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Roadrunner Transportation Systems, Inc. (NYSE:RRTS)

Q1 2014 Earnings Call

April 30, 2014 4:30 PM ET

Executives

Mark DiBlasi – President and Chief Executive Officer

Peter Armbruster – Chief Financial Officer

Analysts

Tom Albrecht – BB&T Capital Markets

Todd Fowler – KeyBanc Capital Market

Ben Hartford – Robert W. Baird

David Ross – Stifel Nicolaus

Scott Group – Wolfe Trahan

Bill Greene – Morgan Stanley

Rob Salmon – Deutsche Bank

Nate Brochmann – William Blair

Operator

Greetings, and welcome to the Roadrunner Transportation Systems’ 2014 First Quarter Conference Call. Today’s call is being recorded. At this time, I will turn the call over to President and CEO, Mark DiBlasi. Please go ahead, sir.

Mark DiBlasi

Thank you. Good afternoon, everyone. Thanks for joining us today for our first quarter 2014 earnings conference call. With me today is Peter Armbruster, our CFO. After some comments from Peter and me, we will open up the call to questions.

But before we begin, I’m going to turn it over Peter to discuss the Safe Harbor Act. Peter?

Peter Armbruster

Thanks, Mark. Before we begin, I would 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 second quarter 2014 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 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 and environmental regulations; insurance in excess of our prior experience level; and the other Risk Factors set forth in our SEC filings.

Mark DiBlasi

Okay, thanks, Peter. I’m going to take a few minutes now to briefly discuss the strategic composition of the company for those of you who are not familiar with us, which we believe drives our long-term performance and then provide some color on the quarter, current trends, and strategic initiatives in the business.

Our asset-light business model is well positioned for continued market share gains. We provide a one-stop solution to meet each customer’s individual needs. We offer a full complement of solutions including customized and expedited LTL truckload, truckload logistics, freight consolidation, inventory management, transportation management solutions, intermodal solutions, expedited services, international freight forwarding, customs brokerage and comprehensive global supply chain solutions.

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 base. Although we service large national accounts, we primarily focus on small to mid-size shippers. 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 flows and return on our invested capital on assets.

We report business segments, Less-Than-Truckload or LTL, Truckload Logistics TL, and Transportation Management Solutions TMS. These segments complement each other’s by allowing us to offer all services across all zip codes. By cross-selling each segment services, we’re able to build density in a more rapid rate and expand our operations into new geographic regions.

We control a significant amount of capacity in our network by utilizing independent contractors and smaller carriers where we represent a substantial portion of their business. We believe this provides us with a strategic advantage over other non-asset-based providers as we expect capacity to continue to tighten in the future. We are by definition a carrier with over 3800 drivers in our fleet. We are light-asset primarily because that those drivers are independent contractors that work exclusively for Roadrunner.

Overall, we were pleased with our first quarter results given the impact from severe winter weather throughout the quarter, strong organic and acquisition-related revenue growth led to a $27.6 increase in 2014 first quarter revenues. Our first quarter operating income excluding acquisitions transaction expenses improved 2.5% over the prior years to 19.6 million.

Our first quarter EBITDA improved 6.6% over the prior year to $24 million. Company-wide the adverse weather negatively impacted our first quarter of 2014 operating income by approximately $2.8 million, excluding the adverse weather impact, first quarter diluted income per share payable to common stockholders would have been $0.31.

The weather events experienced in January continued through mid-March resulting in the worst weather conditions we have encountered in the first quarter nation-wide in many years.

This not only reduced revenues but significantly increased cost throughout all of our operating segments. The weather also exposed the balance between supply and demand in our industry and once weather changed that balance it became immediately evident that there is no excess capacity in the market.

Over the past five years, we have purposefully increased the size of our fleet from 1100 drivers in 2009 to over 3800 drivers today in anticipation of the on-coming capacity shortfall. We believe we are uniquely positioned to take market share in a much more positive pricing environment going forward.

Now I’ll give you some business context by segment for the first quarter and the trends we’re seeing so far in the second quarter of 2014.

In our LTL segment, of our three operating segments, LTL was the most impacted by weather due to the location of our terminals in the path of multiple storms. Despite this, we were still able to post a slightly positive growth year-over-year.

This customer growth and existing customer growth are – new customer growth and existing customer growth drove a $2.3 million or 1.7% increase in LTL revenues. Tonnage was up 2.8% for the quarter by month on a per day basis, tonnage was up 2.5% in January, 4.2% in February and 1.8% in March.

Revenue per hundred weight excluding fuel was up slightly to 0.1%. Including fuel revenues per hundred weight was down $0.400. Weight per shipment was up 1% and pricing was stable in the 2% to 3% range. A major factor impacting revenue per hundred weight is a drop in the length of haul by 4% due to our expanded terminal footprint in LTL.

Our line haul cost per mile excluding fuel was $1.26 up $0.02 from the previous year or up 1.6% year-over-year. The combination of weather, cost increases and additional insurance cost of the first quarter 2013 resulted in our LTL operating ratio deteriorating from 93.2 OR in the first quarter of 2013 to 95.0 OR in the first quarter of 2014.

In our Truckload Logistics segment, Truckload revenues grew by $47.3 million up or 32.3% from the prior year’s first quarter. Incremental revenues from our 2013 and 2014 acquisitions accounted for $27.8 million of the increase, while the remaining $19.6 million represented a 13.4% organic growth from our existing business. The positive impact of the acquisitions and organic growth revenue led to a 23.9% increase in our truckload operating income quarter-over-quarter.

Truckload revenues and operating cost in this year’s first quarter were also negatively impacted by the weather, increased cost associated with our hours of service rules and increased insurance cost. As a result, our truckload operating ratio deteriorated from a 93.4 in the first quarter of 2013 to 93.8 in the first quarter of 2014 primarily due to those issues.

Looking forward we continue to see substantial growth opportunities organically and acquisition-related in our truckload logistics segment.

Our TMS segment, our TMS revenues for the first quarter of 2014 increased $35.2 million or 164% to $56.6 million over the first quarter of 2013. The improvement in revenue was primarily due to the Adrian Carriers Marisol International, and Unitrans International acquisitions.

Significant growth opportunities continue to be identified with the addition of our international services, additional amortization of intangible assets associated with the three acquisitions, as well as lower margins in the acquired businesses resulted in an operating ratio increase from 89.2 in 2013 to a 93.9 in 2014.

Overall, we continue to take advantage of increased cross-selling and growth opportunities across all of our operating segments. Revenues from customers using multiple services is now at 42.4% of our total corporate revenues, up sequentially from 39.6% last quarter. We are seeing a very nice trend in terms of integrated solutions and integrated sales within the corporation.

Second quarter trends that we are seeing so far through April which has not yet finished, from our perspective, the economy is still in a slow growth mode. Obviously, the weather had a big impact in the first quarter. However, we are - as previously mentioned, capacity is beginning to tighten up, that said, we are still gaining market share and continue to grow tonnage and revenue.

LTL tonnage in April is growing at approximately 3% year-over-year on a per-day basis. The rate environment in LTL has improved in April in the 3% to 4% range, up over a 2% to 3% range that we saw in the first quarter of 2014.

We implemented a 5.4% GRI, general rate increase on April 14 in LTL. Our Truckload segment continues to grow organically as I mentioned earlier as well as through significant growth and acquisitions. Truckload pricing is also seeing an improvement I the range from 3% to 4% up from 2% to 3% in the first quarter.

Our TMS business is up significantly in April consistent with our first quarter growth, primarily due to our recent international acquisitions. With regard to acquisitions, in the first quarter we made two mid-sized acquisitions. We acquired Rich Logistics on February 21. Rich is a provider of truckload and expedited services based in Little Rock Arkansas. Rich brings to Roadrunner significant cross-border exposure with Mexico as well as significant automotive-related expertise.

We also acquired Unitrans International, on March 14. Unitrans is a leading high-quality non-asset based provider of international logistic solutions based in Los Angeles, California. Unitrans expands our footprint and complements Roadrunners existing international presence by providing a full range of international services with a focus on complex whole chain and high value shipments.

In addition to those two acquisitions, our pipeline is extremely strong and our activity level is very high as we are in various phases of diligence on several acquisitions. We have developed a strong reputation in our industry as a preferred buyer due to our successful track record and acquisition profile.

Each acquisition opportunity meet core acquisition criteria within the company which includes continuing to build critical mass from a geographic standpoint in each of our businesses. Continuing to broaden our capacity to more efficiently utilize our network across segments. Continue to seek companies with complementary service offerings or new service offerings with similar business miles that bring additional value to our customers that we can effectively cross-sell within our suite of services.

And finally, we only seek customers with a management team that will fit with us culturally and that are immediately accretive to our company. We made six acquisitions in 2013. We have closed two so far in 2014 bringing the total number of acquisitions by this management team to a total of 30 acquisitions, 20 of which have taken place within the last three years.

Our differentiated strategy and our strong reputation in the transportation community as well as our proven ability to smoothly integrate each acquired company are large factors as to why our pipeline is at such a high level.

In summary, the momentum in our business continues to be positive and we continue to strategically position our company for long-term growth. The combination of organic and acquisition growth we improved revenues in the first quarter by 27.6% despite severe weather issues.

That was an increase of 82.8 million. With added services and scale to our already robust business model, we also continue to prove that our lower cost high quality business model and our comprehensive portfolio of transportation solutions provide a competitive advantage that enables profitable growth and value creation to our shareholders.

And at this time, I’ll turn the call over to Peter to have to be a little more granularity into some of the numbers we saw in the first quarter and what we see going forward.

Peter Armbruster

Thank you, Mark. I’ll begin by summarizing our first quarter results by operating segment. LTL revenues including fuel increased 1.7% to a $135 million for the first quarter of 2014 from a $132.7 million for the first quarter of 2013. LTL operating income was $6.7 million or 5% of LTL revenues for the first quarter of 2014 compared to $9 million or 6.8% of LTL revenues for the for the first quarter of 2013.

The for the first quarter of 2014 operating income was negatively impacted by approximately $1.4 million due to adverse weather and $800,000 increase in insurance cost and claims expense over the prior year quarter.

Truckload revenues including fuel increased 32.3% to $193.9 million for the first quarter of 2014 from a $146.5 million for the first quarter of 2013. The improvement was primarily due to increased load growth, increased utilization of Roadrunner’s truckload brokerage agent network and the acquisitions of Wando Trucking, TA Drayage, G.W. Palmer Logistics, Yes Trans, and Rich Logistics.

For the first quarter of 2014, these acquisitions collectively contributed Truckload revenues of $27.8 million. Truckload operating income was $12.0 million, or 6.2% of Truckload revenues, for the first quarter of 2014 compared to $9.7 million, or 6.6% of Truckload revenues, for the first quarter of 2013.

The first quarter of 2014 operating income was negatively impacted by approximately $1.4 million due to adverse weather and a $1.4 million increase in insurance and claims expense over the prior year quarter.

Within TMS revenues increased $56.6 million from $21.4 million in the prior year due to our acquisition of Adrian Carriers, Marisol International, and Unitrans. TMS operating income increased to $3.5 million from $2.3 million in the first quarter of 2013.

Our corporate expenses excluding transaction costs increased to $1.8 million in the first quarter of 2013 to $2.6 million in the first quarter of 2014. The increase is due to additions of corporate-wide integrated sales teams IT cost to further develop our IT platforms and the addition of other key management personnel to execute our overall integrated growth strategy.

On a consolidated basis including inter-company eliminations and corporate expenses, revenues increased by $82.7 million or 27.6% to $382 million during the first quarter of 2014. Depreciation and amortization increased from $3.4 million in the first quarter of 2013 to $4.7 million in the first quarter of 2014. Amortization of acquisition and tangibles accounted for $400,000 of the increase.

Consolidated other operating expenses excluding transaction cost increased from $70.5 million in the first quarter of 2013 to $93.6 million in the first quarter of 2014. In addition to items discussed above, the acquisitions in our Truckload and TMS segments contributed the majority of the increase.

Consolidated operating income excluding transaction expenses for the quarter was $19.6 million for the first quarter compared to $19.2 million for the first quarter of 2013. First quarter 2014 net income available to common stock holders was $10.4 million compared to $10.6 million in the prior year.

First quarter diluted income per share available to common stockholders was $0.27, compared with $0.29 in the same quarter last year. Our August 2013 stock offering increased the weighted average diluted shares outstanding for the three months ended March 31, 2014 by 1.5 million shares and impacted diluted per share by $0.01 from the prior year quarter.

For the quarter our net debt increased $114.6 million from December 31, 2013 primarily due to the acquisitions of Unitrans and Rich Logistics. At March 31, 2014, we had a $168.4 million in term debt outstanding and $142 million outstanding on our revolver.

Our $9.5 million cash on hand at March 31, 2014 plus $41 million available on our revolver at March 31 2014 will allow us to fund near, medium-term growth initiatives. To help provide additional funds for near and medium-term growth initiatives we will look for options for expanding our debt capacity.

2014 second quarter guidance. We anticipate our revenues for the second quarter to be in the range of $420 million to $445 million, representing an increase of 27% to 34% from the second quarter of 2013. We expect diluted income per share available to common stockholders to be between $0.31 and $0.41, compared to diluted income per share available to common stockholders of $0.37 in the second quarter of 2013.

The guidance also reflects our August 2013 stock offering, which will increase the weighted average diluted shares outstanding in the three months ending June 30, 2014 by approximately 1.5 million shares and will impact diluted income per share by $0.01 from the second quarter of 2013.

Our second quarter guidance reflects reduced LTL revenue to the elimination of certain high dollar cargo planes accounts within our LTL segment, an additional company-wide insurance and claim cost, negatively impacting our diluted income per share by approximately $0.03 above the second quarter of last year.

That concludes our prepared remarks and we’ll begin our question and answer part of the call. John, do you want to take the first – can you lead into the first question for us?

Question-and-Answer Session

Operator

Your first question comes from the line of Mr. Tom Albrecht of BBT. Please proceed.

Tom Albrecht – BB&T Capital Markets

Hey, guys, can you hear me okay?

Mark DiBlasi

Yes. Tom, how are you doing?

Tom Albrecht – BB&T Capital Markets

Good, thank you. Several questions here. So, Mark, I am little surprised with market tonnage rebound, with not very much it was 1.8%. A lot of the carriers saw the highest growth in the quarter for tonnage in their LTL ops in the month of March. Why do you think yours was lowest in that month?

Mark DiBlasi

One of the things we did and Peter touched on it just at the end of the call or at the end of the prepared remarks is that we are purposely going through and we’ve eliminated or in the process of eliminating some high claims, high dollar claims accounts. So that’s had a negative impact on that, although we still grew – we started to see that initiatives come through in March that had a slight impact.

If you look at my numbers in February we’re pretty strong, March declined due to that fact and now in April, we are running above 3% right now.

Tom Albrecht – BB&T Capital Markets

Okay, and then on your line haul cost per mile, not surprisingly it went up a little bit because of the crazy weather and everything else. But added to worse point, what was that figure and has it come back down from the $1.26 level, where is it kind of now post weather?

Mark DiBlasi

Yes, good question. It bumped up, obviously we look at that on a weekly basis. There was, it probably got to its highest point a couple weeks in there was in the $1.27, stayed pretty consistent in the $1.26 ranger in a couple weeks in the $1.25 range. So it all total came in just above $1.26. And what we’ve seen in April is that it had gone back down by about half a cent. It’s still on the low side, it’s probably about $1.25, $1.26 which would be $1.26m but it’s come down about a half a cent since the beginning of April to the end of April

I posted that as a 1.6% increase, the reality is with rounding, it was really about 1.2% increase in terms of, because the really thing a full $0.02 year-over-year went up about $1.06.

Tom Albrecht – BB&T Capital Markets

Okay, and then two other questions and I’ll jump back in the queue. Purchased transportation cost by segment now are being eliminated, what’s the rationale behind that? I think a lot of several models kind of tied that input amongst other things.

Peter Armbruster

Yes, we will continue to split out our purchased transportation cost by segments within our 10-Q. But just due to our acquisitions with different business models and our continuous shift of employees to independent contractors, we feel that net revenue numbers of less than 40s.

Also the net revenue term is associated more with brokerage and brokerage is a very small portion of our business. Again we are carrying with capacity. We will have those numbers that are in our 10-Q, but for the release in our script going forward we will exclude those just for the reasons I mentioned.

Tom Albrecht – BB&T Capital Markets

When will that Q be out?

Peter Armbruster

March, I think or May 10.

Tom Albrecht – BB&T Capital Markets

May 10. And then also your depreciation on a sequential bass going from about $5.1 million to $4.7 million, why was there such a dramatic drop?

Peter Armbruster

Yes, in the fourth quarter we had a catch up on the amortization of intangible amortization additional, I think about $0.5 million in the fourth quarter. So that’s why it dropped one. So that was a one-time hit in the fourth quarter of 2013.

Tom Albrecht – BB&T Capital Markets

So something around $4.8 million until the next set of acquisitions would be a good quarterly figure?

Peter Armbruster

No it will actually be a little bit higher because of the amortization of Unitrans and Rich Logistics will increase that amortization of intangibles, we’ll increase e that probably by about $600,000. So we just had a very small portion of that here in the first quarter.

So that should go up by additional $600,000 in each quarter going forward. So that was reflected in our guidance of $0.37 to $0.41 per share.

Tom Albrecht – BB&T Capital Markets

And so, right now, it would seem to me that the first quarter where you were likely to begin to see year-over-year margin improvement would be the third quarter year-over-year even though you expect to resume earnings growth in the second quarter, margin growth would still lag at least one more quarter. Will that be a correct way to look at it?

Peter Armbruster

Yes, I mean, plus with the additional insurance cost that we highlighted of about $0.03 above last year. So, you are talking about the operating ratio going forward.

Tom Albrecht – BB&T Capital Markets

Yes, EBIT margin. So.

Mark DiBlasi

Yes, but some of that’s going to be dependent upon pricing and I believe pricing is going to continue to improve.

Tom Albrecht – BB&T Capital Markets

Okay. I’ll jump back in the queue. Thank you.

Operator

Your next question comes from the line of Mr. Todd Fowler of KeyBanc Capital Markets. Please proceed.

Todd Fowler – KeyBanc Capital Markets

Great, thanks, good afternoon. I guess, just a follow-up on Tom’s comments on the line haul rates. So, Mark, is the expectation at this point that the small increase in the first quarter.

A lot of that was weather-related and kind of trending in that $1.25 to $1.26 range, did that’s kind of a realistic or that’s kind of an appropriate way to think about going forward? Or should there still be some more upward pressure based on what we are seeing with truckload capacity?

Mark DiBlasi

No I think we will see $1.25 on the high side $1.26.

Todd Fowler – KeyBanc Capital Markets

Okay, and then, I am just curious if you can talk a little bit about owner operator both within the LTL business as well as within the Truckload segment, we’ve heard kind of consistently that the driver markets become increasingly challenging, kind of agnostic to what business models are if your asset base or if your owner operator? I am just curious kind of what your experiences with capacity right now and how you think you are positioned given the growth that you are seeing?

Mark DiBlasi

Well, we think we are positioned very well. We’ve been one of the few carriers that have added drivers significantly over the course of last four years. As I said earlier from 1100 to over 3800. I will tell you that we recruiting quality drivers is getting tougher and tougher.

And we still have very good flow to us. But the quality of some of those drivers that are coming to us is not near what it used to be in years past. So we actually disqualify a lot more at the beginning than we ever had in the past. But our flow is very strong, we have build up a very strong reputation within the industry as a preferred carrier to work with from an independent contractor’s perspective.

And as you know, whether we have acquired asset- base companies or companies that run independent contractors. We over time transition our asset base companies more towards independent contractors. So that 3800 in our fleet, about 85% of it is independent contractors and we like that business model.

We are very comfortable managing and working with independent contractors within that business model and still are very successful in terms of bringing new IC on board with us and increasing our fleet size as well as continue to keep a very positive turnover rate compared to the industry

Todd Fowler – KeyBanc Capital Markets

Okay, and then, going back to the insurance comments, the number I think, Peter, I think you said there is about 800,000 increase year-over-year in LTL and I think about $1.4 million increase in Truckload and I know that in your first quarter guidance you had expected insurance to be up, I guess what I am trying to get a sense is, with the increase in line with your expectations or were there something unusual?

And then the $0.03 that you have for the second quarter, what’s driving that and then does that start to come down as it sounds like you are strategically looking at your freight profile and your freight mix?

Peter Armbruster

Yes, in our guidance, we had given $0.02. The actual impact was $0.03 increased insurance cost Q1 this year versus last year and that was primarily due to additional accidents due to the weather, so when we highlighted though are weather cost of $2.8 million that did not include the impact of those additional accidents.

So the $2.8 million and the $2.2 million are two separate numbers. Together those are about $0.08 per share increase. That impacted us this year versus last year.

Todd Fowler – KeyBanc Capital Markets

Okay, and then, as far as thinking about insurance going forward, I mean, it still sounds like it’s going to be relatively elevated or at least higher year-over-year in your second quarter guidance. At what point do you start to see that normalize or get some benefit some benefit I think some of the things that you are doing internally on the corporate side and on the freight side?

Peter Armbruster

Yes, we had stated our long-term goals to keep our debt-to-EBITDA around two times. But we will go above that in certain instances. So, we will consider that in the second quarter or sometime this year to increase the debt facility.

Todd Fowler – KeyBanc Capital Markets

Okay and then the last one that I wanted to ask, what is your availability right now? And I think you gave these numbers and I just didn't get all of them, but what's the availability between cash on-hand and on the credit facility? And I think you made some comments about looking at some alternatives or some initiatives. What sort of things are you evaluating to expand your credit facility or your capacity?

Mark DiBlasi

Yes and at this point of time, we are not planning any type of equity offering unless that would be in conjunction with a larger acquisition that could take place later in the year. But right now, we’d rather restructure our debt to do an equity offering.

Peter Armbruster

And on working capital, it usually increased during the first quarter that reduces as the year goes on. So in addition to that generate cash from our business going forward. That will increase the ability.

Todd Fowler – KeyBanc Capital Markets

Okay, all that makes sense. Thanks for the time.

Operator

(Operator Instructions) The next question comes from the line of Mr. Ben Hartford of Robert W. Baird please proceed.

Ben Hartford – Robert W. Baird

Hey, good afternoon guys. Mark, maybe you could just provide an update on where the progress that you guys have made with Brian as COO and we got insurance and claims and weather and some other items in the front half of the year with the pricing environment, it sounds like it’s healthy. Fundamentals are inflecting and you guys have talked in the past about lying aside to 10% plus in the LTL segment.

Like, a little bit of context to where you are in terms of some of the changes that Brian has made with his new role and how credible is that 10% margin you feel now and is there any sort of context that you can provide around the timing of achieving that?

Mark DiBlasi

Yes, with regard to the structure of the company, it’s worked out very well. Brian is obviously the COO and he is directly involved in the management of LTL at this point in time until we bring on an LTL President which are very close to doing. And we will pass that off to that individual once that is done.

But we had lost momentum in the last half of last year and we have – what Brian has been focused on doing over the last three months is gaining back the momentum and I will tell you at this point of time we have significant momentum going into the second and third quarter. We anticipate significant uptick in terms of the number of accounts that come on board as well as the revenue and tonnage that comes along with that.

Ben Hartford – Robert W. Baird

Okay and then, can you provide a CapEx, full year CapEx figure for 2014 and maybe just allow us to think about 2015 as well?

Peter Armbruster

Right now, for 2014 probably $28 million to $29 million as we continue to invest in IT. 2015, that’s difficult to project. I will expect it probably be a little bit similar maybe a little bit less because what we invest in IT this year.

Ben Hartford – Robert W. Baird

Okay and I guess, just going forward, is there a rule of thumb in terms of CapEx as a percent of revenue, do you think that is good guide without getting a specific number?

Peter Armbruster

No, that’s sort of difficult just because of the different growth – different business models that we have. As a percentage of revenue we really don’t look at it. We look at it more as a total where it’s needed within our business.

Ben Hartford – Robert W. Baird

Okay, good. Thanks for the time guys.

Operator

Your next question comes from the line of Mr. David Ross of Stifel. Please proceed.

David Ross – Stifel Nicolaus

Yes, good afternoon gentlemen.

Mark DiBlasi

Hey, Dave.

David Ross – Stifel Nicolaus

Mark, just to start-off on LTL. Looking at the 2Q guidance in terms of earnings, could you give any more color on what the expectation is for LTL tonnage and yield growth and may be margin there?

Mark DiBlasi

Well, we would expect tonnage grow in the mid single-digits. We think, yes we said in April we are looking at 3% - little better than 3% tonnage growth. We think that’s going to escalate somewhat. We have seen a reduction in our flat movement in our revenues – per hundred weight primarily due to the fact that our weight per shipment has gone up a percent, our line haul has gone down 4%.

So that’s impacting that as well. And that’s primarily due to the fact that we opened up 10 terminals last year which kind of changed the landscape and the dispatch activity within the company. That will obviously stabilize over time. But, that’s what we are at, at this point of time with regard to the revenue per hundred weight performance.

David Ross – Stifel Nicolaus

And on the OR, would you expect around a 93 for 2Q to get to that $0.37 to $0.41 number or you are looking more in the 94 range?

Peter Armbruster

The remain three seem, again some of that depends upon pricing and pricing activity that’s currently going on. If pricing continues at the current pace, we could see on the low side of 93. If it’s plateaus or stabilizes maybe on the high side of that.

David Ross – Stifel Nicolaus

Okay, and then on the Truckload segment, with the mix in different businesses as a result of the acquisitions, is there much seasonality to that segment’s margin when you look at 1Q, 2Q, 3Q, 4Q, is there a quarter where you would expect to have margin outperformance or a weaker quarter or should we be modeling all the quarters at roughly the same margin level?

Mark DiBlasi

Well, yes, I would think, relatively consistent if you look at last year, it ranged from in round at 93, 95 range on the average without much of a deviation from that. But in terms of seasonality as we’ve significantly grown our Truckload segment, we kind of taken the seasonality out of the overall segment.

Now within the – within Truckload services itself, there is some business components that have seasonality. But we have so many operations in Truckload today that where one operation is going through a downturn because of seasonality, another operation is going through an uptick because of seasonality. So it’s really kind of leveling off.

David Ross – Stifel Nicolaus

Excellent, thank you very much.

Operator

Your next question comes from the line of Mr. Scott Group of Wolfe Research. Please proceed.

Scott Group – Wolfe Trahan

Hey, thanks, good afternoon guys.

Mark DiBlasi

Hey, Scott.

Peter Armbruster

Hey, Scott.

Scott Group – Wolfe Trahan

So, I don’t want too carried away with kind of the rest of the year from a guidance perspective, but just want to understand with what you are saying about second quarter and what it could mean for the rest of the year. So typically we see third quarter, a penny or two worst than the second quarter. Would you expect kind of that similar seasonality this year or because of acquisitions, or maybe hopefully cost things do you think it could be better than that? I am just wondering where you are at that?

Peter Armbruster

Yes, we would think that third quarter would improve with – just with insurance as the year goes on and just as pricing as we have a full – we have the impact of pricing especially with our LTL. And as we gain momentum, we would expect that to improve.

Scott Group – Wolfe Trahan

Do you think third quarter would be – at this point would be better than second quarter?

Peter Armbruster

It’s difficult to say, but I would think so.

Mark DiBlasi

That would be our expectation at this point in time.

Scott Group – Wolfe Trahan

Okay. I am not sure if I missed it, but can you just repeat the or total organic revenue growth in the quarter and kind of what you are expecting for the second quarter?

Peter Armbruster

It was 6.5 company-wide and we would expect similar or probably better growth as we have pricing take an impact in the second quarter that we would expect that to improve.

Scott Group – Wolfe Trahan

Okay. And just the last thing real quick, can you guys just confirm if there was or was not any earn out issues were at all in the first quarter?

Peter Armbruster

Yes, there was an expense of $100,000 in the first quarter, so it means we increase the liability, so that means the earn out was more. Opposite to what we had some other quarters. So it was actually an expense during the first quarter for us.

Scott Group – Wolfe Trahan

Okay, perfect. All right, thanks guys. Appreciate it.

Operator

Your next question comes from the line of Mr. Bill Green of Morgan Stanley. Please proceed.

Bill Green – Morgan Stanley

Hey, good evening. You might have mentioned this and if you did I apologize. But did you talk about the impact of Easter on the April results, in other words the timing change relative to last year. Did it affect the growth rate at all this year that 3% number you talked about?

Peter Armbruster

Yes, absolutely, I didn’t bring that up, that’s a good point, it’s probably, Easter becomes – we counted as a – Good Friday we count as a full day, but it’s really about a 40% to 50% of a day. So that probably had an impact of probably 1% on tonnage growth. So that 3% could be 4%.

Bill Green – Morgan Stanley

Okay, fair enough.

Peter Armbruster

I mean, well, East have some years so I really don’t like that, drove that out there as a…

Bill Green – Morgan Stanley

No, no but just effecting on an year-over-year basis, how to think about what the underlying organic growth rate would be so to speak. I wanted to ask you Mark we see how well the model did in the recession and we haven’t really gotten to a world where demand is really driving tightness in the market to a large extent our experience in the first quarter was weather.

But when you look at kind of how the model responded to this tightness, do you look at any aspects of it and said well, it’s something we got to kind of pay attention to as demand gets a little bit tighter or do you feel like the model in the first quarter really kind of flexed in the way you expected it to?

Mark DiBlasi

Yes, absolutely and we have just some basic numbers. If you looked at the cost and just talk about LTL perspective, our cost of purchased transportation, our cost of – line haul cost per mile went up 1.2%. But our pricing went up in the 3% to 4%.

So, we are able to get a much better pricing from our shippers than because of our business model and we have such a large and diverse carrier base with our own ICs as well as our extremely large carrier base that we utilize for purchased transportation today, compared to what it was in the year’s passes.

That’s a one example and hard numbers where the business model works very, very effectively. We continue to have low turnover as compared to the industry average which continues to drive independent contractors to us.

Even though there is ELDs and EOBRS and all that talk that’s going on out there, we are currently about 34% of our fleet has that installed already and we will be in position when that day comes to have everyone in compliance with the federal regs.

But all that being said, we are very, very confident in our business model in terms of operating extremely well in a robust environment and we really haven’t experienced that at all since, we said six, seven years.

We’ve been in the industry, we’ve been at the mercy of shipper pricing not carrier pricing and now we have now transitioned to that and I believe that carrier pricing is going to be in place as this year continues we are going to see improvements there.

And over the course of next two to four years carriers are going to be in driver’s seat when it comes to parking just because capacity is going to dictate that and as I told, you guys in the past and I’ve told investors, we purposely added capacity to our fleet over the course of last four years in anticipation of improved demand and tightening capacity in a very positive pricing environment.

And I think we are on the verge of that really taking off going forward. But we are optimistic and looking forward to that robust opportunities and we think our business model – we think our business model is the best business model out there in transportation today and we think it’s going to show itself capacity tightens and as move forward in a better economy.

Bill Green – Morgan Stanley

Okay, one question, I mean, you mentioned the pricing but I think that was an LTL number that you were citing or was that a TL number that you said?

Mark DiBlasi

That was an LTL number that I gave you, but the TL pricing is also in the 3% to 4% range which is the best we’ve seen it in many quarters and we don’t participate to any great extent in the spot market.

Now we all know the spot market jumped through the roof in January and February because of the weather, but we don’t participate in that. So the pricing we are seeing in that 3% to 4% range which at the end of 2014 was in the 0% to 1% to 0% to 2% range. So that’s pretty encouraging as well.

Bill Green – Morgan Stanley

Yes, how far are you through bid season? So, in other words, what are the kind of contract increases you're getting when you renegotiate?

Mark DiBlasi

Well, overall, as I said, we are in the 3% to 4% closer to 4% than we are in a 3% but I can tell you that a lot of our operating segments for many years, for multiple years didn’t go after rate increases and I can tell you that we are currently seeing a much more receptive shipper out there to the rate increases we are asking for.

And some of those rate increases are much higher than 3%, 4%. We are talking 5%, 6%, 7%, because we haven’t asked for rate increases in three, four years. So that’s the anecdotal, that’s not overall. But overall, we are still seeing that nice trend up to the 3% to 4% range and can that go farther, it can go farther as capacity stays tight.

Bill Green – Morgan Stanley

Yes, what's your sense for the current truckload environment? Does it feel like the market, I mean, clearly it's normalized from the tightness we saw in January and February, but does it feel like it's sort of tighter year-over-year or is it kind of equalizing as the market adjusts?

Mark DiBlasi

I think it’s still tighter year-over-year. And obviously it has come down from where it was in January and February. But it’s tighter year-over-year and what I would tell you is that the attitude of the shipper has changed from what it has been in the years past. They are receptive to price increases they know that it’s coming.

They know the capacity is tight. It’s not going to get better because more regulations are going to drive more drivers out of the industry. So they know that the day has come in and the weather impacts in the first part of this year really force them to take a hard look at their all their modes of transportation and we’ve seen people shift from different modes because of that. But, as I said, much more receptive to improve pricing for the carriers than in the past several years.

Bill Green – Morgan Stanley

Yes. Okay. Just one last question is on the deals, on acquisitions. Does the environment you just described, does it make it harder to do deals? Do the companies who are open to selling. Do they want a much higher price now because of what we're seeing in the markets?

Mark DiBlasi

Well, I would point you to the deals that we do. We have always stayed very consistent in that 4 to 6 times multiple. We paid a little more than on that on accessions for certain types of businesses or certain types of business margins. But we have not seen an uptick at all in terms of that.

We, as I said earlier in the call, we are a preferred buyer. We have a reputation in the industry. We are the kind of company want to be acquired by and I would tell that in many situations that those 30 acquisitions that we did, I guarantee you we were not the highest bidder in every one of the situations.

Companies told to us because of the way in which we integrate, the way in which we allow them to continue to operate the fact that they are part of our team that they like compared to being the part of someone else’s team, but we get a better – we get a good price and fair price in terms of an acquisition, but the value that we bring to that company that we acquired is the ability for them to continue to grow and expand and really develop.

There has been several of the companies we’ve acquired, they are twice as big as they were when we acquired them. And that’s what companies like to see, they don’t like to be acquired by companies that are going to go in and just take their customer that’s the exact company. That’s not what we do and we have a reputation of doing exactly the opposite. We go in and acquire a company, integrate it within our operating segment and then help it grow extensively over the course of the next year or two years.

Bill Green – Morgan Stanley

Okay, so basically, it’s more that you bring more to the acquisition than just price. So price, from your perspective hasn’t really proved to be an impediment to getting more deals done?

Mark DiBlasi

No, and like I said, our pipeline isn’t as full today as it has ever been. To the point where we have offers that are knocking on our door then we will them, we would be interested or we are interested but we won't get to you for a few months.

Bill Green – Morgan Stanley

Got it.

Mark DiBlasi

And then more than moving away because of all those reasons I just gave you.

Bill Green – Morgan Stanley

Right, excellent. All right. Thank you for the time and insights. Appreciate it.

Operator

Your next question comes from the line of Mr. Rob Salmon of Deutsche Bank. Please proceed.

Rob Salmon - Deutsche Bank

Hey, good evening, guys.

Mark DiBlasi

Hey Rob.

Peter Armbruster

Hi, Rob.

Rob Salmon - Deutsche Bank

I guess getting back to the LTL segment, if I normalize for both the weather as well as the higher insurance and claims expense for the quarter, it still looks like kind of the EBIT was down on a year-over-year basis despite some of the benefits from the increased network density with the tonnage growth.

Could you give us a sense in terms of where you feel you are in terms of optimizing the network mix within LTLs? Should this take a few more quarters to kind of get the network to where it should be where we'll start seeing more of the tonnage and pricing drops to the bottom-line?

Mark DiBlasi

Yes, as I said earlier, we had lost the momentum in the latter half of 2013 and we are gaining that momentum back. So we would expect that to occur towards the – at some point in the second quarter but for sure in the third and fourth quarter of this year.

Rob Salmon - Deutsche Bank

And Mark, do you see growing more of the regional business over time or would you guys like to kind of continue to focus on the long haul side of the LTL side of the business?

Mark DiBlasi

We still focus on the long-haul. We are not and do not intend to expand into regional markets.

Rob Salmon - Deutsche Bank

All right, that's helpful. But shifting gears a little bit to the truckload and (inaudible) side of the business, any sort of impact that we should be thinking about for either the second or third quarter with regard to some of the perishables, you know, particularly coming out of California that we should be thinking about it as we're modeling the next couple of quarters given the drought?

Mark DiBlasi

Well, obviously that could have an impact. Dredge in particular it has to seems to have its share of issue, you got court strikes, you got work stoppages, you got drought impacts, you got the rail impact that had an impact on dredge significant impact on especially in the first quarter because of the weather.

And so that’s all been impactful. Going forward, we are very confident in our dredge operation a minimal operation. We continue to provide a premium service at a premium price compared to the regional mom and pop type dredge operations.

We will continue to do that, but we are at the mercy of – there was the work stoppages in Savannah and on the West Coast, yesterday and to some degree today. So that slows things down.

When a guy can turn maybe, three or four times to the port now he is turning one or two times, that really cuts into your productivity. So, we are dealing with that, but over time that will work out and the drought, obviously the drought will have – and it could have an impact on it, but we do haul a fair amount of perishables, especially on the West Coast in our dry operations.

Rob Salmon - Deutsche Bank

Great, that's helpful. I guess we'll have to kind of continue to watch that as that unfolds. With regard to the international side of the business, you guys are – after the couple of recent acquisitions, you're bigger in that side – are any of your customers saying they're pulling freight earlier into the U.S. just given the uncertainty around the dock workers?

Mark DiBlasi

To some degree that we have heard that anecdotal stories of that remains to play out as to whether or not that’s going to be any – of any significance but we have had some customers of ours that have indicated that.

We’ve been very pleased with the performance of the Marisol acquisition from last year and for Unitrans they had for three weeks in the first quarter and that adds to the whole month of April. Very pleased with what they bring to the table.

We cross-train and cross-educated all of the sales people within the international component as well as the domestic component. So we are seeing a lot of opportunities with cross-selling, significant amount of our domestic accounts have international needs. And again, that’s one of the reasons why we have seen a nice uptick in our utilization of multiple services within the company.

Rob Salmon - Deutsche Bank

Thanks. I appreciate the time.

Operator

Your next question comes from the line of Mr. Nate Brochmann of William Blair. Please proceed.

Nate Brochmann - William Blair

Good evening, gentlemen. I wanted to just actually follow-up on Rob's question a little bit. In terms of looking at your acquisition pipeline, where do you think the biggest opportunities are in terms of, whether new platforms as opposed to maybe just building out some of the current platforms, you guys have done a nice job of adding different pieces to the puzzle, and just wanted to see, you know, where else you think right now you could, you know, really utilize some different expertise to create the overall solution?

Mark DiBlasi

Well, some of the things we’ve done, if you look at the Rich Logistics acquisition that we just made, that’s a drive and truckload carrier, but they have extensive exposures to cross-border opportunities. But prior to Rich we didn’t have, now we have a significant presence in cross-border. That has tightened very nicely with the rest of our Truckload operations.

They also have a significant expertise in the automotive space, something we did not have prior to that acquisition. So, we acquired a company that’s prior – it really brought two new verticals to us it did that we didn’t have. So we like the way that complements us.

I can tell you that with regard to some of our current acquisition opportunities in our pipeline, there are more automotive, there are more cross-border opportunities that we are looking into that are on the table. But we will continue to build that out.

And as we continue to acquire, we will – most of the acquisitions are going to take place in the Truckload logistics segment as well as the TMS segment. And as I told you before, not many in LTL simply because there is very few LTL or few light asset and non-asset LTLs out there that we would be interested in. So, we look for organic growth on the LTL side, and organic additional growth on the Truckload and TMS side.

But we will continue to build out and add scale to our existing facilities and then when the opportunity presents itself, we will add new services that we can continue to cross-sell.

Nate Brochmann - William Blair

Okay and then also back to one of Rob’s questions about the margin expansion in the second half of the year, is that reliant upon just getting the density through some of the newer terminals? Is it just about building, more business overall or getting the pricing? What do you think are the key variables in terms of seeing that turnaround in terms of just the margin enhancement?

Mark DiBlasi

Well, it’s a combination of things. Some of it’s – a good portion of it is pricing, a good portion of it is lane density and lane-specific pricing. A good portion is, the quality of the account, as I mentioned earlier, that there are a few accounts that we are purposely not intending to handle any longer because they have such high claims.

And those are because of packaging and other issues within the account not because of our handling. So those are some things that will have an impact, definite impact on the overall performance.

In the quarter, adding density is king our business so if we can continue that density and build scale in the LTL we will see that dropping even quicker. But again lot of it will depend upon our performance and pricing and we are seeing a nice uptick in pricing from the first quarter to second quarter.

Nate Brochmann - William Blair

Okay and then just one last one to follow-up on Bill's question, but when you were talking earlier about the relative cost purchased transportation being up, give or take 1% to 2% in LTL, pricing being up 3% to 4%, you said TL was also up 3% to 4%. I would assume the way that you run your P.T. for outside power that give or take that was probably up 1% to 2% in the TL side as well in terms of the overall spreads?

Mark DiBlasi

You mean the purchased transportation?

Nate Brochmann - William Blair

Yes, correct, in terms of the outside.

Mark DiBlasi

Yes, we…

Nate Brochmann - William Blair

The third-party stuff.

Mark DiBlasi

The number I quoted is a blended number. It includes all of our inside or intra-company movements by our ICs as well as all purchased transportation, as well as anything we might put on the rail because we do take advantage of the rail where they can meet our service expectations.

So that’s – that $1.24 that’s been the last several quarters in the $1.26 in the first quarter that’s a blended number that we give./ We don’t break it down by – we do know what those numbers are by individual purchased transportation or IC transportation or rail transportation, but we don’t break it down and make it public.

Nate Brochmann - William Blair

Okay. Fair enough. Thanks guys.

Operator

We would now like to thank everyone for their participation in the Q&A session. I would now like to turn the conference over to Mr. Mark DiBlasi for closing remarks.

Mark DiBlasi

Okay. Thank you. Bottom-line is, first quarter was – overall as I said in the prepared remarks, we are pretty pleased with it, because of the impact the weather did had. We have built a significant amount of momentum coming out of that in all of our operating segments.

We expect to grow pretty significantly organically as well as through acquisitions going forward. So we are pretty positive about where we are going what we see for the company going forward and those are last of my comments. So, with that, we will close the call. I appreciate all of your time and all of you have a good evening. Thanks.

Operator

Thank you everyone for your participation. You may now disconnect and have a great day.

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