers. We've moved into 2015 with a lot of momentum, and we're on track to triple the size of our business over the next three years. 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 are 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. The first question is from Rob Salmon with Deutsche Bank.
Rob Salmon (Senior Analyst)
Hey, good morning, guys.
John Hardig (CFO)
Good morning.
Rob Salmon (Senior Analyst)
You know, Brad, one of the biggest questions that I've been getting from investors is related to the acquisition pipeline. It sounded from Scott's prepared remarks that you've got a, you know, a pretty compelling opportunity across several lines of segments. Could you talk a little bit about kind of where your areas of preference are related to the three end markets that Scott had mentioned as well as how deal valuations are trading, particularly following the recent APL Logistics takeout for roughly 15x, and you know, how they compare relative to the 8x-10x that you guys have been talking to?
Brad Jacobs (CEO)
Okay. So on the first part of your question about which types of deals are we most interested in. We're interested in building out our platform in Contract Logistics, Last Mile, Intermodal, Truck Brokerage, expedite. Those are the main areas that we're active in, but we're also looking in our other fields as well. Contract Logistics makes a whole lot of sense for us to acquire more companies because we have this really robust infrastructure in place in High Point that can be leveraged up, and there'll be a lot of synergy with buying another Contract Logistics company as a result of the excellent infrastructure that we've got in place already. Last mile, we're also interested in building up, and we have a lot of discussions going on.
Unlike some of the other modes, but the acquisitions in Last Mile will mostly be ones in the tens of millions of revenue rather than larger ones, because that market is much more fragmented than the others. There's obvious benefits of density that we get when we do Last Mile. Intermodal, there's not a lot to buy, so, you know, we may not buy a lot there, but we always keep looking around. Truck Brokerage, we have a handful of truck brokers that we're in discussions with. Stars haven't lined up with any of them, but some of them could be interesting. With respect to, you said valuations, I think, was your question, and the APL deal. Well, I don't want to comment on someone else's deal. I wouldn't think that's appropriate for us.
I would say in general, sometimes it's hard to figure out exactly what the real economics are on a deal. We know that from our own case, for deals that we've been involved in, and we haven't won, and then you see how it's reported, or deals that we have won, and somehow it's reported differently than how we're looking at it. And when you have a corporate carve-out from a parent company, it gets complicated. So you really can't just look at the headline price of the EBITDA. You got to look at what the economics of the transitional services agreement and all the other agreements that go with it in totality.
Having said that, there's no question that the Land of the Rising Sun has risen in the last few days and has made two bold acquisitions, not just APL, but also Toll. That's to be noted. Where that goes from here, I, I'm not—I don't know. I'm not really plugged into the Japanese market close enough to really know what their plans, if any, are going forward, but they were definitely interesting ones and unexpected ones. In terms of North American acquisitions, there's been absolutely zero change in valuations in the four years that we've been out there talking to acquisition candidates. The smaller ones are still in the 4-8 times range, and the larger ones are still in the, you know, 4 turns higher than that, and a whole bunch in between. So really nothing's changed there.
Rob Salmon (Senior Analyst)
Perfect. That's really helpful, Brad. You know, could you guys talk a little bit about a little bit more detail about the UX Specialized Logistics acquisition? You know, how many new customers were brought on with this transaction? And how should we be thinking about the transaction synergy, whether from a revenue or cost standpoint? I would imagine it'll probably be less than what you guys saw with 3PD, given how dramatic those were. But, you know, can you give us a sense of how we should be framing that up?
Scott Malat (CSO)
Yeah, Rob, it's Scott. So UX is a company that's just like our Last Mile Logistics. They do the same thing. They work with a lot of e-commerce customers, installing appliances, electronics, and they have a very strong brand in furniture. They're focused on the East Coast, and also some Midwest, and then across Canada. So it's very synergistic with what we have today. It adds to our density. It's fast-growing, it's scalable, it's a great team. The team fits in very well with us. It's a very scalable platform, and the team works very hard. It fits right in with the XPO culture, and it's been a great start since we've gotten going.
It's doubling down on our XPO Last Mile position, where we're already the number one player in that space, and it's working out well so far.
Rob Salmon (Senior Analyst)
Perfect. Thanks for the time.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
The next question is from Allison Landry with Credit Suisse.
Allison Landry (Research Analyst)
Thanks. Good morning.
Brad Jacobs (CEO)
Good morning.
Allison Landry (Research Analyst)
I wonder if you could talk about what you're seeing, in terms of buy rates versus sell rates to customers in the brokerage division, and then maybe if you could give us your view on truckload capacity and carrier pricing for 2015.
Scott Malat (CSO)
Yeah, I'll take the buy rates and the sell rates, and then I'll, I'll send it over to Brad for, for the view over the year. On the buy rates and sell rates, we've had mid-teens increases in revenue per load this year. Some of that is length of haul, but a lot of that is price and increases, still year over year. That was in the fourth quarter. Our cost to capacity is up, somewhat in the same range to a little bit higher. So our gross margin dollars are up. Our gross margin percentage, in the fourth quarter was down.
As you head into the first quarter, that's flipped a bit, where our margin percentage has been increasing in Truck Brokerage, and our gross margin dollars have been declining just because of loosening capacity over in January in a seasonal slow period. I'll turn it over to Brad to talk about this year.
Brad Jacobs (CEO)
So Allison, in terms of the outlook for capacity and pricing, the simple answer is, I don't know. There are factors that would make capacity loosen and rates come down. There are other factors that could make it tighten and go up. We were at a couple conferences last week, and interestingly, or maybe not surprisingly, the shippers were arguing more that capacity is not gonna be as tight and rates aren't gonna go up as much, and the carriers and some of the brokers were arguing just the opposite. So people were either talking their hand or they were, you know, believing their own biases. When you look at the factors, on the one hand, it can't be denied, for the last four months, Class 8 orders have been high.
When there's only, I don't know the exact number, 2.5 million or so trucks on the road, and you got this kind of 30,000 trucks here, 30,000 trucks there coming on, not knowing whether they're maintenance or whether they're growth, it's hard to know exactly what is going on there. But Class 8 orders are up, and they haven't been up for the last four months. That would argue for capacity is coming on, and capitalism's doing its thing and finding some balance there, but too early to call a trend there. The temporary suspension of the hours of service, the 34-hour restart provision, that helped a little in terms of, of loosening up some capacity, but not a huge amount. But if it becomes permanent, that's gonna be a, a good guy.
Well, depending on which side you're rooting for, that's gonna make capacity loosen a little bit more. You have, in the energy sector, oil and gas workers who no longer have jobs. Might they become truck drivers? Maybe. How to quantify that? Hard to say, but that's certainly in the category of loosening. Lower oil prices also would have the effect of some of the weaker carriers. There's 200,000 carriers out there, and most of them have five or 10 trucks. Some of the weaker ones, with oil prices going up, were getting really hard. It's getting harder and harder for them to continue. Now they can continue, so that's more another thing for capacity loosening.
Rates being up, 'cause year over year, they are up, means more money to pay drivers and attract more drivers. That's one side of the equation. The other side of the equation is there's still a driver shortage, big time, and it's not getting better. The economy is getting better, however, so that's creating a little bit more freight. That's making it even more tight. The looseness that everyone experienced in January has tightened up a little bit in the last couple weeks. So maybe that was just seasonality, and now you're getting the beginning of a season, and then you're gonna have the produce season coming out in a few weeks. We'll probably know a lot, lot more 60 days from now how the year is gonna do than now.
Lower fuel oil prices, even though they've gone up something like 50% from the bottom, they're still lower than they were. That's making trucking a more attractive alternative than going over- going Intermodal in, in some of the cases. So that's putting more demand on the road, a little less demand on Intermodal, although Intermodal customers don't ship that much. The ELD mandate, that being phased in over the next year or two, that's a serious thing. That's probably the biggest factor in my book, because that's gonna decrease capacity quite a bit. It's gonna decrease utilization. And a whole host of other government regulations, probably not the least of which is hair follicle drug testing, because it used to be urine testing, and if someone stayed clean for a few days, they passed the test, and now they do the hair follicles, and-...
And it goes back the better part of a year, and lots of young people aren't gonna be able to get CDL licenses. So, short answer to your question is, I don't know. Many factors would argue one way, many factors argue the other way. It's gonna be interesting to see it plays out. We're primed to serve our customers effectively, whether it's tight, whether it's loose.
Allison Landry (Research Analyst)
Excellent. That was extremely helpful response. I guess thinking about the organic growth, it was very strong in the fourth quarter. So I was wondering if you could help us think about that rate, you know, the organic growth rate as we progress through 2015, and I realize that acquisitions will obviously have an impact, but, you know, sort of holding all else equal, do you think that we'll still sort of trend towards that 20% or 25%, organic growth range that you've talked about in the past? Or is that something that you think might be another year out?
Brad Jacobs (CEO)
Organic growth is gonna do exactly what we've said it was gonna do for the last few years, which is as we get bigger, now we're at $3 billion, going to $5 billion. Organic growth will still be really super strong, but it's going to come down. You're not gonna have 39% organic growth when you're $5 billion. It's not gonna happen. It's a lot of big numbers.
Allison Landry (Research Analyst)
Right.
Brad Jacobs (CEO)
So organic growth will certainly come down, but it's gonna be strong. And it's gonna be strong in our company because we focus very hard at serving our customers better, earning and getting more of their business, and we have a very robust effort going out and penetrating all the new customers that we don't have yet, which is the vast majority of the market. So there's gonna be strong, strong organic growth, but it's gotta come down. There's no way it can be 39%, going forward.
Allison Landry (Research Analyst)
Okay, great. Thank you so much for the time.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
The next question is from Chris Wetherbee with Citi.
Christian Wetherbee (Senior Analyst)
Great, thanks. Good morning, guys.
Brad Jacobs (CEO)
Good morning.
Christian Wetherbee (Senior Analyst)
Maybe a question just sort of on balance sheet capacity or cash balances. Obviously, you know, it seemed like an opportunistic equity raise back in the fall of last year, then you followed up with a debt deal just very recently. Kinda curious how you think about sort of more structurally longer-term cash availability to keep that dry powder. Seems like you're on the high end of the spectrum now. Presumably, there'll be transactions this year, but just sort of bigger picture, how much cash do you wanna have on the balance sheet at any given time?
John Hardig (CFO)
Hey, Chris, it's John Hardig. Thanks for the question. So we feel very, you know, good about the liquidity that we have right now against the targets we have for 2015. As I said, we have $1.1 billion of cash on the balance sheet. You know, we have a completely undrawn ABL facility. It's $415 million today, but it has a $100 million accordion that we could flex up and add another $100 million of capacity to. And that certainly gives us enough capital to pursue our 2015 plan and budget. In terms of longer term, you know, we've been very public to say that, you know, we're comfortable with debt in a range of, you know, call it 3-4 times EBITDA.
We may go up a little bit above that, if there were a really great acquisition to go after on a short-term basis, and then we would look to lower leverage after that acquisition. But on a long-term basis, 3-4 times, and that gives us plenty of capacity to get to our 2017 targets.
Christian Wetherbee (Senior Analyst)
Okay. When you think about sort of, you know, the opportunity here, I guess, in 2015, you talked about $1.5 billion of sort of, you know, revenue that you wanna be able to acquire over the course of the year of 15. You know, if you think about sort of multiples that you guys have been able to transact at in the past, it seems like you're talking about sort of a number, maybe acquisitions between $500 million and $1 billion worth of activity, obviously, relative to that cash balance. Is that the right way to be thinking about sort of the potential opportunity here, or is it too difficult to sort of pigeonhole into a specific sort of target multiple range like that?
John Hardig (CFO)
I think you're looking at it right. You know, the way we have our budgeting done for the year is organic. The same, the EBITDA from what we own now is about $225 million, and we're gonna buy another $75 million. So that'll get us to $300 million run rate by the end of the year. In order to buy $75 million of EBITDA, the ranges you said of revenue acquired makes sense, depending on which lines of business, because they all have different EBITDA margins. So that's about right.
Christian Wetherbee (Senior Analyst)
Okay. One final question, just want to follow up on the Contract Logistics side. Just want to get a rough sense of sort of what the organic opportunity here. How does the pipeline look as we move into 2015? Thanks.
John Hardig (CFO)
The Contract Logistics organic pipeline?
Christian Wetherbee (Senior Analyst)
Yeah.
John Hardig (CFO)
We have an organic pipeline of both the existing and new customers. The existing customers, there's a tremendous opportunity. One of our larger customers, for instance, we have about 2% of their SKUs that we handle, and they're looking for us to increase that, and it could be a sizable increase. Across aerospace, across technology, and across retail are three of the areas that are growing the fastest. In terms of new customers, the good pipeline that was brought on with New Breed, but what's exciting is the pipeline that we brought to New Breed. So we went across all of our customers, our 15,000 customers across XPO.
There was about 100 or so that had business that was very specifically, could be outsourced in the way that New Breed does, for very highly complex, highly engineered, solutions. We've made introductions. We've had some good meetings. The sales cycle is a little longer for Contract Logistics. It could last anywhere from a year to a few years of sales cycle. But those conversations have gone well, and we have a lot of opportunities.
So next week, we have
... the RILA conference in Orlando, and we have a delegation going there from all different verticals. And two of the people joining us will be Kelly Abney and Joe Hauck from New Breed, from our Contract Logistics group, because there's a lot of Contract Logistics being done by the 200 retailers who will be at that conference. We have some great relationships and doing lots of business with some of those retailers, and we're going to introduce them to them. And they have a lot of great relationships they're doing business with, with some of those retailers, they would introduce for cross-selling some of our others. I will say this, New Breed definitely outperformed in the fourth quarter, and it really came through.
It's very unusual that you buy a company and they outperform the book that they sold it to you on. Usually, they miss the numbers that were in the book. And if you look at the fourth quarter, they outperformed for four reasons. Number one, the customers had higher volumes, especially retail. Number two, the team was very focused on operational efficiencies and cost control, and there's an excellent management team there under Louis' able hands. Number three, we were ahead of plan at getting new business. And number four, the weather wasn't too bad. So all these things conspired with each other, and New Breed had a really great quarter.
Christian Wetherbee (Senior Analyst)
That's great color. Thanks very much for the time, guys. Appreciate it.
John Hardig (CFO)
Thank you.
Operator (participant)
The next question is from Bill Greene with Morgan Stanley.
William Greene (Global Director of Research)
Yeah. Hi there, good morning.
Brad Jacobs (CEO)
Good morning.
William Greene (Global Director of Research)
Brad, I'm curious if you can talk a little bit about the thought process behind some of the growth rate targets. They seem perhaps a little conservative, given some of the color Scott offered around current market trends or whatnot. Is that a fair characterization, or is it just, look, the law of large numbers is kicking in, and that's why you see a little bit lower kind of top-line number, which it suggests about a 12%-13% growth rate, which I think is down a bit from 15%-20%, which I kind of interpret as the long term?
Scott Malat (CSO)
Not really. It depends how you look at it. We are on about a $3 billion revenue run rate. We did outperform in fourth quarter above our plan. The environment was great in fourth quarter. Everything was at our back. We had a lot of it we can take credit for, and a lot of it, the environment was good. It was, it was a good time to be a broker. It was a good time to be in a lot of our businesses. We look at the revenue run rate going from three billion to $5.25 billion, $1.5 billion of that will come from acquisitions. So going from roughly $3 billion to $3.75 billion is a 25% growth rate.
Now, you're right that we are a little bit ahead of plan in terms of where we're coming out fourth quarter, so maybe it's a blended of the two numbers. If you're saying 12% and us saying 25, it's somewhere in the middle of there.
Brad Jacobs (CEO)
Bill, the difference in opinion, I think, with what you're mentioning is, what you're using as the base to calculate how much the organic growth is. So we're not, we're not giving ourselves—we're not just taking the $831 million of revenue and multiplying ×4. We're saying fourth quarter was an unusually great quarter, particularly in our, our Truck Brokerage business, where everybody had a great quarter. It was an unusual quarter that is, was extraordinary. So we're saying we're really on our, about a $3 billion revenue run rate, to be fair.
William Greene (Global Director of Research)
Okay. All right, that makes sense. And then, Brad, when you look at the long-term, revenue guide and you think about getting there, I presume a fair amount of this depends on the timing of the acquisitions. But as a rough guess, does it feel like it should be sort of linear or that it sort of will be faster sooner, and then it'll tail off as we approach that? So in other words, 2017, you may actually get to some numbers before we actually get to the 2018 total goal. Do you know what I'm saying?
Brad Jacobs (CEO)
I, I do. But the main swing factor there, Bill, is going to be acquisitions and the timing of them.
William Greene (Global Director of Research)
Yeah.
Brad Jacobs (CEO)
The business itself will grow organically, very nicely. We're in verticals that are the fastest-growing parts of transportation, and we have great leadership positions in all of them. So we will be growing above average in general there. And then the gap of getting to the numbers sooner or on target, I don't think we're going to get to them late, will be dependent on when we do the acquisitions, just the timing of acquisitions. But there, we let the timing take its own pace. When it's right, it's right. When it's not right, it's not right.
William Greene (Global Director of Research)
Yeah, that makes sense. Let me ask one last question just on Intermodal. You mentioned that you, the low oil, while it does make trucking more competitive, it doesn't seem to be causing a huge shift from Intermodal. Do we feel at all like rail service is an impediment to the growth, or is it back enough that this isn't really such a concern anymore?
Brad Jacobs (CEO)
Well, I am concerned about rail service because our customers are, and we want it to improve, and we're doing on our end everything we possibly can to facilitate that. To a large extent, we're at the mercy of the rails in general, and they're doing lots of things as well. They're hiring people, they're buying locomotives, they're investing in CapEx, they're getting their systems in place, they're communicating more. I see a big, big improvement in the communication between all the rails and our operational folks, and I think that makes a big difference. And letting customers know the status of their shipments is probably the biggest improvement of them all. Even if it's not right on time, letting them know that. But service kind of bottomed out, I would say, around October, November, and it's gotten better since then.
I would hope, I can't promise, but I would hope that it's going to continue to get better every quarter through the rest of the year, and by the end of the year, service will be like it was a couple of years ago. Having said that, I would say even despite congested rail situation, Intermodal's been on fire. I mean, Intermodal is increasing. People are signing up for more Intermodal. People are still converting their supply chains from over-the-road to Intermodal. So there's a real powerful trend there. Bearing in mind, over-the-road is hundreds and hundreds of billions of dollars. Intermodal is only $15 billion, so little conversions from truck to Intermodal make big percentage increases in the Intermodal business. So we believe in—look, we're agnostic, we're big in over the road, we're big in Intermodal.
We just want to serve our customers and present our customers with alternatives that make sense for their supply chain. But I am a big believer in the long-term viability and growth in Intermodal.
William Greene (Global Director of Research)
That's great. I appreciate the time. Thanks, guys.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
The next question is from Kevin Sterling with BB&T Capital Markets.
Kevin Sterling (SVP)
Thank you. Good morning, gentlemen.
Brad Jacobs (CEO)
Good morning.
Kevin Sterling (SVP)
Maybe Brad or Scott, with some of the weather we've seen lately here in the past couple weeks, and I'll tell you, it even snowed in Richmond, Virginia, so you know, it's cold out there. Are you seeing some capacity tighten up a little?
Brad Jacobs (CEO)
It's tightened up in the last couple weeks. That, that's for sure, across the board. It really was not tight in January, that's for sure also. January was not. But the last couple of weeks, it's gotten a lot tighter, and rates have firmed up, and it's starting to feel more healthy out there.
Kevin Sterling (SVP)
Okay, thanks, Brad. Do you think that's due to some weather, or is that maybe just demand kind of picking up after this, this lull or softness we saw in January?
Brad Jacobs (CEO)
Well, the weather hasn't hurt, but I think a lot of it is just seasonal.
Kevin Sterling (SVP)
Okay. And Brad, you also mentioned ELDs earlier, and you obviously, I think I heard you say that's a big kind of going to be an impact to capacity. As you look at your carrier pool, have you thought about the impact of some of your smaller carriers that ELDs could have?
Brad Jacobs (CEO)
It's gonna hurt them. There's no question about that. There's, there's nothing positive other than safety, which is great for—for everyone, all of us driving on the roads. But apart from that, there's nothing positive for a small carrier with the ELDs. It's gonna hurt their productivity and make it a, a more challenging business, and they're gonna have to somehow or another make ends meet and hopefully pass along higher costs.
Kevin Sterling (SVP)
Yep. Okay. And lastly, in Last Mile, you know, the UX acquisition, I just think is a good acquisition, continue to gain scale in this business. But given how small the pool is to find qualified drivers to offer that white glove service, how important is it to kind of do additional acquisitions in Last Mile so you can kind of grow that business, particularly with the growth rate we're seeing in e-commerce?
Brad Jacobs (CEO)
Well, we're gonna grow it anyway, even if we didn't do any other acquisitions, because we've got a great service offering, and we have a number one position, and we've invested so many tens of millions into technology that the customer experience is so, so much better than, than the alternative. And we have many strategic... Well, I shouldn't say many. We have a number. We have a handful of large customers who are talking to us about strategic arrangements so that they can transition their Last Mile supply chains in response to the e-commerce growth. And we have a, a unique capability that we can offer there. So the opportunity to grow that organically is very, very substantial.
We signed up about $80 million of new business over the course of 2014, and we'll get the full benefit of that $80 million this year. So I'm very, very bullish on Last Mile growth.
Kevin Sterling (SVP)
Well, great. Thanks for your time today, and congratulations on a nice quarter.
Brad Jacobs (CEO)
Thank you, sir.
Operator (participant)
The next question is from Todd Fowler with KeyBanc Capital Markets.
Todd Fowler (Managing Director)
Great. Thanks. Good morning, everyone.
Brad Jacobs (CEO)
Good morning, Todd.
Todd Fowler (Managing Director)
Good morning, Brad. I wanted to ask on your EBITDA margin expectations for 2015. If I take the year-end targets, I'm coming up with about 5.7% EBITDA margins. It sounds like that the fourth quarter was, you know, a couple of favorable things going on, but basically, if I take the run rate around 5% or so, you know, can you, can you help us think about, you know, the, the EBITDA margin improvement that you're expecting? Is that a function of mix? Is that a function of some of the leverage that you're getting? Is it employee productivity? Just kind of some of the main buckets to bridge the gap on the margin side.
Brad Jacobs (CEO)
Sure. The two biggest areas are, one, in corporate expense. Our corporate expense will stay relatively flat. John, John said it was $55 million-$60 million, not changing much. While we have significant organic growth over that infrastructure, that is, finance, it's IT, it's recruiting, it's training, it's the leadership team. If you put all that together, we won't need to add in, in the corporate side of the business as we grow it significantly on top of it. On top of it. And then in addition to that, it's employee productivity, especially within Truck Brokerage, where there's three things that are driving our productivity levels right now. It's, it's tenure, it's training, and then it's investment in technology. Those three things should continue to drive up our productivity and our margins within Truck Brokerage.
Todd Fowler (Managing Director)
Okay, and then, so with what we're looking at for the Contract Logistics here in the fourth quarter, is that the right way to kind of think about either the EBIT or the EBITDA margins for that segment going forward, or is there some opportunity to move that margin up as well?
Brad Jacobs (CEO)
Well, we don't know. It's early. There's no plan in place to change those EBITDA margins much one way or the other.
Todd Fowler (Managing Director)
Okay. And then I guess just the last one that I had kind of along the same lines, but Scott, in your prepared comments, it sounds like that in the Last Mile business, that there were some cost pressures, and it sounds like that you were maybe incurring some higher costs to meet your, to meet your service commitments. Did I catch that the right way? And then, can you talk about, you know, what we should expect from either a net revenue margin standpoint or to alleviate some of those cost pressures going forward?
Scott Malat (CSO)
Yeah, the net revenue margin for Last Mile, the biggest impact was the acquisition of ACL, which has margins in, let's call it teens, mid- to higher-teens percentage. So that on a blended basis takes down your margin. In addition to that, Optima has lower margins than the core white glove service. And then third is, yeah, the transportation costs increased in the fourth quarter. We are working to take up price and pass that on, and but in this industry, it's very important that we deliver quality service.
Todd Fowler (Managing Director)
Right.
Scott Malat (CSO)
So, capacity is tighter or capacity is tight, we'll go above and beyond, and we'll service the customer, and that's exactly what we did in the fourth quarter.
Todd Fowler (Managing Director)
Okay, so maybe the answer is to think about mix and then some of the seasonal factors and that, you know, in tight markets, we can see some margin compression in that business.
Scott Malat (CSO)
It is, but that's a business that service matters more than price. I mean, it, price always matters. Price matters in every single one of our businesses, but if you were to rank them, in Last Mile, service is just so important. So as long as we continue to improve that leading service and double down on our capacity, and buying UX brought us another 1,600 contract carriers and installers, so it added more density to our Last Mile footprint. And you put that capacity together, you add the density, and we should be able to get healthy margins in that business.
Todd Fowler (Managing Director)
Okay, sounds good. Thanks for taking my questions today.
Scott Malat (CSO)
Thanks, Todd.
Operator (participant)
The next question is from John Mims with FBR Capital Markets.
Brad Jacobs (CEO)
Hey, John, I think you might be on mute.
John Mims (Vice President and Senior Equity Analyst)
Sorry. Thanks. Good morning.
Brad Jacobs (CEO)
Good morning.
John Mims (Vice President and Senior Equity Analyst)
So, Brad, let me ask you a question on the Logistics business. I know it makes a great, you know, strategic fit, and you've talked about that. But, you know, from some of your peers, it's always seemed to be a bit of a struggle from a margin standpoint. So when you, you know, hit the growth targets you're looking for, you get the scale that you see, we move past the noise, in terms of acquisitions and integration, et cetera. You know, what's the, what's the longer-term operating margin we should expect in that business?
Brad Jacobs (CEO)
I think it really depends on how effective we are continuing to be very focused on cost control. Louis and his team are really good at that, and they're very laser-focused on operational excellence, and I'm just extremely impressed with their ability to track and to execute on that. That's what it comes down to. In that business, customers aren't looking for us to make a nickel off their back. They're looking for us to be more efficient and more operationally excellent and help save them money. So we're not really focusing on growing the margins as much as we're focused on pleasing the customer, making more money for the customer, and then we'll make money by taking costs out and being more efficient and passing some of that along to the customer and keeping some of that for ourselves.
John Mims (Vice President and Senior Equity Analyst)
Sure. No, I get that. But I mean, when you look like internally planning, assuming you get all of that stuff right, is this a longer-term kind of double-digit margin business, or, you know, is it still gonna kind of bounce around, you know, mid-single digits like we've seen with some of your other guys, some of the peers?
Brad Jacobs (CEO)
I think you'll see the margins in Logistics, barring buying someone else, but the margins that we have right now are stable. We're not expecting them to be going up, going down. They're margins that we can live with and our customers can live with as well.
John Mims (Vice President and Senior Equity Analyst)
Okay. And one more on the transport side. You know, with the port strike going on, and really more importantly, kind of the unwinding of the backlog that we'll likely see over the next couple of months and how that coincides with produce season and peak season, you know, can you walk through the four subsegments now and talk about real winners and losers that you see now as far as, you know, transport or trucking versus Intermodal, versus Last Mile, versus expedited, and just kind of what your outlook is over the next several quarters?
Brad Jacobs (CEO)
Outlook in terms of capacity, John?
John Mims (Vice President and Senior Equity Analyst)
Yeah, in terms of capacity, but also just, you know, where you're seeing the most positive outlook and who are gonna be kind of the winners and losers within those different segments?
Brad Jacobs (CEO)
Oh, okay. Well, so we have two segments. We have Transportation now, and that incorporates everything but Contract Logistics. And we have Logistics, which is Contract Logistics, and that's our new SEC reporting, which makes some forms to how we're running the business. On Contract Logistics, I think we're gonna be big winners there because there's... We're operating at a very high level of the sophistication of Contract Logistics. We're not doing a lot of pallets in, pallets out kind of stuff. We're doing highly engineered, technology-enabled Contract Logistics for Fortune 100 companies that have complex supply chains, and, and we do it very well. So I, I think that business is gonna be stable and, and continue to grow.
And if and when we do acquisitions of other Contract Logistics companies, I, I'll modestly say that I'm confident I think we can raise their margins because of the management team and infrastructure that we have in place in North Carolina. In Last Mile, I like our positioning, I think because of e-commerce, and because of the outsourcing of final mile by the retailers, we got a lot of wind to our back there, too. Intermodal, we have a good position. We're not number one, we're not number two, we're number three, although we have a leading position in cross-border Mexico. There, we're a little bit at the mercy of the market, and it's a little unclear, you know, in certain of the trends, and we don't know yet.
But I like our position, and it's certainly gonna get better. I don't know whether the rate of betterment will be the same as the other modes or not. I just don't know. Truck brokers were only gonna get better as we get bigger, and we've been growing primarily organically there, and 59% organic growth in the fourth quarter, wow, you know, we're just really getting the leather off the ball there, and I expect that to continue for quite a while. Expedite, completely a crap shoot, really depends on supply chain disruptions, let's see how the port, the port situation, which is horrible for the country, horrible for lots of other parts of the business and the industry. Great for Expedite. Expedite is doing very well with the port disruption.
So the more disruptions there are, like port strikes, like weather situations, Expedite will do better. Does that give you the color that you're looking for?
John Mims (Vice President and Senior Equity Analyst)
Yeah. No, that's helpful. And 'cause, you know, when you look at the margins you reported on a year-over-year basis, you know, within the transport subsegments, and I know there's some acquisition noise, and Scott had mentioned some, you know, mix shift in truckload. But, you know, I'm wondering how, you know, the huge jump in net revenue margins in Expedited from fourth quarter of last year to fourth quarter of this year, the drop in Last Mile, you know, the increase in truckload, the drop Freight Forwarding. kind of given the disruptions that you see now, how all of that plays out from a seasonal basis, you know, as we go into 2015.
Brad Jacobs (CEO)
Right. Right. Well, what you're describing is the beauty to being multimodal and diversified. So at any one point in time, some of our modes are doing better than others, and some of them aren't doing as better as well as the others. And which ones will be doing better or worse will, will keep changing over the course of seasons and years, and that's the way a diversified model works, and it decreases the risk from our point of view quite a bit.
I think, John, big picture, the 36% gross margins you saw, net revenue margins that you saw across the company in fourth quarter is a relatively good run rate. If you look at all the different factors, there's a lot of different factors that go up and down, but our fastest growth is in Truck Brokerage, where in Truck Brokerage you might have half that.
John Mims (Vice President and Senior Equity Analyst)
Great. Thanks for the time.
Brad Jacobs (CEO)
Thanks, John.
Operator (participant)
The next question comes from Donald Broughton with Avondale Partners.
Donald Broughton (Chief Market Strategist and Senior Transportation Analyst)
Good morning, everyone.
Brad Jacobs (CEO)
Good morning, Donald.
Donald Broughton (Chief Market Strategist and Senior Transportation Analyst)
Well, since we've seemed to have beaten the Intermodal mode and fuel shift horse to death, let's ask a more strategic question. At what point in your platform does it make sense for you to expand out into other types Freight Forwarding, whether it be Freight Forwarding, customs duty, brokerage, et cetera? At what point does it make sense to expand out into those fields?
Brad Jacobs (CEO)
Well, you know, we Freight Forwarding. we do air and ocean. We do over $200 million a year, and it could almost be a company by itself. I mean, it's a substantial company, but we're a $3 billion company, so it's a small percentage of our whole business.
Donald Broughton (Chief Market Strategist and Senior Transportation Analyst)
Right.
Brad Jacobs (CEO)
It's been going well. I Freight Forwarding revenue in the fourth quarter, organically, grew 44%. Revenues were up 234%. So there's a lot of, a lot of growth in, in our small, relatively Freight Forwarding business. We haven't figured out a way to conquer the world Freight Forwarding. we don't see an angle. We don't see an edge. In all our other verticals, we have an edge. There's something special about what we're doing. We've got a technology advantage. We've got a size advantage. This, we got a training advantage. There's something that we're doing that when we meet with a customer and we explain what we're doing, they go, "Ah, I get it. Let's do that." And, and, and, and we get in the door, and we're off, off and running, and we do a good job.
Freight Forwarding, we also do a good job, but the larger customers have their deals cut directly with the liners. There's not 200,000 air and ocean liners like there are in truck brokers. There's a couple dozen that have the vast majority of the market. They're very sophisticated. We're not going to be able to help them a lot in terms of offloading their capacity. So there's some great competitors Freight Forwarding that have been around for decades and have multi-billion dollar networks and great technology. They've learned a lot over the years and some doing better than others, but they're worthy competitors. So we don't see how we're going to be number one or number two or even number three there. So we've been a little scared.
We've been a little nervous to go in full bore and get really big Freight Forwarding without having a clear path to why are we special, why are we unique? What are we bringing to the customer that our competitors aren't? Having said that, we're open-minded. We're open-minded, and if the Freight Forwarding acquisition presented itself to us, that made sense strategically, made sense operationally, and made sense financially from a acquisition price point of view, we would do it. But we're not-
Donald Broughton (Chief Market Strategist and Senior Transportation Analyst)
Fantastic
Brad Jacobs (CEO)
... we're not hungry, eagerly going out trying to do that.
Donald Broughton (Chief Market Strategist and Senior Transportation Analyst)
Thank you.
Thank you.
Operator (participant)
The next question is from Scott Schneeberger with Oppenheimer.
Daniel Hultberg (Senior Equity Research Associate)
Good morning, guys. It's Daniel filling in for Scott. Yeah, most of the questions have been answered here, but I just want to hit on the, on the IT budget, which looks like it's pretty up pretty nicely from last year. Can you just go a level deeper there on what you're trying to do and what the benefits could be near term?
Brad Jacobs (CEO)
So you're talking about the technology, Daniel?
Daniel Hultberg (Senior Equity Research Associate)
Yes.
Brad Jacobs (CEO)
So technology, we spent roughly about $115 million last year. We'll spend roughly about $125 million this year. I love spending that $125 million, because that $125 million translates very powerful solutions for our customers, and it translates into our employees, our sales reps and our carrier reps, being able to do their job more effectively, more easily, and gives them a big advantage over their competitors. So when we hire people from competitors, almost always, their jaws drop when they see the technology that we have compared to what they had before. Not always, but in almost all cases.
That's really important, because from an efficiency point of view, from a productivity point of view, from a customer service point of view, we have over 200 IT projects right this minute that we're in the middle of implementing. And we get thousands and thousands of suggestions from our customers and our employees every single month of what their dream-... what their fancy technology would look like, and we're implementing on it. We're, we're prioritizing them, we're putting resources on them in Cambridge, in High Point, and all across the company, and it's, it's really making a big, big difference. So we're, we're happy to spend $125 million.
Daniel Hultberg (Senior Equity Research Associate)
Okay, great. Congratulations on a nice quarter.
Brad Jacobs (CEO)
Thank you, Dan.
Operator (participant)
The next question is from Jason Seidl with Cowen and Company.
Jason Seidl (Managing Director)
Good morning, guys. Just one quick question. You know, you talked about the rule of large numbers with sort of slowing organic growth rates, and I get that. But how is the hiring environment right now? Is that going to constrain you if it gets a little bit tighter?
Brad Jacobs (CEO)
Hiring for, for what, specifically?
Jason Seidl (Managing Director)
Basically for people to work on the brokerage side, on the Logistics side.
Brad Jacobs (CEO)
Oh, internal. Internal, yeah. So, the labor market's fine. You know, Contract Logistics, we're not hiring huge amounts of executive people. We're hiring hourly, and we can pay competitive rates, and we don't have a problem hiring people. In other modes, on the Transportation side, we have great training programs. We have great compensation that's competitive. We have technology that enables them to be able to make their bonuses more. So, you know, we're an attractive -- we're a growth company. There's lots of opportunities for advancement, and we invest a lot in our recruiting programs. So we have a big presence on the internet for particularly for the college grads. So hiring has been okay.
Jason Seidl (Managing Director)
Thanks for the time, .
Brad Jacobs (CEO)
Thank you.
Operator (participant)
The next question is from Casey Deak with Wells Fargo.
Casey Deak (Associate Analyst)
Hey, guys. How you doing?
Brad Jacobs (CEO)
Good morning. Good.
Casey Deak (Associate Analyst)
So just to go back a little on the strategic side, you've talked in the past about, you know, when you're looking for acquisitions, you're looking at brokerage firms that may have a high turndown volume and the ability for you to take that volume in and convert it on your network. So my question is, are there similar strategies across the other service lines? Are there value propositions there that when you're out in the market looking for an acquisition, there's a certain characteristic that piques your interest?
Brad Jacobs (CEO)
There are in each case. And in start with Logistics. We look at our platform and what we can provide for them and how we can leverage our platform with that business. We look at end markets and customers, how complex are the projects, how highly engineered, how much do they depend on technology for their customer? And we look at end markets in terms of verticals. Are they areas where there's fast growth in that outsourcing trend? Are companies in that vertical outsourcing more and more, and what's the opportunity set? When we look at Last Mile, Last Mile is a lot more like brokerage, where there's turndown markets. They don't have enough density, they don't have enough capacity to move things. We have more access to capacity in that business.
We have more density because we have more freight. So we look to see what are the business opportunities that they passed up on, how tight are the customer relationships that they have? Like, for example, UX has very strong relationships, decades-long relationships with some blue chip customers, retailers, and then e-commerce providers. And from an e-commerce perspective, how can we cover the country nationwide from an e-commerce perspective and add to the density and be able to drive down your cost of capacity in those tertiary markets and not just the big markets across the U.S.?
Casey Deak (Associate Analyst)
All right. That's helpful. Thanks, guys. I'll pass it along.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
The next question is from Jamie Clement with Macquarie.
Jamie Clement (Analyst)
Morning, gentlemen.
Brad Jacobs (CEO)
Good morning.
Jamie Clement (Analyst)
You touched on the West Coast port situation as it relates to expedited, and I think that's pretty obvious to everybody. Can you talk in maybe a little bit more nuanced terms about some of the ripple effects from the port situation on your other business lines that perhaps some of us wouldn't realize?
Brad Jacobs (CEO)
Well, ripple is a good word. I mean, it's more like a domino than a ripple, because the boxes aren't available to load, and they're not accepting 40-footer, not accepting small boxes in there. It's a mess. I mean, the port situation in California in the West Coast is not America at its finest, and it'd be really great if Washington would step in and bring some more porters to that. It's very unfortunate. So it's freight in a nutshell, freight's just being moved less efficiently and at lower volumes. So in Southern California, we've got three trucks for every load, literally. I mean, and I've never seen that before. Three trucks for every load.
So our reps are saying, "If you post a load, you better have 12 phone lines open because it's going to go ring, ring, ring, ring, ring." Now, in our business, that hurts Intermodal because there's less Intermodal loads coming in internationally. That's only about 12% of our Intermodal volume. But it could impact, to your point, as much as, say, about 20% of our Intermodal volume nationally because of that, that ripple effect of boxes not being able to load. But, you know, our diversification, going back to the earlier question, it really helps us mitigate the impact in the ports. And, and again, when one mode is, is off kilter, another mode picks it up. And the final point I would say there is not to be just all Dr. Doom on, on the port situation, it really is pretty bad.
But there is a silver lining, and that is when it clears up, and I'm not predicting when it's going to clear up, but eventually it will. There'll be a spike in volume, and it'll be a super spike. There'll be a big backlog of freight that gotta get moved really quickly, and you'll see rates go up. You'll see a big, big tightening. I don't know when that'll be.
Jamie Clement (Analyst)
Has this been a significant enough event where, you know, in looking at your acquisition pipeline, there may be some people that might have been a little bit more convinced to sell, perhaps five years earlier than they might have?
Brad Jacobs (CEO)
... five years, but,
Jamie Clement (Analyst)
Two years.
Brad Jacobs (CEO)
There's some people, there's some people suffering from it, feeling some pain. I don't know if that makes them want to sell. I mean, most sellers are selling due to a larger reason. They've got a health problem, or they want to lift liquidity, or they're getting up in age, or it's owned by a private equity firm, or there's partners, some partners want to get out. There's issues that are less specific to this market right now.
Jamie Clement (Analyst)
Very fair. Thank you very much for your time.
Brad Jacobs (CEO)
Thank you.
Operator (participant)
The next question is from Jack Atkins with Stephens.
Jack Atkins (Research Analyst)
Great, guys. Thanks for squeezing me in here. Just a couple of questions for you, Brad. You know, you referenced earlier the ELD mandate, and that could have a negative impact on your smaller carriers. You know, I guess by implication, that would seem to me that the smaller carriers without ELDs aren't really complying with federal hours of service regulations. I mean, do you have a sense for, you know, how much the average carrier, small carrier, you know, without ELDs, is driving above where they normally would if, you know, if they were to start complying with hours of service?
Brad Jacobs (CEO)
Well, first of all, Jack, we will always squeeze you in. No, no problem there. Second is, on the ELDs, we don't know what the level of compliance is. They all tell us they're complying. We don't believe they're all complying, obviously. We understand human nature, and we have to hear anecdotes, but I don't know what the level of compliance is. And I don't know precisely, numerically, mathematically, how much capacity it's going to take out when everybody is complying, but it's significant. I'm sure it's significant. It's not a minor point.
Jack Atkins (Research Analyst)
Okay. Okay, that's fair. And then lastly here, just sort of on the capital structure. You know, you talked, like John referenced earlier, the comfort with being sort of 3-4 times levered on EBITDA. I guess, you know, when I think about sort of the what the capital structure looks like, you know, in 2017, you know, on that $575 million in EBITDA, you know, do you think your... Is that 3-4 times leverage on $575 million, or is it 3-4× leverage, you know, getting to $575 million?
Brad Jacobs (CEO)
No, Jack, it, you got it right the first time. It's, it's the leverage on the 575.
Jack Atkins (Research Analyst)
Okay. Okay, that's what I thought. I just wanted to clear that out. Thanks again for the time.
Brad Jacobs (CEO)
You're welcome. And for the record, just for everyone, if anyone's new to the story, we have more cash than we have debt at the moment, so we have no leverage on the balance sheet in that sense.
Operator (participant)
The next question is from David Campbell with Thompson Davis & Co.
David Campbell (Senior VP, Research Analyst)
Good morning. Thanks for taking my question.
Brad Jacobs (CEO)
Good morning.
David Campbell (Senior VP, Research Analyst)
I just wanted to ask everyone there, of course, but, Scott, you mentioned that in February, the expedited market seemed to pick up in terms of demand. But that's also when Forward Air bought Towne, and Forward Air started raising rates. Is that acquisition a factor in the expedited market? I know it's a small part of your business, but it could be a little bit misleading if the market isn't really that strong, but Forward Air bought Towne, and that's the reason it got better.
Scott Malat (CSO)
No, I think it got better for a few different reasons. One, look, we were in a seasonally slow period in January. You get into February, today is Chinese New Year, so you'll start to see pickup in volumes after Chinese New Year, and then you'll have produce season in mid-March, and you're just coming off the seasonally slowest part of the year. And then along with that, you have the port strikes. I think that's the bigger impact. And you'll have people diverting traffic to different ports and just unplanned freight, which leads to more unplanned shipments, leads to more expedite in general. I don't think that the size of the acquisitions you talked about are really rippling through the industry or a size to make a material impact for us.
David Campbell (Senior VP, Research Analyst)
Hmm. Right. So you think, the port strike had more, more impact in February probably than January?
Scott Malat (CSO)
I think it does, yeah. I think right now-
It hasn't gotten better. If you look at the photographs, and we see, you know, and people send us these photographs every day of thousand-foot vessels with all these containers just parked outside the port, and then you see these other aerial shots of just bumper to bumper to bumper trucks worse than Laredo in Southern California. It's just, it's a mess. It's a big clog. It's very inefficient.
David Campbell (Senior VP, Research Analyst)
Mm-hmm. All right. And the other last question, most of my questions have been answered, but you were, Brad, you were talking Freight Forwarding earlier in response to a question. Your concern about the long-term interest in that business, is it partially because there's a lot of very good competitors with high price targets and then a few big ones with very low profit margins and struggling, and but there's no way to turn them around, or you wouldn't know how to turn them around? Is that one of your hesitancies?
Scott Malat (CSO)
I wouldn't quite say it like that. When I look Freight Forwarding, by the way, I don't want to Freight Forwarding. we have a nice Freight Forwarding business, and it's run, runs well, and the numbers are up and to the right, and we're all in support of it, and we give the resources they want. They're growing very nicely. They do a good job, and on the customer surveys, you know, we see really good results from it. We haven't gone big and long Freight Forwarding, only because we haven't figured out a strategic plan of how we can create huge amounts of value for our customers and therefore for our shareholders, as we have in the other verticals.
In the other verticals, we've got really clear strategies of how we have competitive advantages for in the marketplace. We haven't figured that out Freight Forwarding, and maybe we will someday. We haven't yet. That's the reason. We don't want to just buy things for the sake of buying things. I mean, you want to buy things that there's a reason for buying it, there's a strategic, compelling logic to buying it. So we haven't quite figured that out Freight Forwarding. maybe we will in the future.
David Campbell (Senior VP, Research Analyst)
Well, there's also the aspect of how Freight Forwarding business integrates with the Truck Brokerage and how it could help.
Scott Malat (CSO)
I don't know that it does much, David. I mean, for in our business specifically, the person, the people that we talk to in, in truck aren't the same people who are doing the Freight Forwarding. so would there, would there be some advantage? Sure, there would be. Just like in some of our other verticals, you get an introduction from somebody who works on the same floor as the other person who handles the other vertical. But it's a little bit different. It's a, it's a different part of the supply chain enough, the air and ocean from the, the ground here, that the nexus isn't as close as it is from... First, it's Intermodal and truck, it's very close. And we're talking to customers who their hands, the person we're talking to handles both modes and is planning on alternatives based on their outlooks there.
So there it makes a whole lot of sense to... There's a lot of synergy there. With Freight Forwarding, there isn't as much, in our customer base, at least.
David Campbell (Senior VP, Research Analyst)
Mm-hmm. Okay.
Scott Malat (CSO)
It might be different with others, but it's not ours.
David Campbell (Senior VP, Research Analyst)
Well, thank you very much. I appreciate your answers.
Scott Malat (CSO)
Thank you, David.
Operator (participant)
We have no further questions at this time. I'd like to turn the call back over to Brad Jacobs for closing remarks.
Brad Jacobs (CEO)
Thank you, everybody. We went a little over time, so I won't say any comments other than see you in 90 days. Thanks a lot. Have a great day.
Operator (participant)
Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.