XPO Logistics, Inc. (XPO) Q4 2014 Earnings Report, Transcript and Summary

Welcome to the XPO Logistics' Fourth Quarter 2014 Earnings Conference Call and Webcast. My name is Ellen, and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session. [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 securities laws, which by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law. During this call, the company also may refer to certain non-GAAP financial measures, as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the Investors section on the company's website at www.xpo.com. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

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 Head of Investor Relations. As you saw last night, we delivered extremely strong fourth quarter results. We exceeded our year end targets for an annual revenue run rate of $3 billion and EBITDA run rate of $150 million. We more than tripled our total revenue in the quarter and we increased our net revenue by more than five-and-a-half times. We achieved robust organic revenue growth of 39% company-wide, led by our top corporates business which grew organically by 59%. And we generated $42 million of EBITDA in the quarter which was ahead of the plan. The peak was broad-based across our operations with noteworthy strength in our truck brokerage and contract logistics businesses. Last night we issued our 2015 outlook for an annual run rate at year end of more than $5.25 billion in revenue and EBITDA run rate of over $300 million. We are right on track to achieve our long-term targets of $9 billion in revenue and $5.75 million in EBITDA in 2017. Two weeks ago we prefunded our growth by issuing $400 million of high-yield bonds. We now have approximately $1.5 billion in available capital to execute on the acquisition pipeline. As you know, our most recent acquisition was UX Specialized Logistics which we completed last week. UX had 2014 revenue of $113 million. We bought it for $59 million which is about seven times 2014 adjusted EBITDA of $8.2 million. UX which we're rebranding as XPO Last Mile is highly scalable. They facilitate home delivery and installation of heavy goods, were already number in North America. It was founded in 1978 and has long-term relationships with blue chip retailers and e-tailers. With this acquisition we gained another 1,600 contracted carriers and installers which adds more density to our last mile footprint. In summary, 2014 was a busy and productive year for us. We're ahead of the plan and we're still in the early stages of our growth. Now, I'll turn it over to John to review the numbers. John?

Thanks Brad. I'll cover the performance of our business segments during the quarter; then we'll provide our outlook for certain financial measures in 2015. We had very strong performance in the quarter. We increase revenue 223% over last year through our acquisitions of Pacer, New Breed and ACL and by driving strong organic growth across every one of our businesses. In conjunction with our bond issuance two weeks ago, we preannounced our expectations for adjusted EBITDA in a range of $39 million to $42 million. I'm happy to report that we came in at the top of the range at $42 million. We modified our total reporting segments to reflect how we're managing our expanded range of services under the XPO umbrella. Our Transportation segment includes our truck brokerage, intermodal, last-mile, expedited and freight forwarding businesses. Our Logistics segment consists of our New Breed contract logistics business and our Corporate segment remained unchanged. On a year-over-year basis, revenue in our Transportation segment was up 158%, primarily from our acquisitions of Pacer and ACL as well as organic growth. Transportation net revenue increased on a year-over-year basis by 150%. Transportation net revenue margin was 20% versus 20.6% in the prior year quarter. The decrease in margin was primarily due to our acquisitions of ACL, Last Mile and Pacer freight forwarding operations both of which have lower margins in our legacy businesses. We're very pleased with the performance of our Logistics segment. Our New Breed business was hitting on all cylinders during the quarter driven by a high level activity from our core customers, increased volumes from our seasonal deliveries during the holiday peak, as well as disciplined operating management and cost controls. On the corporate side fourth quarter SG&A expense increased to $17.8 million from $11.6 million a year ago. Included in corporate expense was $2.7 million of transaction and integration related costs, $1.8 million of non-cash compensation expense and $1.5 million of litigation costs. We expect our 2015 corporate SG&A expense excluding one-time transaction cost related to future acquisitions to be in the range of $55 million to $60 million. Net interest expense was $16.7 million for the quarter. Interest expense included $3.1 million related to the conversion of $14 million principal amount of the convertible notes to common shares during the quarter. In January we incurred $3.5 million of interest related to a conversion of an additional $19 million of converts to equity and this will hit our interest line in the first quarter. Following these conversions the base amount of convertible notes has been reduced to $88 million. In 2015 we expect interest expense to be in the range of $82 million to $87 million. Our effective tax rate was 8% for the quarter and 29% for the full year. Excluding the impact of future acquisitions we expect our effective tax rate for 2015 to be in the range of 15% to 20%. This range could change materially based on the accounting for 2015 transactions. At the end of 2014 we had $195 million of the federal tax NOLs which means we don’t expect to be a cash tax payer for some time depending on the timing of future acquisitions. Capital expenditures for the quarter were $23 million. We incurred $8 million due to early equipment lease buyouts in connection with our acquisition of New Breed. The rest of our capital expenditures consisted mainly of technology related spend. Looking ahead our 2015 CapEx is expected to be about $70 million the vast majority of which is IT related. Depreciation and amortization for the quarter was $34.6 million. In 2015 excluding future acquisitions we expect D&A to be in the range of $135 million to $140 million. We entered the quarter with $653 million of cash on our balance sheet including restricted cash. Earlier this month, we completed a tack on offering of $400 million of base amount of our existing 778 [ph] senior notes which were issued at a 6.9% yield to maturity. Following the debt offering our cash balance is approximately $1.1 billion. Our undrawn accounts receivable facility gets us up to an additional $415 million of liquidity for a total liquidity position of $1.5 billion for acquisitions. Now I'm going to turn the call over to Scott and then we'll go to Q&A.

Thanks John. From a macro standpoint the year concluded on a very positive note. Demand accelerated through the fourth quarter leading to growth across all of our businesses. This puts us on a strong trajectory going into 2015. In our transportation unit we've been in a seasonal slow period entered the Chinese New Year which is today and produce season which typically starts in mid March. In the last week and a half things have picked up and we expected to trend upward from here. It is clear midway through the first quarter that access to dependable capacity remains top of mind for our customers. The tight transportation market of 2014 was a challenge for the industry. So our deep access to capacity is very compelling to shippers. We currently have 4,900 trucks under contract and we work with our network of another 30,000 independent carriers every day. In intermodal, service levels are improving and we're increasing our pricing. This quarter we're rolling out our new rail Optimizer system. This proprietary technology increases visibility across our organization. And we expect it to drive significant efficiencies. In the Last Mile, the demand for home delivery and heavy goods remained strong. We're growing this business with our existing and new customers and through strategic acquisitions like UX that build our presence with e-commerce companies and traditional bricks-and-mortar retailers. Technology is an important differentiator for us in Last Mile. No one else in this sector invests as much in improving customer satisfaction through innovation. We've honored all customer commitments in Last Mile despite rising transportation costs. Our intense commitment to shippers and their end customers together with our industry-leading service levels have created a strong differentiation to the XPO brand in Last Mile. Our margin business trended positively through the fourth quarter and has increased again into the first quarter. Our contract logistics business continues to execute well for its customers. We have opportunity to grow this business organically with new and existing customers and we're looking at several medium-to-large size acquisitions in contract logistics to build on this platform. Our strategic accounts team is continuing to make significant inroads with large customers. In the fourth quarter we won business with 19 new strategic accounts and now that we're in bidding season the pace has accelerated. Our profile is much higher in the industry today than it was just a year or two ago. Our penetration opportunity is huge and it's threefold. We can expand many of our existing customer relationships to multiple with our current size by earning a greater share of spend. We can capitalize on our higher profile and broad resources to gain new business and we can leverage our leading positions in fast growing areas of logistics to capture share as our end markets expand. In every case our not so secret sauce is service. We are vehemently committed to giving our customers world-class service that is closed to flaw as is possible. Our employees prove our commitment thousands of times a day in the way they rise to the challenges inherent in this business, like port disruptions, or tight capacity or inclement weather. We're cementing the reputation of our XPO brand as the customer service leader. Another major contributor to our growth is our cold-start program. We opened a brokerage cold-start in Nashville in the fourth quarter and a freight forwarding location in Jacksonville last month. We plan to continue to open cold-starts in talent rich areas and grow them quickly. In the fourth quarter the revenue run rate for our brokerage cold-starts was in excess of $270 million. On the technology front, our IT budget this year is approximately $125 million which we believe is among the highest in the industry. Right now we have more than 200 projects under development with a team of over 600 IT professionals. That gives you an idea of the massive importance we put on innovation. Our M&A pipeline is full with potential acquisitions in all of our lines of business most notably in contract logistics, last mile and truck brokerage. We see a clear path to acquire at least $1.5 billion of revenue this year. We're continuing to scale up our business as one integrated company with constant growth in capacity, cutting edge technology and increasing depth in a broad range of services. These are attributes that resonate strongly with shippers. We moved into 2015 with a lot of momentum and we're on track to triple the size of our business over the next three years. With that operator we'll turn it over to questions.

Thank you. [Operator Instructions] The first question is from Rob Salmon with Deutsche Bank.

Hey, good morning guys.

Good morning.

You know Brad, one of the biggest questions that I've been getting from investors is related to the acquisition pipeline. It sounded from Scott's prepared remarks that you've got a pretty compelling opportunity across several lines and segments. Could you talk a little bit about kind of where are your areas of preference are relative to the three end markets that Scott had mentioned, as well as how deal valuations are trading particularly following the recent APL Logistics take out for roughly 15 times and how they compare relative to the 8 to 10 that you guys have been talking to?

Okay, so the first part of your question about which types of deals are we most interested in, we're interested in building out our platform in contract logistics, last mile, intermodal, truck brokerage, expedites, those are the main areas that we're active in, but we're also looking into our other fields as well. Contract logistics makes a whole lot of sense for us to acquire more companies because we have a really robust infrastructure in place and high points that can be leveraged off and there will be a lot of synergy with buying another contract logistics company as a result of the excellent infrastructure that we got in place already. Last mile, we're also interested in building out and we have a lot of discussions going on. Unlike some of the other modes, both the acquisitions in last mile will mostly be ones in the tens and millions of revenue rather than larger ones, because that market is much more fragmented than the others. There are obvious benefits of density that we get when we do last mile. Intermodal there is not a lot to buy, so we may not buy a lot there, but we will keep looking around. Truck brokerage, we have a handful of truck brokerage that we're in discussions. We'll start [ph] to have aligned up with any of them, but some could be interesting. With respect to, you said valuations, I think was your question, and the APL deal. Why do I comment on someone else's deal? I wouldn’t think that's appropriate for us. I would say in general, sometimes it's hard to figure out exactly what the real economics are on a deal, we know that from our own case, for a deal that we've been involved in and we have one and you see how it is reported and a deal that we have one somehow is reported differently than how we're looking at it. And we have corporate part out from a parent company it gets complicated. You really can't just look at the headlines price of the EBITDA, you got to look at what's the economics of the transitional services agreement and all the other agreements that are with and in total. Having said that, there is no question that the land of the rising sun is risen in the last few days and have made two bold acquisitions, not just APL, but also Total [ph]. And it has to be noted and where that goes from here, I don’t know. I'm not really plugged into the Japanese market close enough to really know what they are planning on sending out going forward, but they were definitely interesting ones and unexpected ones. In terms of North American acquisitions, there has been absolutely zero change in valuations in the four years that we've been out there talking to acquisition candidates. This small one that's doing 4, 8 times range and the larger ones which shown fortunate higher than that and whole bunch in between, so really nothing has changed there.

Perfect, that's really helpful Brad. Could you guys talk a little bit about, a little bit in more detail about the UX Specialized Logistics acquisition? How many new customers were brought on with this transaction? And how should be thinking about the transaction synergy whether from a revenue or cost standpoint? I would imagine it will probably be less than what you guys saw with the ACL given how dramatic those were, but can you give us a sense of how we should be framing that up?

Yeah Rob, it's Scott. So, UX is a company that's just like our Last Mile Logistics. They do the same thing. They work with a lot of e-commerce customers installing appliances, electronics and they have a very strong brand in blue chip. They are focused on the East Coast and also some Midwest and then across Canada. So it's very synergistic with what we have today. It adds to our density. It is fast growing. It is scalable. It is a great team. The team fits in very well with us. It is a very scalable platform and the team works very hard. It fits right in with the XPO culture and it has been a great start since we've got it done. So it's doubling down on our last mile position where we're already the number one player in that space and it's working out well so far.

Perfect, thanks for the time.

Thank you.

The next question is from Allison Landry with Crédit Suisse.

Thanks, good morning.

Good morning.

I wonder if you can talk about what you're seeing in terms of buy rates versus sell rates to customers in the brokerage division and then, maybe if you could give us your view on truckload capacity and carrier pricing for 2015?

Yeah, I'll take the buy rates and the sell rates and then I'll turn it over to Brad for the view over the year. On the buy rates and sell rates we've had mid teens increased in revenue per load this year, some of that is led by haul, but a lot of that is price and increases, still it is year-over-year that was in the fourth quarter. Our cost to capacity is up somewhat in the same range to a little bit higher. So our gross margin dollars are up. Our gross margin percentage in the fourth quarter was down. As you head into the first quarter that slipped a bit where our margin percentage has been increasing in truck brokerage and our gross margin dollars have been declined just because of loosening capacity over in January in the seasonal slow period. And I'll turn it over to Brad to talk about this year.

So in terms of the outlook for capacity and pricing the simple answer, I don’t know there are factors that would make capacity loosen and rates come down and there are other factors that could make it tight and go up. We were at a couple conferences last week and interestingly, maybe not surprisingly, the shippers were hardly more that capacity is not going to be as tight and rates are not going to go up as much in the carriers and some of the brokers were arguing about this. So people were either taking their hand or they were bleeding their biases. When you look at the factors on the one hand you can't deny the last four months Class 8 orders have been high and when there's only, I don’t know the exact number, 2.5 million or so trucks on the road and you got this kind of 30,000 trucks here, 30,000 trucks there coming on not knowing whether they are maintenance or whether they are growth, it's hard to know exactly what is going on there. But Class 8 orders were up and they have been up for the last four months. And that we'd argue for capacities coming on and capital has been doing it's thing and finding some balance there, but too early to call a trend there. The temporary suspension of the hours of service, the 34-hour restart provision that’s helped a little in terms of loosening up some capacity, but not a huge amount. But if it becomes permanent that's going to be a good, yeah I said well it's getting out which side you're rooting for. It is going to make capacity loosen a little bit more. You have, in energy sector you have oil and gas workers who no longer have jobs. Might they become truck drivers? Maybe, hard to quantify that, hard to say, but that's certainly in the category of loosening. Lower oil prices are also would have the effect of some of the weaker carriers. There are a couple of 100, 000 carriers out there and most of them pirating the trucks, some of the legal ones with oil prices going it was getting really harder for them to continue, now they can continue. So that another thing could actually be loosening and rates being up as year-over-year they are up. It means more money to pay drivers and in fact more drivers that's one side of the equation. The other side of the equation is there is still a driver shortage, big time and it's not getting better. The economy is getting better however. So that's creating a little more space that's making me more tight. The loosening effect everyone experienced in January has tightened up a little bit the last couple of weeks. So may be that was just seasonality and now you're getting at the beginning of a season and then you're going to have a pro season coming out in a few weeks, we'll probably know a lot, lot more 50 days from now how the year is going to be even now. Lower fuel prices, even though they have gone up something like 50% from the bottom, they are still lower than they were. That's making trucking a more attractive alternative than going intermodal in some of the cases. So, that's pretty more demand on the road, little less demand in intermodal, although intermodal customers don't ship that much. The ELD mandate that will be phased in over next year or two, that's a serious thing. That's probably the biggest factor in our growth because that's going to decrease capacity quite a bit. It's going to decrease utilization and a whole host of other government regulations. We are not the least of which is hair follicle drug testing because, it used to be urine testing and some would stay clean for a few days, they pass the test and now they do the hair follicles and then they go back the better part of a year and lots of young people aren’t going to be able to get CDL licenses. So, short answer to your question is, I don't know, many factors would argue one way, many factors are going the other way. It going to be interesting to see it played out. We are trying to serve our customers effectively whether it's tight, whether it's loose.

Excellent, that was extremely helpful response. I guess thinking about the organic growth that was – is very strong in the fourth quarter. So I was wondering if you could help us think about that rate, you know, the organic growth rate as we progress through 2015 and I realized that acquisitions will obviously have an impact, but you know, sort of holding all else equal, do you think that will still sort of trend towards that 20% or 25% organic growth rates that you've talked about in the past or is that something that you think might be another year out?

Organic growth is going to do exactly what we said it was going to do the last few years, which is as we get bigger, now we're $3 billion, going to $5 billion, organic growth will still be really super strong, but it's going to come down. You're not going to have 39% organic growth when you're $5 billion, so a lot of big numbers. So organic growth will certainly come down, but it's going to be strong and it's going to be strong in our company because we focus very hard at serving our customers better, earning and getting more of their business and we have a very robust effort going out penetrating all the new customers that we don’t have yet, which is the vast majority of the market. So there's going to be strong, strong organic growth, but it's got to come down. There's no way it can be 39% going forward.

Okay, great. Thank you so much for the time.

Thank you.

The next question is from Chris Wetherbee with Citi.

Good, thanks, good morning guys.

Good morning.

May be a question just sort of on balance sheet capacity or cash balances, obviously it seemed like an opportunistic equity raised back in the fall of last year, then you followed up with a debt deal just very recently, kind of curious how you think about sort of more structurally longer-term cash availability to keep that dry powder. Seems like you're on the high end of the spectrum now, presumably there'll be transactions this year, but just sort of bigger picture, how much cash do you want to have on the balance sheet any given time?

Hey Chris, it's John Hardig. Thanks for the question. So we feel very good about the liquidity we have right now. I guess the targets we have for 2015, as I said we have $1.1 billion of cash on the balance sheet, now we have a completely undrawn ABL facility, it's $415 million today, but it has a $100 million accordion that we could fix up and add another $100 million of capacity too and that certainly gives us enough capital to pursue our 2015 plan and budget. In terms of longer term, we've been very public to say that we're comfortable with debt in a range of call it three to four times EBITDA. We make and walk a little bit above that. It there were a really big acquisition to go after on a short-term basis and then we will look to lower leverage after that acquisition, but our long-term base is three to four times and that gives us plenty of capacity to get to our 2017 targets.

Okay. When you think about sort of the opportunity here, I guess in 2015, you talked about $1.5 billion of sort of revenue that you want to be able to acquire over the course of the year '15. If you think about sort of multiples that you guys have been able to transact at in the past, it seems like you're talking about sort of a number may be acquisitions of between $0.50 billion or maybe up to $1 billion worth of activity, obviously relative to that cash balance, is that the right way to be thinking about sort of the potential opportunity here or is it too difficult to sort of pigeon hole into a specific sort of target multiple range like that?

I think you're looking at it right. You know, the way we have our budgeting done for the year is organic, the sense that EBITDA from what we have now is about $225 million and we're going to buy another $75 million. So that will get us to $300 million run rate by the end of the year. In order to buy $75 million of EBITDA the ranges you said of revenue required makes sense depending on which lines of business that are different EBITDA margin. So that's about right.

Okay and one final question, just kind of following up on the contract logistics side, just want to get a rough sense of sort of what the organic opportunity or how does the pipeline look as we move into 2015? Thanks.

The contract logistics organic pipeline?

Yes.

We have an organic pipeline of both the existing and new customers. The existing customers, there's a tremendous opportunity. One of our larger customers for instance we have about 2% of their skews that we handle and they are looking for us to increase that. It could be a sizable increase, across aerospace, across technology, across retailer, three of the areas that are growing the fastest. In terms of new customers, a good pipeline that was brought on with New Breed, but what's exciting is the pipeline that we brought to New Breed. We went across all of our customers, our 15,000 customers across XPO. There was about 100 or so that had business that was very specifically could be outsourced in a way that New Breed does, but very highly complex, highly engineered solutions and we made introductions. We've had some good meetings. The sales cycle is a little longer for Contract Logistics, it could last anywhere from a year to a few years of sales cycle. So those conversations have gone well and we have a lot of opportunities. So next week we have the VIVA [ph] Conference in Orlando and we have a delegation going there from odd looking verticals and two other people joining us will be Tony Anthony [ph] and Joe Hartland [ph] New Breed from our Contract Logistics group. Because there's a lot of contract logistics being done by 200 retailers who will be at that conference. We have some great relationships, doing a lot of business with some of those retailers and we're going to introduce them to them and they have a lot of great relationships they are doing business with some of those retailers and they will introduce for cross-selling some of our others. I will say this, New Breed definitely outperforms in the fourth quarter and it really came through and it is very unusual, that you buy a company and it outperformed the book they sold it to you. So usually they have the matter buried in the book and if you look at the fourth quarter they outperformed for four reasons. Number one, the customers had higher volumes, especially retail, number two, the team was very focused on operational efficiencies and cost control and there's an excellent management team there under Louis' able hands and number three, we were ahead of plan of getting new business and number four, the weather wasn’t too bad. So all these things conspired with each other and New Breed had a really great quarter.

That's great color. Thanks very much for the time guys, I appreciate it.

Thank you.

The next question is from Bill Greene with Morgan Stanley.

Yeah, hi there, good morning.

Good morning.

Brad, I'm curious if you can talk a little bit about the thought process behind some of the growth rate targets. They seem perhaps a little conservative given some of the color Scott offered around current market trends or what not. Is that a fair characterization or is it just looked a lot of large numbers are kicking in that's why you see a little bit lower kind of top line number, which would suggest about a 12% to 13% growth rate, which I think is down a bit from 15% to 20%, which I kind of interpret is the long-term?

Not really. It's depends how you look at it. We are on about a $3 billion revenue run rate. We did outperform in fourth quarter above our plan. The environment was great in the fourth quarter. Everything was at our back. We had a lot of that we can take credit for. A lot of it, the environment was good. It was a good time to be a broker. It was good time to be in a lot of our businesses. We look at the revenue run rate going from $3 billion to $5.25 billion, $1.50 billion of that will come from acquisitions. So going on roughly $3 billion, $3.75 billion is a 25% growth rate. Now you're right that we are a little bit ahead of plan since we are coming out fourth quarter. So maybe it’s a blended of the two numbers. If you're saying 12% not saying 25%, it's somewhere in the middle of there.

Yeah, Bill the difference in opinion I think is what you're mentioning is, we're using is the bait to calculate how much the organic growth is. So we are not giving out ourselves up. We are not just taking the $831 million of revenue and multiplying x4. We're saying fourth quarter was a unusually great quarter, particularly in our truck brokerage business, where everybody had a great quarter. It was an unusual quarter that was extraordinary. So we're saying we're really on about $3 billion revenue run rate to be there.

Okay, right, that makes sense. And then Brad, when you look at the long-term revenue guide and you think about getting there, I presume a fair amount of this depends on the timing of the acquisitions, but as a rough guess does it feel like it should be sort of linear or that it sort of will be fast or sooner and that it will tail off as we approach that? So in other words 2017 you may actual get to some numbers before we actually get to the 2018 total goal, do you know what I'm saying?

I do, but the main swing factor there, those are the acquisitions and the timing of them. The business itself will grow organically very nicely. We're in growth rules that are the fastest growing parts of transportation and we have great leadership positions in all of them. So we'll be growing above the average in general there. And then the gap of getting to the numbers sooner or on target, I don’t think we are going to get to them late, will be dependent on when we do the acquisition, the timing of the acquisitions, but there we let the timing take its own pace. When it's right, its right, when it is not right, it's not right.

Yeah, that makes sense. Let me ask one last question just on intermodal, you mentioned that the low oil while it does make trucking more competitive, it doesn’t seem to be causing a huge shift from intermodal. Do we feel at all like rail service is an impediment to the growth or is it back enough that this isn't really such a concern anymore?

Well, I am concerned about rail service and our customers are and we want it to improve and we went to the yard and everything we talked we can't facilitate that to a large extent we're at the mercy of the rail in general and they are doing lots of things as well. They are hiring people, they are buying locomotives, they are investing in CapEx, they are getting their systems in place, they are communicating more. I feel big, big improvement in the communication between all the rails and our operational folks and I think that's makes a big difference and letting customers know the status of their shipments is probably the biggest improvement of them all. Even if it's not right on time letting them know that. But service kind of bottomed down I would say around October, November and it has gotten better since then. I would hope I can't promise, but I would hope that it is going to continue to get better every quarter through the rest of year, by the end of the year, so it will be like it was a couple of years ago. Having said that, I would say even despite congested rail situation, intermodal has been on fire. I mean intermodal is increasing, people are singing up more intermodal, people are still converting their supply chains from over-the-road to intermodal. So there's a real powerful trend there. Bear in mind over-the-road is hundreds and hundreds of billions of dollars. Intermodal is only $15 billion. So little, little conversions from truck to intermodal make big percentage increases in the intermodal business. So we believe we are agnostic. We're big in over-the-road, we're big in intermodal. We just want to serve our customers and present our customers with alternatives that make sense to their supply chain. But I'm a big believer in the long-term viability growth in intermodal.

That’s great, I appreciate the time. Thanks guys.

Thank you.

The next question is from Kevin Sterling with BB&T Capital Markets.

Thank you, good morning gentlemen.

Good morning.

Maybe Brad or Scott with some of the weather we've seen lately in the past couple of weeks, I'll tell you even its better than Richmond, Virginia. So you know it's cold out there. Are you seeing some capacity tightening up a little?

It's tightened up in the last couple of weeks. That's for sure across the board. It was really was not tight in January. That's for sure also. January was not. But the last couple weeks it's gotten a lot tighter and rates have firmed up and it's starting to feel more healthy out there.

Okay, thanks Brad, do you think that's due to some weather or is that may be just demand kind of picking up after this low or softness we saw in January?

The weather hasn’t hurt, but I think a lot of it is just seasonal.

Okay, and Brad, you also mentioned ELDs earlier and you obviously, I think I heard you say that's a big, going to be an impact to capacity, could you look to carry or pull, have you thought about the impact to some of your smaller carriers that ELDs could have?

It's not a hurdle. There's no question about that. There's nothing positive other than safety, which is great for all those drivers on the road. But apart from that there's nothing positive for the small carrier, but you know, gee it's going to hurt their productivity and make it a more challenging business and they're going to have to somehow make ends meet and hopefully pass along higher costs.

Okay and lastly in last mile, the UX acquisition, do you think it is a good acquisition, continue to gain scale in this business, but given how small the pool is to find qualified drivers to offer that white glove service, how important is it to kind of do additional acquisitions in last mile, so if you can kind of grow that business particularly at the growth rate we're seeing in e-commerce?

Well, we're going to grow it anyway. We didn’t do any other acquisitions because we've got a great service offering and we are the number one position and we've invested so many tens of millions in technology that the customer experience is so much better than the alternative. And we have many strategic, opportunities [ph] we have a number. We have a handful of large customers who are talking to us about strategic arrangements, so that they can transition their last mile supply chains in response to the e-commerce growth and we have a unique capability that we can offer there. So the opportunity to grow that organically is very, very substantial. We signed up about $80 million of new business over the course of 2014 and we'll get the full benefit of that $80 million this year. So, I'm very bullish on last mile growth.

Well, great. Thanks for your time today and congratulations on a nice quarter.

Thank you, sir.

The next question is from Todd Fowler with KeyBanc Capital.

Great, thanks. Good morning everyone.

Good morning, Todd.

Good morning Brad. I wanted to ask on your EBITDA margin expectations for 2015. If I take the year on targets I am coming up with about 5.7% EBITDA margins. It sounds like that the fourth quarter was couple of favorable things going on, but basically if I take the run rate around 5% or so, you know, can you help us think about the EBITDA margin improvement that you're expecting, is that a function of mix, is that a function of some of the leverage that you're getting, is it employee productivity, just kind of some of the main buckets to bridge the gap on the margin side?

Sure. The two biggest areas, one is corporate expense. Our corporate expense will stay relatively flat. John said it was $55 million to $60 million not changing much. While we have significant organic growth over that infrastructure, that is finance, it's IT, it's recruiting, training, the leadership team, you put all that together we won't need to add in the corporate side of business as we grow significantly on top of it. And then in addition to that employee productivity, especially within truck brokerage where there's three things that are driving our productivity levels right now. It's tenure, it's training and then it's investment in technology. Those three things should continue to drive up our productivity and our margins within truck brokerage.

Okay and then so with what we're looking up for contract logistics here in the fourth quarter, is that the right way to just kind of think about yearly EBIT or the EBITDA margins for that segment going forward or is there some opportunity to move that margin up as well?

No, we don't know. It's early. There is no plan in place to change those EBITDA margins much one way or the other.

Okay and then I guess just a last one that I had kind of along the same lines, but Scott, in your prepared comments it sounds like in the last mile business that there were some cost pressures and it sounds like that you were maybe incurring some higher costs to meet your service commitments. Did I catch that the right way and then can you talk about what we should expect from either a net revenue margin standpoint or to alleviate some of those cost pressures going forward?

Yeah, on the net revenue margin for last mile the biggest impact was the acquisition of ACL, which has margins in let's call it teens, mid to higher teens percentage. So that on a blended basis takes down your margin. In addition to that Optima has lower margins than their core white glove service. And third is yeah, the transportation cost increased in the fourth quarter. We are working to take up price and pass that on, but in essentially it's very important that we deliver quality service. If capacity is tighter or capacity is tight, we'll grow above and beyond and we'll service the customer and that's exactly we did in the fourth quarter.

Okay, so maybe the answer is to think about mix and then some other seasonal factors and that in tight markets we can see some margin compression in that business?

It is, but that's a business that service matters more than price. I mean it, the price always matters, price matters in every single one of our business, but if you were to rank them in last mile service is just so important. So as long as we continue to improve that leading service and double down our capacity and buying U.S. products another 1,600 contract carriers and installers so to add more density to our last mile footprint and you put that capacity together you have the density and we should be able to get healthy margins in that business.

Okay, sounds good. Thanks for taking my questions today.

Thanks Todd.

The next question is from John Mims with FBR Capital Markets.

Hey John, I think you might be on mute.

Sorry, thanks. Good morning. So Brad, let me ask you a question on the logistics business. I know it makes a great strategic fit and you've talked about that but from some of your peers that always seemed to be a bit of a struggle from a margin standpoint. So when you hit the growth target you're looking for you get the scale that you see. We move past the noise in terms of acquisitions and integration et cetera. What's the longer term operating margin we should expect in that business?

I think it really depends on how effective we are in continuing to be very focused on cost control and Louis and his team are really good at that and they are very laser focused on operational excellence and I'm just extremely impressed with their ability to track and to execute on that and that's what it comes down to. In that business customers aren't looking for us to make a nickel off their back, they are looking for us to be more efficient and more operationally excellent and help save them money. So we're not really focusing on growing the margins as much as we're focused on pleasing the customer, making more money for the customer and then we'll make money by taking costs out and be more efficient and passing some of that along to the customer and keeping some of that for ourselves.

Sure, now I get that. But I mean, when you look like internally planning assuming you get all of that stuff right, is this a longer term kind of double-digit margin business or you know, that's still going to kind of bounce around mid single digits like we've seen with some of your other guys, some of your peers?

I think you'll see the margins in logistics buying someone else, but the margins that we have right now we're, I'd say we are not expecting them to be going up, going down, they are margins that we see where it went and our customers believe it as well.

Okay and one more on the transport side. You know, with the port strike going on and really more importantly kind of the unwinding of the backlog we'll likely see over the next couple months and how that coincides with produce season and peak season, can you walk through the four sub segments now and talk about real winners and losers that you see now as far as trucking versus intermodal versus last mile versus expedited, and just kind of what your outlook is over the next several quarters?

Outlook in terms of capacity John?

Yeah, in terms of capacity, but also just where you're seeing the most positive outlook and who are going to be kind of the winners and losers within those different segments?

Oh, okay, well. So we have two things. We have transportation now and that incorporates everything bulk contract logistics and we have logistics which is contract logistics and that's our new SEC reporting, which makes importance to how we're running the business. On contract logistics I think we're going to be big winners there because we're operating at a very high level of the specification of contract logistics. We are not doing lot of policies that kind of stuff. We're doing highly engineered, technology enabled contract logistics for Fortune 100 companies that have complex supply chain and we do it very well. So I think that business is going to be stable and continue to grow and if and when we do acquisitions of other contract logistics companies, I will just modestly say that I am confident. I think we can raise their margins because of the management team and infrastructure that we have in place in North Carolina. In last mile I like our positioning. I think because of e-commerce and because of the outsourcing of final mile by the retailers we've got lot of wind to our back there too. Intermodal, we are in good position. We are not number one, we are not number two, we are number three, although we have a leading position in cross-border Mexico. There we are a little bit at the mercy of the market and it's a little unclear in certain of the trends and we don’t know yet. But I like our position and certainly going to get better. I don’t know whether the rate of betterment will be the same as the other modes or not, I just don’t know. Truck brokerage, we're only going to get better as we get bigger and we've been growing primarily organically there and 59% organic growth in the fourth quarter, wow, which is really pealing the leather off a ball there, I expect that to continue for quite a while. Expedite completely catchy, it really depends on supply chain disruptions, the port situation which is formal for the country, grow for lots of other parts of the business in the industry, great for expedite. Expedite is doing very well with the port disruptions. So the more disruptions there are like more strikes, like weather situations, expedite will do better. Does that give you the color that you're looking for?

Yeah, now that's helpful and because when you look at the margins you reported on a year-over-year basis within the transport sub segments, and I know there's some acquisition noise and Scott had mentioned some mix shift in truckload, but you know, I'm wondering how the huge jump in that revenue margin in expedite from fourth quarter of last year to fourth quarter of this year, the drop in last mile, the increase in truckloads and also in freight forwarding, you know given the disruptions that you see now how all of that plays out from a seasonal basis as we go into 2015?

Right. Well, what you're describing is the beauty to being multimodal and diversified. So at any one point in time some of our modes are doing better than others and some of them aren't doing as well. And which ones will be doing better or worse will keep changing over the course of the seasons and the years and that's the way diversified model works and it decreases the risk from our point of view quite a bit.

And I think John big picture, the 36% gross margins you saw, net revenue margins that you saw across the company in fourth quarter is relatively good run rate. If you look at all the different factors there's a lots of factors that go up and down, but our fastest growth is in truck brokerage, where in truck brokerage you might have half that.

Great, thanks for the time.

Thanks John.

The next question comes from Donald Broughton with Avondale Partners.

Good morning everyone.

Good morning Donald.

Well since we've seemed to have beaten the intermodal mode fuel shifts and of course that, let's ask a more strategic question. At what point in your platform does it make sense for you to expand to other types of freight forwarding, whether it be ocean freight forwarding, air freight forwarding, customs duty, brokerage, et cetera, at what point it makes sense to expand onto those fields?

Well, you know, we do freight forwarding. We do air and ocean, we do over a couple 100 million dollars year, it could all be accompanied by itself. It makes a substantial company, but we are a $3 billion company, so this is a small percentage of our business. It's been going well, I mean freight forwarding revenue in the fourth quarter organic we grew 44%, revenues were up 234 percentage, so I mean a lot of growth in our small, relatively small freight forwarding business. We haven’t figured out a way to conquer the world in freight forwarding. We don’t see an angle. We don’t see an edge. In all our other verticals we have an edge. There's something special about what we're doing. We've got the technology advantage. We've got a size advantage. We have a training advantage. It's something that we're doing that when we meet with a customer and we explain what we're doing they are "I get it, let's do that" and we get in the door we are often running and we do a good job. In freight forwarding we also do a good job, but the larger customers have their deals cut directly with the liners. There's not 200,000 air and ocean liners like there are in truck brokerages. The truck double that, they have a vast majority of the market. They are very sophisticated. We are not going to be able to help them a lot in terms of offloading their capacity. So there are some great competitors in freight forwarding that have been around for decades and have multibillion dollar networks and great technology. They have learned a lot over the years and some are doing better than others, but they are not worthy competitors. So we don’t see how we're going to be number one or number two, or even number three there. So we've been a little scared. We've been a little nervous to go in full board and get really big in freight forwarding without having a clear path to why we are special whey do we need, what are we bringing to the customer that our competitors are. Having said that, we are open minded. We are open minded and if the right freight forwarding acquisition presented itself to us that makes sense strategically, makes sense operationally and made sense financially from an acquisition price point of view we would do it, but we're not hungry eagerly going out trying to do that.

Thank you.

Thank you.

The next question is from Scott Schneeberger with Oppenheimer.

Good morning guys, this is Daniel filling in for Scott. Yeah most of my questions have been asked, but I just want to hit on the IT budget, because this looks like it is pretty up, pretty nicely from last year. Can you also go a level deeper there in what you're trying to do and what the benefits could be, near term?

So, you're talking about the technology Daniel?

Yes.

So technology we spent roughly about $115 million last year, we'll spend roughly about $125 million this year. I loved spending that $125 million because that $125 million translates very powerful solutions for our customers and it translates into our employees, our sales reps and our counter reps, being able to do their job more effectively, more easily and it gives them a big advantage over their competitors. So we hire people from competitors, almost always their jaws drop when they see the technology that we have compared to what they had before. Not always, but in almost all cases. That's really important because from an efficiency point, from a productivity point of view, from a customer service point of view we have over 200 IT projects, right this minute that we're in the middle of implementing. And we get thousands and thousands of suggestions from our customers and our employees every single month of what their dream, what their fantasy technology would look like and we're working on it. We are prioritizing them, we are putting resources on them in Cambridge, in the high point and all across the company and it's really making a big, big difference. So we are happy to spend $125 million here.

Okay, great. Congratulations on a nice quarter.

Thank you, Daniel.

The next question is from Jason Seidl with Cowen and Company.

Good morning guys.

Good morning.

Just one quick question, you know, you talked about the little or large numbers with sort of slowing organic growth rates and I get that, but how is the hiring environment right now, is that going to constrain you as it gets a little bit tighter?

Hiring for what specifically?

Basically, for people to work on the brokerage side, on the logistics side?

Oh internally, yeah. So the labor market is fine. You know, contract logistics we're not hiring huge amounts of executive people, we're hiring R&D and we pay competitive rates and we don’t have problems hiring people. In other modes on the transportation side, we have great training programs. We have great compensation that's competitive. We have technology that enables them to be able to make their bonuses more, so we're in fact a growth company. There's lots of opportunities for advancement and we invest a lot in our recruiting programs. So we have a big presence on the Internet particularly for a college grad, so hiring has been okay.

Thanks for the time, Brad.

Thank you.

The next question is from Casey S. Deak with Wells Fargo.

Hey guys, how you're doing?

Good morning, good.

So, just to go back a little on the strategic side, you've talked in the past about when you're looking for acquisitions you're looking at brokerage firms that may have a high turn down volume and the ability for you to take that volume in and convert it on your network. So, my question is, are there similar strategies across the other service lines, are there value propositions there that when you're out in the market looking for an acquisition there's a certain characteristic that peaks your interest?

They are and Casey, start with logistics. We look at our platform and what we can provide for them and how we can leverage our platform with that business. We look at end markets and customers, how complex are the projects, how highly engineered, how much do they depend on technology for their customer and we look at end markets in terms of verticals, are they areas where there is fast growth in that outsourcing trend, our companies in that vertical outsourcing more and more and what's the opportunities there. When you look at last mile, last mile is a lot more like brokerage where there is turn down market, they don’t have enough density. They don’t have enough capacity to move things. We have more access to capacity in that business. We have more density because we have more freight. So we look to see what are the business opportunities that they test upon, how tight are the customer relationships that they have? Like for example, UX has very strong relationships, decade-long relationships with some blue chip customers, retailers and e-commerce providers. From an e-commerce perspective how can we cover the country nationwide from an e-commerce perspective and add to the density and be able to drive down their cost of capacity in those tertiary markets and not just the big markets across the U.S.

All right, that's helpful. Thanks guys, I'll pass it along.

Thank you.

The next question is from Jamie Dimon [ph] with Macquarie.

Good morning, gentlemen.

Good morning.

You touched on the West Coast port situation as it relates to expedited and I think that's pretty obvious to everybody. Can you talk in maybe a little bit more in nuance terms about some of the ripple effects from the port situation on your other business lines, that perhaps some of us wouldn’t realize?

Well, ripples is a word, I think more like a down than a ripple because the boxes aren’t available to load and the non accepting port does not have the small boxes in there, it's a mix. I mean the port situation in the West Coast is not America's finest and it'd be really great if Washington would step in and bring some order into that. It's very unfortunate. So it's in a nutshell freights are being moved less efficiently and at lower volumes. So in Southern California we've got three trucks for every load literally. I mean I've never seen that before. Three trucks for every loads. So all that were saying if you post a load you better have 12 phone lines over because this is going to go wherever you think right away. Now in our business that hurts intermodal because there's less intermodal load coming in internationally. That's only about 12% of our intermodal volume, but it could impact to your point as much as say about 40% of our intermodal volume nationally because of that ripple effect the box is not being able to load. But, you know, like diversification going back to the earlier question, it really helped us to mitigate the impact in the ports and again when one mode is off [ph] another mode picks it up. And the final point I would say there is something we just all docks are dong on the port situation typically is pretty bad, but there is a silver lining and that is when it clears up and I'm not predicting when it's going to clear up, it eventually will, there will be a spike in volume and it will be a super spike. There will be a big backlog of freight that's got to get moved really quickly and you'll see rates go up. You'll see a big, big tightening. I don't know when that will be.

Has this been a significant enough event where you know, in looking at your acquisition pipeline there maybe some people that might have been a little bit more convinced to sell perhaps five years earlier than they might have?

I don’t know about five years, but…

Perhaps two years?

There's some people taking and making fun if you're in pain. I don't know if that makes someone to sell. I mean most sellers are selling due to a larger reason, they have got a health problem or when they want liquidity or they are getting up in age or it's owned by a private equity firm or there's a partner, some partners want to get out and issues that are less specifics of this market right now.

Very fair. Thank you very much for your time.

Thank you.

The next question is from Jack Atkins with Stephens.

Great guys, thanks for squeezing me in here. Just a couple of questions for you Brad, you know you referenced earlier the ELD mandate and that could have a negative impact on your smaller carriers. I guess my implication that would seem to me that the smaller carriers without ELDs aren't really complying with federal hours of service regulations. I mean do you have a sense for how much the average carrier, small carrier, without ELDs is driving above where they normally would if they were to start complying without hours of service?

Well, first of all Jack, we'll always squeeze you in, no problem there. On the ELDs we don’t know what the level of compliance is. They all tell us they are compliant. We don’t believe they are complying obviously. We understand human nature and yet we get anecdote, but I don’t know what the level of compliance is and I don’t know precisely, numerically, mathematically how much capacity it could take out when everybody is compliant, but it is significant. I'm sure significant, it's not a minor point.

Okay, that's fair and then lastly here just sort of on the capital structure, you talked, John referenced earlier the comfort with being sort of three to four times levered on EBITDA, I guess when I think about sort of the, what the capital structure looks like in 2017 on that $575 million in EBITDA, do you think is that three or four times leverage on $575 million or is it three to four times leverage getting to $575 million?

You know Jack, you got to write the first line. It's the leverage on the $575 million.

Okay, okay that's what I thought. I just wanted to clear that up. Thanks again for the time.

You're welcome. And for the record just for every one if anyone is new to the story, we have more cash than we have debt at the moment. So we have more leverage on the balance sheet in that sense.

The next question is from David Campbell with Thompson Davis & Company.

Good morning. Thanks for taking my question.

Good morning.

I just wanted ask everyone there of course, but Scott, you mentioned that February the expedited market seemed to pick up there in terms of demand, but that's also when Forward Air bought Towne and Forward Air started raising rates. Is that acquisition a factor in the expedited market? I know it’s a small part of your business but it could be a little bit misleading if the market isn’t really that strong, but Forward Air bought Towne and that's the reason it got better?

No I think it got better for a few different reasons. One, look we're into seasonally slow period in January. Again the February today is Chinese New Year. So you'll start to see pick up in volumes at the Chinese New Year and then you'll have produce season in mid March and you're just coming off the seasonally slowest part of the year and then along with that you have the port strikes. I think that's the bigger impact and yeah, people are diverting traffic to different ports and just unplanned freight which leads to more unplanned shipments leads to more expedite in general. I don’t think that the size of the acquisitions you're talking about really are rippling through the industry or size to make a material impact for us.

Right, so you think the port strike had more impact in February probably than January?

I think it does, yeah, it hasn’t gotten better. If you look at the photograph and people send us these photographs every day of 1000 feet vessels with all these containers just are parked outside the port and then you look at these other areas with shots of just bumper to bumper to bumper trucks worse than the raider [ph] in Southern California it's just, it's a mess. It's a big clog. It is very inefficient.

All right, then one last, and the other last question was more corrections manager, but Brad, you were talking about freight forwarding earlier and this runs to a question, your concern about the long-term interest in that business, is it partially because there's a lot of very good competitors with high price targets and then a few big ones with very low proper margins and struggling, but there's no way to turn them around or you wouldn’t know how to turn them around, is that one of your hesitancy?

I wouldn’t quite say it like that. When I look at my reporting budget always generates quite reporting, we have a nice little freight forwarding business. And it's one month now and now that we're off into the writing we were all coordinate and we give the resources they want, they're growing very nicely. They do the job and the customer surveys. We've seeing really good results from it. We haven’t grown big and long into freight forwarding only because we haven’t figured out a strategic plan of how we can create a huge amount of value for our customers and therefore our shareholders as we have in the other verticals. In the other verticals we got really clear strategies of how we have competitive advantages in the marketplace. We haven’t figured that out in freight forwarding. And maybe we will someday, we haven’t yet and that's the reason. We don’t want to get buy things and say to buy things. I mean you want to buy things that there's a reason for buying that, there's a strategic compelling logic to buying it. So we haven’t really quite figured that out for freight forwarding, maybe we will in the future.

Well, there's also the aspect of how the freight forwarding business integrates with truck brokerage and how it could help…?

I don’t know that helps David, I mean you take in our business specifically the present, the people that we talk to in truck aren’t the same people who are doing the international freight forwarding. So would there be piece of advantage, sure there would be, just in some of our other verticals getting introduction from somebody who works the same floor you get personal, you kind of got the vertical. But, it's a little bit different, it's a different part of the supply chain and now they are emerging from the ground tier that the nexus is in that close as it is from, plus its intermodal and target break loads and we're talking to customers who, they're hands are touching when talking to handle both modes and is planning on alternatives based on our outlook research, they are making a whole lot advantage to, there's a lot of synergy there. With the freight forwarding there isn’t as much in our customer base at least.

Okay.

It might be different in others, but not in ours.

Well, thank you very much, I appreciate your answers.

Thank you, David.

We have no further questions at this time. I'd like to turn the call back over to Brad Jacobs for closing remarks.

Thank you everybody. We're a little over time, so I won't say any comments other than see you in 90 days. Thanks a lot, have a great day.