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

Chris Wetherbee - Citigroup Global Markets, Inc. (Broker) Ravi Shanker - Morgan Stanley & Co. LLC Robert H. Salmon - Deutsche Bank Securities, Inc. Scott Schneeberger - Oppenheimer & Co., Inc. (Broker) John Larkin - Stifel, Nicolaus & Co., Inc. Allison M. Landry - Credit Suisse Securities (USA) LLC (Broker) Brian P.

Ossenbeck - JPMorgan Securities LLC Brandon Oglenski - Barclays Capital, Inc. Jason H. Seidl - Cowen and Company, LLC Todd C. Fowler - KeyBanc Capital Markets, Inc. Nate J. Brochmann - William Blair & Co. LLC Bascome Majors - Susquehanna Financial Group LLLP.

Welcome to the XPO Logistics' Second Quarter 2016 Earnings Conference Call and Webcast. My name is Christine, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question-and-answer session Please note that this conference is being recorded.

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

During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws by which 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 may also 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, or in the Investors section of the company's website at, www.xpo.com.

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. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin..

Thank you, operator, and welcome to the call, everybody. With me today are John Hardig, our CFO; our Chief Strategy Officer, Scott Malat; and our Head of our Investor Relations, Tavio Headley. Last night, we reported second quarter results that confirmed that we're at a positive inflection point in the evolution of our business.

We achieved record net income, record EBITDA, record cash flow from operations and record free cash flow. Our adjusted EBITDA was $355 million and we generated strong cash flow from operations of $261 million, and free cash flow of $170 million.

Our highest top line growth came from our last mile and truck brokerage operations in North America and our European contract logistics operations. E-commerce continues to be a major tailwind. It drove margin expansion in last mile and gave our Logistics operations some major wins on both sides of the Atlantic.

From a profitability standpoint, our North American LTL business was the star of the quarter. We grew operating income LTL by a whopping 66% over second quarter last year, which was pre-acquisition. Operating income for the quarter in LTL was $115.5 million, a record accomplishment for our LTL operations.

And the operating ratio was 86.7%, the best ratio in a decade. These are monumental improvements and we achieved them in just seven months after buying the business. Looking at the full year, we now expect to generate at least $1.265 billion of adjusted EBITDA, which is up from $1.25 billion.

And we've raised our free cash flow target to at least $150 million from a range of $100 million to $150 million. We expect our free cash flow to accelerate significantly in 2017 and 2018. For 2018, we have a well-defined path to our target of $1.7 billion of EBITDA.

More than $300 million of our profit improvement opportunities are company-specific and independent of macro conditions. This is only a little more than 2% of our $14 billion of addressable spend. The largest categories of savings will come from procurement, real estate, technology, shared services and transferring best practices globally.

Our company-wide focus continues to be on driving results on accelerated EBITDA and free cash flow, while making the investments to grow our business long-term. With that, I'll turn it over to John to review the quarter.

John?.

Thanks, Brad. We had an exceptionally strong quarter despite a sluggish market. Our EBITDA and free cash flow were well above our expectations. Adjusted EBITDA for the quarter was $355 million and net income was $50 million. We delivered these results despite a low growth market environment.

On a pro forma basis, excluding fuel and FX, as if we had owned all of our acquired companies on April 1 last year, adjusted revenue increased 1.8% year-over-year in the quarter. As Brad said, our strongest growth was in our last mile, truck brokerage, and European supply chain operations.

This was offset by market softness which impacted our domestic intermodal and expedite operations. Organic growth in the quarter also reflected our yield management and restructuring initiatives to improve the profitability of former Con-way operations. Excluding Con-way, our pro forma revenue growth for the quarter was 4.3%.

Revenue in our Transportation segment was $2.4 billion during the quarter, up 181% over last year, and adjusted EBITDA was up 365% to $276 million. Operating income in Transportation was $153 million. Within our Transportation segment, in freight brokerage, we increased revenue by 12% year-over-year.

Net revenue margin declined to 17% from 20.1% last year due to decreases in expedite and intermodal margins while truck brokerage margins were flat. In truck brokerage, we increased share and grew volumes organically by over 20% year-over-year, while revenue per load decreased due to lower rates and lower fuel revenue.

In intermodal, the market remained weak from continued excess truckload capacity and low fuel prices. Expedite volumes declined in the quarter versus a year ago due to the ongoing slow industrial economy. In less-than-truckload, we continued to improve service and profitability during the quarter.

Compared to the prior year pre-acquisition, revenue per 100-weight, excluding fuel surcharge, increased 5.5% year-over-year, and daily LTL tonnage decreased 7.4%. Consistent with our strategy and the trend over the last few quarters, reductions in national account revenue were partially offset by increases in revenue from local accounts.

Our LTL operating ratio was 86.7%. Adjusted operating ratio, excluding amortization of intangibles and integration costs, improved to 85.5% compared to 92.4% last year. Tonnage trends did improve through the quarter, with June being the strongest month. In the third quarter, we do expect tonnage declines to moderate.

We expect yield improvements to continue, but at a more measured pace as we begin to lap last year's yield initiatives. Our last mile operation continues to experience strong growth. We grew revenue by 18% year-over-year. We continue to see a high volume of new business opportunities especially in e-commerce.

Last mile net revenue margin increased 80 basis points in the quarter from an increase in e-commerce business, as well as improved carrier utilization and productivity as we leverage our growing network density.

In North American truckload, revenue in the quarter, excluding the impact of fuel, was 1.8% lower than the same period last year, which was pre-acquisition. Volumes were flat and rates excluding fuel declined 2.7% year-over-year.

In the face of a challenging market, we improved our truckload operating ratio over the prior year by reducing SG&A expense and improving empty mile percentage to 9.2% from 9.9% a year ago. In our European Transportation operation, we drove revenue growth through higher volumes, while pricing was flat compared to the full quarter a year ago.

Transportation management in France and our LTL operations had especially good revenue growth year-over-year. Strength in these areas was offset by lower fuel revenue and pricing pressure from more competitive market, pricing in Spain and the Eastern European countries.

We improved margin in our European Transportation operations through actions to reduce infrastructure costs. Our Logistics segment continued strong performance in the quarter. Revenue increased to $1.3 billion and adjusted EBITDA increased to $107 million, due to our 2015 acquisitions, along with organic revenue growth and margin expansion.

Operating income in Logistics was $51 million in the quarter. Performance in our European Logistics operation was particularly strong compared with the prior full-year quarter. Year-over-year revenue growth was driven largely by new contract starts, notably with e-commerce and food and beverage customers.

Supply chain margins in Europe increased year-over-year during the quarter, mainly by improving warehouse utilization and turning around unprofitable sites.

In our North American Logistics operation, we significantly improved margins by exiting low margin business, optimizing the cost structure of our combined platform, and driving higher productivity. New contract wins were more than offset by exiting low or no margin business.

The areas of strength included the high-tech and chemical verticals, while retail and transportation management were weaker. Corporate SG&A expense decreased to $34 million in the quarter from $57 million a year ago. Included in corporate expense was approximately $4 million of integration costs.

The reduction in corporate expense was primarily from higher transaction and integration costs in the second quarter of 2015. We expect corporate SG&A expense, excluding non-recurring integration costs, to be in the range of approximately $25 million to $28 million per quarter. Net capital expenditures for the quarter was $91 million.

More of our CapEx will come in the second half of the year, which coincides with the timing of our revamped procurement processes. Our expectation for net CapEx in 2016 remains $475 million to $500 million. Depreciation and amortization for the first quarter was $162 million.

D&A was lower than expected, reflecting the reduction in the estimate of Con-way asset values and purchase accounting. Purchase accounting for the Con-way acquisition is not finalized. However, based on current analysis, we expect depreciation and amortization to be in the range of $168 million to $173 million per quarter for the rest of the year.

Free cash flow exceeded our expectations for the quarter due to higher EBITDA, the timing of CapEx and working capital initiatives. As a result, we raised our guidance for free cash flow to at least $150 million for the full year.

We ended the quarter with $378 million of cash and approximately $940 million of liquidity when taking into account the $100 million we had drawn on our $1 billion credit facility at quarter end. Now, I'm going to turn the call over to Scott.

Scott?.

results matter. They matter to customers and they matter to investors. We'll continue to push the pace on every initiative that can contribute to customer service excellence, and profitability and cash. This quarter, we turned in very strong results that give you an insight into the future of XPO.

It's the best indication yet of the dramatic opportunity on our doorstep. With that, we'll turn it over for questions.

Operator?.

Thank you. Our first question comes from the line of Chris Wetherbee with Citi. Please proceed with your question..

Hey. Thanks. Good morning, guys..

Morning..

I wanted to ask about free cash flow. And obviously, a strong second quarter performance on the free cash side.

When you guys have talked about free cash seasonality and the cadence we would expect over the course of this year and going forward, I think there's always been an expectation that the fourth quarter was the strongest free cash quarter for you.

Now, I know CapEx probably is a little bit more back-half weighted than we've seen in the first half of the year. But how do we think about that? It would suggest that there is – or if it still is the biggest quarter for you guys that there could be a decent bit of upside to what you're talking about.

Can you walk us through some of the moving parts of how that plays out over the third quarter and fourth quarter?.

Hey, Chris. It's John Hardig. Thanks for the question. Yes, so we did increase our guidance in terms of free cash flow for the year. And so, we said we'll do at least $150 million of free cash flow, whereas before we had a range of $100 million to $150 million. We did have a very strong free cash flow quarter. And there were a couple of reasons for that.

One was the EBITDA performance. We definitely exceeded our expectations from an EBITDA perspective.

And then from a CapEx perspective, as I said in my comments, we are being very flexible around our procurement processes and pushing some of our CapEx to the latter part of the year to take advantage of some of those initiatives and really trying to optimize our pricing on investment.

We also did a lot around our working capital processes, just trying to manage DSO/DPO, making sure we get our billing out quickly, making sure that we collect cash aggressively and making sure that we pay our vendors only when they're required to be paid, and not before.

So, we've done a lot in the quarter that was not really related specifically just to the performance of the business. We are going to do at least $70 million of free cash flow in the second half. And that will be weighted more towards the fourth quarter than the third quarter, but we're really just giving guidance for the rest of the full year..

So, some of the working capital adjustments that happened in the second quarter maybe kind of that's done now, and you don't necessarily get the incremental benefit going forward, and that maybe part of the reason that in CapEx, kind of why fourth quarter may not be the strongest quarter for free cash this year?.

Well, working capital is a long-term opportunity, Chris. That's something we have invested heavily in. We have a best-in-class back office. And we are absolutely investing in making sure that we bill quicker, that we collect it as fast as we can, and that we pay on time, but it doesn't need to be early..

Okay. Okay. That makes sense. And then, I want to follow up on a Con-way question, or an LTL question if I could. When you think about sort of where you are in the cost savings run rate, I might have missed that in the prepared remarks.

But, I think, last time we got it, it was in sort of the $90-plus million range, I think, maybe now in the low $100-plus million or so.

Is the roughly $200 million of cost savings target still the right number to be thinking about Con-way given all the progress you've made so far? And if it is, is this sort of potentially a low 80%s OR business for you guys? I'm just trying to make sure I get a sense of where we are in that process and maybe what the opportunity is going forward?.

We have progressed on our plans for profit takeout. We're now up to $110 million of run rate profit improvement. That's up from $90 million last quarter. The difference is some procurement initiatives and then some back office consolidation. The $170 million to $210 million, we still have a bulk of the procurement opportunity ahead of us.

There's additional technology savings and some other rationalization of duplicative cost as we integrate the systems. When you look at the $300 million that we laid out, it takes into account the fact that while we're on a $110 million run rate, we'll report in 2016 about $80 million of those savings.

So, when you actually lay-out the run rate, which came later in the year, you'll report about $80 million of savings. So, if you assume we get to our $200 million, that's another $120 million from LTL between 2016 and 2018, plus another $180 million of additional opportunity. Within that $180 million is upside from LTL as well..

Okay. Okay. That's helpful. And then one just follow-up question. In terms of the full year guidance, you raised it a little bit, I know, on the back of a strong performance in the second quarter. Organic revenue growth, I think, John, you gave us some pro forma numbers there.

How should we be thinking about sort of what's included in the full-year target? Is it in that low single digits, or, I know, maybe a little bit higher ex the LTL acquisition.

How do we think about that going forward?.

Chris, I think we'll see a consistent rate of growth for the rest of the year. So, we'll be in that mid-single-digit range..

Okay. That's helpful. Thanks very much for the time this morning guys. I appreciate it..

Thank you..

Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question..

Thanks. Good morning, everyone. So Brad, a couple of longer term questions. I've heard you guys use the phrase inflection point quite a bit in the last few weeks which implies that you're kind of settled in and have digested Con-way and Norbert and are kind of looking ahead to the future.

So, what does the next phase of XPO look like from here? Is it something that's mostly organic, or do you think that you'll settle down now that you can kind of go back to the M&A route?.

So, when I use the word, or the phrase inflection point, Ravi, I'm referring to a record amount of EBITDA, $355 million, much higher than consensus expectations.

And after generating $249 million last quarter, an inflection point in cash flow from operations, also a record $261 million cash flow from ops, an inflection point in terms of turning free cash flow positive, and a very healthy $170 million free cash flow positive, and an inflection point in terms of we expect to continue to generate increasingly more cash flow going forward.

So that, it's an inflection point in a sense that we've done the heavy lifting over the last several years in terms of acquiring, financing, the tough part of the integration, putting in place the infrastructure. And now, we're benefiting from operating leverage and we're turning into a cash machine while still investing in growth.

So, you asked, what does it look like? Visually, it looks like we're wearing green visors with our head down and running the business very, very well.

And focusing on a very well-defined plan to take the $1.265 billion of EBITDA this year to our target of $1.7 billion of EBITDA in 2018 with the vast majority of that profit improvement coming from actions that are company-specific and are independent of the macro environment, especially global procurement.

And as Scott said, attacking all $14 billion of our global spend. So, we're not looking at acquisitions now. We're not. We're looking at dozens and dozens of specific work streams to optimize the business that we have and to delight customers more..

Got it. Very helpful.

And just, you personally, I mean, you've always been kind of been here for a while, and have kind of steered the ship to get to where it is right here, kind of where do you see – how do you see your involvement kind of continuing over time? I mean, do you feel like you have a lot more to do here, or can you just help us understand that?.

Seven days from when I wake up to when I go to sleep, I'm fully involved and plan to stay fully involved..

Beautiful. I love it. Thanks so much..

Thank you, Ravi..

Our next question comes from the line of Rob Salmon with Deutsche Bank. Please proceed with your question..

Hey, good morning, guys, and real nice quarter. It's been a long time since we've seen Con-way Freight operate in kind of the mid-80%s, and you did it in a tough backdrop.

Can you give us a sense if your longer term expectations have changed it all in terms of where that margin can go to given the execution that you achieved in the second quarter? And if you could also give us an update in terms of the pricing and tonnage July month to-date transit that you've experienced quarter to-date?.

So, on operating ratio, we're working our way into the high 80%s. Now, just keep in mind, there is seasonality with the business. You have your best operating ratio quarters in the second and third quarters. We do have upside opportunity as we execute on the $200 million or so of improvement, and then the upside that's included addition.

But it's too early to say that we can get past the mid-80%s and get into the low 80%s, really working our way into the mid-80%s..

On the July numbers, it's the same trends as we've been seeing. Yield up about 4%, volume down about 6%. And that's how the model has been trending. Now, as we work through the tonnage that was unprofitable or very low margin, we'll over time see that volume trend improve a little bit. So, we're going to hold firm on pricing.

We think we have a very rare product in the market that wins awards for, number one, in on-time pick-up, number one in on-time delivery, very low damages, excellent service and we want to charge a fair price for that. So, we want to hold firm on price. And over time, we'll improve the volumes..

Makes a lot of sense. You guys highlighted about $180 million of kind of run rate profit improvement kind of across a broad spectrum.

Can you give us a sense of some of the new cost opportunities that Ramon has identified since joining the company that are included in that kind of longer range target that you guys laid out?.

Yes. So, procurement is a very, very big component of that, because we're buying billions and billions of dollars of things now as a $15-billion company that were previously purchased as a $3-billion, or a $5-billion or a $9-billion company. And now, we deserve the $15-billion price. The vendors understand that.

As we consolidate our vendor base and we become a more meaningful purchaser of trucks, of trailers, of tractors, of fuel, of tires, of temporary labor, of office supplies, of forklift equipment, of all the things that we're spending tens of millions or hundreds of millions of dollars a year on, we deserve a better price.

We're very much focusing on global procurement. We are also focusing on real estate. We're mostly (30:00) doing some wonderful work on real estate and finding ways that we can get better rebates from the brokers that we use and other ways that we can optimize our real estate expenses. We have $600 million of company-wide real estate spend.

We're also looking at how to improve labor productivity. We have over $5 billion of labor costs, both salary and temporary labor, direct and SG&A labor as well. And we're rolling out engineered standards for everything that we do.

So, we're starting with, we have 750 logistic warehouse facilities around the world and we're monitoring the one that function at the most efficiency, the most productive, satisfying customers the most, where we have customers delighted with our performance and the financial performance is great.

And then benchmarking those, all the rest of them, and then bringing up the lower performance to the higher performance, we're doing the same thing with our 450 or so cross-dock facilities and LTL, both in Europe and the United States.

And we've had a lot of people flying back and forth from places like Michigan to France and vice versa, and comparing notes and comparing metrics and comparing KPIs, so transferring these best practices all around the world, training people on these new standard work instructions, benchmarking them, rewarding people from meeting them.

Those are the kind of things that very excited about in terms of increasing the profitability of the company and also pleasing our customers more..

Makes a lot of sense. Well, keep it up. We're seeing it show up in the bottom line. I'll turn it over to someone else. Thanks for the time..

Thank you, Rob..

Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question..

Thank you. Good morning. I wanted to start off with, in LTL, obviously you've been doing a lot of repricing.

I'm curious, could just speak anecdotally to the behavior of the customers that are going through this with you? And just what you're seeing as an overall behavior?.

how can turn this money losing business into a profitable business or at least a breakeven business for us? And we want to keep the relationship. We have other ways we can help those customers on the supply chain besides just their LTL business. But we don't want to lose money. It's as simple as that.

So, people get that, and business people don't want to show a loss. They want to show a profit..

Thanks. And, Brad, just to specify the question a little bit more.

I think you've been most aggressive with the large national accounts, are you losing a lot of them in the process? Or how does it go post-discussions?.

Well, we have three categories of LTL customers. On the large national accounts, we have stopped doing business with some of them. That's part of what you see in the tonnage going down. And those were primarily customers that we were just losing too much money on and couldn't find out a way to bridge that gap, at least, get it to breakeven.

So for the time being at least, we've turned away that business or they've gone somewhere else where they can get a deal, at least for the time being, that satisfies them. On the 3PL and the local account business, that's a different story. That business is profitable, and that business has been flat to growing..

Great. Thanks. Just one more to follow-up. Going over to Europe, it sounds like the Transportation business is performing very well. Could you elaborate, I guess, on a regional basis on what you're seeing there? Thanks..

So, in Europe – although this morning, UK suddenly got better than it already was because of the actions of the government in lowering the rates more, UK has been strong. Spain has been strong. France has been not so great, not so bad, kind of flattish. They've had strikes. They've had terrorism. It's been a tough few months for the French.

But the business is holding up. The business is resilient even in the face of this adversity. Those are the three biggest countries that we're in, in Europe. And overall, as you saw from the numbers, our European businesses performed well..

Great. Thanks. And nice job on the execution..

Thank you..

Our next question comes from the line of John Larkin with Stifel. Please proceed with your question..

Hey. Good morning, everybody. Thanks for taking the questions..

Morning..

On the LTL business, Brad, initially you had talked about the notion that – excuse me, the high-service LTL product that you currently offer only addresses about one-third of the LTL market and the other two-thirds is more of a generic lower price, lower service alternative.

Have you changed your thinking about the timing on when you may begin to roll out a service offering to attack that two-thirds of the market that you're currently not serving?.

That's likely to roll out second half of next year. That's a big project that needs lots of engineering, lot of pre-programming and has to go flawlessly when we roll it out. That's something that can't be done frivolously. But it's something we want to do. There's no question about that.

There is a large market for an economy product where customers are not very sensitive to whether it gets picked up on Thursday, or Friday or a Monday and are much more focused on price. That's not our product. Our product is one that picks up exactly when we say it's going to and gets delivered exactly when we say it's going to.

And the damages are very, very, very low. That's a different type of customer..

But the idea would be to use essentially the same infrastructure, the same pick-up and delivery network.

And then engineer the line haul to be more flexible especially with respect to the lower service alternative?.

is that economy or is that priority? And then you have to have the right locations mapped out on the cross-dock so it goes the right location. And the communication with the trucks has to be very clear where it goes. It's still a complex process..

Got it. Thanks for the answer there. Also, originally you endeavored to try and find a buyer for the asset-heavy truckload operation.

And because the price you were looking for wasn't there, you decided to keep it and talked about some of the synergies that existed between the asset-based truckload and the sort of asset-light brokerage capability within your brokerage business.

Have you seen that really play out where you've got your asset-based operation handling sort of the base load volume from particular customers, and then the brokerage business sort of providing the flex capacity at the end of the month, end of the quarter, end of the year, et cetera?.

We have definitely started to see some great synergies between truckload and LTL, and between truckload and brokerage. So, brokerage is – it has visibility into the empty miles and is filling those trucks.

One very interesting synergy that's come about is about 80 of our repair and maintenance facilities in LTL, which previously had never been available to truckload, we've opened those up to truckload. So we don't have to go to third parties. We don't have to travel long distances. And of course, it's cousins. It's LTL and TL, so it's taken care of well.

So, that's something that we've been rolling out, too. And this has the benefit of keeping maintenance down as well, and we can extend the life of the trucks. Many best practices are being shared.

A lot of the things that we had been previously doing in LTL very well like rate – pricing, like load optimization, like lane optimization, all those things now we're rolling out into truckload. Now, that's a process that's going to take a few months to do. But I'm very optimistic in our ability to significantly improve the profitability of truckload.

I think Tim Staroba is doing excellent job down there..

Excellent. And then maybe one last one for Scott.

To what extent do you think the surplus inventories out there, particularly in the retail supply chain, are causing the softness in freight demand, not only in the U.S., but perhaps even in Europe? And how long do you think it'll be to sort of clear that up so that inventories get to normalized levels, and we'll see the pull-through to freight demand normalize? Is that a 2017 event? Or when do you expect that to be happening?.

Well, it's always hard to tell. If you look at the macroeconomic indicators and the things we usually track, industrial production. We haven't seen as much freight as those macro indicators would imply.

And we don't see anything right now that looks like it's just tightening up the market in the back half of the year so much and a big swell of volume, but we'll see..

Thanks very much..

Thank you. I see we only have about 20 minutes left till the market opens. So if we could try to limit the questions to one and maybe one follow-up, that'd be great..

Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question..

Thanks. Good morning..

Good morning..

So, you talked about UK exposure and contract logistics being relatively insulated from the macro, and putting the QE expansion this morning aside for a second.

How do we handicap the risk to EBITDA if GDP does go negative in both the UK and broader Europe?.

If GDP goes negative in UK and broader Europe that's going to be negative for us. So, our businesses, some of them are economic sensitive and some of them are less economic sensitive.

So, our e-commerce business, which is our strongest vertical in Europe, I would say that's not going to be too affected, but it might be affected, because even though the trend of purchasing goods online is increasing, the total amount of goods purchased may go down and up, if that positive trend may not overcome it.

Another big vertical for us in Europe is, food and beverage. Food and beverage, I think, people are still going to eat and drink a fair amount. And some of those countries in Europe, they actually might drink a little more. I'm not as worried about the F&B over there.

Anything that's auto-related in a negative GDP environment, would be negatively affected. But I'm not very pessimistic about recession happening in Europe. Europe is in a different part of the cycle than we are. Europe is not raising rates, they're not thinking about raising rates.

The debate is on how much they're going to lower rates, as they did this morning. Unlike the United States – unlike here in the States, in Europe, they're still doing quantitative easing. They're putting liquidity into the system. I just don't feel the likelihood of a recession in Europe being very high because of that.

Now, if there's geopolitical events, there's some massive terrorism, that's a different story..

Right. Okay. That was helpful. And then just my follow up question, you mentioned pushing some of the CapEx to the latter part of the year, sort of to take advantage of some procurement initiatives.

But I just wonder if you could elaborate on specifically what types of investment you were able to push and which segments that would relate to? And if any of this then was pushed to 2017, or if it's just to the back half of this year? Thank you..

Yeah. Hi, Allison. Thanks for the question. Yeah, nothing's been pushed into 2017, so we still expect our CapEx to be $475 million to $500 million. And the biggest category of that deferral in terms of pushing back and taking advantage of procurement was around the rolling stock, tractors and trailers..

Got it. Okay. Thank you for the time..

Thank you..

Our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question..

Hey, good morning. Thanks for taking my question..

Good morning..

I just had a question on European e-fulfillment back in April and May. There was a few announcements about EU, Single EU Debt, and also more concerted effort to facilitate a more cross-border e-commerce in Europe. So, obviously, they're still early stages, but I don't know how you saw that playing out.

If that would be – if more facilitation be beneficial for you, just to get more volume, or if they would somehow affect what you do on a day-to-day basis? Be curious to hear your thoughts there. Thanks..

It's in general anything that opens up the borders, anything that makes it easier to trade around Europe, makes it easier to grow e-commerce. And e-commerce for us has been very cross-border. There has been where we have more centralized auto e-fulfillment facilities, and we can distribute that across PAN Europe.

So, we think it's moving in that direction..

Everything related to e-commerce globally is doing very, very well at the moment. Either that's contract logistics, last mile, even the line haul, anything that touches our big e-tail customers is growing very rapidly. And that's not just for us. It's for our competitors as well.

We just happen to have a very significant portion of our business levered to that..

Okay. And then just one quick housekeeping.

Can you give us the integration cost you expect for the second half of the year?.

Around $25 million in the third quarter and then it will moderate in the fourth quarter. We still expect our integration cost to be in the $75 million to $100 million this year as we've always forecast..

Okay. All right. Great. Thanks for your time..

Thank you, Brian.

Operator, who is next?.

Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question..

Hey, good morning, everyone, and thanks for taking my question. And also, thank you for the improved financial disclosure on LTL. That's helpful this quarter. On the question....

(45:31) that more disclosure was partly in response to your request for it on the last call, Brandon. So thank you for that request..

Well, I think it helps a lot of your investors in analyzing results here too. So appreciate it. On the question of e-commerce, I think you guys mentioned about a few contracts that were helping in the quarter with both Logistics and final mile.

I was wondering if you could expand a little bit more on that? And also, provide a little bit of thoughts on organic growth within Logistics, I think you might have covered it, but I missed it.

But just talk more broadly about how e-commerce is fitting into your various verticals, and how that could be a future opportunity or even risk from some of the bigger players?.

For e-commerce, it's really been a play on our e-fulfillment and contract logistics, and also in last mile, as you were saying. From organic perspective, Europe's supply chain was a star in the quarter. It was very, very strong. And that is because of the e-commerce, as well as some customer wins on the consumer side.

Last mile was also a big grower, it grew 18%. And that's including fuel. So excluding fuel, it was higher than that. And that is very much the e-commerce. We work with a lot of different brick-and-mortar retailers and e-commerce direct providers to provide e-fulfillment and last mile.

And we do more things in the areas where we can add more value than anyone else. So in big and bulky, that's something we do extremely well. It's something that we are the largest player, we have density, there's very specialized characteristics and what you need to handle that well.

And in e-fulfillment, having the largest platform in Europe, we have very strong returns logistics, which is a very complicated part of the supply chain. So, with e-commerce providers, we're handling things that are very specific, very complex and adding a lot of value..

Okay. I appreciate that, Scott. And then maybe one just very quickly on the balance sheet.

So, as you look forward to better free cash flow next year and into 2018, can you guys update us on where you're looking for target leverage, and potentially any ability to refinance debt as you pay down some of that aggregate outstanding right now?.

Yeah, sure. We're about four times leveraged today based on 2016 EBITDA, and obviously that's come down through the course of the year. We do expect leverage to come down again in 2017. And in terms of repaying debt, I mean, we've said before that we want to run with about $300 million of cash on the balance sheet.

That's an amount of cash availability that we're comfortable with. And anything in excess to that, we would use to repay debt. We can't repay under the term loan yet, because it's not recallable without a premium. But we will and we'll be able to do that in a few months if that's something we should choose to pursue..

Okay. Thank you..

Thank you..

Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your question..

Thank you, operator. Good morning, guys..

Good morning..

Quick questions, when we're looking at the contract logistics business, can you give us an idea about the pipeline, sort of into the maybe back half of the year and into 2017 and what we should we expect?.

Well, that pipeline's grown to about $1 billion overall. So far in Europe, we've closed – just in Europe, we've closed about €265 million of new business. So, we're very much – we're closing somewhere in the range of 25% of the business in the active bidding pipeline.

And you're right to say that a lot of the things in that $1 billion pipeline would start to impact us in 2017. So, when we win our share of that, you'll see it ramp up maybe in the back, at the end of this year, but more likely in 2017 and even the back half of 2017 for the contracts we're working on right now.

These are very complex long-term five-year to 10-year contracts where the sales cycle is usually 18 months and the ramp up time could be a year..

And Jason, when you look at the €265 million new business won to-date that Scott just mentioned, that contrast with €175 million this time last year. So, €175 million won, has now gone up to €255 million won year-to-date.

So, my hats off to Jean-Luc Declas and his team who run the sales organization for supply chain in Europe, just, doing a great job..

Yes. Clearly, they seem to live with those numbers. Also, just want to piggyback on a previous question, somebody mentioned, that you guys at one point were looking to sell potentially Con-way truckload. Now, it looks like you're getting a bunch of synergies out of it.

Is that completely off the table now? Are there are so many synergies that you're finding that you'd rather keep it in long-term, or if the markets were to turn and you could get an adequate price for truckload that will be something that you would potentially revisit?.

We're not trying to sell truckload. We're trying to optimize truckload. We see lots of ways to take that $110 million to $120 million EBITDA business to $130 million to $150 million EBITDA, and even higher than that over a period of years. So, we're improving it, we're increasing it, and we're making it a better business..

Okay. Those are my two, now, guys, I appreciate the time..

Thank you..

Our next question comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed with your question..

Great. Thanks. Good morning, Brad..

Good morning..

Good morning. Just on the guidance here, I think historically you've talked about the second quarter being about 26% of the total year EBITDA. If I take what you did this year in the quarter, it implies a run rate higher than what you guided to.

Can you help us think about maybe some of the strengths here in the second quarter? And then, how do we think about the EBITDA sequentially as we move to the back part of the year?.

Thanks, Todd. We did have a very good EBITDA quarter in the second quarter. I think third quarter will likely be in line with second quarter, with EBITDA.

And then, fourth quarter, we've always said is a much lighter quarter, we would expect, given the strength, especially so far this year, somewhere in the range of 24% to 25% of the EBITDA for the year to come in the fourth quarter..

Okay.

And so, the thought process there is that the seasonality – or the seasonality is offsetting some of the cost opportunity and some of the growth that you'll see as you move to the rest of the year at this point?.

Well, we'll continue to grow on a year-over-year basis, but there is significant seasonality. Our second and third quarters are very close together. Usually, in LTL, seasonally, second quarter is the best quarter of the year. And in Europe, Transportation second quarter is the strongest quarter in the year.

And the rest of the business, third quarter is the strongest quarter in the year. So, they're very close, somewhere neck and neck. And then, fourth quarter, as the seasonality at the end of the year, as shipment start to tail off, you will see a slowdown in mid-December, so that's a much smaller quarter than two and three..

Okay. That helps. And then, just for my follow-up, can you remind us the difference between the depreciation that you report on the cash flow and then the other depreciation adjustments that you make? I mean, I've got the quarterly cash flow for the depreciation statement that $160 million range.

But the total depreciation, when you do the add-backs for the segments, is closer to $225 million.

What's that $70-million difference in the D&A and the cash flow and what you do on the segments?.

I'm not sure I follow your question on that, Todd. Why don't I reach out to you afterwards and follow-up because I'm not following your math..

Okay, John. We can follow-up offline. I'm just trying to reconcile between when I do the segment EBITDA and I add up all the segments to get to what you reported and the difference between what you report for depreciation on the cash flow. I know there's some reclassification coming out of purchased transportation, some of the other costs.

I just wasn't sure why they show up in the segment D&A – or the segment EBITDA, I should say, versus the cash flow. But we can follow-up offline if it s not clear the way I'm asking it..

We definitely will follow-up and talk about it. Within the segments, we usually include footnotes where there's D&A included within our net revenue line..

Yeah. Okay. And that's the piece, I guess, I'm trying to reconcile. But let's do it offline at this point..

Sure..

Okay. Thanks, guys..

Thank you..

Thank you, Todd..

Our next question comes from the line of Nate Brochmann with William Blair. Please proceed with you question..

Good morning, everyone..

Good morning..

Hey.

So, I wanted to talk a little bit in terms of when you originally set up these targets in terms of how much you can cut out of the business, as well as, obviously, the recent acquisitions, how you establish that threshold in terms of not cutting too deep where we would either destroy service levels or maybe a year from now we realize that we cut too much and then have to add a bunch back.

What's kind of the initial thought process with that?.

So, we never want to do anything that hurts customer service levels. First and foremost, we have to delight our customers. We have to keep our customers happy. We have to be listening. We have to be very – have lots of feedback loops to make sure that they're happy with our service because customers have choices.

We're not the only transportation logistics provider. So, in terms of head count reduction, let's talk about the place where we've had the most head count reduction, LTL. In LTL, every single metric of our service has gone up, and we do weekly customer satisfaction studies. And in every single metric we've improved our customer satisfaction.

I would say it's not despite the head count reduction; it's in part because of the head count reduction.

When you run an organization more leanly with clear lines of authority, and clear reporting structures, with clear metrics and you roll out P&Ls to every single unit, and you hold people accountable, and you have very clear objectives, you end up working more efficiently and more effectively for the customer.

And I think, in large part, the head count reductions and our ability to compete more effectively with a better cost structure has been a plus. So, we have not seen any degradation in customer satisfaction in any of the businesses that we bought. Every single one of the businesses we bought has been improved since we bought it.

And that's the thing I'm most proud of what the team has accomplished over the last several years..

Okay. And then just for a quick follow-up, obviously, you've been benefiting a ton from the cross-selling opportunity.

I'm just wondering how much of that is coming from just customers who use that other service and then are using you for a portion of that spend versus kind of the ongoing slightly secular trend here of allowing some of the more third-party providers to get a little bit deeper into their supply chains and overall operations? And just how you see that trend progressing and how that's benefited you?.

It's both. There is a little of – we inherited a customer with a certain acquisition and, a year or two later, we inherited the same customer with a different acquisition. So suddenly, they're doing two services or three services instead of just one previously. But the majority of the cross-selling growth is the latter. It's proactive.

It's going out and having a completely different level of discussion with customers. So, who we meet with at our customers is a higher level as a result of the broad service offering that we have. We're meeting with global chief supply chain officers. We're meeting in the C-level suite.

And we're looking not just at a specific mode, but we're looking at their $500 million or $5 billion a year of total transportation logistics spend globally. And our role is how can we take out tens of millions of dollars from that spend? That's what we're doing now.

That's a completely different business model than just trying to bid on a commoditized basis for a specific service line.

This is really forming a partnership, a strategic partnership with our customers to understand their supply chain and how they can do what their bosses are putting pressure on them to do, which is to take out a couple of points or more of cost every year, continuous improvement of their supply chain cost structure..

Great. Thanks for the additional color there..

Thank you..

Our next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question..

Yeah. Thanks for squeezing me in here. So first off, congrats on the accelerated progress towards your multiyear targets on the EBITDA and the cash flow; clearly, there's some external challenges out there, but you're doing well.

I was hoping in light of the improving margin and cash flow profile here, can you give us a fresh walk-through of your sense of downside sensitivities to EBITDA and free cash in a recessionary scenario?.

Sure. The good thing about our model is that our CapEx is very flexible. So we can take down CapEx in time in downturns and maintain or actually increase our free cash flow. So in a deep, deep downside scenario, we can still cut our CapEx more than EBITDA, and then you get the money back on free cash flow.

Different businesses react differently to the cycle. That's the power of the model. Some of our businesses like contract logistics do very well through a cycle in actuality. Sometimes we do better in contract logistics in a downturn, as some of our customers look to outsource more of their supply chain to variabilize their own costs.

So you have a lot of opportunity to win new business. And then truck brokerage tends to do well through cycle last mile, with e-commerce trends as more secular, we'll do well through a cycle and has done well through previous cycles.

Things like LTL and truckload and other parts of Transportation, sure, that will be more hit on the EBITDA line than some of those other more resistant levels. But again, CapEx, especially within LTL is very flexible.

The trucks on the local pickup and delivery can last 10 years, 11 years or more in some cases, and you can delay purchasing for a number of years until you need to revamp that purchasing..

Bascome, if there's one single point that we'd like to communicate to you on this call is that the majority of the several hundred million dollars of improvement that we are executing on in profit over the next few years, are company-specific actions that are independent of the macro.

Regardless of what happens with GDP, I can assure you, we will be purchasing tractors and trailers at lower prices over the next few years than we are now. I can assure you, regardless of Brexit, or recession, or GDP, we will be purchasing tires at lower prices than we have been historically, and so forth and so on.

So, that's the main point we want to get across that we have an amazing opportunity right in front of us to continue to execute on cost reduction and improvement and transferring best practices that are independent of the macro..

So, I see now, it's past the market open at 9:30. Let me conclude with the following. We started the call with saying that we're at a positive inflection point in evolution of our company, and that we're reaping the rewards of the last five years.

We've built a very well-diversified, well-functioning global business that provides significant value to our customers. And the proof is in the pudding. Look at the numbers this quarter. We had record EBITDA, way above expectations. We had record cash flow from ops, way above expectations, record free cash flow.

So, we have a clearly defined action plan to go from $1.265 billion of EBITDA this year to our $1.7 billion target in 2018. Thank you for participating in the call. And we look forward to speaking with you in three months..

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation. And have a wonderful day..