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Executives

Mark DiBlasi – President and Chief Executive Officer

Peter Armbruster – Chief Financial Officer

Analysts

Jon Langenfeld – Robert W. Baird

Tom Albrecht – BB&T Capital Markets

David Ross – Stifel Nicolaus

Matt Sherwood – Cooper Creek Partners

John Larkin – Stifel Nicolaus

Ben Hartford – Robert W. Baird

Roadrunner Transportation Systems, Inc. (RRTS) Q4 2012 Earnings Call February 6, 2013 4:30 PM ET

Operator

Greetings, and welcome to the Roadrunner Transportation Systems 2012 Fourth Quarter Conference Call. Today’s call is being recorded. At this time, I will turn the call over to President and CEO, Mark Blasi. Please go ahead sir.

Mark DiBlasi

Thank you. Good afternoon, everyone. Thanks for joining us today for the Fourth Quarter 2012 Earnings Conference Call. With me today is Peter Armbruster, our CFO, and after some comments from Peter and me, we will open up the call to any questions that you might have. Before we begin, I’m going to turn it over Peter at this time to discuss the Safe Harbor Act.

Peter Armbruster

Thanks, Mark. Before we begin, I'd like to remind everyone that a number of statements made today will be forward-looking statements that relate to future events or performance including our first quarter 2013 guidance. These statements reflect our current expectations, and we do not undertake to update or revise these forward-looking statements, even if experience or future changes make it clear that any projected results expressed or implied in these or other statements will not be realized.

Please be cautioned that these statements involve risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from the forward-looking statements. These risks and uncertainties include, but are not limited to, risks related to the integration of acquired companies; competition in the transportation industry; the impact of the current economic environment; our dependence upon purchased power; the unpredictability of and potential fluctuation of the price and availability of fuel; the effects of governmental or environmental regulations; insurance in excess of prior experience level; and other “Risk Factors” set forth in our SEC filings.

Mark DiBlasi

Okay. Thanks, Peter. I’m going to begin with some overall comments on the company and strategy. First of all, I’ll take a few minutes to briefly discuss the strategic composition of the company and for those of you that are not familiar with us, which we believe has driven and drives our long-term performance. And then provide some color on the quarter, current trends, and strategic initiatives in the business. We believe our asset like business model is positioned perfectly for continued market share gains. We provide a one-stop solution or à la carte service to meet our customers’ individual needs. We offer a full complement of solutions including customized and expedited less-than-truckload, truckload and logistics, freight consolidation, inventory management, transportation management solutions, intermodal drayage and expedited services.

We utilize a proprietary web-enabled technology systems and a broad network of transportation providers comprised of both independent contractors and purchase power to serve a very diverse customer group. Although we service large national accounts, we primarily focus on small to mid-size shippers. And our business model is scalable and flexible and our cost structure is variable and requires minimal investment in transportation equipment and facilities, which enhances our free cash flow and returns on our invested capital and assets.

We report through three business segments less than truckload, truckload and logistics, and transportation management solutions. These segments complement each other by allowing us to offer all services across all zip codes. By cross-selling each segment services, we are able to build density in a more rapid rate and expand our operations into new geographic regions. It also helps us to positively impact our organic growth by cross-selling through all of operating segments.

We are a carrier and we have a large amount of capacity dedicated to us. We control a significant amount of that capacity in our network by utilizing independent contractors and smaller carriers where we represent a substantial portion of their business. We believe that this provides us with a strategic advantage over other non-asset-based providers as we expect capacity to continue to tighten in the future.

In terms of our Q4 business, Peter will go over some of the numbers in greater detail, but I will give you some business contacts by saying that for the four quarters and the trends that we are seeing in the first quarter so far in 2013.

In our LTL segment, new customer growth, expansion into new markets and existing customer growth, drove a $11.3 million or 9.6% increase in LTL revenues. In mid-June, we opened two new terminals Baltimore and Philadelphia. The start-ups went very smooth and we saw consistent growth in line with expectations throughout the fourth quarter. In September, we expanded our Huston operation and in late November we opened our Boston terminal. These also went smoothly and we expect similar consistent growth into 2013.

On August 10, we acquired Expedited Freight Systems or EFS, which is a Midwest region of the LTL carrier to complement our existing Midwest regional operation. And since that time, we’ve integrated EFS into our total LTL services and have seen nice growth in that service offering.

Tonnage was up 15.5% for the quarter. By month on a per day basis tonnage was up 9.6% in October, 17.8% in November and 17.1% in December. The fourth quarter was positively impacted by the EFS acquisition. And without the EFS acquisition, our tonnage growth for the quarter was at 3%.

Revenue for run rate excluding fuel was down 5.3% due to the addition of EFS, due to the freight mix and the likes of calling EFS, provide much lower revenue per hundredweight, so when you combine the two would drive the overall down.

Our net revenue margin improved in the quarter to 28.1%, up from 24.8% in 2011 due to a comprehensive set of performance and service initiatives that we began in the fourth quarter of 2011, as well as the addition of EFS in the new terminal openings in 2012. Our line haul cost per mile excluding fuel was $1.24 during the fourth quarter of 2012, and the same in 2011 and for all of 2011 our full-year line haul cost per mile was very consistent at $1.24. We were still able to show improvement in our operating ratio last year despite experiencing load inefficiencies due to Hurricane Sandy and in current integration cost on non-recurring basis associated with the consolidation of certain EFS operations.

Overall our LTL operating ratio improved to 94.9 from 95.5 in addition to our continued performance initiatives as we build density in new areas improved the mix and pricing of freight within our system, further absorb cost associated with growth and fully integrated EFS, we would expect greater improvement in our operating ratio as we move into 2013 and beyond.

With regard to truckload and logistics, complete with the truckload and logistics performance during the quarter revenues grew by 45.3% to $143.4 million and operating income increased by 33.9% or $10.3 million from $7.7 million in the fourth quarter of last year. Our acquisitions of D&E Transport, CTW Transport, R&M, Sortino, Central C.A.L., A&A and a DCT contributed to over $34.3 million of the revenue increase. Organic growth was $10.4 million or 10.5% of that growth.

We see tremendous amount of growth potential both organically and acquisition related in our truckload and logistics payments and we are making investments in personnel and infrastructure commensurate with our strategic objectives in that segment.

In our truckloads and logistics division, we are expanding ours infrastructure and personal to effectively integrate the growth of truckload services as we execute on our strategy, that D&A Transport acquisitions that we completed in April. The Central Cal, A&A acquisitions acquisition in June, and the DCT acquisition in December were the next steps of work is anticipated to be a series of acquisitions to expand our geographic footprint, scope of services, and dedicated capacity in truckload services.

The addition of key personnel and advance of our growth is the same precise game plan that we’ve effectively utilized to grow our Roadrunner from a $150 million company in 2005 to over $1 billion Company this year. As in our LTL segment, we’ve been very fortunate to consistently attract individuals to our team that we know well and have had led high growth business units in transportation and logistics that are substantially larger than they are operating.

So as a result, the teams that we’ve been able to strategically assemble on each of our business units are highly motivated to efficiently grow Roadrunner business and have the proven capabilities to do so. And I can tell you this time, we have a waiting list of key individuals on board with our company at this time.

The cost associated with the infrastructure and personnel additions have been reflected in our first quarter earnings guidance that Peter will cover in a few moments.

Our TMS segment, revenue grew $1.8 million to $23.8 million or 8.3% during the quarter. Organic growth, pricing in our February acquisition of Capital Transportation Logistics accounted for the 8.3% increase. The operating leverage associated with this combined growth led to a 29.6% increase in TMS operating income, and our TMS operating ratio improved to an 88.2 from 90.1 in the prior year.

Per quarter trend that we are seeing in 2013 the economy is for transportation and generally slow recent weather conditions provide uncertainty for the quarter. However, we continue to grow and take market share. Our January LTL tonnage growth was 21.5%, improvement over the same on a per day basis over last year. The LTL rate environment continues to be consistent over the past several quarters and we continue to see rate negotiations stick in the 3% to 4% range. Couple of logistics business continues to perform well, pricing is stable in the 2% to 3% range, and the integration of our fourth quarter acquisition if Central Cal, A&A, and DCT is going well and we are seeing additional growth opportunities from our cross selling initiatives. Our TMS business was up in January consistent with what we have done in prior quarters.

With regard to acquisitions, we continue to have a significant pipeline of acquisition activity. In fact, I would say that our acquisition pipeline is as robust as it has ever been. We are in very space of diligence on several tuck-in acquisitions. We are fully capable from a management standpoint to effectively simulate each of these opportunities and are hopeful that one or more will be completed in the relatively near future.

Each opportunity will be consistent with our core acquisition criteria, and criteria is to continue to build critical mass from a geographic standpoint in each of our businesses, continue to broaden our capacity to more effectively utilize our network across all of our operating segments, continue to seek companies with complementary service offerings or new service offerings, and with similar business models that bring additional value to our customers that we can effective with cross sell within our suite of services.

Finally, we only seek companies with management teams that will fit with us culturally and then are immediately accretive. By following that acquisition criteria, we've been very successful in the acquisition and integration of the companies we brought on board in the past several years.

Reminder the three previously mentioned acquisitions in November, December bringing the total number of acquisitions by this management team to 22, 13 of which have been acquired in the past year and a half, eight alone in 2012. As I stated earlier, we continue to have a very robust pipeline of potential acquisitions, our differentiated strategy in our strong reputation in the transportation community as well as our proven ability to smoothly integrate each acquired company our large factors as to why our pipeline is at such a high level. In the December stock offering that we just completed fast at the end of last year gave us significant dry powder going forward to accomplish and make these acquisitions.

In summary, we are very pleased with our fourth quarter results despite the impact of additional shares related to our December common stock offering, lost revenue and additional cost incurred related to Hurricane Sandy and fourth quarter acquisition transaction expenses which in total impacted diluted earnings per share by about $0.02. We continue to strategically position our company for long term growth.

We were extremely pleased with our full year performance in 2012 through an aggressive combination of organic and acquisitional growth. We improved revenues by over 27% to exceed $1.73 billion in terms of total revenues. And of that, 27% growth clearly one third of it was through organic growth and the other two thirds were through acquisitional growth.

We have proven that our lower cost, high quality business model and our comprehensive portfolio of transportation solutions continues to provide a competitive advantage and enables profitable growth and value creation to our shareholders. As evident in the fact that we increased our operating income by 49.5% to $69 million for the year, we improved our operating ratio by 90 basis points for the year to 93.6 and improved our earnings per share by 41.5% to $1.16 up from $0.82 in 2011.

At this time, I’ll turn it over to Peter to go into a little greater detail.

Peter Armbruster

Thank you, Mark. I will begin by summarizing our fourth quarter results by operating segment. LTL purchased transportation cost as a percentage of LTL revenues for the fourth quarter decreased 3.3% from the fourth quarter of last year. This improvement was primarily a result of ongoing pricing and cost initiatives, new geographic regions, additional lane density and the addition of EFS.

Our fourth-quarter net revenues increased $7 million, from the fourth quarter of 2011, driven by a 9.6% revenue growth and 330 basis points of net revenue margin expansion. EFS acquisition added incremental net revenues of $5.6 million. LTL personnel and related benefits increased $3.9 million from the fourth-quarter 2011, primarily due to a shift from outside temporary dock labor to employee dock labor, reinstatement of our Company 401(k) match, compensation associated with new personnel, hired to accommodate growth, drive business performance and the addition of EFS.

LTL other operating cost increased $1.6 million primarily due to the addition of EFS. Our LTL operating ratio for the fourth-quarter improved to 94.9, from 95.5, we are still able to show improvement in our operating ratio over the last year, despite experiencing load inefficiencies due to Hurricane Sandy and incurring integration costs on a non-reoccuring basis associated with the consolidation of certain EFS operations.

For 2012, our LTL segment operating income improved 45.9% or $11.2 million to $35.5 million from $24.3 million in 2011. Of the $11.2 million operating income increase, $0.5 million was due to the EFS acquisition and the remaining $10.7 million was due to our GAAP improvement.

Overall truckload and logistics net revenues for the fourth quarter were 32.9% of truckload and logistics revenues compared to 35.3% for the fourth quarter of 2011. The truckload and logistics net revenue percentage was impacted by the additions of D&E, CTW, R&M, Sortino, Central Cal, A&A and DCT in the 2012 quarter and the ship from company owned equipment to independent contractors within our existing truckload companies. Collectively the acquisitions had a incremental net revenues of $12.1 million.

Within our truckload and logistics business, operating income increased to $10.3 million from $7.7 million in the fourth quarter of 2011. Due to continued performance initiatives and insurance costs levels, the truckload to operating ratio improved from 94.1% in the third quarter of 2012 to 92.8% in the fourth quarter of 2012.

Within our TMS business, revenues increased to $23.8 million from $22 million in the prior year. TMS operating income increased $0.6 million quarter-over-quarter and our TMS operating ratio improved to 88.2% for the third quarter – for the fourth quarter of 2012 from 90.1% last year.

On a consolidated basis including inter company eliminations and corporate expenses, revenues increased $57.1 million or 24% to $295.1 million during the fourth quarter of 2012. For 2012, overall revenue increased $229.7 million or 27.2% to 1.73 billion for 2012 from $843.6 million in 2011.

Other operating expenses including transaction cost increased $54.5 million in the fourth quarter of 2011 to $69.8 million for the fourth quarter of 2012 primarily due to the addition of $5.8 million of operating cost associated with the acquisitions of our LTL, truckload and logistics and TMS segments as well as the items discussed above.

Consolidated operating income for the quarter increased $4.5 million or 33.6% to $17.7 million during the fourth quarter of 2012. Our consolidated operating ratio improved to 94.0% for the fourth quarter of 2012 from 94.4% in the fourth quarter of 2011. Overall, for 2012, operating income increased $22.8 million or 49.5% to $69 million from $46.1 million in 2011. Our total 2012 operating ratio improved to 93.6 from 94.5 in 2011.

Our effective tax rate was 38.8% for the fourth quarter 2012 compared to 38.4% in the fourth quarter 2011. Earnings per diluted share increased to $0.29 during the quarter, this was up $0.07 per diluted share or 31.8% from $0.22 per share last year. For 2012 overall, earnings per diluted share increased 41.5% or $0.34 per share to $1.16 from $0.82 per share in 2011.

In December of 2012, we completed a public offering of 3.4 million shares of new common stock. Subsequent to year-end on January 2, 2013 the underwriters for our public offering exercised in full the over-allotment option to purchase an additional 525,000 shares of common stock. The $8.1 million net proceeds from the over-allotment have been added to our $11.9 million year-end cash balance, our cash on hand plus the full availability of our $125 million revolver will allow us to fund near and medium-term growth initiatives.

Additional shares from our common stock offering and the exercise of our over-allotment option increased weighted average common stock outstanding by about 3.9 million shares. We have considered these additional shares in our first quarter guidance. At December 31, 2012 our leverage ratio fell below two times, the company seeks to maintain a long-term pro forma leverage under two times debt-to-EBITDA. Although our leverage ratio may go above two times if certain acquisitions are completed.

2013 first quarter guidance, we anticipate our revenues for the first quarter will be in the range of $285 million to $310 million representing an increase of 20% to 31% from the first quarter of 2012. Further we expect diluted income per share available to common shareholders to be between $0.27 per share and $0.29 per share compared to diluted income per share available to common stockholders of $0.25 in the prior years’ quarter.

The impact on diluted income per share from the December 2012 stock offering of 3.9 million shares will be approximately $0.03 between years. On an adjusted basis, our diluted per share guidance of $0.27 to $0.29 represents an increase of 23% to 32% from the first quarter 2012 adjusted diluted income per share of $0.22.

That concludes our prepared remarks and we will begin our question-and-answer part of the call.

Question-and-Answer Session

Operator

Okay, thank you. (Operator Instructions) And our first question comes from Ben Hartford with Baird. Please proceed.

Benjamin Hartford – Robert W. Baird

Good afternoon guys. Peter could you provide a little bit of detail, I guess on the guidance, the number of operating days in the first quarter of ‘13 relative to 2012, can you provide that?

Peter Armbruster

Sure. So the first quarter of 2012 we had 64 days. In 2013 we have 63 days, and included in those 63 days is the last day March 31 which I believe is Good Friday.

So we have considered that in our guidance.

Benjamin Hartford – Robert W. Baird

Okay. Mark, I know that January sounds like all in on a per day basis volumes in the LTL business up 21.5% though accelerating from even November and December levels. Can we assume that the distortions from Sandy are complete and how representative is this 21.5% volume growth and may be can you segregate it an all in number or maybe an expectation for the first quarter and underlying organic volume growth in the first quarter of on the LTL business?

Mark DiBlasi

On the organic side if you take out EFS, the tonnage growth for January is about 6.5%. So that is also what pretty significant over the 3% we posted in the fourth quarter of 2012. The impact of Hurricane Sandy is pretty much over with although there are businesses that are no longer shipping and no longer receiving goods in that area that have gone or not coming back, but for all practical purposes our calculation impacted - Sandy impacted us by $0.01 in the fourth quarter by itself and the share change in the transactional cost was the other cent that impacted us.

We gave a range as you recall of $0.27 to $0.31 for the fourth quarter, which was a fairly wide range for us. We usually have a much more narrow range that we gave for the first quarter of this year, but we gave a wider range because of the impact of potential impact of Sandy and as you saw we came in right in the middle of that range we gave.

Peter Armbruster

Hurricane Sandy affected revenue, but also on an LTL side affected - our loads weren’t quite as efficient as they normally are during that two week period which affected the cost side.

Mark DiBlasi

Right.

Benjamin Hartford – Robert W. Baird

Right. I know in the fourth quarter you have the step up on an all in LTL volume growth basis. I assume organically you have a similar step up as Sandy did normalize. So the 6.5% organic growth in January is that an acceleration even from December levels and I guess if so what do you think is driving that acceleration?

Mark DiBlasi

Our ability to take market share when others can’t.

Benjamin Hartford – Robert W. Baird

Okay. And is that market share gain is it driven by any specific disruptions from a competitor or is just the value proposition playing out.

Mark DiBlasi

It’s the value proposition playing out.

Benjamin Hartford – Robert W. Baird

Okay. And then last question Mark, can you talk a little bit about – and you made the comment as you have been – that you expect capacity to tighten in the future, spot rates, truckload rates have been lower in the back half of the year. Can you talk a little bit about what the dynamics are from a supply/demand perspective and what’s your expectations are through the year. I mean how (inaudible) the current environment, and how do you expect that to play out over the course of 2013?

Mark DiBlasi

Of course it's a speculation, but what we've seen is our ability to maintain good solid pricing, because capacity is fairly at an equilibrium. We believe that with any uptick at all in the economy is going to create a capacity shortage and capacity crunch, which is going to be obviously positive for us and other carriers in terms of pricing and our ability to fully utilize the capacity we have out there.

So we are optimistic that although we have not seen a bump in the economy for the last two years, we've been able to take market share despite the economic impact to us. If we see an uptick in the economy and you are starting to hear more about the housing and how the economy is starting to gradually improve, we believe that we could see as early as the spring peak in March tightening to capacity which would have a positive impact on pricing.

Maybe that’s wishful thinking on our part but that's how we see it today. I think capacity out there is as I said at equilibrium and any slight uptick in the economy was going to have a significant impact on overall capacity. And that's one of the reasons why over the course of the last year and half in terms of our acquisitions we have acquired companies that have bought capacity to us.

In addition to the capacity that was brought to us, we have added significant capacity to those companies and to our existing operations to be prepared for that time when the capacity does get tight.

Benjamin Hartford – Robert W. Baird

Okay. That's helpful. Thanks for the time guys.

Operator

And our next question comes from the line of David Ross with Stifel Nicolaus. Please proceed.

David Ross – Stifel Nicolaus

Yes, good afternoon gentlemen.

Mark DiBlasi

Hi, Dave.

Peter Armbruster

Hi, Dave.

David Ross – Stifel Nicolaus

You open up some new LTL facilities recently, are there more to come in 2013 or you kind of set where you are in the LTL network for now?

Mark DiBlasi

We will open up a few more each year for the next few years. We do have territories targeted at this time.

David Ross – Stifel Nicolaus

Okay. You saw that targeted roughly 30 when it's all said and done, it’s kind of the number?

Mark DiBlasi

Yeah, we are 23 right now, 30 would be an accurate number over the course of the next 3 to 5 years.

David Ross – Stifel Nicolaus

Okay. Peter do you have CapEx plans lined out for 2013, just wanted to seek how these acquisitions may have affected the CapEx profile?

Peter Armbruster

Sure. So for 2012, we ended our net CapEx $13.8 million and right now based upon our current expected IC levels we would expect to be at about $17 million CapEx for 2013 and it will evaluate that as time goes on based upon IC needs.

David Ross – Stifel Nicolaus

Are there any carryover costs from the acquisition that you did in 2012 into 1Q13?

Peter Armbruster

No, there are no additional carryover acquisition costs as of right now.

David Ross – Stifel Nicolaus

Okay. And I may have missed this in the comments because I was trying to write real fast, but did you give a share count guidance number for the first quarter, is it around 36, 36.5?

Peter Armbruster

Yes, it's right in that range. So in Q4 the offering impacted us about 800,000 shares additional shares in the Q4 and then it’s going to impact us about 3,925,000 in the quarter and that will bring us close to that number 36.5 that you had mentioned over the total shares outstanding.

David Ross – Stifel Nicolaus

Okay. As for the acquisitions, Mark, you went down the line thinking about doing acquisitions to either expand geographic coverage, add new services and scope for services, and you may have mentioned one or two other items. Could you prioritize those, is it more that you want to geographically expand which you already have, or is it more that you want to grow into new services or grow existing services faster than other services?

Mark DiBlasi

David it is more - my first priority in terms of acquisitions, it’s the cultural fit. Having the cultural fit regardless of what it brings to us, whether it’s a geographic benefit, or a same service, tuck-in service benefit, or new service benefit, the key to our acquisition strategy and more importantly the integration of those companies after we’ve acquired them, is how well we fit culturally with the company we’re acquiring. When we have the good solid fit, integration goes very smoothly. And that's why we've been so successful where other transportation companies have failed in terms of acquiring and integrating company.

So the cultural fit is first, and then it depends on what the strategic need is. A lot of our acquisitions last year gave us a very strong strategic geographic footprint in the refrigerated truckload business in the central United States. And we’ve been able to grow that significantly since we’ve made those acquisitions, over and above what the acquisitions themselves brought to us.

So it all kind of depends on where we are going. I can't just sit here and tell we are going to shoot for this geographic, or we are going to shoot for this complementary service. What’s in our pipeline today fits all of those and again we will be very aggressive in those acquisitions this year as we were last year.

David Ross – Stifel Nicolaus

Okay. And then last question, the goodwill impairment test was that done at year end is that when you typically do it and Peter everything checks that okay and not going to be any charges I assume you would have taken one in this quarter if that were the case?

Peter Armbruster

Yes, the goodwill impairment will have no impact on us, correct. All the acquisitions by segment are going well.

David Ross – Stifel Nicolaus

Excellent. Thank you very much.

Operator

And our next question comes from the line of Art Hatfield with Raymond James. Please proceed.

Unidentified Analyst

Hi there. This is Alex calling for Art.

Mark DiBlasi

Hi, Alex.

Peter Armbruster

Hi, Alex.

Unidentified Analyst

Hi, there. So you mentioned the LTL rate environment being consistent and contract rose up in the 3% to 4% range, I just want to back on 4Q could you tell us what the yielded excluding the EFS?

Mark DiBlasi

Hang on. The yield excluding EFS including fuel was 4.7%. Excluding fuel was 1.6%.

Unidentified Analyst

Okay. So 1.6%, 1.7%.

Mark DiBlasi

Yeah, that's without EFS.

Unidentified Analyst

Okay. Perfect. And then if you could one more sound OR front so 93.6% consolidated from the full-year almost 90 basis points improvements. Looking at 2013 would consistent rate improvement capacity – capacity crunch coming online, do you see 2013 being a year where you could potentially driving further improvement and kind of what you look at it goals for the OR in the next coming years.

Mark DiBlasi

Well, if you look at our track record we improved OR significantly over the last three years. We would expect to continue that into 2013.

Unidentified Analyst

Good, thank you for that.

Operator

And our next question comes from the line of Todd Fowler with KeyBanc Capital. Please proceed.

Todd Fowler – KeyBanc Capital

Thank you. Good afternoon and congratulations.

Mark DiBlasi

Hi Todd.

Todd Fowler – KeyBanc Capital

Hi guys, and just a follow-up on the expenses related to Sandy that depending I guess that you are isolating just the Sandy, is that costs associated with Sandy or you factoring in some lost revenue opportunity, and then is all of that concentrated within the LTL segment?

Mark DiBlasi

That's a combination of cost and revenues lost, it’s also includes not only LTL, but our truckload operations on the Eastern Seaboard, as well as our drayage operations on Eastern Seaboard. So the whole company is – several operating segments of the company were impacted by Sandy.

Peter Armbruster

Yes. The revenue was both truckload and LTL and the cost side was primarily LTL where we had inefficient loads.

Todd Fowler – KeyBanc Capital

Okay. And then I guess kind of where I’m going with part of this is, Peter you had some comments about the increase in operating expenses in the LTL business on a year-over-year base, this in some change in I guess some company employee personal versus temporary workers. I’m trying to get a sense of what the run rate right now is for operating expenses within the LTL business. And I guess I’m also curious kind of that thought process behind taking some temporary workers and making the company workers going forward?

Peter Armbruster

First with the, moving temporary to company employees, we just felt there was just a more efficient way to handle it and at a more efficient or better rate.

Mark DiBlasi

In certain location start we had too many temporary employees and in, actually that was cost savings to move those temporaries to full time at our rates, versus what we’re paying a temporary agency to do so.

Todd Fowler – KeyBanc Capital

And we think if you would also get some efficiencies too, I mean as those people have more kind of…

Mark DiBlasi

Yeah we get…

Todd Fowler – KeyBanc Capital

One on your curve?

Mark DiBlasi

Right, exactly.

Todd Fowler – KeyBanc Capital

Okay.

Peter Armbruster

And then, yeah as far the costs going forward, Hurricane Sandy probably impacted the net revenue percentage by about maybe three or four tens and then the operating cost line for LTL will be somewhat consistent with the fourth quarter, however we did incur some integration cost within EFS that affected other operating costs plus we have some personal additional expenses for moves and things like that within the LTL that affected that in the fourth quarter.

Todd Fowler – KeyBanc Capital

How much would you say that integration in the personnel cost kind of in total were I mean just ballpark was it a couple of hundred thousand and or..

Peter Armbruster

No. Probably closer to 300,000, 400,000, to 500,000.

Todd Fowler – KeyBanc Capital

Okay. And then Mark how do you think about the LTL network at this point I mean from a capacity standpoint, I guess I'm curious if you have a metric as far as where you think the network is running, how much additional times you could potentially handle and I’m thinking about it in two ways from opportunities within the market and then also I would assume that as you grow tonnage you'll get some additional density and that would help the OR?

Mark DiBlasi

Keep in mind that with our model it’s much different than an asset based model we’re not lock into terminals and employee drivers like our competition is, so we have lot of flexibility where they do not. To give you a number, I would say we're about 60%, 65% of our capacity right now so we have play a room for grow as capacity tightens or as the economy improves.

Todd Fowler – KeyBanc Capital

Perfect. Okay. And then in the last one I had just on the insurance costs, I know that the past couple of quarters I have spent some variability there, is the right way to think about the fourth quarter that there wasn't anything unusual and I know that you don’t specifically break it out, but I think that we’ve talked in the past kind of what million-dollar run rate or something like that but that’s what it was in the quarter and that's what we should expect for ‘13?

Peter Armbruster

Correct. There was no unusual type insurance cost in the fourth quarter and right now we do not foresee any additional type insurance costs in the first quarter, but again that can change at anytime.

Todd Fowler – KeyBanc Capital

Sure.

Mark DiBlasi

Normal run rate at this point. I mean as I said on previous calls, our frequency is one of the best in the industry. So there was more of an anomaly last year in the second and third quarters in terms of the severity of those accidents that occurred that impacted our insurance levels. So we would expect return to normal figures here and as Peter said that could change, but that’s how we have to take.

Todd Fowler – KeyBanc Capital

So why they are called accidents, okay. Thanks a lot. Yep.

Operator

And our next question comes from the line of Scott Group with Wolfe Trahan. Please proceed.

Reena Krishnan – Wolfe Trahan

Hi, good afternoon guys. It's actually Reena Krishnan sitting in for Scott Group today. Peter and Mark, I just wondering maybe you can give us an update on what your current mixes between purchased transportation and IP?

Mark DiBlasi

Current mix is about 55% IC and about 45% purchase transportation and that gives the LTL.

Reena Krishnan – Wolfe Trahan

Right.

Mark DiBlasi

Keeping in mind that LTL today is only about 40% of our revenue and has changed significantly over the last 2 to 3 years.

Reena Krishnan – Wolfe Trahan

Okay. Where do you guys see this mix going in 2013 and maybe that if you could give us an update on why you see an in terms of renegotiating contract with your ICs?

Mark DiBlasi

The negotiating contracts have been completed and was completed on January 1 and we don't negotiate we set the contract.

Reena Krishnan – Wolfe Trahan

Okay.

Mark DiBlasi

That was completed with the minimum impact to the company. In terms of were the ratio will go that will fluctuate based on market conditions. So when purchase transportation is cheap, my IC utilization is down, my purchase transportation is up. And purchase transportation is more expensive by use more independent contractors. What we’ve try to do and we do this in the majority of all cases as we run a balanced operation with our ICs and we were imbalanced we use purchase transportation. That allows us to never have to use, or never have to run empty miles or back haul lanes, or haul cheap freight in order to reposition equipment, by doing so that makes us much more cost effective than competitors in the LTL market. So that, I see that number for 2013 staying between 50% and 60%, it will fluctuate up or down a few percentage points if the economy improves, we will see that number go up. But right now it’s 55% to 45% it’s right above where we want it to be and would expect it to be.

Reena Krishnan – Wolfe Trahan

Okay. I guess, the other part of that is just, if you would look at your line haul cost and they have been in pretty consistent last couple of quarters. Just wondering where this could gather in 2013 in terms of if we could see more improvement, or what your expectations are around that?

Mark DiBlasi

Well, for the last eight quarters we maintained an average of $1.24 mile. I think that’s pretty consistent. And we would expect to be able to maintain that consistency throughout 2013.

Reena Krishnan – Wolfe Trahan

Okay. And if I could just ask for clarification, when you said that right now, right just staying in a 3% to 4% range, is that including EFS, or is that just the core base? Just wanted get a sense of how that compares with the, I think you imagine the 1.6% increase in rates excluding EFS and fuel.

Mark DiBlasi

That was revenue per hundredweight and that’s different in rate negotiations. They are not the same.

Reena Krishnan – Wolfe Trahan

Okay. All right, and you’re saying 3% or 4% is what you are getting in terms of rate negotiations right now?

Mark DiBlasi

In LTL, yes.

Reena Krishnan – Wolfe Trahan

In LTL, okay. All right. And then just one more question, just wanted to get some of you guys are hearing anything from your customers about possibly accelerating some volumes or maybe bringing more volumes to head of potential seems to negotiation?

Mark DiBlasi

We haven't heard anything along those lines yet. I don't think any of our customers are too concerned over the teams to negotiation yet, they don't tend to get too concerned until get like...

Reena Krishnan – Wolfe Trahan

Okay, great. Thanks for your time guys.

Operator

(Operator Instructions) And our next question comes from the line of William Greene with Morgan Stanley. Please proceed.

William Greene – Morgan Stanley

Hi there, good evening guys.

Mark DiBlasi

Hi, Bill.

William Greene – Morgan Stanley

I wanted to just talk a little bit conceptually I realized it's hard to predict the timing of any acquisition. But given how aggressive you’ve been, you suggested the pipeline is as full as ever been. If we look at kind of these growth rates so sort of a two part question, first if you keep growing at 25% a year, either double the company and about three years, right, so I don't know if that's kind of where a realistic longer-term target should be or at least definitely must slowdown. But you also said sort one thirds, two thirds organic versus acquisition. Maybe help us think a little bit about how does that evolve in the next, even year or two or does to stay at that level just given helpful the pipeline is?

Mark DiBlasi

I think it kind of stays at that level; keep in mind that our run rate for last year. Our 27% revenue growth last year, was organic and two thirds was through the acquisition. And the reason I point that out is there is misconception out there that all of our growth is come from acquisition. $75 million last year was through organic growth. And then once we make acquisitions, we help those companies that we acquire, become much more aggressive in their growth profile by adding support and adding the capital they need in order to grow. I will give an example, we added 250 tractors to the companies we acquired this year alone, on top of what they brought to us. So we added a lot more capacity, it would have taken those companies years to add 250 drivers, whereas we did it in six, seven months. So and that’s just one example of how we help them grow organically once they come on board with us.

You are right, in a two to three year period, we get double the size of the company, our run rate this year borrowing any acquisition is over $1.3 billion. So, yeah, we would expect to continue that even if we didn’t make any more acquisitions, which is not the case. We would expect all of our operating companies to grow pretty significantly through organic growth. You throw that on top of what we have in our pipeline for acquisition opportunities, and you are right. You are going to see this company continue to grow pretty significantly over the course of the next several years.

William Greene – Morgan Stanley

Yeah. Now that makes lot of sense. Okay, so then turning to the margin story, so you mentioned you think it gets better, I mean, all that expect that as well. If I look at your incremental margins, whether I look at LTL or I look at total corporate, we’re talking about 18% to kind of 20%, 21% or so, is this the sort of – is this the kind of construct, the framework that you’ve got for this business model. Could we see margins that are ultimately in the mid-teens?

Mark DiBlasi

You could, keep in mind or as we make these acquisitions, we have really changed the face of the company over the last several years. I mean, five years a ago we are primarily LTL care. This year 43% of our revenues are going to come from LTL, so as we bring on new companies and bring on new business, the dynamics change a little bit and the margin change somewhat. There’s higher margins in TMS and in LTL that are in truckload, into pure truckload.

William Greene – Morgan Stanley

Okay.

Mark DiBlasi

Now certain aspects of our truckload and logistics segment have very nice margins. But you have to look our company as a whole to really, to get a feel for that instead of breaking it out by segment.

William Greene – Morgan Stanley

Okay.

Mark DiBlasi

If we made our bunch of truckload or truckload brokerage acquisitions this year, our margins would go down somewhat, because that’s not as higher margin business as our LTL, our TMS, our drayage and our freight consolidation inventory management margins.

William Greene – Morgan Stanley

So as you look at it, what’s the most important – are you really just focused at this point still look we’ve got a decent margin, we’ve got good cash flows, so I’m going to focus on growing the top line? Or do we need to think about you in the context of both margin and top line. I think that’s where we’re sort of struggling right, because of what you just sort of said here, and fairly the margin can actually go down.

Mark DiBlasi

It could, but we want to grow the top line, but we also want to keep an eye on the margin as well. We want to be a very profitable growth company, and that’s what we’ve been able to do. And we will continue to do that. But we’re unlike most companies out there, even acquisitional companies focused on one type of acquisition.

William Greene – Morgan Stanley

Yeah.

Mark DiBlasi

We made eight acquisitions in 2012, six of them are truckload and logistics, one of them was in our LTL segment, and the other was in TMS. So we look for acquisitions across all of our freight segments. And our truckload logistics segments encompasses truckload services, in (inaudible), as well as freight consolidation inventory management. So within that segment alone there are three sub segments that we can add acquisitions to. So we are unlike any other company today in transportation, especially with our very aggressive acquisition strategy.

William Greene – Morgan Stanley

Yeah.

Mark DiBlasi

What I point out to investors and to you on this call is look at our track record now. Look at what we’ve done over the course of last two and half years. Back when we did the IPO almost three years ago, we told people what we were going to do, now we can say look at what we've done and apply that to what we say we're going to do and we have creditability with regard to that.

William Greene – Morgan Stanley

Yeah I agree. Okay, last question is just also an acquisitions, how should we think about how much you're willing to spend on them, you talked a little bit about some of the leverage ratio so obviously you're going to stay within certain bands, but is there a dollar amount or a number of acquisitions, I think that's kind of tougher to do, but any color there would be helpful?

Mark DiBlasi

Sure. In terms of multiples we've tried to stay in the four to six times range, I can tell you that of the eight last year most of them, all of them fell in the four to six range, some of them fell in below four times range. So we very pleased with our ability to bring on cost-effective and accretive acquisitions. In terms of size, we made acquisitions up to $100 million acquisition down to $1 million acquisition, and in our pipeline today we have similar size opportunities from very small tuck-in acquisitions to $80 million, $90 million, $1000 million type acquisitions that are out there and have a potential to be on board with us before at year end.

William Greene – Morgan Stanley

Okay, but you don't have like a target spent?

Mark DiBlasi

No.

Peter Armbruster

No. But right now as we have mentioned, we have $20 million of cash on our balance sheet for acquisitions plus full availability of our revolver. Right now our leverage is below two times closer to $1.7 million and there quite long-term goals keep it under two times, but in certain situations we made above that two times just based upon the acquisition that are available at the time.

William Greene – Morgan Stanley

Right. Okay, great.

Peter Armbruster

The business generates quite a bit of cash also,

William Greene – Morgan Stanley

Yeah, exactly.

Peter Armbruster

Also that provides additional cash for acquisitions.

William Greene – Morgan Stanley

Of course. This one take so much of the time.

Mark DiBlasi

Sure.

Operator

Ladies and gentlemen, this concludes today's question-and-answer session, I would now like to turn the call over to Mark DiBlasi for closing remarks.

Mark DiBlasi

Okay thanks. I appreciate all of you being on the call today. We have taken the company over the course of last several years, but in particular the last two years and really expanded the service offerings and complimented the service offerings. We exceeded $1 billion in 2012, our run rate as you heard me say is over $1.3 billion for 2013. And that’s barring any more acquisitions which I can guarantee we will be making several more.

We’ve proven a lot in our operating ratios, in our incremental margins over the course of the last year. We’re very pleased with our performance in 2012. And we’ve done all that in very tough economic conditions. We’ve taken market share, and have grown the company when others in our industry have come up with all kinds of excuses as to why they haven’t been able to grow. We are proving it can be done. We intend to continue that.

And we’re very optimistic about, we’re very pleased with how we performed in 2012, we’re very optimistic about what we see going forward in 2013. And we’re hoping that many of you will come along for the ride.

So with those comments, I will end the call and thank you all for your time and take care. Thanks.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a good day.

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