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Executives

Bradley S. Jacobs - Chairman of The Board and Chief Executive Officer

John J. Hardig - Chief Financial Officer

Scott B. Malat - Chief Strategy Officer

Analysts

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Robert H. Salmon - Deutsche Bank AG, Research Division

William J. Greene - Morgan Stanley, Research Division

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

David P. Campbell - Thompson, Davis & Company

Jack Atkins - Stephens Inc., Research Division

XPO Logistics (XPO) Q4 2012 Earnings Call February 28, 2013 8:30 AM ET

Operator

Welcome to the XPO Logistics Fourth Quarter 2012 Conference Call and Webcast. My name is John, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded.

Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable security laws which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook.

During this call, the company also may refer to certain non-GAAP financial measures as defined under applicable CE -- 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 company -- a copy of the company's earnings release, which contains additional important information regard forward-looking statements and non-GAAP financial measures, in the Investors section on the company's website at www.xpologistics.com.

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

Bradley S. Jacobs

Thank you, operator, and good morning, everybody. Welcome to our quarterly conference call. With me today in Greenwich are John Hardig, our CFO; and Scott Malat, our Chief Strategy Officer.

I'm pleased to report that we remain on track with scaling up the business, and we're achieving that scale in a way that balances the 3 parts of our strategy: acquisitions, cold-starts and optimizing operations.

First, on acquisitions. As you saw last night, we purchased Covered Logistics. Covered is a well-run freight broker that we plan to integrate and scale up quickly. It had $27 million of 2012 revenue, and the purchase price was $8 million in cash plus $3 million in 3-year restricted stock. The co-founders of Covered are Tuck and Paul Jasper and Patrick Gillihan, and they're staying on to lead the operations in Lake Forest, Illinois and Dallas. The Covered team has deep roots in the industry and they share our passion for growth. We'll put them onto our technology, which will connect them to the entire XPO organization. At the same time, we'll give them access to our network of over 22,000 carriers. Covered's relationships with over 4,000 carriers and their lane history should also have a positive effect on the XPO system both in terms of pricing and in finding trucks.

Covered is our sixth acquisition, and our second this year. As you know, we acquired East Coast Air Charter a couple weeks ago. The company has been a partner to our expedited division for more than a decade and we know them very well. They're a specialist provider of expedited air charter logistics, which fits right in with our expedited offerings. We've been using East Coast to meet the demand for urgent air cargo from our existing customers, and now that we brought that service in-house, we'd cross-sell Air Charter across all our divisions. East Coast is based in Statesville, North Carolina and had 2012 revenues of $43 million. They have a proprietary technology that's popular with their customers. We're also impressed with their people. Bill McBane, who owned and ran the company, is staying on to lead the operation with his wife, Lisa.

Each acquisition we make adds lane and pricing histories as well as carrier relationships. All of our XPO brokerage branches can leverage this information to purchase transportation more effectively and grow the business.

In 2012, all of our locations continued to scale up, and 3 of our branches showed that they have the potential to be mega-branches. Not only do they have strong leaders, but they're also located in very attractive areas for recruitment. Two of the 3 were cold-starts, charlotte and Chicago; and the third one is in Gainesville, which we acquired with Turbo Logistics. We plan to supercharge the growth in these locations and apply that same model to other cities that meet the same criteria.

We're also accelerating our sales and marketing efforts across the company. We've identified 3 million small- and medium-size shippers and another 1,000 large shippers that have the potential to become major customers for us. We put our salespeople on salesforce.com and have assigned a single point of contact to each customer and prospect.

It's been a busy 14 months. We opened 17 cold-starts: 8 in truck brokerage, 8 in freight forwarding and 1 in expedite. And we've grown our company's headcount from 208 to more than 900 employees. We've expanded our footprint to 60 offices in the U.S. and Canada and we've put the foundation in place to support the much larger company that we're building.

So we're pursuing every opportunity for growth. In the fourth quarter, revenue was up 146% and gross margin dollars were up 118% compared with the prior year. All of our divisions had year-over-year revenue growth.

Turning to 2013, we're providing the following guidance. We intend to purchase companies this year with combined historical revenue of at least $300 million. We also intend to open at least 3 freight brokerage cold-starts in 2013 and add at least 400 sales and carrier procurement personnel in our freight brokerage group. We expect to generate positive EBITDA by the fourth quarter and to achieve an annual revenue run rate of more than $1 billion as of December 31.

With that, I'll ask John to give you some more color on the quarter. John?

John J. Hardig

Thanks, Brad. I'll start by giving you some details on the performance of our 3 business units during the quarter.

Starting with freight brokerage. Revenue was up 760% from last year to $71 million and gross margin dollars increased 586%. A little over $27 million of the revenue increase came from the mid-quarter acquisition of Turbo on October 24, which exceeded our plan for the quarter. The balance of the increase came from our acquisitions of Kelron, Continental and BirdDog, and from organic growth. Freight brokerage gross margin percentage was down year-over-year. The decline was primarily due to the addition of our 8 cold-starts, which are still in start-up phase. However, gross margins improved sequentially for the second consecutive quarter. Gross margin percentage was up 80 basis points to 13.4% in Q4 from 12.6% last quarter.

In expedited transportation, our revenue increased 9% but gross margin percentage decreased to 16.6%, down from 20.9% last year. We continue to see the effects of slower expedite market on our margins, compounded by the higher rates to owner-operators that we put into effect in March last year. SG&A increased 11% as we continued to make investments in our expedite sales force and recruiting efforts to increase the number of independent fleet owners we use.

In our freight forwarding segment, we're starting to see the results of our investments. Revenue increased 10% and gross margin increased 62% compared with the same quarter last year. The increase in revenue in our company-owned locations had a positive impact on margins. And as a result, we increased our freight forwarding operating income significantly despite higher SG&A expense associated with opening locations in Charlotte, Atlanta, Los Angeles, Houston, Chicago and Minneapolis.

On the corporate side, expenses during the fourth quarter were $10.1 million, which is an increase of $5.3 million from a year ago. Included in this number is $1.4 million in litigation-related legal costs, $1 million of acquisition-related transaction costs and $924,000 in noncash share-based compensation expense.

Net interest expense was $3.2 million for the quarter, which was mostly from the convertible notes. We expect book interest expense from the convertible notes in 2013 to be $12.5 million, which includes $6 million of noncash amortization of bond discount. Our income tax rate for the quarter was 34.9%. During 2013, we do not expect to record a deferred tax benefit, so our effective tax rate will be negligible. The benefits of our NOLs remain available to us to reduce future taxes to the extent of income generation in subsequent periods.

Earnings per share available to common shareholders was a loss of $0.57 for the quarter. Our liquidity position remains very strong. We had $252 million of cash on our balance sheet at December 31.

Looking at current macro conditions, transportation volumes in general have been steady. There are some positive signs in the industry, but it's too early to call them a sustained trend. We have not yet seen a meaningful pick-up in truckload volumes and capacity remains relatively balanced in most parts of the country. We're showing that we can grow in this type of environment, and this is a great time for us to build strong relationships with our carriers because they're looking for more freight. And these relationships will increasingly be valued when demand does pick up and capacity tightens.

Now I'm going to hand it over to Scott, who will be giving you an update on our strategy, and then we'll go to Q&A. Scott?

Scott B. Malat

All right, thanks, John. I'll go over the progress we're making with our cold-starts. Then I'll talk about some of the broader strategic initiatives that are driving our momentum.

Our truck brokerage cold-starts are ramping up nicely. So far this year, in January and February, the 8 cold-start locations are trending in a combined revenue run rate of $60 million to $65 million. We're happy with that, especially considering that we're in a seasonal low point right now. The run rate includes about $10 million of contribution from BirdDog and the Turbo branches that we consolidated into our existing operations in 2012, and the bulk of it is organic growth.

The success of our cold-start program is grounded in 3 key components of our plan: recruiting, training and IT. In recruiting, we've continued to refine our processes to find the best talent from inside and outside the industry. As you can see in the release, we're up to almost 600 sales and carrier procurement people in our freight brokerage segment as of the end of the year. And today, we're excited to launch our new careers website, which is part of a broader employment branding strategy to accelerate our hiring pace. You can find it at jobs.xpologistics.com. It's going to help us hit our 2013 target of adding at least 400 net new salespeople and carrier procurement people in Freight Brokerage. In addition to that, we'll add salespeople from acquisitions and then we'll hire more people as we scale up those acquisitions.

As we ramp up recruiting, our leading-edge training programs are helping increase the productivity of our salespeople. Marie Fields and her training team are coming out with new modules every month, and not just for new hires. We're enhancing our continuing education programs. For example, in February, we have experienced salespeople in advanced-level training sessions on flatbed and intermodal. These programs complement the significant amount of direct coaching that salespeople receive from their branch presidents.

On IT, we're moving fast and we're building up our proprietary technology. We launched the platform last March, we released new pricing tools and truck-finding capabilities in July and we introduced our proprietary freight optimizer software in December. The algorithms that our IT team has created provide actionable pricing information and efficient ways to find the right carrier for each load. This year, we're planning to release upgraded LTL capabilities, sophisticated new carrier analytics and new customer and carrier portals.

For our expedite segment, we're excited about adding the capabilities of Air Charter. We see an opportunity to grow Air Charter as part of a range of our services. Our expedite team is also focused on the strategic verticals of cross-border Mexico, temperature-controlled and defense. We grew revenues in these strategic areas by 12% in the fourth quarter. And we're adding to our sales force to mine the core expedite market and take share. At the same time, we're fine-tuning the way we buy expedited transportation, and we expect margins and load count to improve in 2013, starting with Q2.

For freight forwarding, we continue to add new offices, with the goal of gaining critical mass. Most recently, we opened Montréal and Nashville. We now have 29 locations in our network. Nine of those are company-owned offices. We expect substantial contributions in 2013 from some of our new company-owned locations in big markets such as Houston, L.A. and Chicago.

So we have a lot of momentum going into 2013. We're continuing to invest in and growing the sales force, and that will have a near-term effect on profitability. And we expect our financial results to improve sequentially, starting in Q2 of this year. We feel confident about our outlook of positive EBITDA by the fourth quarter. And we've set the stage to scale up both our top and bottom lines dramatically over the next several years.

With that, we'll open the floor up for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And our first question is from Scott Schneeberger.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

I was wondering if you could touch a bit on -- you mentioned the 3 million small- and mid-size shippers. That sounds like a huge portfolio of opportunity. Could you elaborate on that a little bit more, please?

Bradley S. Jacobs

Sure. So the customers that we're targeting fall in 2 different categories: the small- and medium-sized enterprises and large national accounts, mostly Fortune 1000 companies. The Fortune 1000 companies have huge transportation spends and represent huge opportunities for us, and we're going to service them, service them, service them, just give them world-class service. We're going to put dedicated teams on them. We already have, through inheritance, through the companies that we've bought, good relations with a bunch of them, but there's a lot, lot more to go on that. On the small- and mid-sized customers, there's 3 million of them we've identified. We've done a lot of demographic studies and a lot of IT research. And what we've done is divide that up throughout the organization so we don't have more than one office calling the same customer. So we have a single point of contact. So all of our salespeople are on salesforce.com. And in the system, you're assigned an account. And that's our job. Our job is to provide good service to small-, medium- and large-size customers.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And with regard to -- obviously, I saw the guidance, with regard to acquisitions, what -- is there a large acquisition that you guys are anticipating? Does that have anything to do with your goal to break even or the EBITDA positive by the fourth quarter? Or a more measured case on the acquisitions? Just curious if there's a big one embedded in there.

Bradley S. Jacobs

So we've looked at over 1,000 acquisitions, usually in-person meetings, sometimes phone meetings, most of them, people that someone in our group knew from a previous job or we developed relationships as they come here. And most of them are proprietary; a few came through intermediaries. We winnowed that list down to about 100 companies that we think could make a good match with XPO. And we think the people would fit in with our culture and we think they're kind of customers -- the right kind of customers, and it could work. We're not going to buy all 100 of those. We're not -- we're only trying to do 3 or 4 a year, more or less. In order to do the acquisitions that we outlined for you this morning in the press release and on the call, we could do 1 big acquisition and blow away through the $300 million, or we could do 2 large acquisitions and really blow it away. Or we could do a bunch of smaller acquisitions or a medium number of medium acquisitions. Very difficult to predict that. I'm not trying to be coy with you because I don't know. We're in discussions with lots and lots of different companies and we'll see which ones get to the finish line.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And just one more clarification, and then I'll turn it over. On -- Scott, you mentioned 400 net new salespeople. That's organic, not including acquired salespeople from acquisitions, correct?

Scott B. Malat

That's right, and not including the salespeople we add as we ramp up those acquisitions.

Operator

Our next question is from Justin Yagerman from Deutsche Bank.

Robert H. Salmon - Deutsche Bank AG, Research Division

It's Rob, on for Justin. Brad, could you talk a little bit more about the Covered Logistics acquisition? Can you give us a sense of the type of gross profit margins that the company generated, EBITDA or an EBITDA-type multiple that you guys have paid for the company?

Scott B. Malat

Yes, Covered -- it's Scott. This -- Covered is a great little -- a great acquisition outside of Chicago and a great location to find industry talent. They had high margins on a gross margin basis, high teens. This is a fast-growing company. They've increased the size of their company by multiples over the last several years. They've been investing in sales force, and even despite that, because they have high gross margins, their EBITDA is in the same place you'd see kind of other targets that we've seen out there in the mid single digits percentage-wise.

Robert H. Salmon - Deutsche Bank AG, Research Division

That color is really helpful. And I guess, as part of this transaction, you guys offered to pay $3 million in XPO stock. It sounds like this company is growing a lot, is growing very fast. I would imagine that was part of the reason why you guys were willing to pay out the equity as part of this deal. But could you give us a sense, is this something we should be thinking about looking forward? Or is this just a very unique case?

Bradley S. Jacobs

Every case is its own story. In this case, we didn't want to do an earnout because in some of these relatively smaller transactions to administer the earnout and to account for the earnout and to resolve any conflicts that come out with the earnout is sometimes troublesome. So we figured, let's put a little stock in the deal. They wanted stock, they see the upside. We've been talking to them for the better part of a year, as they got to know us and we got to know them. It made some sense for the upside and to bridge valuation expectations to put some stock in there. One big benefit of putting stock in a deal, it keeps people's head in the game. They're married to XPO by their pocketbook. And they want XPO to succeed and they feel they're part of the whole organization and not in a silo somewhere. So we felt, with $3 million of stock issuance, it's really not horribly dilutive. So it's not going to move the needle a lot. And it accomplished all the things I just mentioned.

Robert H. Salmon - Deutsche Bank AG, Research Division

That's helpful, I guess. One final question on the Covered Logistics acquisition before I turn it to a different part of the results. You had indicated they've got a Dallas service center. You guys opened a Dallas branch. Is there an opportunity to integrate the 2 together and make it a very big service center? Or do you plan to operate that independently?

Scott B. Malat

We're going to operate that separately. One of the owners of Covered runs the Dallas office. He wants to grow that very quickly, and we're all behind that.

Bradley S. Jacobs

Every acquisition is a case-by-case customized situation. In this case, it makes sense to keep them separate. In the case of Turbo, which had a Dallas office, it made sense to put them together. And that's worked out really, really well. The Dallas office that we have is combined with the people who came over from Turbo's. You know it's a lot more energy now that it's a larger office.

Robert H. Salmon - Deutsche Bank AG, Research Division

That's helpful. I guess, John, too, you had mentioned briefly on the tax rate, did I hear it correctly that it should be negligible for an effective tax rate, so close to a 0% effective tax rate? Or did I mishear that in your prepared remarks?

John J. Hardig

No, no, that's right. I mean, that's what we're expecting to do in 2013 and it really has to do with the fact that we're going to be back in valuation allowance land, so the deferred tax asset on the balance sheet, we're not going to really get the benefit of that on the P&L this year. All of that, obviously, will change dramatically once we start to generate earnings. And we've got, as I said, as I mentioned, full use of those NOLs that we've accumulated so far. It's really more of an accounting thing this year. We're not allowed to -- as I think I said in the last call, we're not allowed to use acquisitions in our projections for earnings. And so when we look at our ability to use those NOLs, we're kind of forced to take a very conservative view. And so that's what really drives the tax rate.

Robert H. Salmon - Deutsche Bank AG, Research Division

Yes, so we should start to see a help then, I guess, in fourth quarter and then beyond as you guys start to generate positive earnings.

John J. Hardig

That's right.

Scott B. Malat

Fourth quarter -- just to be clear, fourth quarter will be a positive EBITDA from a net income perspective. Because of how you account for the convertibles, it could take a few more quarters.

Operator

Next question is from Bill Greene from Morgan Stanley.

William J. Greene - Morgan Stanley, Research Division

Scott, could I just ask for some clarification? I may have missed it in your remarks, but did you give any sense for a breakout between what 2012 had as kind of a cold-start total revenue and then acquired revenue? And it may actually be hard to sort of parse that out, but I thought I'd try, anyway.

Scott B. Malat

Yes, it is relatively rough. We've tried to break it out in a lot of different ways so we can get at numbers that you need. One of the things is we added $27 million from Turbo in this quarter, so you can back that out, which was a great result, which is moving pretty quickly. Through the year, we've given some different ramp rates and kind of talked about where the cold starts were so you can kind of piece those together to get an idea. Right now, they're on a $60 million to $65 million revenue run rate, which does get some benefit of acquisitions. It does get tougher and tougher as we integrate these offices and work together more and more, which is a great thing. It's just harder for us to break it out for you in different pieces. And you know the kind of the sizes of the acquisitions and what we've kind of grown, so you can get an idea of what's been organic versus not. But it's -- we can go out -- over after the call if you want...

William J. Greene - Morgan Stanley, Research Division

Okay. No, that's helpful. I just wanted you -- I -- it wasn't sure if I'd missed this specific number. All right, can I ask a little bit about gross margin as well? We've seen some of the larger brokers have been struggling a bit in that area. And I'm just curious how you guys think about the evolution of that as you grow. Is it reasonable to think that our numbers like in, let's say, the truckload brokerage world can kind of get toward those high teens? Or are you having to sort of revamp and rethink kind of where those gross margins go just given where the industry is?

Bradley S. Jacobs

I don't know whether it's going to get up to the high teens and, if it is, when it's going to do that. The issues are, what's capacity going to be? Because if capacity is very tight, historically, as you know, the margins have been a little lower. And when capacity is really loose, they go higher. But when capacity is loose, you have less volumes. So I -- and we actually kind of prefer to be in a situation where margins are a little bit lower but volume is a lot higher.

William J. Greene - Morgan Stanley, Research Division

Yes, because it seems today we've got sort of this balanced market, yet margins aren't better, which I would think this would be -- I mean, admittedly, you don't have the volumes, so it's tough to exploit, but on the other hand, we don't have the tightness. So it sort of seems like they contradict one another, almost.

Bradley S. Jacobs

Well, as I tell you, the 3 different choices: being balanced, being loose, being very tight. Balanced is the worst for an intermediary, like, say, a broker. And unfortunately, we've been in balance for about a year now. And every once in a while, there's a weather crisis that makes it tight, and that lasts for about 3 weeks and then capacity comes back on. So sooner -- and it's a dynamic market. Sooner or later, the balance will break due to whatever events and either they get loose or tight, and business will get better. But in terms of margins, I don't think we can look at margins in a vacuum just as a single point of being all-encompassing. It's one of a bunch of data to look at.

William J. Greene - Morgan Stanley, Research Division

Yes, I know, that's fair. When I look at this forecast on positive EBITDA for the fourth quarter, can we just talk a little bit about what the drivers are to that? What may or may not cause that? In other words, if we think about you did some acquisitions you didn't expect and you grew faster than you expect and sort of expand, I guess that could pressure some of the costs as well. So maybe just talk a little about puts and takes, what might cause you to revise that higher or lower. What are the key metrics that we need to watch?

Scott B. Malat

Yes, we laid them out in our outlook. I think $300 million is a right amount of acquisitions to kind of look for in terms of revenue, historical revenue run rate. If we were to exceed that, I would -- that would be a great thing. And we found some good companies to go buy, but I think $300 million is probably the right number to look at. 400 net new salespeople and at least 3 new cold-starts, we factored that in. That's an investment we're making. We're happy to do it. Over the next several years, we think that will be very accretive for us. And it's a great investment for us to make. So the -- it's really the 2 biggest levers are acquisitions and then the hiring pace.

Bradley S. Jacobs

It raises an interesting point. This is an interesting business model in a non-asset world. As opposed to previous asset businesses I've been in, where your capital investment goes into fleet or hard assets and you'd capitalize that over a bunch of years and it bleeds out in the P&L. Here, our CapEx is minimal, it's basically IT. And our main use of capital is to -- apart from acquisitions, is to hire people, hire salespeople. And unlike capitalizing that in an asset-heavy business, that goes right to SG&A, it goes right earnings -- or hit to earnings results that you've gotten in. So the 2 different levers are acquisitions. If we do more acquisitions, we could become more profitable. If we do more sales, which is a good thing business-wise, because it's how we grow long term. In the short term, while they're getting productive, which can take up to a year, that's a hit. So if we hired more people, which is a good thing long term, it's a bad thing short term.

William J. Greene - Morgan Stanley, Research Division

Right, no, exactly. And that was my point. I was just trying to think through, because it's actually a sort of counterintuitive because of the way these things work. And with earnouts, that could happen as well, right? The better things are, to some extent, you can end up paying more than you expected, which is a bit weird.

Bradley S. Jacobs

Yes, yes. Although, we're -- although that's a good thing to pay out more because it's something that -- it's like with salespeople: We always want our salespeople to be making more money because the only way they're making more money is of they're making more money with the company as well.

William J. Greene - Morgan Stanley, Research Division

Exactly, it's just counterintuitive. So in terms of the acquisitions, and you gave some guidance around that, is there any reason we need to think about any capital raises that are required to do what you've set out here?

Bradley S. Jacobs

Not for the base case scenario. But I don't want to shut the door and say absolutely not, and then if we get some very interesting acquisition opportunities and we want to load up on cash to capitalize on those, you'll get upset with us because it's conceivably possible that we do raise more capital whether that's debt, whether that's equity or it's combination, who knows?

William J. Greene - Morgan Stanley, Research Division

Okay, fair enough. Last question, is -- in Covered Logistics, you mentioned the oil and gas sector. Obviously, it's a hot topic, particularly in transports given that there's a lot of trucking involved in this stuff now. Do you have sort of an outsized exposure here where we would think that that's actually a pretty big growth segment for you? Or is it so small relative to the whole mix that it's not a real driver?

Bradley S. Jacobs

It's still small, but it has a good opportunity to grow.

Operator

Our next question is from Peter Nesvold from Jefferies.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Scott, tell me if I'm doing the math wrong here. If I just annualized the $108.5 million for fourth quarter, I get to about $450 million of annualized revenue. And I recall, you're targeting $500 million for the exit rate. Is -- was there something about the timing of the acquisitions that explains the bridge? Or did we come up just a few million short of the year-end target?

Scott B. Malat

Yes, there's a couple of things. One, Turbo came on in the middle of the quarter, so you don't get a full help of Turbo. We came within kind of spitting distance of $500 million. Certainly, ECAC goes over that, and then Covered goes even more over that. But it's kind of roughly in that range.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Okay. And then as we look ahead to the $1 billion run rate target for exiting 2013, exiting roughly $450 million, $500 million this year, acquiring $300 million. So that's about $200 million of organic growth -- it gets dangerous when I get into too much math. But I'm talking about a 40% organic rate. Does that seem about right?

John J. Hardig

Yes.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Okay. In terms of cash flow, so you used about $31 million, $32 million of cash flow this year from operating activities and CapEx. And as you look out to achieving the plan for '13, how much cash do you expect to use prior to acquisitions for this year?

Scott B. Malat

From an EBITDA perspective, it will -- EBITDA will improve as we go through the year and then turn positive. Interest expense is about $6.5 million. CapEx is in the range of $7 million to $10 million for the year. There are no real taxes, so it kind of gives you an idea.

H. Peter Nesvold - Jefferies & Company, Inc., Research Division

Okay. So the 250 that you have seems sufficient, I mean, to the prior question about the need or likelihood of follow-on equity-linked deals this year. I mean, it seems like the 250 is sort of there depending on the size of the transactions that you might do this year.

Scott B. Malat

Yes, the only thing that I left out is working capital because working capital is usually kind of roughly ranges, 8% of sales as we grow. So use that in terms of cash. But yes, in terms of the plan, the plan is fully funded.

Operator

Next question is from David Tamberrino from Stifel, Nicolaus.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

I wanted to just focus on carrier capacity. With the addition of ECAC and then Covered, the 4,000 from covered, what does that take your current carrier capacity up to?

Scott B. Malat

A little over 22,000.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

And the 4,000 from Covered, were those 4,000 unique? Or how much of that kind of overlapped with what you originally have in place?

Bradley S. Jacobs

A fair amount of overlapped because we're both focusing on those carriers with under 100 trucks, typically 50 trucks. So there was a fair amount of overlap.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And how would you kind of characterize the capacity environment so far for 1Q '13?

Bradley S. Jacobs

Flat, very flat. It's -- but if I get -- if I was forced to say, is it more tight or more loose, I'd say that we're more loose. The reason I'd say that is when you go to our offices, let's take for instance Charlotte, where we have 130 people just dying for diesel all day long, most of the board is pretty cleaned up by 1:00 in the afternoon, 2:00 in the afternoon. So it's not like we're scrambling for trucks. You can find trucks in most lanes.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And how do you think that changes over the year? And what are you doing in preparation for the new hours of service rules that, after the delay being rejected yesterday, will likely be put in place July 1 of this year?

Bradley S. Jacobs

One real interesting thing about this industry is, if you go back and look at all the surveys that come out about predicting what capacity is going to do for the next year, about half the time it's right, and about half the time it's wrong. So I don't know whether it's easy to -- I know it's not easy to predict what capacity is going to do over the course of the year, at the beginning of the year. But if you -- if we have to give or take a view, I would say that rates will go up a little bit, maybe 1% or 2% on average and that it's going to stay fairly balanced. The hours of service will take some capacity out. But we do notice that, every time some capacity comes out, more capacity comes in. Don't -- it doesn't tie in with the headlines. When you read the headlines, you hear all about the shortages and driver shortages, and that's all real, but when you look at the actual reality of capacity, capacity actually is there. And there was another part of your question, what do we do to prepare? So...

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Yes, what are you preparing to do?

Bradley S. Jacobs

We would love capacity to get really tight or really loose. The balanced situation is, right now, well, that's when we really are living, I guess. I guess it's probably a good thing. It pushes us, but life gets a lot easier for broker whether it's one way or another. And what we do is we just try to service our customers, service our customers, service our customers and treat our carriers with respect. And as long as we do both those 2 things, we'll be well positioned to capitalize on any disruptions that occur in the market to be able to take care of both of those 2 important constituencies.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

In regards to kind of the 2013 guidance and goals, what's the expected timing of cold-starts throughout the year?

Bradley S. Jacobs

Hard to say. It all depends on who we fall in love with, when. So we are always looking for strong branch presidents, people who have been there and done that before, people who have charisma and leadership and know the business really, really well inside and out, preferably both from the sales side and the carrier side. And when we find someone that we really want to be part of our organization, we'll plant a flag in whatever city he or she wants to work in and do a cold-start. We have a little bit more of a bias toward locations that can be larger locations, going with -- that have the demographics in terms of being able to hire people from the industry because we like 1/4 to 1/3 of or so of the personnel in a branch to be from the industry to help transfer best practices and help mentor the new people. And we want to have -- be in the places where there's a good workforce demographic, where we can hire people of good caliber.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

So nothing really imminent in the end of the first quarter and the beginning of second quarter?

Bradley S. Jacobs

I wouldn't rule that out. We're in discussions with a number of potential branch presidents, a handful. And who knows whether something will work out? A lot of times it's a courting process, a mutual get-to-know process. It's not something we want to rush into or they want to rush into because it's a big deal for both of us. But I wouldn't rule out that we'll open a branch in the first quarter. It's possible.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then my last topic to discuss today is timing of hiring. Is that something that you're looking to do more seasonally, typically when college is coming out, middle of the year? Is that ratable over the year? Is there any expected real seasonality to that?

Bradley S. Jacobs

It's really not seasonal. It's -- that's a year-long day-in, day-out process. We've got a group of 8 people that are just doing recruiting and talent management. And we're all over the Internet, we're all over the college -- we're all over the place getting very good people -- flow of people. What is the gating factor is, how are we doing? So if there's a branch that's growing by leaps and bounds and the utilization is going up and their numbers are looking good, the morale is great and they're begging for more people, we say, "Okay, we'll give you more people." If it's -- if there's -- if any of those factors aren't there, then we'll say, "Let's slow down a little bit. Let's go at a more measured pace. Let's get more training, let's get more mentorship, let's get more oversight and why pile on more people while we're still getting our act together?" So it really is an internal decision based on how well we're doing in the different locations.

David J. Tamberrino - Stifel, Nicolaus & Co., Inc., Research Division

And does that also -- is the turnover effect kind of a planned effect, as well? Obviously, as you've been growing, you probably had a pretty low turnover with all the excitement on all the offices, but do you expect that to increase in 2013 as you continue to layer-on additional hundreds of people?

Bradley S. Jacobs

It'll go up a little bit, for the reasons you said. But turnover is the enemy. Turnover is something we don't want to have, whether it's voluntary or involuntary. And the way we are tackling that are -- is, first of all, on the intake, make sure that we're hiring people that's a match for the job, that they have a personality and a skill set and the background that's applicable to what they're going to do; and then train them and train them and spend more time in training than would be necessary, in some cases, but overtrain and overtrain and give them all types of training, whether it's classroom training or structured simulation or on-the-job or the mentorship or the continuing education classes or direct coaching from the branch presidents or any of the modules that Marie's rolled out. She's rolled out 10 new modules for new hires on all different topics. So train them, train them, train them because when you hire somebody -- and we've seen that in some of the smaller competitors that have hired people without proper training -- it doesn't work because then the salespeople can't perform, they disappoint customers, they disappoint carriers, they don't make a lot of money and they leave or they get fired. So turnover is a waste of -- it's a real waste of resources. Because when you hire someone, it takes about 1 year before we start making money from them. Until they get up to, call it, $11,000, $12,000 a month in gross margin, we're still losing money on that person, we're still investing in that person, which we're more than happy to do, because if you get somebody who makes it through the first year and has found their voice and has gotten their self-confidence, has learned the nuances in the business, it can be a very mutually profitable arrangement between them and the company.

Operator

The next question is from Ryan Bouchard from Avondale Partners.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

I was wondering if you could help us think about the corporate operating expense in 2013 or at least kind of give us an idea of what you expect for the first quarter.

John J. Hardig

Well, for the year, we're projecting corporate expense to between $33 million and $37 million. And I think the first quarter will be about in line of what we did in the fourth quarter last year. But we're looking at a little bit of -- we got some increased headcount based on the organic growth in corporate. Most of that is around IT and accounting. And so that's going to drive a little bit of an increase year-over-year.

Bradley S. Jacobs

Ryan, as you know, because we've talked about this before, we're building XPO like a tank. We're building it with the infrastructure in place upfront, with IT, with accounting, with the training, with the recruiting, with all the multi-operating review infrastructure, with all the Sarbanes-Oxley, all the things that are in place so we can be a multibillion-dollar company. What we don't want to do is to grow a multi-billion dollar company and say, "Oops, what about the infrastructure?" So this investment in infrastructure is critical to our growth.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay, makes sense. And then turning over to the expedite division. So is it safe to assume that the gross margin is probably in the 16.5% neighborhood, given the pay increases at least until maybe the economy really picks up? Is that safe?

Scott B. Malat

No. We're working with our fleet owners and our owner-operators to make sure that we have plans in place that both help margin but also help loads and help our owner-operators and fleet owners get out on the road more. So we are addressing some of those plans with them now. It probably won't affect first quarter, but as we go through the year, that hopefully will take -- make an impact. Expedite certainly is more macro sensitive than some of our other areas. I'd say if you look at our freight brokerage division, and just depending on where the market goes, we can make money. We can keep moving. And freight forwarding is the same kind of thing. When you're talking about expedited, it is a little more macro sensitive, but we should be able to fix some things and work with our owner-operators and fleet owners to improve that before it -- a little bit, irregardless of the macro.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. Can you talk at all about kind of what you're seeing in that division so far in the first quarter? Has it -- did it started out doing fine in January and has it slowed in February? Or can you give us any color on that?

Scott B. Malat

Yes, it's -- look, it's been relatively weak. It hasn't done that much. January was stronger on a year-over-year basis. But January is a slow month. It's just a quiet month in general, so I wouldn't -- you don't make too much to that because March is going to make up a bigger part of the quarter. February is probably a little slower than January was on a year-over-year basis, but March will be a lot more important.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. And then you spoke earlier about the Covered Logistics, their operation in Dallas and how you're not combining those. But it looks like you -- that they also have one near Chicago. Would you combine that office with your Chicago mega-center...

Bradley S. Jacobs

No, because our Chicago office is right downtown and Covered's in Lake Forest. And in Chicago, suburb people don't want to come to the city often. City's people don't want to reverse commute out to the suburbs often. So it makes sense to keep them separate. And they're 2 different -- they're part of the same organization, but they're 2 different units with their own integrity.

Ryan T. Bouchard - Avondale Partners, LLC, Research Division

Okay. Same situation with East Coast Air Charter, you'll leave that kind of separate?

Bradley S. Jacobs

Oh, yes, absolutely. They're firmly based. They're in Statesville and there's absolutely no reason to move them anywhere. They're doing a great job and will keep doing it right there.

Operator

The next question is from Ryan Cieslak from KeyBanc Capital Markets.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

The first question I had, I just wanted to take another angle at the gross margins within freight brokerage and how should we be thinking about that into 2013. Obviously, you guys saw some of the sequential improvement in the fourth. I'm assuming some of that has to do with the increased productivity with the cold-starts and just buying capacity a little bit better. Should we continue to see sort of sequential improvement? Or maybe just what does your positive EBITDA assumption by the fourth quarter imply from a gross margin standpoint?

Scott B. Malat

Ryan, there's a couple of levers there. We do continue to expect that we will buy better. We are buying better every month. Every quarter, we buy better than the last quarter. The relationships we have with trucking, with the carriers that we use, is -- it continues to improve. And over time, we'll buy better. That gross margin will depend on a few different factors. It'll depend on new business. When you bring on new business, you can bring it on at very good pricing, you could price it right in line with the market. But as you're getting new lanes that you've never done before, it takes some time for you to work with the right carriers and choose the right carriers for that load and for that lane. And over time, that -- those margins and those lanes will move up. So it'll depend on the percentage of new business we're bringing in versus the amount of business we're bringing on in existing lanes. It also depends on M&A and margins of the business that come in. The biggest factor in that will be pretty much length of haul and mix of business. If you have a business that we acquire that has a longer length of haul, that maybe does produce, your average revenue-per-load could be multiples of the 12 50 [ph] on average. It could be $3,000, $4,000. And then your gross margin percentage could be lower, but your gross margin dollar transactions could be higher, which would be fine with us and we can make a lot of money. Conversely, we could do -- we can work with a company that maybe it has a little bigger mix in LTL. Or we can -- LTL can grow a little faster. And LTL has a much higher gross margin percentage, but the average revenue-per-load could be something like $250, so it's -- and that could be very profitable and we can do that as well. So those are the factors that'll go into it. But I do expect us to have a very large percentage of new accounts. We have our salespeople out there mining new accounts, aggressively going after new business all year. And I expect that has some margin percentage, lower margin percentage as you grow into that business.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

And then I also want to see just what kind of impact Hurricane Sandy had in the quarter here on you guys and then also if it's having any sustainable impact here into the first quarter.

Bradley S. Jacobs

Sandy was great for about 3 weeks, and then capacity came back on. I mean, there still is some residual disruption here up in the Northeast, but it's basically more or less back to normal.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay. And then you mentioned Turbo Logistics, I think, was running ahead of your -- or ran ahead of your expectations in the fourth quarter. I think it was $27 million in revenue or so. I just wanted to see, what's the drivers behind that? What are you seeing specifically within that acquisition that makes you feel good about the run rate you're seeing? And just talk a little bit about that, it would be great.

Bradley S. Jacobs

Well, I love Turbo. I mean, Turbo turned out to be an amazing, amazing acquisition. And what was amazing about it was the deep -- depth of the relationships they have with these large Fortune 500 companies and their commitment to passionately service them and just make sure you just don't go home at night till all the loads are covered and covered well. And it's -- the relationships they have is really, really impressive. And I've been personally going on some customer visits with Jeff Battle, the Head of National Sales there, and I was very, very impressed with it. Now, what specifically is impressive is when we bought Turbo, it had historical revenue of about $124 million. And since then, they've made some additions with a couple of key accounts that added another $10 million or $15 million of revenue. So what was a company that we thought who had $124 million of revenue now has $135 million, $140 million of revenue, which is a bonus, which is great.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then also on the cold-starts, I think, Scott, you had mentioned annualizing right now around $60 million to $65 million. How should we think about the existing cold-starts, how that should progress into '13? And maybe a better way of asking it is, in -- as some of these cold-starts get into their second year, what's the expectation of what they should be generating from a revenue standpoint? I know it will depend on the size and the location, but just sort of what's the expectation there?

Scott B. Malat

Yes, it will depend on the size and location. Every one of the cold-starts has a little bit different life of its own. Roughly, they've been getting into the ranges of $5 million to $10 million in the first year. And you can expect -- the difference is Chicago, which started in August, is our largest cold-start; it's moved very quickly. We've ramped that up very strong. So I would think a little bit more in terms of salespeople and the 400 salespeople that we'll be adding on over the year. And I think, the existing salespeople, which we now gave you, which is almost 600 salespeople, and then the 400 salespeople that we're bringing on each year. In year 1, the revenue for a sales person, as is defined there with carrier procurement and logistics coordinators, makes around $350,000 in revenue. The revenue run rate at the end of the first year is close to -- it's $675,000 or so on a revenue run rate basis. And you can kind of calculate it out off of that, probably.

Ryan Cieslak - KeyBanc Capital Markets Inc., Research Division

And then lastly, just on -- closing on the cold-starts. Have you guys updated or do you have an updated sort of longer-term goal or target for how many you want to open up within freight brokerage?

Bradley S. Jacobs

Nothing's changed there. The long-term plan is we'll probably have 20 or so over time. It may be -- it made more for a little bit into a small or a number of larger locations, but overall, the parameters are about the same.

Operator

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

David P. Campbell - Thompson, Davis & Company

Brad, someone answered a question about the corporate expense a few minutes ago and the answer was $33 million to $37 million this year. I'm confused. Does that compare to what was a $40 million run rate in the fourth quarter?

John J. Hardig

Well, keep in mind, David, that we did do -- we -- in the first 3 quarters of last year, we had a corporate allocation, where we were allocating some of that corporate expense into the field. And so about -- there's about $2 million of that in 2012. And so you've got to think about adjusting the 2012 number into '13.

David P. Campbell - Thompson, Davis & Company

Right. So what -- the $40 million then in run rate in the fourth quarter is only -- it was only $38 million.

Scott B. Malat

No. The $40 million is $40 million from an apples-to-apples. I would say that there were a couple of costs we pulled out in the corporate expense in the fourth quarter that you can look at when you look out over the run rate of the year in terms of M&A transaction costs and litigation-related and different things that we broke out. As you look out over the course of the year, yes, I think that our run rate will be lower than that $10 million or so on an apples-to-apples basis.

David P. Campbell - Thompson, Davis & Company

Okay. And so some of the costs are going into other divisions, other divisional expenses.

Scott B. Malat

It's actually the exact opposite. We've really tried to break out and move things from corporate out. So if you noticed, when I'd said mid to high, like high-20s kind of corporate expense for this last year, we came in around $27 million or so. We grossed it up to $29 million, because we took things out of the division, started putting it into corporate so that it's much easier for you to follow, so that it'll be more transparent. And next year, that includes that extra $2 million that we're taking out of the divisions and putting into corporate so that you can see it more clearly.

Bradley S. Jacobs

It's much better from a management point of view to have that transparency as well because, if you're allocating it all out into the field, it kind of gets lost. So if you -- if -- from an organizational perspective, we like to see, and I suppose investors like to see too then, what are we actually spending on a corporate infrastructure rather than it being just allocated and just brings down the margin a little bit in the field. But you don't -- you can't really track it. So we manage this company in an old-school kind of way from a financial perspective. We break up every single one of the -- part of the organization and put it into a business unit. And we have a budget, and every month we sit down and we spend 1 hour to 3 hours doing a variance analysis for each 1 one those business units. We say, "Okay, look, where did we come out better? Where did we come out worse? Why did we do better? Why did we do worse? How did we do on the action items last month? What's our new action items to improve the performance for the next month?" And when you have the corporate functions buried into the field, it's hard to manage that, because you're sitting with people doing an operating review with people who aren't from corporate. So why are you going over that with them? So that's why we're breaking that out. It looks like a big number, but it's an honest number.

David P. Campbell - Thompson, Davis & Company

Right, right, right. So the -- basically, the corporate costs are -- if you take out -- especially if you take out the nonrecurring stuff in the fourth quarter, corporate costs are -- will go up very little next year in 2013 and then primarily from IT, new IT personnel.

Bradley S. Jacobs

They'll go up some, but they're not going to go up proportionally the way they have because, that reference I made before of building it like a tank, once you've got that infrastructure in place, it's -- you get the advantages of scale. You don't have to go up one-for-one as you grow the top line. You can leverage the SG&A.

David P. Campbell - Thompson, Davis & Company

Right. And tell me something about the East Coast partnership that you mentioned with the old expedited business. Is that -- was that partnership a -- used to obtain capacity? And so this $43 million of East Coast revenues is additional expedited revenues? Or is some of it purchase transportation costs? Just what -- how does that work?

Bradley S. Jacobs

Yes, we -- our predecessor company, which you followed, Express-1, use to do a lot of business with East Coast for years. And we continued to do business with East Coast after we became XPO Logistics. So some of that $43 million is intercompany eliminated going forward. But we'll grab all the margins. Instead of splitting the margin with Bill, it will all go into XPO now. But the growth for East Coast, the growth opportunity is he's got these great relationships with a couple hundred different air carriers. He's got great relationship with all the expediters who use Air Charter services. But we also have relationships with a whole large universe of customers who use expedite services. And for most of those expedite shipments, which are unplanned, a ground transportation is just fine. But some of them is so urgent that if you're going to go from Detroit to Mexico and it has to be there this afternoon, for example, you're going to go by plane, you're not going to go by a truck. So our -- the synergy is for us to feed those leads in a bigger way, so have all 60 of our locations all across North America have this Air Charter capability in their mind and then feed them into East Coast Air Charter. That's where the growth is there. So I mean, that business could be an over-$100-million business in a few years. That could easily happen.

David P. Campbell - Thompson, Davis & Company

Right, right, right. And as far as what happened, expedited, since the second quarter, is that -- if we take most of that as a macro effect of the economy, is that the fact that it went down in profitability as much as it has?

Bradley S. Jacobs

Well, I think that's part of it. But to be perfectly honest, it was partly our own doing. We, towards the beginning of the year, made a call that we wanted to raise rates that we pay to the carriers, which we did. We gave them more -- another -- more than $0.10 a mile. And we called it completely wrong because the market got weaker. So we kind of got -- in the worse of both worlds, we're paying more to the drivers and we're getting paid less from the customers, and that was the margin squeeze. So that's a mea culpa on our part.

David P. Campbell - Thompson, Davis & Company

So the solution in 2013, other than East Coast, is what?

Bradley S. Jacobs

Oh, we've revamped that completely. We've done a lot of analysis and we've done a lot of discussing with our carrier base of, "This isn't working for us. What will work for us?" And we've changed the compensation programs. For competitive reasons, I'm not going to tell you all the details on a large conference call, but basically what we're doing is we're paying for total miles, not just the loaded miles, and we've decreased the amount. And people are happy with that because the most important thing that owner-operators want is they want miles. They want to be moving; they don't want to be parked. So if we -- if -- in the new setup, we're going to give them more miles, but we're going to keep a little bit more of the top line. So I think we're -- I think this ship is guided right, is right-guided now. I think it's in very good direction. There's a -- I don't want to give you the wrong impression. I was out in Buchanan about a month ago. Morale is high; energy is high. There's good, strong leadership. There's a good bench there. Express-1 is one of the -- we're ranked by Transport Topics the fifth-largest expediter. Well, we can't quite figure out who's 3 and 4. We think we're the third-biggest one. And it's a strong business unit of ours. If expedite was a $50 billion industry instead of a $4 billion, $5 billion industry, we'd do all the expedite because expedite, customers really need it. They're calling you because they've got an urgent problem that you can solve. And when you go to our office in Buchanan, it's very uplifting, it's very invigorating, because you go out there in a suburb of a suburb and you walk in the office and you're still surprised with the energy level and the intensity. It's like an emergency room. It's very, very focused. People are very professional. They've been in the business a long time, who have a lot of trust in them by the customers. And some of the biggest users of expedite in the auto industry and life science industries, they really only go to 3 or 4 different expediters, including ourselves. They go with FedEx Custom Critical. They go with Panther. They go with us. Sometimes they only go with those 3. Sometimes they go with 1 or 2 others. I'm very proud of what we're doing there.

David P. Campbell - Thompson, Davis & Company

So the East Coast should help, shouldn't it?

Bradley S. Jacobs

Oh yes. East Coast will help because, in the ground transportation at expedite, minutes count. And something that's got -- requires air, seconds count sometimes. You -- if someone calls up, they need something, "Do you got -- do you have a solution for this or not?" They're not going to wait around for you to call them back 45 minutes later. So having that all integrated with us is a good plus.

David P. Campbell - Thompson, Davis & Company

Right. And is there any fallout from Panther? You mentioned -- Panther is #3 or #4, I guess, in the industry since they've been acquired by Arkansas Best. Is there any fallout from that? I saw Andy Clarke leaving. That didn't sound good.

Bradley S. Jacobs

Well, I like Andy Clarke. And if he didn't have a non-compete, I'd probably offer him a job. I think Panther is a great company. It's actually #2, after FedEx Custom Critical. And that's a competitor that we respect and take seriously.

David P. Campbell - Thompson, Davis & Company

And there hasn't been any fallout from being acquired by Arkansas Best?

Bradley S. Jacobs

There's always some changes when a company is acquired, but I'm not writing off Panther, that's for sure.

David P. Campbell - Thompson, Davis & Company

Okay. Okay, great. And the interest cost next year, you mentioned -- someone mentioned $12.5 million. Is that the number? Is that the correct number?

John J. Hardig

That's right. And that's really coming from the convert, David.

David P. Campbell - Thompson, Davis & Company

Right. I understand, yes.

John J. Hardig

[indiscernible] for that is it's noncash.

David P. Campbell - Thompson, Davis & Company

I understand. Right.

Operator

Our next question is from Jack Atkins from Stephens.

Jack Atkins - Stephens Inc., Research Division

I just have a couple of quick follow-ups here. When we think about -- Brad, you talked quite a bit about Turbo and how that's performing. But I'm just sort of curious to know how the other acquisitions you guys made in 2012 have performed thus far relative to expectations, specifically Kelron and Continental. How have those businesses done since you closed those transactions?

Bradley S. Jacobs

Continental is very good. Continental at first was a little hesitant to start working with Charlotte and covering their loads, and now they're the biggest proponents for doing that. They're covering a very big chunk of their loads through Charlotte, our national operations center there and using more of their time to grow their business. BirdDog worked out well. It was basically a tuck-in. Those folks came over. They were just down the road from us in Charlotte, came over to our organization and they are fully integrated and working out great. Kelron, Kelron is good. Kelron was a company that was losing a tad, and now it's in the budget this year for making a couple million dollars. But execute's on that. We bought it for $8 million. So from a financial perspective, it worked really well. From a customer perspective, it worked extremely well because they have a small select group of large customers that they have good relationships with that we can go much deeper with now that we've got more capacity, now that we've got more back office. Turbo, I spoke about earlier in the call, love it, love it, love it. East Coast, it's too early to declare victory, but I'm very optimistic about it. And of course, our sixth acquisition we just closed yesterday, so we can't give a report card yet.

Jack Atkins - Stephens Inc., Research Division

Sure, that all makes a lot of sense. And then last question for me, Scott. Did I hear you right that you noted earlier that the first quarter EBITDA levels should be similar to the fourth quarter? Is that the right way to think about it?

Scott B. Malat

Roughly, yes. We've added a lot of salespeople. One of the things we gave in the release is the number of salespeople. You should really look at that. So from the third quarter to fourth quarter, we really made a big investment in sales. We'll continue to do that. But as you start to see, the law of numbers will start to overpower that as you go through the year. But the investment that we made in salespeople in 4Q, in addition to that, seasonality in 1Q. 1Q by far on a seasonal basis is the lowest quarter of the year. On a revenue basis, on a margin basis on that, 1Q seasonally will always be the smallest quarter of the year.

Operator

Our next question is from Kapasa Hal [ph] from Albeta Equity [ph].

Unknown Analyst

First of all, I need a clarification on your $500 million run rate. That includes Coast and Covered Logistics, right?

Bradley S. Jacobs

Yes, we're over $500 million now, now that we bought East Coast and Covered. We missed it by a smidge going into the end of the year, came really close, but now that we've done those acquisitions, we're over it.

Unknown Analyst

On your Kelron operation, I think, in last conference call, you mentioned about that you will cover some of the business in that unit. So why not you -- do you have a percentage to share regarding how much business you are now covering? And what's your long-term revenue target for the Kelron unit?

Scott B. Malat

Yes, Kelron, we did look at the business and saw what makes sense and what doesn't. And as Brad said, it's -- we're looking to be -- to add a few million dollars in EBITDA this year from Kelron. So we -- I think we've done some things that make sense. The business, from a revenue standpoint, that affected probably 20% to 25% of the business. And we're going to grow it. We're going to grow Kelron. Vancouver office, things are going very well. That's the largest office there. And we're going to be adding sales force and adding headcount to that to grow that business. It's got great leaders and great people and they serviced our accounts very well. Toronto, Montréal are also the same thing. Cleveland, we're going to be adding people and growing. And Cleveland's very small, and we've been adding people and we're going to grow that as well. So, we'll continue to grow the top line now that we've built the business more profitable.

Unknown Analyst

So are you done with the integration on Kelron?

Bradley S. Jacobs

Yes, yes. Usually, we integrate things faster than we interested -- than we integrated Kelron. Kelron had 2 little curlicues to it. One is it had French language we had to work out. And the other, it had currency changes. So from a technology point of view, it was wiser to go a little bit slower than normal.

Unknown Analyst

Okay, that's good. So right now, everything is done, right? I mean, in terms of...

Bradley S. Jacobs

Yes.

Unknown Analyst

Okay. And also January, when you acquired a business, due to this integration issue, do you normally see any interruption during the business, be a risk in business?

Bradley S. Jacobs

Not if it's done right, no. I mean, that's something that is done in a methodical way and an organized way and a planned way. Things -- I've worked on integration of hundreds and hundreds of acquisitions over the years. They never go perfectly. That's naive. It doesn't work like that because there's a lot of change that takes place in a short amount of time. But if it's done well and it's done with a good spirit and it's done with professionals who know what they're doing and is in a coordinated way, it's a good thing to -- it's like ripping a Band-Aid off. Sometimes, you just rip it off and do it.

Unknown Analyst

Okay, great. Can you talk about your longer-term revenue potential for the Dallas cold-start, in particular when you compared it your mega-branches that you mentioned, like Chicago, Gainesville and Charlotte?

Scott B. Malat

Every cold-start has its own life. A lot of these cold-starts will get up to in the range of several million dollars in EBITDA, kind of like a $3 million to $5 million in EBITDA. But if you look at some of the areas that we've really focused in on, Charlotte, Chicago, Gainesville, which is not a cold-start but something we purchased, not only do they have strong leaders but they're also located in areas where we can recruit effectively, both from transportation people from inside the industry and then people that have been outside the transportation industry, where you can really scale those up to be much larger. So we'd expect Chicago and Charlotte and then a few other places that we've been targeting that could get to much larger sizes than that.

Unknown Analyst

Great. I think, last time, you mentioned about a 5-year plan and then you said probably you are going to finalize the next set of KPIs probably at the beginning of the year. Do you have any update on that? For example, do you have any long-term objective for your gross margin, operating margin or EBITDA margin?

John J. Hardig

Nothing's changed there in the long-term plan. We started out with $177 million in 2011. We're now in a run rate of over $500 million. We want to get to $1 billion by the end of this year and we think we'll do that through organically and through acquisitions. And we want to get to $4 billion to $6 billion by 2016. And we think that's a reasonable goal and it's one we're marching towards. In terms of the lower-level margins, we're going to be of a size that we're going to approximate what's going on in the industry as a whole. So if you look at the larger competitors and see what their margins are, they -- we'd probably end up like there. Of course, that'll depend a little bit on our business mix too.

Unknown Analyst

Okay, great. So, on your longer-term growth driver, would you say that it more -- will be more on medium- and the small-sized businesses?

John J. Hardig

You mean on the acquisitions, Kapasa [ph]?

Unknown Analyst

No. I mean growth drivers, like your customer base. So what do you think will be your main growth drivers? Is it going to be more from the small- and the medium-sized business? Or I think -- is it going to be from -- more from, like, large corporations?

John J. Hardig

We're going after both. I mean, there's -- we're able to service both very well. We're able to do a good job with large customers and with small customers, and we're going after both segments. It's a different approach, because, the large customers, there's only about 1,000 of them. And it's a more sophisticated, longer-term sales approach, it's less transactional. The smaller customers, there's 3 million of them and so we have a lot of people calling, a lot of different customers for there. But we're going to do a...

Unknown Analyst

Okay, so right now, you are -- in the moment, you are small -- in terms of brand percentage, is it more from large corporations or small- and medium-sized business?

John J. Hardig

We have more smaller customers than larger customers. And over time, that mix will go in the other direction.

Unknown Analyst

No, I understand. In terms of revenue percentage, is it skewed more from the small and medium sizes?

Scott B. Malat

Yes. Right now, the majority of our revenue is from small- and medium-sized. Over time, the percentage that's coming from the larger accounts will increase.

Unknown Analyst

Got you. In terms of IT, can you talk about -- a little bit about your IT for your freight forwarding and expedited? Are they using the same IT system as your brokerage business?

John J. Hardig

There's 2 parts to the IT. There's the back office part and there's the customer-facing, carrier-facing part. On the back office part, yes. On the customer-facing part, we have a -- we work with a selective system. On expedite, we work with a peanut [ph] system on CGL. And then we have our own mongrel system for the truck brokerage.

Unknown Analyst

Okay, great. So do you have any update on your Robinson litigation?

Bradley S. Jacobs

We generally don't comment on litigation publicly.

Operator

That was our last question. I'll turn it back over to you, Brad, for any closing remarks.

Bradley S. Jacobs

Okay. Thank you. I apologize, the call went past the morning open. We'll have to figure out what time to do it next time so we don't cut into the trading day. Thank you for your questions. And we look forward to seeing you over the quarter and talking to you in 90 days. Have a great day. Thanks, bye.

Operator

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

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