Bradley S. Jacobs - Chairman and Chief Executive Officer John J. Hardig - Chief Financial Officer Scott B. Malat - Chief Strategy Officer.

Robert H. Salmon - Deutsche Bank AG, Research Division Allison M. Landry - Crédit Suisse AG, Research Division Prashant Rao William J. Greene - Morgan Stanley, Research Division Brandon R. Oglenski - Barclays Capital, Research Division Kevin W. Sterling - BB&T Capital Markets, Research Division Scott A. Schneeberger - Oppenheimer & Co.

Inc., Research Division Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division John R. Mims - FBR Capital Markets & Co., Research Division Casey S. Deak - Wells Fargo Securities, LLC, Research Division Jack Atkins - Stephens Inc., Research Division.

Welcome to the XPO Logistics Third Quarter 2014 Conference Call and Webcast. My name is Jeanette, and I will be your operator for today's call. [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 only -- are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law.

During the call, the company also may refer to certain non-GAAP financial measures, as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and related financial tables.

You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the Investors section on the company's website at www.xpo.com. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin..

Thank you, operator, and good morning, everybody. Thanks for joining our call. With me today are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Director of Investor Relations. The third quarter was transformational for us on many fronts.

We raised $1.2 billion of capital to fund our growth, we completed our largest acquisition so far, New Breed, which established XPO in the top echelon of contract logistics and gained a critical mass. We drove a year-over-year increase in gross revenue of 242% and an increase of more than 400% in net revenue.

These reflects the benefit of acquisitions and 48% organic growth company-wide. We generated strong adjusted EBITDA of $24 million for the quarter, which was a swing from the $7 million EBITDA loss a year ago. And we owned New Breed for only 29 days in the quarter so the full contribution of the acquisition will come in the fourth quarter.

We continue to be on target to achieve an EBITDA run rate of $150 million by the end of the year. New Breed has made a seamless transition to XPO. Its performance has been ahead of plan in the first month out of the gate for both net revenue and operating income. Some of the relationships with our contract logistics customers go back 10 or 20 years.

These customers spend a significant amount on other types of transportation services, and we intend to capture that business. There's also a sizeable opportunity to sell contract logistics and related transportation management services to our 15,000 customers.

In fact, we've already had many positive meetings with Tier 1 customers about these capabilities. Moving to intermodal, our integration of Pacer is largely complete. Our intermodal team is doing a great job of meeting customer requirements in a congested rail market.

And I'm happy to report that we've made substantial gains in customer satisfaction and proprietary IT development for this business. Looking at the company as a whole. Our strategic accounts group is ramping up very substantially, and we're getting an excellent reception from large shippers.

Some of this is because XPO's profile is much higher now than the year ago but there's also a market dynamic working in our favor. Shippers are concerned about tight capacity and about driver shortages.

They're looking to develop relationships with 3PLs like XPO that have deep access to capacity and are strongly committed to investing in technology and offer a broad range of services. In only a short time, we've had a great amount of success, selling multimodal services to our customers.

We're already generating revenue from multiple lines of businesses, with 36 of our top 50 customers. And half of those 36 customers are using 3 or more of our services. To sum it up, we've attained critical mass and leading positions in the fastest-growing areas of logistics.

We've built a strong and scalable foundation and now we're jelling as 1 integrated organization, with a single-minded focus on customer service. We have substantial liquidity to take advantage of a very lively acquisition pipeline and we continue to meet or beat every one of our strategic goals. With that, I'll ask John to review the numbers.

John?.

Thanks, Brad. Turning to the results. We delivered very strong revenue growth and margin improvement in the quarter, ahead of expectations. We increased gross revenue 241% to $662 million, and we increased net revenue by 403% to $175 million.

Adjusted EBITDA was $24 million in the third quarter, up from $14 million in the second quarter and compared to a loss of $7 million a year ago. Revenue from our freight brokerage segment increased 240% year-over-year to $519 million.

Net revenue from truck brokerage, excluding the contribution from last mile and intermodal, increased 81% year-over-year. This was largely driven by the continued growth and margin expansion of our truck brokerage cold-starts, which are now on an annualized revenue run rate of over $250 million; that's up from $120 million a year ago.

Truck brokerage net revenue margin increased by 55 basis points from last year. This was our sixth consecutive quarter of year-over-year margin improvement. Excluding the impact from the brokerage business we acquired with Pacer, this increase would be even higher. In our intermodal business we increased revenue 9.6% year-over-year.

However, we experienced higher drainage cost due to the rail network disruptions. Our last mile business continued strong revenue growth, driven by increased volumes with existing and new accounts and continued growth with e-commerce customers.

The market for last mile carriers remained tight during the quarter, and we maintained high service levels by procuring short-term capacity during surges in demand.

In expedited transportation, we continued strong year-over-year top line growth and profitability, driven by cross-selling synergies between our 4 expedited services and strong market demand during the quarter.

We're making good strides in improving recruitment and utilization of owner operator capacity by implementing new route optimization and carrier selection software. This is allowing us to offer better service to our customers and more miles to our carriers.

In freight forwarding, we made significant strides toward consolidating the former Pacer operations. We completed the consolidation of 3 freight forwarding offices and substantially improved our operating margin over the second quarter.

Corporate SG&A was $23 million, which included $10 million of transaction and integration costs, $1.8 million of noncash share-based compensation and $1.5 million of litigation costs. Interest expense was $17.8 million in the quarter, which included $9.8 million of commitment fees to fund the New Breed acquisition.

We expect that interest expense in the fourth quarter will be in the range of $14 million to $15 million. Excluding future acquisitions, depreciation and amortization will be approximately $34 million to $35 million in the fourth quarter.

Our tax rate for the quarter was 63.2% due to the full release of the valuation allowance on our deferred tax assets as a result of acquisition of New Breed. This gave us a significant noncash tax benefit in the quarter. Without the release of the VA, the tax rate would have been 16 -- 36.1%.

We expect our tax rate in the fourth quarter will be in the range of 30% to 33%. We have significant tax carryforwards and don't expect to be a federal cash taxpayer for several years. We ended the quarter with $690 million of cash on the balance sheet, including $10 million of restricted cash. And we generated positive free cash flow for the quarter.

As an accounting note, we expect to record a $41 million noncash charge in the fourth quarter related to our recent $700 million equity project placement. The amount of the charge is equal to the difference between the amount allocated to the preferred shares we issued and the fair value issuance of the underlying comp.

The charge will be recorded when shareholder approval for the conversion of the preferred stock to common shares is received, which we expect will be in the fourth quarter. We expect our fourth quarter weighted average diluted share count to be approximately 66 million shares, assuming we convert the pipe preferred to common on December 19.

The share count could be slightly higher or lower depending on the exact date of conversion. Now I'll hand it over to Scott for comments on our strategies.

Scott?.

Thanks, John. From a macro standpoint, the holiday season is top of mind. There's a lot of internal debate as to how and when the peak will come. Holiday got off to a late start, although the L.A. ports have tightened up quickly in recent weeks. This could mean we're in the calm before the storm. There's no debate about capacity.

Although it's not as tight as it was earlier this year, it's still relatively tight and it would take only a little increased demand to tip the market over into imbalance. It's a good time to be a broker and at XPO, we're particularly well positioned to take care of any surges.

That's because we're continuing to grow our business as 1 integrated company and can utilize our increasing scale and resources to serve our customers. For example, we have relationships with over 28,000 carriers, representing 667,000 trucks, which is over 3x the number of carriers we worked with only 18 months ago.

This increased density enables us to do a better job at finding the right truck for each load. This is in addition to the 4,000 trucks we have under contract through our subsidiaries, our auction-based XPO NLM system and our air, rail and shipping capacity. This strategy is clearly working as we delivered 48% organic growth.

A major contributor to this outsized growth is our cold-start program. We're adding at least one more brokerage cold-start in the fourth quarter in Denver. It will be led by an experienced leader with a successful track record. The outlook for last mile continues to be exciting.

We've won over $70 million in annualized new sales so far this year, with accounts tied to e-commerce making up a significant portion of the growth. We'll see the full contribution from these wins in 2015 and beyond.

We're continuing to invest in proprietary technology to support our growth in e-commerce and drive-up our industry-leading last mile service levels. And we're beginning to benefit from our acquisition of ACL.

In 3 major markets served by ACL, more than half of the last mile contract carriers are taking advantage of additional overnight business associated with e-commerce. The additional income is a big plus to many contract carriers and attracts them to XPO, while at the same time leveraging capacity to add to our margin.

We have a similar strategy for intermodal. We're becoming even more customer-centric by building on the platform we inherited from Pacer. We tied compensation to customer satisfaction. We've revamped the training programs, and we've completed technology enhancements that provide greater realtime visibility to key metrics on the floor.

We're getting great feedback from customers regarding how well we communicate and plan and on our issue resolution. Overall, we have a lot of avenues for growth. We're just scratching the surface of a much larger opportunity. For example, we're winning business from many of the largest shippers in North America.

And 3 years into our growth, we still only met with about 1/3 of the over 2,000 strategic account prospects. So we have years of growth ahead of us. At the same time, we're creating significant potential for incremental revenues with our existing large customers.

We're providing high levels of service to these customers, who typically have individualized needs and exacting service requirements. We're taking the time to make sure we meet or exceed all of their requirements to earn more of their transportation spend.

With this type of opportunity, coupled with our multimodal solutions, we have significant scalability already embedded in the business. Looking out over the next few years, we have clear line of sight to exceptional growth. With that, operator, we'll turn it over to questions..

[Operator Instructions] And our first question comes from Rob Salmon of Deutsche Bank..

Scott, in your prepared comments, you have highlighted about $70 million of new business that you guys have annualized in your business that you've won that's related to e-commerce. Can you give us a sense how much of that you guys are currently moving? And kind of how that will kind of scale up in 2015 and beyond..

Okay. Thanks, Rob. The last mile business had been won through the year. It usually takes a few quarters for that business, the new business, to get ramped up. And it takes some time for it to become profitable as you set up and have setting-up costs in the markets.

Some of it rolls in, in the third quarter; more of it will roll in, in the fourth quarter; and then a majority of that $70 million will be rolling in, in the first quarter of next year..

Okay. That's really helpful. And can you talk a little bit more about kind of how ACL is integrating in with the rest of your last mile business? It sounds like there's a lot of opportunity to better leverage the owner-operators, who are providing capacity here.

Any sort of additional color would be really helpful as we think about that business and how it kind of supplements the rest of your last mile businesses..

Yes, that's gotten off to a great start. So ACL, since we've taken over, has signed up a large new contract. And we're not only getting last mile business from that new contract, but we're also getting truckload business and expedites. So there's been a lot of cross-selling.

The nature of ACL's business is they're moving goods and doing zone skipping from 12 a.m. to 6 a.m. So what that enables us to do is contract carriers that we work with in our last mile division that are running things for us from, let's say, 8 in the morning until 7 p.m. at night. We can offer them freight overnight.

So a lot of the contract carriers are taking advantage of that capacity. More than half of them in the markets that we're doing business in with ACL are taking advantage by putting a different driver in that truck and having the truck run overnight. That does a lot of different things.

The biggest advantage we have in last mile is our customer satisfaction. Our customer service scores are well above the industry. And the reason they are is because we work with the best contract carriers. We can work with the best contract carriers because we have great freight.

We can get them 10 to 12 stops a day and we can pick and choose and make sure we're using the best contract carriers. This gives us another advantage because we now can offer them freight round-the-clock and it makes it even more of an advantage to work with XPO versus one of our competitors..

And I guess, Brad, I'll turn it over to you for a quick question with regard to New Breed and -- what do you see as the cross-selling opportunity across the different XPO platforms? As well as can you give us a sense of what their TMS spend is that could potentially go into either last mile or truck brokerage as well that you guys can manage internally over time?.

Sure, this is Brad. I'll take the first part of it. Scott will take the TMS part. So the cross-selling opportunity is big. It's big both ways. Contract logistics -- this contract logistics service is a very highly engineered, complex, sophisticated type of contract logistics services that New Breed offers and does very well.

It's applicable to somewhere between 100 and 200 of our 15,000 customers. And we are doing a very systematic approach to those customers, make sure we understand their needs and we'll pitch it. And we've already started doing that and that's a receptivity. Now contract logistics, you don't sign up a $50 million contract in 2 weeks.

There's a lead time on that. It takes a while. There's a lot of studying the situation and customizing. So there'll be some lead time on that, but I'm very, very optimistic, and I'm reflecting the optimism of our strategic sales team, that we have identified the right customers to pitch that to.

Now looking the other way, New Breed has some amazing relationships that go back as much as 20 years with a core group of Fortune 100 customers, where they've lived and breathed. They've been in the tranches together for a long time and there's a lot of mutual trust there based on experience.

And those customers do a lot more than just contract logistics. They do truckload, they do expedites, they do intermodal, they do TMS, they do all the other services that we have gained leading positions in. And we have begun, but just a little bit, to approach those customers for those services.

And in the coming months, we'll approach them more intensively, and I'm optimistic we'll get a lot of business from that. That business will come up faster than the other way because it's a shorter sales cycle..

On the TMS platform, we're doing a little less than $100 million in transportation management services during the New Breed platform. That's an area that we're selling very fast. That's an area that we're getting a lot of interest from customers.

If you look at our transportation customers, they're looking at that new platform we bring from transportation management combined with what XPO NLM has in terms of an online auction capability. And we're marketing that new platform to our transportation customers..

And our next question comes from Allison Landry of Crédit Suisse..

So first, maybe if you could talk a little bit about the rollout of the track and trace technology and what percentage of your truckload freight is currently utilizing this offering? And then what has the customer and carrier response been since you've rolled it out?.

Thanks, Allison. Yes, the track and trace capability we rolled out in this last quarter is an ability for us. It's a great tool for us from a track and trace perspective. It's an ability for us to send out a text message to the carrier when they've accepted a load.

And as long as they write back to us, "Yes," we can then track and trace through their mobile phone without calling them and know where the truck is at any given time and provide that information to the customer.

So it increases visibility, it improves efficiency at XPO because you don't have as many people calling every 2 or 4 hours to make sure the freight is going the right direction and where it needs to go. That has gotten off to a great start.

We're up to about 15% of the freight is being tracked and it's an education process with our carriers in getting comfortable with using the technology and approving the request to track their phone. But it's certainly a great tool that's been warmly recepted by some carriers and other carriers have to go through an education process..

Okay. That's helpful. And my follow-up question, so New Breed looks like it's tracking better than your initial expectations, cross-selling really appears to be gaining some traction.

So I just wanted to gauge whether you think that there's potential upside to your 2014 EBITDA target?.

No, I wouldn't go there. I mean, we're very comfortable with the $150 million EBITDA run rate for the fourth quarter. That's -- we feel good about that. So about bottoms up planning for that, but we wouldn't want to guide you to more than that..

And our next question comes from Chris Wetherbee of Citi Research..

This is Prashant in for Chris.

I had a -- I guess, my first question, you talked a little bit about the change in the market for the core truckload brokerage and capacity, still being good but in terms of [indiscernible] for you guys, but as we're crossing here from 3Q into 4Q, I just wanted to kind of get an -- I mean, updated thoughts you have, a rough sense of maybe things -- how things are trending and, especially as we go into the holiday season and also if you could maybe touch upon how the interplay with intermodal is looking as we go into, especially with the e-commerce boom that we expect this year?.

So we have an interesting view on this because we're looking at patterns of contract logistics in the last mile, in intermodal and in expedite and in truck. And overall, taking all that data in aggregate, it's been a late holiday season start. I mean, it really didn't start in force until a week, 10 days ago. It was really quite quiet.

And now it's gotten very big in certain pockets of the country versus the West Coast has come up alive in the last 2 weeks, and it's right off the chart.

Whether that's the -- this has been the quiet before the storm and now it's going to be a big crunch, which is what some of our people think, or whether it's just lost business from a late start, it's too early to tell. So we have to see how the quarter's going to play out.

My personal feeling is truck brokerage might slow down a little bit in the fourth quarter. It's slowed down a little bit in October, but that's 1 month out of 3. It could come back roaring in November and December and some of the other businesses, business is looking up, business is looking good.

With respect to intermodal, so intermodal, the theme on intermodal, the big, big issue has been the service levels. And the service levels are still congested, there's no question about that. They do look like they've bottomed out a couple of months ago and things have gotten better in the last couple of months.

It certainly looks to us that the rails across the board have come a long, long way in terms of being aware and sensitive to the service issues than they were even 6 months ago and 9 months ago. And they staffed up and the communication levels are better and there's just more wickedness in the rails in terms of the service levels.

Now, some of those things will take time. Some of those things of hiring people and training people and doing the capital investments, some of that stuff won't -- you won't see the full benefit from that impact, so that's in the middle of next year. But I think it bottomed and it's getting better now.

In terms of the overall trends, what surprises me the most is that, and it's very instructive, is that despite the service levels, the volumes are up. I mean, our volumes in intermodal this quarter, up 6%. Our revenues are up 9.6%. And it wasn't great service levels. And it's -- it tells you something.

What it tells you is there is a real trend from over-the-road to intermodal for longhaul. And our hypothesis for that is it sure is saving the money. There's a price differential, but there's something changing in the supply chain patterns. Not necessarily from the shippers side, but from the capacity provider's side.

So because of hours of service and because of lifestyle changes, truckers don't want to do those longhauls anymore. I mean, a much smaller percentage want to be away from home for longer periods of time. And even though if you do, it's more expensive because of the hours of service restrictions.

So a lot -- that helps, I think, the conversion to intermodal. We're not thinking about that. We're -- we have a big over-the-road presence, we have a big intermodal presence. But there definitely is a trend towards conversion that's taking place even in these non-optimal service times..

Okay. Great, guys. And just a quick follow-up about cold-starts.

Just any sense of how many we could see in the coming quarters and maybe sort of a geographic distribution, where you're thinking the best strategic opportunities are?.

Well, we just opened 1 in Denver with a real fantastic France [ph] leader there. We almost had 1 in Boston and then the first one we recruited chickened out the last minute. But we're still talking to her; we might still be able to recruit her.

In terms of locations, we don't look at it as we have certain places on the map that we want to open up a cold-start.

What we look at it as we want to recruit fantastic branch presidents, who are experienced, who are charismatic, who are leaders, who are ambitious, who can get people to follow them and can get customers to follow them, who really understand the value of technology, really strong, strong truck brokerage veterans.

And wherever they are, as long as there's enough people to hire, we'll back them and we'll open a cold-start. So it's more reactive to where we can find talent than geographic locations. It's all done in the phone, not in the Internet anyways..

And our next question comes from Bill Greene of Morgan Stanley..

Brad, I wanted to ask you about sort of the pipeline and the priorities, right. So you've got a lot of different aspects now through multimodal.

Maybe you can talk about what needs to be built up from here or is it really just adding to the scale that you're building organically anyway?.

It's adding to the scale. So on contract logistics, we've got a very rich infrastructure. With New Breed, that can be scale. So those several hundred IT professionals and all the back office and all the engineers and all the Ph.D.s that Louis has assembled. That whole organization can handle a lot more.

So that's why buying another contract logistics company, 1 plus 1 will equal more than 2. Last mile, we have a bunch of stuff going on as well. And last mile is primarily getting the density that Scott was referring to earlier in his remarks.

And to be able to -- when the bids come out from the retailers, and we service 29 of the top 30 retailers in the United States, and in most of those cases, we're their #1 outsourced last mile provider. Getting -- being able to -- they bid on the whole country. We want to be able to have presence across the whole country.

So with last mile, unlike when I was just answering the earlier question about truck brokerage, last mile it is a geographic play, where the acquisitions we're doing do have a sense of geography.

And the kinds of companies we're looking for in last mile, the kind of companies we're talking to are ones that have similarities to ACL, where it brought something we weren't doing, brought relationships, really important in fast-growing customers, that we were only doing a small amount of business with.

That's the kind -- and it comes with great management. We got Rob Hughes [ph] out of that. So it's -- those are the kind of companies we're looking for in last mile. Intermodal, intermodal we have a very few number of conversations going on, but they're good conversations. There's just not a lot of intermodal companies to buy.

So we've got the third largest intermodal company ourselves. And we're just going to -- we will just continue discussions and see if anything comes out of that. On expedite, there's a few companies that have capacity in the form of asset light to passenger to owner operators on expedite that has always been a conundrum.

Do you want to enjoy a bike company with owner operators or do you want to just throw money on the table and recruit owner operators. And our decision, we want to do both. So there is a capacity play because expedite's all about capacity.

In truck brokerage, Bill, it's really about scale and getting lane density and getting -- becoming more of a player in more power lanes throughout the country so that we can serve our customers better. So that's how we're looking at it.

Is that what you were looking for?.

Yes, yes. Well, so in other words, you've kind of built out the key segments now. So there's not a missing piece. You've got the multimodal aspect down.

So it's not like you'll go into a new segment from here?.

We have almost no discussions going on with anyone who's not in our existing segments. I won't say none, but it's almost none..

And let me ask you this because we didn't really -- we don't talk about this a lot, but freight forwarding sort of on the international side, does it make sense to even keep that? I mean, I suppose it's not really a distraction because it's still pretty small, but maybe that's a source of funds if you divested it?.

No, we're not going to sell freight forwarding. Freight forwarding is up into the right; their numbers are good. It allows us to touch customers that we wouldn't have otherwise been in contact with, we can do cross-selling with them. We're kind of a -- sort of a sizable, small freight forwarder now.

We're up to over $200 million in freight forwarding between what we had acquired in the very first acquisition we did, the CGL subsidiary of Express-1. And the Pacer -- part of the Pacer International freight forwarding that we didn't close down, it adds up to over $200 million.

And the numbers are in the right direction, so there's absolutely no reason to divest that. It's part of our service offering..

Okay.

And then just last question, Brad, can you remind folks about the incentive targets you have in place? So how did the management targets relate to the long-term targets that you have out there for the company?.

So we have 2 strata of compensation plans, 2 buckets in general. One is for the senior management team, which might be what you're referring to.

In the senior management team we have, as you know, I got everybody to take salary cuts when they're hired and came onboard in exchange for helping chunks of equity that vests over time and also vests in terms of specific targets. So the tranches we gave out earlier this year were set on -- correct me if I'm wrong, Scott.

I think it was $2.50 of cash earnings per share in 2017..

Yes..

And AM [ph] stock trading at $50 a share anytime between now and March 2018 for 20 days since second [indiscernible]. So those 2 triggers, people get their RSUs. And on the field level, I -- we don't give out too much equities to the field.

If you don't want the field looking at XPO or the stock, we want them looking at the company that serves customers and deals with carriers and is in the "real world." So from there, we tie compensation to profit managed to gross margin dollars improving and the profit improving.

So we try to keep base salaries reasonable and we are happy to pay people large sums of money, but only if they've performed. And if they performed, God bless them. Let's let them make a lot of money..

And our next question comes from Brandon Oglenski of Barclays..

Brad, I want to follow through Bill's question there on the deal pipeline.

Has the recent volatility we've seen in the marketplace slowed down the pace of discussions or caused people to walk away from the table? Or how should we think about timing of where you're looking at the next deal? I mean, is it in the next 12 months or should we be thinking by the end of next year we'll have something else done?.

No, much more compressed time on that. I mean, we could announce another -- I mean, it's very hard to predict deals because sometimes you get right up to 5 of midnight, the deal falls apart.

But generally speaking, we've got enough conversations going on right now at a fairly serious stage that we could announce a deal in as early as 3 weeks from now or 3 months from now. That there's a lot of conversations going on. And over the next 3 or 4 months, it could be more than 1 deal. We have a lot of financial capacity.

We have almost $700 million of cash on the balance sheet. We've got the ABL, that's got $515 million of unused opacity, including the accordion. We've got leveragability even more so over and above that. We've got an operations team that is eager to build up their parts of the organization.

I mentioned accounting group is functioning very, very well, closing in the books right on time, cleaning numbers, able to take on more business. The IT that we've been rolling out is very scalable and leverageable. And the acquisition team has more -- a larger number of discussions going on today than at any time in the company's history.

There's -- and that's our style. Our method is to have multiple discussions going on at any one time so that we don't fall in love and get undisciplined on any particular acquisition. We stay responsible. And there's more active discussions going on in acquisitions right now than ever before.

So I would just pull up all your -- the days you mentioned by a significant amount..

Well, I just want to make sure we have the right time frame expectations out there, but it sounds like the confidence level is pretty high that you're going to get something done?.

Very high. We have a lot of conversations going on. I mean, I'm sorry we might have disappointed some by not being able to announce an acquisition. Chris Healy ran out of earnings date, but stay tuned..

Okay, no problem. Now that you've had New Breed on the property for a little bit.

And I think this comes back to some of the earlier discussions, but do you feel more comfortable now that, that business can grow 15% over the long run? And I think that's the target you laid out last time you spoke?.

I do. I do. I love New Breed before we bought it. I loved it even more after we bought it. I'm very impressed with the quality of the management. When I visited the -- when we did the tours last month in Memphis and in Dallas, it's very impressive.

It's just run really, really, really well and we'll be down there next week again and it's just a really great shop. I mean, it's well planned out. They think like engineers. They're very much in planning and they're very meticulous and careful and thoughtful about everything they do, including their financial planning..

Okay, and maybe the last 1 is for Scott, but I do have to nitpick here. It looks like in your truckload and LTL and intermodal results, you did have 2% sequential growth. But sequentially, the margins were down a little bit.

Can you talk to the type of sequential growth expectations we should be thinking about for the fourth quarter and where margins could trend, especially with the impact of the new cold-start in Denver?.

Yes. On freight brokerage, our margins year-over-year on the truckload side were up 55 basis points. And that's the sixth consecutive quarter we were up. And we continue to expect margins to improve over time just because we're pricing better and we're finding better capacity and we have more relationships and we have more -- better access to trucks.

On the intermodal side, there you had a tight drayage market. You still had some rail disruptions albeit improving. We did see improving price through the quarter as you ended the quarter in September and on into October, we've started to see some more pricing in intermodal network.

We've got a lot of initiatives that Brad laid out in terms of intermodal and all the things we're doing to improve our service levels and our efficiency levels. We would expect margins to improve in the intermodal business going on into the fourth quarter..

And our next question comes from Kevin Sterling of BB&T Capital Markets..

Brad, you talked about the intermodal conversion trend you're seeing over the highway. And the opportunity you see there going forward, it sounds like you're very excited about that. Do you need more scale on intermodal? And what I mean by that is Pacer has a great north-south business.

Do you need more east-west scale? Maybe do you need more drayage containers? How should we think about that?.

We could use some more drayage, and we are talking to a few different drayage companies as possible acquisition targets. They're small, but strategically it would help quite a bit. In terms of east-west versus north-south, we are a lot stronger in north-south than east-west.

We'd like to get more east-west business and we'll chase it and we're going to continue to grow that.

It's an interesting thing what happened this year, we bought Pacer and then all the weather issues and the rail issues, that intermodal market, the service wasn't spectacular so our sales force was all geared up and ready to push intermodal to our -- well, then it was 14,000 customers, now 15,000 customers, and we put the brakes on that.

We said, "Look, we're not going to burn our truckload customers or expedite customers or other customers with introducing a new mode that they're going to be upset about right away and we want to get the service levels up." But they're chomping at the bit to sell it and it's still selling despite us pushing it because, I believe, because of the issues we mentioned before.

Interestingly, in intermodal, we saw pricing accelerate in September and October. Volumes are healthier than they are in truckload. Just interesting, at this moment, the intermodal seems to be accelerating more than the truckload brokerages. I don't know what to make of that, but that's just what we're seeing internally.

The other thing I would mention is, on intermodal, there's a lot of things that we're doing ourselves that we take control, that we do control. There's some things we don't control in intermodal. There's a lot of things we do. So we revamped the whole intermodal business reporting process so we have more actionable data.

We've created regional dispatch functions in the larger metro areas so we can do -- schedule pickups better and help balance the street better and just improve efficiencies in general. We rolled out new owner operator recruiting and retention programs. We've rolled out new training modules.

We've rolled -- we've tied compensation to the key employees in part to customer satisfaction and on-time performance to motivate behavior more on that. We rolled out a proprietary IT platform, what we call the XPO Rail Optimizer, that's in beta now. It's getting good reviews now and it should be fully launched by the end of first quarter.

So a lot of things going on in intermodal right now. So I'm bullish about that long term..

That's very interesting, about your comments here regarding pricing. So accelerate in September and October, I know you're excited to hear that. And lastly here, you talked about the West Coast I think recently picking up steam.

Had you been impacted at all prior to that from some of the congestion we've heard and read about in L.A., Long Beach, the chassis issue.

Has that impacted you at all?.

It has. I mean, intermodal has been a challenging market and our team has done a great job and our service levels have improved through the quarter. Incidentally, California has just gotten tighter recently. I mean, they're much, much tighter than it was. And all those things do affect rail service. But that's not to say there's not a lot we can do.

And Brad laid out a bunch of different things that XPO can do, that we can do to improve service levels, improve the efficiency of our fleet, but certainly the environment, especially on the West Coast and then some of as well in terms of the chassis availability going to Mexico as well. That does impact us..

And our next question comes from Scott Schneeberger of Oppenheimer..

Guys, a continued strength in organic growth, I think, 48% for total company, 58% in freight brokerage.

Could you speak to really what are the main drivers of that across your segments? And I imagine sales productivity and truck brokerage is one of those elements, so if you could elaborate on that, too, please?.

one is the huge investment in technology we've made there; and number two, our business model of having contract carriers that we're measuring the service scores and we're being very responsive to those service scores and we're -- we've instilled inside the XPO Last Mile culture, which incorporates 3PD -- the former 3PD, ACL, Optima.

That original last mile credo, essence of the culture of it's all about passionate commitment to customer service no matter what. No matter what. No matter what, we've got to succeed on that last mile because our customers' brand is at stake. Every single one of those 7 million shipments we do a year.

And the technology really allows us to put meat behind those words.

So Scott, do you want to add anything about what's fueling the organic growth?.

I don't -- I think you hit the main points.

And I think in general, we added a little under $300 million in organic growth on it on an annual run rate -- on an annual revenue run rate business and a little less than half of that was from the cold-starts and we have the strategic accounts growing very quickly in cross-selling and the end markets are growing.

So we have the tailwinds and the end markets and it's been a good year for brokerage and for our other businesses. It's a good time to be a broker. So I think you hit on most of the key points..

Great. And then you mentioned in the prepared remarks that Pacer is largely integrated.

Could you remind us the cost savings, the synergy potential that you kind of have been talking about since that was announced? Has that changed since last update? Where is it now and how far are you through? And are there other incremental potential benefits you might derive there?.

When we first announced Pacer, we estimated there'd be about $10 million, I think was the number we put out there for synergies. Some of that was a swag. Some of that we hadn't done our due diligence. We are just kind of guesstimating.

And we later, once we got under the hood, and worked with the team, raised it to $15 million and that's what it's going to be.

And that breaks out in rough buckets of, off the top of my head, about $1.5 million of public company costs, about $5 million each of corporate headcount reductions and savings from the international freight forwarding locations that were not profitable -- that were closed and the balance of about $3.5 million from IT savings from merging some of the IT functions and that adds up to $15 million.

And we're about 2/3 through that and the other $5 million is a clear line of sight to it. So that's that was the good news. That was a good guy that came out of the Pacer acquisition that wasn't predicted..

And our next question comes from Ryan Cieslak of KeyBanc Capital Markets..

Let's see, first question I had is on intermodal with regard to maybe some of the impact from the rail service issues in the quarter.

Is there a number or a way to think about what the impact was maybe to the numbers, maybe on the EBITDA standpoint or maybe a net revenue margins to implement within intermodal?.

It's so hard to quantify it. And frankly, we haven't spent a huge amount of time focusing on that. We've said -- we've been using that time to do what we can do to serve our customer better, to communicate more between ourselves, to communicate better with the rails, to communicate better with the customers.

And that was a silver lining in the kind of price these kind of things. And this year, with the intermodal situation, what's happened is all companies, not just ourselves, our competitors as well. I think everybody's gotten their game up.

Everybody's gotten their act together a lot more in terms of identifying problems before they exist, communicating what's on the horizon, coming up with alternatives in terms of ground and in some cases, even air [indiscernible] solutions. I know one of the reasons that we could have had better numbers in the quarter in intermodal if we did this.

We stepped up to the play with a handful of customers, where they were impacted by some of the rail service issues and we had no recourse to the rails under our contracts to that, but we stepped up and we found other ways to get their freight where they needed to go and we ate that and that was in terms of either ground or in many cases, expedite and in 2 cases, air expedite, which was expensive.

But those are the kind of things you do if you really value a long-term relationship and it was a mess earlier part of the year. There's just no other words to describe it in the very beginning of the year when everybody was kind of caught by surprise. It's gotten a lot, lot better..

Okay, that's good color. And then Brad, the top line within intermodal looking good and it sounds like pricing has accelerated.

I just wanted to get your sense of the pricing opportunity with intermodal next year for you guys, just sort of what is your expectation going into 2015?.

I don't know yet and that's -- I don't know yet. We have to see how the rest of this quarter plays out. We have to see what demand's like and most importantly we've got to see how the bid season goes beginning of next year. So it's a little too early to make a call now..

Okay, fair enough. And then lastly, the 1 question I had is on the cross-selling opportunity. I think there was a couple of questions asked earlier, but I wanted to see maybe if there is a way you guys are thinking about what that opportunity is as a whole now with the different verticals that you've brought on in certainly, now with the scale.

Is there a dollar amount longer term that you guys are looking at to target, where you think the cross-selling opportunity can be or just -- maybe just some color around that will be great..

Well, Scott or John can put a financial figure on it. But conceptually, here's what we've been doing. We've been going through our best customers.

Customers that we have the closest relationships with and are doing a lot of business with and have been doing business with the longest amount of time and showing them the other services that we provide, and that's been our strategy. A real simple strategy for cross-selling and it's been working very well.

If you look at our top 50 customers, 72% of them are using -- now are using at least 2 of our verticals. And half of those are using at least 3 of our services. So it's happening, it's working and we've had several wins in managed transportation and we're cross-selling the managed transportation platform that came with New Breed.

Very powerful technology platform they developed and they were doing it with a handful of customers. There's no reason to do that, so that they can't do that with a much larger amount of customers. I'll give you a couple of examples, if you want, of cross-selling.

We had a recent cross-sell win with a Tier 1 auto supplier that Pacer had been doing with -- doing business with and had been about a $6 million intermodal customer for Pacer before we acquired them. It's now a $20 million customer for us because we've sold them truck brokerage, we sold them expedite.

We have several large retailers that were last mile customers with 3PD and with ACL, by the way, and we're now doing a significant amount of truck brokerage business with them.

There's 1 large company in oil and gas that I can think of, where we're in the middle of doing joint bids right now or truckload intermodal, LTL and expedite, all at the same time as part of the package. So this is our approach to market.

Our approach to the market is we're not just a truck broker, we're not just a contract logistics company, we're not just an IMC, we're a full service, end-to-end comprehensive supply chain partner and we want to be an integral part of your supply chain and save you money.

Scott, do you want to put any color on the numbers?.

Yes, in terms of how to think about the opportunity, if you look in the first quarter this year, we were getting about 5% of our revenue from cross-selling. We've taken that up to about 14% of our revenue. That 14% of our revenue is coming today from cross-selling a secondary or third or fourth service to an existing customer..

Okay, that's great color.

And just to follow-up on that, I mean, just to be clear, the expectation, I would think, going into next year or particularly with the bid season, is that -- that number should continue to accelerate for you guys?.

We believe so, yes. We think it will be a larger and larger piece of our business, the secondary, third or fourth service that we sell to those customers..

Is there a target, Scott, that you should be thinking about by the end of next year? Or would you care to maybe just give some color on that?.

We haven't set a target for specific cross-selling. We wanted to continue to see the increases..

And our next question comes from John Mims of FBR Capital Markets..

I had a -- just 1 quick question to go back to the acquisition front. Brad, when you look at some of the bigger guys, you look at just, say, Hub Group. And I know you're not going to comment specifically on any one company and that's fine, but they're right now at $1.5 billion in enterprise value, trading at 12x trailing EBITDA.

I guess, if you were to look at something that large, if you were -- you put in a take-out premium, let's say, you pay 14 to 15x EBITDA, it's a really big deal and a higher multiple than you've paid historically. So I guess, 2 questions.

So like, one, do you have the capital now, the dry powder to do a deal that big if it made sense? And two, would you be comfortable paying that sort of multiple for the right product -- for the right company if it scratched the right itch strategically?.

A few things there. So number one, we have a lot of respect for Hub. We have several people who work with us and who used to work at Hub and they have people who used to work at Pacer, and there's a lot of respect going both ways between those 2 organizations.

They're -- they're just a great, great company that we have a lot of respect for on a professional basis. In terms of buying that, nobody's told us they're for sale so I don't know what to react to on that.

In terms of, in general, apart from Hub, just anybody, we came -- we believe that we have the access to capital to buy any acquisitions that makes sense and on terms that makes sense, even much larger than the one you're referring to. Look, we're here to make money for our shareholders. That's our job.

That's why we get paid a salary, that's why we have equity in the company. Our job is to create value. It's to create shareholder value long term and substantial shareholder value.

And we keep an open mind and we are rational and we think strictly in those ways of -- it is something we're going to do, whether it's an acquisition, whether it's a financial transaction, any activity that we take, is this going to create or destroy shareholder value? If it's going to create significant shareholder value and it's something that is -- we only have so much bandwidth in general in life so if it's something that creates a substantial amount of shareholder value, we'll look at it and we'll look at it seriously.

If something is sexy and exciting, but doesn't create shareholder value, that's not sexy and exciting for us. So with that -- that's our mentality of how we look at things.

Does that answer your question?.

Yes, it does. It does. Now -- and it makes sense.

But, well, I guess, on the valuation part of the question though is -- are there general ranges where you feel comfortable? I know it all depends on growth and how it fits in and everything as well, but when you look at public versus private targets, I think of a multiple above 10 pretty high from where -- versus what you've paid historically.

So I don't know if that's a deal killer from the beginning or if it's -- if you're entertaining things where you would pay in the teens of EBITDA?.

I agree with what you said a second ago that the multiple you pay is -- should be in relationship to the growth rate. It shouldn't just be because of the size.

If you look at a deal, whether it's a small deal, a medium deal, a large deal, you want to see what that's going to turn into and what that's going to be contributing a year from now, in 2 years from now, in 3 years from now, in 5 years from now. And it's a pretty simple analysis to figure out what makes sense in terms of what you want to pay for it.

But it's really about growth rate going forward for us. It's not so much about size..

Sure.

So anything's on the table?.

Anything that makes sense is on the table as long as it creates value for the shareholders. If it doesn't create value, it's not interesting to us..

And our next question comes from Casey Deak of Wells Fargo..

I just wanted to go back to brokerage gross margins.

I believe I heard it correct that you said it was -- truckload brokerage was up 55 basis points sequentially, is that right?.

Yes. It was up year-over-year..

Year-over-year [indiscernible].

So that was year-over-year?.

Yes, which would be the sixth consecutive quarter where we've expanded our margins on the year-over-year basis.

As we price better, as they get bigger and procure capacity better, as our sales force gets more tenured, as our technology gets populated with more information of these algorithms, all these things make us able to -- and plus, we've got a great market, great truck brokerage market that's enabled us to grow margins..

Sure. So I don't know if you want to comment on how those trended Q2 into Q3.

Just trying to get a sense of what you're seeing, purchase transportation increases versus the pricing increases and kind of how much of that is driven by mix versus your ability to purely price above what you're seeing in spot market truckload prices?.

It's a good point, but some of it definitely is mixed and the mix in terms of average length of haul on the -- and there is a trend towards shorter length of haul on the truck for all the reasons we mentioned before. On truck brokerage, we did notice that business got softer in October versus the third quarter.

That may very well come back, but it may not in November or December. We'll have to see how that one plays out..

Okay. Well, that's great. And I guess, one more from me on -- going back to Pacer, the way I see it, when would you guys be expecting to kind of go full steam on that volume front? I'm looking at it more, and I believe this is the way you're framing it, that it's more the rail service issues, it's not an integration issue anymore.

They're pretty much fully much integrated and once rail service gets better, you'll go more aggressive on the volume front.

Is that the right way to look at that?.

Yes. From an -- the integration is not what held us back from selling intermodal towards small or midsized customers.

We didn't want to disappoint our small or midsize customers, they're a big part of our bread-and-butter and they want to sign them up for something to save 10% and lose a freight or have the freight get there delayed and I found out they're upset with us and it's puts our other modes that we're working with them in jeopardy.

And now that that's improving and hopefully, will improve over the next couple of quarters, we will do what our original plan we were going to run, which is to fill up that sales pipe with intermodal. But the integration of Pacer is substantially complete. The truck brokerage is fully integrated into the XPO organization.

They're on the same XPO technology on a Freight Optimizer. They have access to our entire nationwide capacity, which is now about 28,000 carriers and about 670,000 trucks. The international air and ocean groups have been fully integrated with our XPO Global Logistics division. The ones that were going to get closed, got closed.

The ones that are open are thriving. We fully integrated the Pacer outside sales group with our sales group. All of these things have had a positive effect on morale.

Any time you do an acquisition there's a certain unease and queasiness when you first do it and that's way, way behind us and the intermodal team has a new spring in their step and, as I mentioned earlier, we're right on schedule for the $15 million of cost savings that we identified..

And your last question comes from Jack Atkins of Stephens..

Two questions from me. I guess, first off, we've talked about rail service quite a bit.

But are there any internal initiatives that I think you guys are trying to tackle in an effort to sort of improve the profitability of that intermodal business until we start seeing improvements -- improved service from the rails?.

Yes, absolutely. And I've tried to explain it to someone earlier in the call maybe not very articulately or maybe too fast, but the kinds of things that we're doing are communication.

So getting more information on track and trace and location and forward planning in realtime, sharing that with everyone, making -- and we've assigned a very specific people to account only for service. Of course, that adds cost; that's okay because that's necessary cost in order to please the customer. We've got a lot of good feedback about that.

Communicating getting better with the rails, communicating better with our customers as well. We need the rail. The rails need us. There's a good long-term need for relationship there and we have to work together. We have to work together in a very professional and efficient way and I think that's improving quite a bit.

We've also put out regional dispatch functions in the cities around the country. And we've beefed up substantially our recruiting and our retention programs. So we have about 800 and -- some over 800 owner operators that work with us on the drayage. We're trying to get that up. We want that up even more. And we've done a lot in training.

We have taken the XPO training group and put them on to intermodal and gotten all the things that need to be cross-pollinated. What we found was there were silos of expertise that were great expertise and really great well-trained people with lots of experience and we want to cross-fertilize that across organizations and we've been doing that.

And we tinkered with the compensation plans for the senior people, so we included an element for things that matter to customize -- to the customers..

Brad, that makes sense. And then last question is on the portion of your business that utilizes owner-operator capacity, we've started to see core decisions here from others in the space that sort of challenged prior owner operator models.

Do you guys feel like your owner operator models across your various business lines are sort of beyond challenged? Or is that something that you guys are maybe taking a look at to make sure that you're good to go there?.

Well, beyond challenged doesn't exist in America because anybody can file a lawsuit and a lot people do just file a lawsuit. But we do believe that we've taken good legal advice. We follow the legal advice and we continue to follow all that advice.

We have good programs and procedures and processes in place that are accurate and truthful in terms of characterizing them as owner operators. Thank you, Jack. Thank you, everybody. Sorry we went a little long today, and have a great day. Bye-bye now..

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