Bradley S. Jacobs - Chairman and Chief Executive Officer John J. Hardig - Chief Financial Officer Scott B. Malat - Chief Strategy Officer Karl Meyer - Co-Founder, Chairman and Chief Executive Officer Karl Meyer -.

Robert H. Salmon - Deutsche Bank AG, Research Division Christian Wetherbee - Citigroup Inc, Research Division William J. Greene - Morgan Stanley, Research Division Allison M. Landry - Crédit Suisse AG, Research Division Kevin W. Sterling - BB&T Capital Markets, Research Division Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division John G.

Larkin - Stifel, Nicolaus & Company, Incorporated, Research Division Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division Jack Atkins - Stephens Inc., Research Division.

Presentation:.

Welcome to the XPO Logistics Second Quarter 2014 Conference Call and Webcast. My name is Shannon, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures.

During this call, the company will be making certain forward-looking statements within the meaning of applicable security laws, which by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements.

A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings.

The forward-looking statements in the company's earnings release 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 of the company's website at www.xpologistics.com. I will now turn the call over to Mr. Brad Jacobs. Mr. Jacobs, you may begin..

deep relationships in e-commerce, complementary truck capacity, a strong multiregional footprint and, most importantly, a demonstrated track record of successfully handling the demanding service requirements of last mile. So it's exciting times here at XPO.

We had excellent results in the quarter and with New Breed and ACL, we're positioning the company to grow even more rapidly and to serve customers more completely. Now I'm going to turn the call over to John, who'll provide a summary of the quarter and give you more detail on the transactions..

Thanks, Brad. I'll go over some details on the acquisitions and then I'll talk about our results. The New Breed acquisition will be an all cash transaction for a purchase price of the $615 million. At the closing, New Breed CEO, Louis DeJoy, will use $30 million of its proceeds to purchase XPO restricted stock from the company.

We expect to close the New Breed acquisition in the third quarter. New Breed had revenue of approximately $597 million in adjusted EBITDA of $77 million for the 12 months ended June 30. The value of the transaction represents a consideration of approximately 8x adjusted EBITDA.

On Monday, we bought Atlantic Central Logistics for $36.5 million in cash, or approximately 5.9x trailing 12-months adjusted EBITDA. ACL had revenue of $63 million and adjusted EBITDA of $6.2 million for the 12 months ended June 30.

We intend to finance the New Breed acquisition with a combination of cash on our balance sheet, our ABL facility and a debt commitment we've arranged from 4 commercial lenders led by Crédit Suisse. We'll be opportunistic as to how we shape the final structure, but we intend to finance the acquisition with debt.

Turning to our performance in the quarter. We delivered very strong revenue growth. We also continued to drive margin improvement. We increased net revenue margin company-wide by 690 basis points. Adjusted EBITDA was a positive $14 million compared to a loss of $12 million a year ago and breakeven last quarter.

Freight brokerage, our largest segment, delivered organic growth of 67% and over $23 million in EBITDA. Within freight brokerage, truck brokerage continued to scale up as our sales reps became more productive. Our reps have closer relationships with more customers and carriers than they did a year ago.

And they have a benefit of continuous enhancements to our technology, as well as more pricing and lane data. Our 11th freight brokerage cold starts were only 1.5 years old on average and they're now on an annualized revenue run rate of $220 million. That's up from $90 million a year ago.

We increased our net revenue margin in truck brokerage by 70 basis points from a year ago, which was our fifth consecutive quarter of year-over-year improvement. That's excluding the contribution from Pacer, which would make the increase even higher.

We also significantly increased the profitability in both our intermodal and last mile businesses following the weather difficulties in the first quarter.

In expedited transportation, we had another strong quarter of top line growth and profitability, driven by our XPO NLM managed transportation business, our air charter operation and a generally more robust expedited market environment.

In freight forwarding, we increased revenue and continue to be on track with our plan to consolidate the former Pacer Logistics operations. The addition of the Pacer business had the effect of shifting our transaction mix more toward international transactions, which tend to be higher revenue but lower margin.

Corporate SG&A was $15.1 million, including $2.3 million of corporate costs and integration costs from Pacer. The Pacer corporate costs will be ongoing, so looking forward we expect corporate SG&A to be in the range of $13 million to $14 million a quarter. Our reported tax rate for the quarter was 11.4%.

We expect our tax rate to remain in the 10% to 15% range, although the rate could be significantly higher next quarter, given the accounting for New Breed. This would result in a non-cash benefit since we have tax carry forwards and don't expect to be a cash taxpayer for some time.

We ended the quarter with $129 million of cash on the balance sheet, including $17 million of restricted cash. We had no debt other than the $120 million of convertible notes that are trading well on the money. Now I'll hand it over to Scott for his comments on the operations.

Scott?.

Thanks, John. The operating environment across our businesses is more favorable than what we had seen in 2012 and 2013. In truck brokerage, capacity remains tight and truckload pricing is up. We're a major beneficiary as more shippers look to the bigger brokers, like XPO, to find trucks.

In addition, tighter capacity has led to more emergency freight, which is lifting our expedite business. We expect a number of factors, including regulation and driver shortages, to keep over-the-road capacity tight for some time. That's a good dynamic for us.

In last mile, the demand for home goods remains strong and we're growing our business with our existing customers. We have a healthy pipeline for new business in last mile with a big e-commerce component.

Our purchase of ACL puts us in an even better position to take advantage of demand from e-commerce, which is projected to keep growing at a double-digit rate. With intermodal, we're benefiting from an uptick in demand as shippers return to rail, following weather-related service disruptions in the first quarter.

And we expect intermodal to continue to grow based on secular conversion from trucks to rail for long-haul freight. The integration of Pacer has been going very well. The truck brokerage group is benefiting from being on our XPO technology, having access to our nationwide capacity.

And our new proprietary rail optimizer technology platform is under development and will be launched in early 2015. We've moved them to our reporting processes, which gives us more actionable business intelligence. We rolled out new training modules and compensation plans. All these things have had a positive effect on morale.

Our intermodal team has a new spring in their step and we're right on schedule for the $15 million of cost savings that we previously identified. Drilling down on intermodal. We see tremendous growth potential in cross-border Mexico freight movements, which is the fastest growing area of transportation and it's where we're the #1 provider.

Mexico has become the site of choice for many manufacturers. BMW and Nissan just became the most recent automakers to announce $1 billion-plus investments to build factories in Mexico. The supplier Robert Bosch also announced a $500 million investment. Several other manufacturers are expected to follow suit.

Industry analysts are projecting Mexico's automotive output will increase 60% to 5 million cars by 2020 from roughly 3 million today. And it's not just the auto companies; a sizable amount of nearshoring growth is being driven by other industries. So for example, Unilever, it's building a major new food and beverage manufacturing facilities in Mexico.

And the billions of dollars being invested in Mexican production capacity should cause Mexico to surpass China as the top U.S. trading partner within the next 5 years. Switching gears. We've had a lot of success in our cross-selling activities by our strategic account managers.

Since April, we've been awarded business for new service lines at 45 existing customers, and we're presently bidding on cross-selling business with another 57 accounts. Already, we're generating business from multiple service lines for 33 out of our top 50 customers. Nine of these accounts are using 3 or more XPO services.

We've made recent progress in our rebranding strategy. Rebranding is an important piece of the cross-selling opportunity. We're marketing to customers as one integrated portfolio of supply chain services under the XPO brand. As of June, our Express-1 business, which is the core of our expedited transportation capacity, operates as XPO Express.

And in last mile, our platform acquisition, 3PD, now operates as XPO Last Mile. Our XPO family now includes XPO Express, XPO NLM, XPO Air Charter, XPO Last Mile, XPO Global Logistics and our flagship brand, XPO Logistics. So company-wide, we're benefiting from secular and cyclical tailwinds. We're ahead of plan with organic growth and acquisitions.

Our service offering has become significantly more compelling to customers with the addition of best-of-breed solutions across key areas of the supply chain. We've hit an inflection point with profitability, both in terms of our investments in growth and our operating leverage.

And by December, we project that our company will be roughly 17x the size it was 3 years ago, with plenty of runway ahead of us. Now I'm going to hand it back to the operator for Q&A..

[Operator Instructions] Our first question comes from Rob Salmon from Deutsche Bank..

Congrats on the 2 acquisitions that you announced this morning, Brad. I'm curious to get your thoughts with regard to New Breed. Obviously, contract logistics is a new foray for XPO.

How should we be thinking about the cross-selling opportunity given the roughly kind of 275,000 orders that are flowing through their network?.

Cross-selling will be a big emphasis going both ways. So New Breed has long-term relationships with customers that we're, in general, nowheres with, we don't have any business with whatsoever. And if you look at their top 10 customers, their average tenure with New Breed has been 10 years.

So they're long, stable relationships and a valued, valued supply chain partner. So we're going to do what we've done on other acquisitions, the same thing, we're going to go in together and ask them for possibilities in getting other business, and I'm optimistic we'll get that business.

By the same token, we have -- when we did the due diligence and we were looking at New Breed's target list of new customers, we are doing business with about 1/4 of them and doing business in a significant way, because it's mostly Tier 1 customers. So we may be helpful in introducing New Breed with a positive introduction to those customers.

So I'm excited about that..

And with regard to kind of the current New Breed customers, is there much overlap between XPO and New Breed's customer list? It sounds like there's a decent amount of cross-pollination on the XPO side for some of these targeted customers for New Breed, but just the current account base, any color there would be helpful..

No. On the existing customers in New Breed, there's not much overlap, which is exciting for us because there's a lot of transportation volume for some of those big aerospace customers and big technology customers and especially retailers. There's not a lot of overlap, but there's a lot of truckload business.

There's a few customers that New Breed is a kind of 4PL for, they're doing the managed transportation for and actually, we were getting freight from them from those customers. That's exciting to us because transportation management is a trend that is happening in our space. And we've got our toe in the water with the XPO NLM product.

And now with the New Breed product, we're getting some critical mass there..

That's really helpful. Scott, in your prepared comments, you had talked about some of the cross-selling that's going on at XPO. You had highlighted that you guys are bidding on 57 accounts and that you had won new business with different service lines of 45 customers.

Can you give us a sense of when that new business is going to be coming on, as well as when we could hear more about the potential wins of those 57 accounts that you'd highlighted?.

Yes. The new service lines with 45 existing customers, most of them are in setup stages right now and we are starting up in a small way. Typically, when we get new business from a strategic account, it's been averaging about $1 million in the first year on an annualized run rate. So those companies go in at about $1 million.

We also brought on 36 new strategic accounts this quarter. And again, it's been about $1 million an account once they get going..

Our next question comes from Chris Wetherbee from Citi..

I wanted to touch a little bit also on the New Breed acquisition. When you think about sort of the pipeline of the opportunities that they're seeing -- even before you guys stepped to the table, you mentioned 16% revenue growth historically and better than that on the EBITDA side.

Does the pipeline still suggest that you can continue to -- that the business on a stand-alone basis still can continue [ph] that type of pace and then obviously, there's some cross-selling there, but I just want to get a rough sense of how the core business on a standalone basis looks going forward?.

It looks good, but their main growth has been with existing customers, getting more and more business with long-term existing customers. Frankly, they've been distracted a little bit with us and with this process.

And Louis and I were joking about this on the phone last night, he was looking forward to getting back to getting his nose down into the business and enlivening the whole sales and marketing effort for new customers, and that's something I'd love to work with him on..

Okay, that's helpful.

What's the average length of contract for New Breed right now?.

It's 5 to 10 years in the average, those are typical contracts. The average length of the contract is between 5 and -- it's 5.5 years remaining..

Okay, that's great. And then switching gears to the updated guidance, obviously, some good acquisitions and clearly, some strong underlying organic growth.

When you think about sort of the run rates both on a revenue and an EBITDA basis, can you break out a little bit of sort of where you're getting the surprise to the upside? Obviously, a lot of acquisitions planned over the course of the last several years, but how strong is sort of the underlying organic growth rate and is that driving potentially, some of the upside here?.

It's coming -- it's really off the charts organic growth and I've run a lot of businesses over my career, I've never run a business that has 49% organic growth. So this is coming from a few different places.

It's coming from adding people; and it's coming from people that we added in previous years becoming more productive; it's coming from being in a good brokerage market, that's not something that we can take credit for, it just happens to be a good brokerage market and there's more volume in it; and it's coming from getting bigger gross margin percentage.

So the gross margin percentage is going up a little but -- a lot, so we're getting more revenue per load..

Okay.

And on that point, my last question would just be sort of any updated thoughts as we're moving here into the third quarter, about sort of that core truckload brokerage market? I just want to get a rough sense of maybe how things are trending as we're crossing over from 2Q to 3Q?.

Chris, I really don't know. I mean, if you look at the last 6 months, it's been a great truck brokerage market. And it has been so much better than it was in 2011, 2012, 2013. I mean, the world really did change for truck brokerage. And truck brokers are standing tall and getting a lot of love from shippers now.

And it's just -- volatility is a good thing. But I don't know. I mean, if you look at 2Q, what were the factors that made it a great quarter and will they stay or not? Not sure. So we had catch up freight. There was a lot of freight that was deferred from the first quarter because the weather was just a bomb in the first quarter.

And you had rollover freight that was coming from intermodal, that the rail service had definitely improved a lot from the first quarter, but it's still not up to speed. So you're still seeing freight coming off the rails onto over the roads.

And then that will continue to get better for the rails, so there will be more intermodal, less brokerage in that respect. And then you had this port strike, which never happened in Southern California. And it was freight pulled forward that would have ordinarily gone in the third quarter, got into the second quarter.

And then I guess on top of that, you had what I'd call PTSD syndrome still from the shippers, who were so in shellshock from the first quarter with not being able to move their product that they weren't as razor-sharp difficult on pricing as they usually are. So some of those factors will continue, some of those factors will not continue.

One thing that is likely to continue for the foreseeable future is I don't see any way that capacity is not going to be tight. There's just no factors that are bringing more capacity in and there's a whole bunch of factors taking capacity out. So that bodes very well for the brokerage market..

Okay, yes so the starting point is a positive one.

We'll see where sort of the freight takes us from here, I guess?.

Yes..

Our next question comes from Bill Greene from Morgan Stanley..

Brad, you and I have talked about this in the past, but I think maybe it would be worthwhile to revisit now, in light of the New Breed acquisition. So a lot of investors kind of thought of you as a truck brokerage roll up and you've evolved the strategy a fair amount.

Can you kind of talk about your thoughts on that? Do you feel like it's maybe we were too narrow in our thinking about what XPO was ultimately going to be and kind of how you see this going as we look forward?.

a truck brokerage, expedite, freight forwarding and intermodal. We weren't in intermodal yet at the time but obviously, eventually, got into that.

We found, over time, as we got wiser, 2 new verticals that customers wanted -- same exact customers that we deal with, same exact freight that we deal with in another part of the supply chain -- and those were last mile, which we got into last year, and contract logistics, which we got into now. So with these verticals, we are complete.

We're a full-service provider to a shipper and I don't think anybody else can say that. And we have a different level of conversation and we can bring more solutions to the table and some more worthwhile discussions. And that's how we look at it, no more complicated than that..

Yes.

And now when you look at what you've built here now, is there anything left that's not here? Or is it just build the scale now, and so any acquisitions would sort of fit into the verticals that you've now built?.

If you look the 100 acquisitions we're looking at, roughly 90 of them or a little over 90 of them are in the verticals that we're in right now, including contract logistics and last mile. There's a small handful of them that are in things that are intriguing, that we may or may not end up doing.

I mean, customs brokerage would be an interesting thing to -- on cross-border Mexico would make us more sticky with customers and be a full service provider there and it's one little thing that's missing, but we don't have anything actionable or anything imminent that's about to happen there.

And we never could figure out how to crack the nut of package and not just be like a little, little tiny decimal point compared to UPS and FedEx. So we don't know how to get into that. It would sure be nice to because we're moving a lot of packages and our customers are moving a lot of packages, but we don't see a way to do that.

So the short answer to your question is the vast majority, the vast, vast, vast majority of the acquisitions we're going to go do going forward are in businesses that we're already in..

Okay, fair enough. And then on the guidance you touched on -- the '14 guidance, you didn't touch the long-term, but presumably these acquisitions get you closer to that.

Is that fair or was there a reason you didn't sort of address the longer-term views?.

No, we're very much on track for $425 million in EBITDA. It's likely we'll have a higher-margin profile in the business than we laid out, just in terms of the nature of the acquisitions that do have solid margins. But the $425 million is absolutely -- we're on track..

Yes. And then just last question, I know you're going to finance this likely through the balance sheet, but presumably you won't stay levered that way.

So is it realistic to think some of this over time, assuming your long-term targets get -- they go a bit higher, that we would see some equity raise?.

Debt. Debt. The next markets that we will tap are debt markets. We have an ABL facility that's got $415 million of availability and another $100 million of accordion at very nice rates and very nice terms and very covenant-light and it's a beautiful thing and we like that.

And there's other debt markets that are very receptive right now and we don't need to raise equity in order to fund the business plan..

Our next question comes from Allison Landry from Crédit Suisse..

Just sort of a follow-up on that last topic.

What do you see your available borrowing capacity being post-closing New Breed and now that you've just recently closed ACL?.

Well, we -- after the ACL acquisition, our pro forma cash balance is going to be order of magnitude $90 million, and then we have a completely undrawn ABL facility. So prior to closing New Breed, we'll have that 100% available to us..

Okay.

And any sense of what you think the availability will be after the New Breed closes?.

After New Breed closes, we'll have a couple of hundred million dollars of dry powder left to pursue acquisitions after that. That will be a combination of cash and ABL, depending on how much incremental debt we raise to fund the acquisition..

Okay.

And thinking about New Breed and taking on new customers, is there any change in the way that we should think about the incremental dollars needed to start a new customer contract within contract logistics relative to your existing business?.

All self-funding. New Breed generates a lot of cash flow, and that's what we'd look towards to finance that..

Okay.

And any idea with respect to integrating the 2 IT platforms, how you're going to attack that and how long that might take?.

Over time. They have a great IT platform. We got a great IT platform. We want to merge those things slowly, carefully, methodically over time..

Okay. And so that's a segue into intermodal. I know that part of the Pacer technology platform you mentioned earlier in the call, that you're setting up a rail optimizer technology to be rolled out next year.

Could you maybe give us a little bit of additional color on that?.

Yes, sure. The technology team has a lot of momentum. They are pumped up and they're working -- we have some people that are working on the rail optimizer out of our technology headquarters in Cambridge as well. And they are starting to roll on to certain portions of that even over the next several months.

And that integration onto the rail optimizer will be complete in the first quarter next year..

Our next question comes from Kevin Sterling from BB&T Capital Markets..

Brad, I remember years ago, I don't want to date myself here, but Pete Rose of Expeditors once told me he never liked contract logistics because it's a low margin business, high startup cost, lack of customer stickiness, if you will.

But what do you see in New Breed that may be different than how one of the legends of the industry would characterize the business?.

Contract logistics is a funny space in a sense that there's a lot of different players doing a lot of different things and different approaches to the business, different types of customers, different services they're providing, different levels of success or lack thereof.

I think in terms of the ones you just mentioned, low margin does not apply to New Breed. New Breed provides a very sophisticated high-end, technology-enabled service and that gets an appropriate margin that's not a low one.

And in terms of -- I can't read my handwriting, it says lack of customers?.

Lack of customer stickiness..

Oh, so stability of customers. Let the numbers speak for themselves. If you look at the 10 top customers of New Breed, their average time that they've been doing business with New Breed is 10 years. So I would call these very, very stable customers as opposed to some of our transactional spot business where they can come and go in a matter of months..

Okay. And your net revenue margin in the quarter was at present, 21.3%. I think you said some of it was due to acquisition to 3PD, Optima, Pacer.

But could you tell us how much of that significant year-over-year improvement is due to maybe the favorable environment? And in particular, could you give us some color as to what were your prices paid to carriers in the quarter, or at least directionally what they were, and what were your prices received from shippers? And I ask that question because your primary competitor this morning in truck brokerage cited the swing in their favor of that dynamic.

Did you guys see the same thing?.

Kevin, so if you back out the Pacer acquisition, our margins -- our net revenue margins were up 70 basis points year-over-year, and that has been driven by an improvement -- so the average revenue per mile is up and the -- obviously, the average cost that we're paying to transportation providers is not up as much.

Ours is not up us much as what you see in the field because we've been able to improve our purchasing power relatively dramatically year-over-year as we gain scale, as our technology has had a bigger effect on the -- and we've improved the algorithms with more data.

As our sales people increase their tenure, so not only they're pricing better, but then our carrier procurement folks have stronger relationships with those carriers and are getting better pricing. So we're not up as much as others, say, in terms of our cost of transportation.

But our price of transportation, we're seeing in spot rates up in some cases, in the midteens..

And Brad, you had talked a lot about the favorable truck brokerage environment, the carrier failures and the shippers and you kind of -- like how they see the market.

Are more shippers, maybe new shippers, coming to you guys because of your extensive carrier network, sensing potential carrier failures on the horizon from the 20-or-so new regulations out there that could impact the trucking market? Are you getting more and more inquiries from new customers, new shippers, looking to you guys for capacity?.

they've been out doing it for 2, 3, years in many cases that we've hired; and also, people that we've hired who have been in the business for 10 or 15 years. So we've got a more mature organization than we had in previous years. But to be honest, it's also because of the market is much more favorable.

And shippers had a disastrous first quarter with their supply chains getting clogged up. And brokers role in life elevated as a result of that. People -- shippers who used to just take inbound calls were making outbound calls, and a lot of those to brokers, to get capacity.

So brokers that have great access to capacity, that give real good track and trace, that are really good, very high on-time pickup and delivery, this is a really good time to be in the business..

Got you. And Brad, it looks like you really like the last mile service offering, I think given the growth in e-commerce. Let me ask you about the dynamics of that business. You have the integrators now implementing dimensional weight pricing. I think the post office is raising rates.

With all of these changes in e-commerce, is this an opportunity for you guys to grow and possibly even maybe take share in this e-commerce market?.

Yes, this is Karl. I mean, I think that's right. I think we've seen strong growth in the second quarter in our transactional business and we're going to continue to grow that as we expand our footprint. We ended the second quarter with 26 facilities. We'll add 7 more by the end of the year.

And then the ACL acquisition brings us in season, another 1,200 carriers to service the business. So we're expanding our footprint, we're expanding our capacity and we think we're going to be able to take market share..

And a last question here.

Brad, are you tracking a little bit faster in cold starts maybe than you initially planned? And if so, is this a function of the seasoning of your salespeople or maybe it's an improving brokerage environment or possibly a combination of both?.

The cold starts are doing great. They're up to -- I mean, with all this different news we've got with the acquisitions and the business, that kind of got lost. But it's -- I'm glad you mentioned it. So the cold starts dropped to about $220 million in run rate, and that's up from about a year ago.

What was it a year ago?.

It's like $90 million..

$90 million. It wasn't even $100 million. So it's up over -- it's like roughly 2.5x in 12 months. And it's very, very gratifying because even though that's not billions of dollars, it's only $200 million, $220 million, it's organically grown with very little invested capital.

So maybe we've got -- don't hold me to this, it's something like $10 million or $15 million invested into that, something in that zip code, and it's generating $220 million. So we didn't have to go out and pay $200 million to buy that. We've invested and we're patient and grew that over a period of a couple of years.

So we're going to continue doing those cold starts and we're going to continue to invest in the cold start network that we've grown already. It's working very, very well. It's not just huge. It's steady and it's high-growth on a low base..

Our next question comes from Scott Schneeberger from Oppenheimer..

A couple questions. First one, and I've asked something similar to this last quarter, but it's still certainly relevant. You guys have been incredibly active on the M&A front and surpassed the acquired revenue guidance that you provided for the year.

What should we think about nearer term, kind of in the back half of the year on your appetite, your activity, given a lot of the, obviously, integration need here?.

We're going to be flexible. We're going to be adaptable. We're going to be agile. We're going to be opportunistic, and we're going to keep an open mind. That may be we end up doing nothing for the rest of the year. That may be we end up -- we do something..

Fair enough. Just seeing what the reaction would be there. Karl, getting you involved, please.

With ACL, any unique differentiators regarded with it? Is it very much a nice add on to what last mile is at XPO at the moment or anything unique that you'd like to highlight, specifically?.

Sure. I mean, I think the first is that it's a great business. It's benefiting from trends where online retailers are seeking ways to increase velocity and lower cost for fulfillment. So it's a big part of it and there's a lot of growth ahead there. The other piece of it is the cyclical nature or the daily cyclical nature of their business.

They'll run on average, through most of the year, about 600 carriers every night. But they run from, call it, midnight into 6:00 in the morning, which is counter to our corporate business today. So we're always focused on capacity and a big part of capacity is the ability to generate revenue for our carrier partners.

So this creates a scenario where we can offer opportunities for our carriers to expand their business, to run fixed cost assets that are already leveraged in their day business, to run them at night, which flips it [ph] and generate more revenue. So that's the other part of it.

So I think there's a lot of synergy there and we're looking for a tremendous amount of growth. A very strong pipeline in that business right now..

And Brad, one more if I can swing back to you. Just could you address kind of the state of the nation, progress report on your management team, top to bottom, but primarily kind of toward the top.

Now that you've padded on a lot of businesses, how's the integration of personalities, working relationships, the kind of the structure at the top and the leadership? What's your comfort level there and what do you view the challenge is?.

My comfort level with the senior management team is very, very, very high. I love each and every one of them and we all love each other and we're getting along very, very well and we're focused on the goal. And people are working ridiculously long hours and ridiculously long weeks and we're loving every minute of it.

And we just have a great team and everything's going really well there. Troy is COO. You know Troy from United Rentals and United Waste, and Troy has been with me for 20 years. He has been right at my side. He integrated 200 acquisitions at URI, helped build up United Waste to 86 trucking companies and 120 different other facilities.

And we promoted Paul Smith with Dan's input, Dan's guidance, to President of Intermodal.

And Paul was Vice President of Network Profitability and Management for Pacer, and he was responsible for optimizing all of Pacer's intermodal network including the capacity flow and the asset management and doing market base pricing and capacity planning, and he had a role in the rail relationships.

It's a very, very perfect choice and we took Dan's advice in promoting him to President of Intermodal. Of course, Karl here, I mean, I couldn't find a better head of last mile than Karl Meyer, what can I say. And Chris Healy is President of the expedite team, a real legendary figure in expedite.

He's been in expedite his entire adult life and he's my age, that's a long life. And we've taken that expedite and really created something new that didn't exist before because we integrated, under Chris, the former Express-1, which we've now rebranded as XPO Express. We've also put under Chris, NLM, which we rebranded as XPO NLM.

And we've also put under him, the expedite division of Turbo, which we've rebranded as XPO Logistics. So all that XPO expedite is all under Chris and was going to market in a very cohesive, integrated, powerful way. And customers are absolutely resonating well with this. And that's one of the reasons expedite's doing so well.

So I'm not going to go and on, but I could brag about each one of the top 20 people, but I won't take up the time. But everyone is doing very well..

Our next question comes from John Larkin from Stifel..

Really intriguing announcements and congratulations on so much growth so quickly here, it's really impressive. I wanted to talk a little bit about some of the feedback we get from investors. A lot of it is around share count.

There's some confusion around that, and also the pace at which intangibles are amortized and that leads to estimates that are kind of all over the map a little bit. And I was just wondering if there's some way that maybe through your IR effort you could sort of sort that out and provide a little more clarity for people.

I think it might actually help out in telling the overall story..

Well, I'll pass to John or Scott to go into the details of the share count and the pace of intangibles. I'd say from my level, I hate that accounting that you have to when you do the acquisitions, you have the intangibles and then you write-off the intangibles because it just kills EPS.

I mean, I personally focus on EBITDA and that's my 100% exclusive -- I don't even know our EPS, so it's -- go ahead, John..

It's John. I'll just comment. We do a table in the back of our press release each quarter that kind of goes through the share count. I think the one part that makes it difficult is all the potentially dilutive securities, the convertibles and warrants and things like that.

They don't really affect the share count on a fully diluted basis because they would actually increase earnings per share if you looked at them on a fully diluted basis. So until we are net income positive, those shares won't follow into the share count. But we do have just under 80 million shares on a fully diluted basis.

So if you think about all of the converts were converted and the preferreds were converted, and you had full impact of all the options and warrants and things, those would all -- they'd be just under 80 million shares. We'd be happy to give more detail around that. If you need a little more information, we could do that on the phone separately.

On the amortization, look, every time we make an acquisition, it's a funny thing. The accounting is the accounting. And so we have to value the intangibles that we're acquiring, put those on the balance sheet and amortize them. The rate at which they amortize is different based on the asset.

And based on exactly -- even like a customer relationship values, those can change based on contract lengths and things like that.

So we have a very detailed schedule on how the amortization is going to run out in the future, which you guys don't have the benefit of, but we can think about doing something to give a little more color there in terms of how it's going to roll out in the future. We had total amortization in the quarter of about $15 million up.

That'll run at the same rate the rest of this year until we close on New Breed. And then we'll pick up some more intangible with that transaction, which will cause a step up in the intangible amortization..

Got it. No, I didn't want to criticize you there. It was just that Tavio was actually extremely helpful on both these points, it's just that it appears that not everybody is singing from the same song sheet when you look at the consensus estimates going forward. That was more of a comment than a question..

That's a good feedback. We appreciate that feedback..

Thanks for listening to me there. And then with respect to sort of the next strategic push, I guess, you have just about all the bases covered in what I would call the domestic logistic space when it comes to what I would generally refer to as containerizeable freight.

With the frac-ing boom that's underway and all the liquid bulk and solid bulk freight that's going to be moving around, is there any desire to perhaps move into that space as a new avenue of growth? And is there any interest in, perhaps, moving more aggressively into what I would call the intercontinental market?.

What is the intercontinental market?.

Well, I mean, sort of from the U.S. to Europe..

Oh, so air and ocean. Yes, so on the air and ocean, we have a few hundred million dollars of air and ocean between what we had at what's now called XPO Global Logistics, which used to be called CGL, Concert Group Logistics. We rebranded it as XPO Global Logistics.

And what we acquired through Pacer's air and ocean business, we've got a -- what are we up to, about $0.25 billion in air and ocean?.

$200 million..

We're over $200 million of air and ocean. It's fine. It's a business that is a real business and allows us to work with customers that we might not have otherwise and ask them for other freight. It's not growing like a weed, like our other businesses. I mean, it's basically growing -- it will grow by global GDP.

If there's more international freight, that business will get better. And if there's not, it's going to be hard to get better. So there's not a big emphasis on that. That's not something that we're itching to get much, much deeper in. But you never know. If something came up that was extremely attractive and opportunistic, we would keep an open mind.

But it's not top of mind at the moment. We don't know much about all the other stuff you mentioned, the frac -- how to take advantage of the frac-ing boom and that stuff. That's something that we've got to get smarter about. It hasn't been something on our radar..

Got it. There were a couple of people over the last couple of weeks during earnings season that have mentioned that it's been obviously difficult to find truck drivers, difficult to find mechanics. But now, increasingly difficult to find young people who are interested in becoming, what I would call, young brokers within a network like yours.

How are you sort of dealing with that problem? And are you having success bringing a lot of new people and training them in order to drive the organic growth of the cold starts?.

We have no problem recruiting millennials to come work for XPO. We've got a nice brand. We've got a nice presence in cyberspace and social media, and we're active out in many different venues. And we're all over the place. There's a nice inflow of -- there's many, many more people applying for jobs than we have jobs open.

But from our point of view, what's really important is that we hire the right people. We're not doing that person a favor of hiring them if they're not going to succeed and we're certainly not doing ourselves a favor hiring them if their skill set doesn't match, if they don't have a clear understanding of what the job is.

This is a rigorous job with long hours and hard work. There's a lot of rejection. There's a lot of stress. I mean, it's a serious job for someone in their 20s. And we want to make sure that they're very likely to succeed because we don't profit from a new recruit for at least a year.

We're training them, we are doing -- then they're doing on-the-job training after that and we're doing -- we're taking up -- and they're doing -- they're helping with some of the back office and they'll doing the -- but we don't really get them up to a point where they're doing $1,000 or $2,000, $3,000 a month in margin for at least a year..

Got it. And then on the contract logistics side, I guess, the tom-toms off in the distance were suggesting that there might have been some other contract logistics properties out there, ones that were perhaps not as sophisticated and didn't add quite as much value that were more in the sort of, what I would call, normal logistics and supply chains.

Would one of those, at some point in the future, be complimentary to New Breed, given that it would allow you to attack the contract logistics market in sort of the broader, more generic space? Or are you pretty much wedded to the concept of building out New Breed as it's currently configured?.

Well, we're certainly very much wedded to working with Louis and building up New Breed to a much larger company than it is right now because the product that -- the service that New Breed provides is just really, really impressive.

It's the top-of-the-line contract logistics that's working with industries and companies in those industries that have needs for this. And they're bringing a real, genuine value to these Fortune 50 companies and saving them very large amounts of money on these big mega projects. So we're absolutely wedded to that.

Now could we buy another contract logistics company or companies in time, and there will be synergy there and some business plan that makes sense? That could be, but I'm not trying to telegraph to you that we're about to do that or that we're not about to do that.

I was just -- in general terms, we're very much committed to New Breed and we'll keep an open mind on the other ones..

And maybe just one final question on the general size of acquisitions. I guess, 2 and 3 years ago, my impression was -- and maybe I was just off base, was that you were going to be doing a much larger number of smaller acquisitions.

As time has evolved here, you've sort of focused around larger, transformative, pretty attractively priced, frankly, acquisitions that have allowed you to round out your service offerings.

Is that the type of thing we should see more of? Or now are we going to pivot to more of the smaller, tuck-in types of acquisitions now that you've filled out the 5 vertical silos?.

You're going to see both. We get a constant inflow from our operating guys about little tuck-ins that were not on our radar, and things that would just make a lot of sense for them. And we've done a few of those and they make a lot of sense to do.

They don't move the needle hugely, but they do sharpen our service offering and make us more competitive in the marketplace, so those are good. In terms of growing up to a company that's going to do $5 billion, $10 billion of revenue and hundreds of million dollars EBITDA, we will do transformational transactions here and there..

Our next question comes from the line of Ryan Cieslak from KeyBanc Capital Markets..

Most of my questions have been answered, but just a couple ones I wanted to tackle here. First, Brad, the question was asked earlier on about the mix of business and maybe how's that evolved with the story over the last couple of years.

I'd be curious to know, just based on the type of businesses that you have right now, how you view sort of the mix of the company maybe longer term, out towards that 2017 target relative to maybe where you were originally when you put the plan out there?.

So in the original plan, contract logistics and last mile weren't in our consciousness. But today, if you say what is our best estimate of where we'll be from a mixed point of view in, say, 2017, truckload and LTL will be the biggest. I'm talking about EBITDA because revenue is -- I mean, revenue is nice but EBITDA is what it's all about.

Truckload and LTL will be the biggest. So when we're at $425 million plus of EBITDA, you could see truckload and LTL be $125 million in EBITDA, something like that.

What we've got in contract logistics right now with about $77 million in New Breed's EBITDA and that growing, if we didn't buy anything else and New Breed just grew at similar-type midteens growth, that would get up to over $100 million of EBITDA, $115 million, $120 million, that kind of magnitude. The third rank down, I would put last mile.

Last mile would be something in the magnitude of $75-ish million of EBITDA, up from the $45-ish million EBITDA now. We look at intermodal. Intermodal now, pre-corporate allocations, is roughly about $35-ish million of EBITDA. And that would grow to get you to -- don't hold me to these exact numbers.

We're just trying to give you like a broad tableau, $50-something million EBITDA. Expedite now is something like, it's up -- approaching $20 million EBITDA. That could grow, depending on the expedite market, to $30 million EBITDA. Freight forwarding would be a little less than that.

And then it would be to be designated, to be determined on what we end up buying. That would be what we grow organically from we got right now. And then acquisitions depends on what we buy. And then you obviously -- you got to net out the corporate overhead from that..

No, that's actually really good color. I appreciate that. The other question is I had is on the synergy opportunity, the revenue synergy opportunity with New Breed. It sounds like a lot of maybe the focus can be targeted towards the strategic national accounts.

I just would be curious to know maybe some additional color around that in terms of where you are with that today, and then where do you see that by the end of next year or several years in terms of really what New Breed can provide and maybe accelerate that initiative going forward..

I didn't quite follow the question.

You mean, what can New Breed provide us in terms of getting business from their existing customers?.

Yes, more so on the larger national accounts. It seems like New Breed certainly can provide some leverage in accelerating that growth, and I know that has been an area of focus for you guys. I just maybe wanted to get some more color around that..

Exactly. Okay, I get it. So all of New Breed's accounts are what we call Tier 1 accounts.

They're large, sophisticated, usually Fortune 50 companies that are the biggest aerospace companies, the biggest telecom companies, Fortune 50 retailers, companies doing omnichannel distribution or big e-commerce projects, big projects involving lots of technology to keep track of things moving around, spare parts and so forth.

All those big customers have a lot of freight and they're very picky, very, very picky who their service providers are, very mission-critical, service-sensitive customers. Also the government agencies, some of it is top-secret clearance stuff. It's very top-of-the-line customers.

We are very much looking forward to meeting with those customers and explaining to them the services what we have and looking for business. And I'm optimistic, and so is Louis, that we're going to get it..

And then I guess the last question I had is on Pacer. I think in the slide deck you had mentioned that the revenue with intermodal was up about, I want to say it was 11% or 12% or so.

Was that the case? And then also, what type of revenue growth are you anticipating within your intermodal services here over the next couple of quarters?.

Revenue in intermodal was up 11.7% in the quarter and volume was up 7.7%. It's good when the revenue is up more than the volume. So it's a good thing. So I find it very encouraging that even in a -- I would call it a challenging intermodal market for the first half for this year because of the service issues in the rails.

We're still growing the business. The business is actually growing and growing nicely in very adverse situations. So my expectation is that when the service issues are behind us all and the rails are functioning on all 8 cylinders, so to speak, the growth is going to pick up..

Our final question comes from Jack Atkins from Stephens..

So just a couple of questions here. I guess, first on ACL. Is there an opportunity to grow that business into some larger -- into some other geographies with your larger customers? Because I know you've got some large customers within that business.

And on the flip side, is there any risk that those online shippers that make up a good chunk of that ACL business could take their business in-house or try to squeeze you guys on margins as they look to lower their transportation costs?.

Yes. I mean, I think there's a lot of -- this is Karl. I think there's a lot of opportunity to grow additional markets. We're pretty limited right now within ACL on the East Coast, so we're looking to expand into the Midwest and the West Coast.

And from the standpoint -- I think we're uniquely positioned with them and rolling them into our last mile business to be extremely competitive, to -- first and foremost, to be able to leverage that business, to drive margins, but also create cushions to be able to maintain that business and still hold good margins if we have to.

I mean, the key to that is providing more revenue opportunity for our carriers. And when you do that, their cost is -- their revenue is spread across a fixed cost asset more favorably. So I mean, I feel strong about growing the business.

I think the trend itself for retailers to find more creative solutions to get to the end consumer and accelerate velocity and reduce cost is going to continue. It's natural and I think with ACL, we've got the ability to offer a strong value proposition to those customers. So I think we're going to grow the businesses..

Okay, okay, that makes sense. And then Karl, just to follow-up on that.

Are the contracts within ACL -- or I guess should I say, are there multiyear contracts there or is it more spot in nature in terms of the business?.

No, they're multiyear contracts, dedicated contracts and then there is a component in the Northeast that is tariff based. The majority of it is dedicated..

Okay, okay.

And then shifting gears here, I know you guys touched on the IT integration of Pacer, but with this new rail optimizer platform that's going to be rolled out early next year, will that complete the IT integration of Pacer into your existing XPO infrastructure?.

That will. We're going to -- we'll continue to add bells and whistles and features and we have lot of ideas for optimizing the business and improving turns and decreasing the empty miles and all different things we could do in technology. From an integration standpoint, that's on the latest technology. It's much easier to use, much quicker.

The number of keystrokes will be down. The systems are all integrated and unified and we're moving very quickly on that..

Okay, great. And then last question for me.

Would you expect to be cash flow positive after you close the New Breed acquisition? And will the business at that point be self-funding?.

Yes, we do..

Thank you, everyone. We appreciate your time and talk to you in 3 months. Bye-bye now. Have a good day..

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