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XPO Logistics, Inc. (NYSE:XPO)

Q1 2014 Earnings Conference Call

May 2, 2014 8:30 am ET

Executives

Brad Jacobs - Chairman & CEO

John Hardig - CFO

Scott Malat - CSO

Tavio Headley - Head, IR

Analysts

Rob Salmon - Deutsche Bank

Kevin Sterling - BB&T Capital Markets

Ryan Cieslak - KeyBanc Capital

Allison Landry - Credit Suisse

Scott Schneeberger - Oppenheimer

John Mims - FBR Capital Markets

Jack Atkins - Stephens Inc.

David Campbell - Thompson Davis & Co.

Barry Haimes - Sage Asset Management

Robert Hoffman - Princeton Opportunity Partners

Operator

Good morning and welcome to the XPO Logistics' First Quarter 2014 Conference Call and Webcast. My name is Brendan and I will be your operator for today's call. At this time all participants, are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). Please note that this conference is being recorded.

Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable 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 and the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, including its outlook, except to the extent required by law.

During this call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables.

You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section of the company's website at www.xpologistics.com.

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

Brad Jacobs

Thank you, Operator, and good morning everybody. Thanks for joining our first quarter conference call. With me today are John Hardig, our CFO; Scott Malat, our Chief Strategy Officer; and Tavio Headley, our Head of Investor Relations.

Last night we reported a strong first quarter performance with significant growth in every major metric. We increased our gross revenue by 148% and we grew net revenue by 259%. Our organic growth, which excludes acquisitions, was 51% companywide and in freight brokerage we generated organic growth of 75%. At the same time we continue to drive margin improvement. We increased net revenue margin companywide by 640 basis points compared to the prior year quarter, primarily due to the acquisitions of 3PD and NLM.

In freight brokerage, we increased margin 90 basis points from a year ago, excluding the benefit of the last-mile margin. And that's our fourth consecutive quarter of year-over-year improvement in our core business margin.

Excluding cost associated with the acquisition of Pacer, this was the second consecutive quarter of positive EBITDA, and we are solidly on track to reach an EBITDA run rate of $100 million by the end of the year.

The integration of Pacer is going extremely well, morale is very high, we now have one combined sales force under the strong leadership of our Chief Commercial Officer, Julie Luna, who was previously Head of Intermodal Sales for Pacer. We have a lot of confidence in Julie. She is a 25-year industry veteran with a great track record of dealing with some of the largest shippers in North America. At UP, she led Union Pacific's $1.2 million automotive transportation business.

We are getting a very positive response from our customers about our multi-model capabilities. A number of our brokerage customers are asking us to move long haul freight under rail. With about an hour of sending an email that we had bought Pacer, we received more than 300 responses from our customers, many of them request for Intermodal close.

In addition to revenue generation, we made great progress in taking out cost in Pacer acquisition. And our updated estimate of cost synergies is tripled from our initial expectations. We have now identified $15 million of synergies in technology, real estate, sales and administrative function, public company cost, and duplicative personnel. And we have already executed on many of them.

For example, we quickly implemented our plan to reverse the lawsuit at Pacer's logistics business. We closed the consolidated 16 offices and retained 10 profitable operations now part of our XPO Global Logistics freight forwarding group.

Dominic Muzi has done a superb job at ramping up our profitability in freight forwarding over the last three years, is now in-charge of growing this combined organization.

With brokerage, we put the form of Pacer brokerage business, under the leadership of Josh Allen, who fully integrated it with XPO. Josh is one of Regional VP's, he is growing our brokerage offices in Louisville and Cincinnati the fast clip, and we move the operations on to our proprietary Freight Optimizer technology, which has allowed the team to serve customers better and price loads more effectively. They can do their jobs faster on a more user-friendly system with access to the more than 26,000 carriers we now have in our network.

So in some we reported a very strong first quarter and delivered sizable internal growth. We completed a transformative acquisition that made us the third largest intermodal provider in North America and the largest cross-border Mexico intermodal player. We continue to achieve our milestone. We are on track to generate 2017 revenue of $7.5 billion and EBITDA of $425 million.

With that I hand it over to John. John?

John Hardig

Thanks, Brad. The completion of the Pacer acquisition had a meaningful one-time impact on our results for the quarter. So I will start by covering that and then I will turn to the very positive performance of our three business units.

Because we completed the Pacer acquisition on the last day of the quarter, Pacer's first quarter results of operations were not reflected in our P&L. However we did incur a $4.6 million of transaction expenses largely related to Pacer, and $6.4 million of one-time Pacer integration charges consisting of severance and lease impairment cost.

Our year-over-year top-line growth was very strong. We increased freight brokerage revenue by 196% and increased net revenue dollars by 340%. Within freight brokerage segment, we drove up revenue on our truckload, LTL, and intermodal operations by 85% year-over-year and achieved organic revenue growth of 75%.

This demonstrates our ability to leverage our carrier network and technology to scale up our brokerage operations especially in time to market volatility.

Net revenue margin for truckload LTL and intermodal increased by 90 basis points to 13.8%. Also within brokerage, our last-mile business grew its revenue by approximately 15% year-over-year. Net revenue margin for last-mile declined by 210 basis points sequentially from the fourth quarter primarily due to weather constraints. We're seeing a positive trend and demand for white good delivery services and we are continuing to capitalize on our position as a clear leader in this space.

Our expedited transportation business had a strong quarter. We increased revenue by merely 42% and increased operating income by 397% over last year. This reflects our acquisition of XPO NLM in December as well as a very strong expedited market during the first quarter.

Net revenue margin increased to 34% from 16% a year ago. Because XPO NLM recognizes revenue on a net basis virtually all of its gross revenue goes to margin. Volume through the portal increased by 47% year-over-year.

Our freight forwarding business achieved strong revenue and profit growth in the quarter. We increased revenue by 20% over last year and improved operating income by 48%. Excluding the one-time charge last year for rebranding it as XPO Global Logistics, this is the sixth consecutive quarter with year-over-year increases in revenue and operating income in freight forwarding.

We will be rebranding two more of our businesses in the second quarter. We are changing Express-1 to XPO Express and our 3PD business will become XPO last-mile. They will be joining the rest of our XPO brand family, which currently includes XPO Logistics, XPO NLM, XPO Global Logistics, and XPO Air Charter. This will further organize our businesses under a common XPO banner.

We except to incur approximately $4.6 million of one-time charges in the current quarter related to the Expedited and last-mile branding changes of which $3.3 million will be non-cash amortization of the old brands.

Corporate SG&A expense was $21.7 million for the quarter. This includes the $11 million of transaction and Pacer integration cost I mentioned earlier; $1.4 million of non-cash compensation expense; and $1.2 million of litigation cost.

Net interest expense was $10.1 million for the quarter consisting of $4.5 million for the Pacer debt commitment we received from Credit Suisse; $3.2 million of interest on our convertible notes; and $2.3 million related to early conversion of some convertible notes to common stock.

On April 1, we amended our ABL to upsize the facility to $415 million, with an additional $100 million accordian. The facility has an interest rate of LIBOR plus 175 to 225. It is currently undrawn and with our cash it gives us liquidity to do acquisitions.

Our effective tax rate for the quarter was 10.5%. Our tax rate was lower than expected due to the intangible asset valuation of the Pacer acquisition. This resulted in the valuation allowance against our deferred tax assets. It has no effect on our ability to use our tax benefits in the future and at the end of the quarter we had $155 million of federal tax NOL.

Capital expenditures for the quarter were $3.9 million consisting mainly of technology related spending. With Pacer added as of March 31, our plan full year CapEx is approximately $30 million.

Our liquidity position remains very strong. At the end of the quarter, immediately after completing the Pacer acquisition, we had $157 million of cash on our balance sheet, including $13 million of restricted cash. And apart from our convertible notes, which are trading well in the money, we have just $2 million of debt and capital lease.

So each of our business unit is performing very well, our balance sheet is strong and we have a lot of momentum going into the second quarter.

Now, I'm going to turn it over to Scott and then we will go to QA. Scott?

Scott Malat

All right, thanks John. The big part of our growth in the quarter was the fact that we were able to get our hands on capacity and move record amounts of freight during severe weather disruption. I'm proud to say that we honored all of our commitments. Our customers very much appreciated that and they rewarded us with a substantial amount of incremental spot business.

The weather service caused problems for the rails, which drove more freight over the road. That tightened up truck capacity which led to more expedite business. And then some of those expedite loads shipped into air charter. We were able to move freight through our brokerage network through the owner/operators at Express-1 through our auction platform at XPO NLM and through XPO Air Charter.

While the weather impact was temporary we gained new customers who had hit a wall with their usual capacity providers. We were also able to build stronger relationships with our existing customers. This helps us grow the business even if capacity loosened over the past few weeks.

We're finding that customers of all sizes are very receptive to giving XPO some first time freight. They're actively looking to partner with large multi-modal 3PLs that have deep capacity and are in this for the long run. They can see that we're investing in growth and capacity and infrastructure. This resonates particularly with larger accounts who want stable supply chain relationships.

Our strategic accounts team brought in business from 33 new customers in the first quarter. Now, when we meet with our customers the dialogue is not just about moving freight but also about analyzing their supply chain. We're looking at where they have issues and where XPO can add value. This is exactly why we bought Pacer, 3PD, Optima, and NLM. They all provide services that are rapidly growing in demand in the North American supply chain.

Of our 24 cold starts 11 are in freight brokerage including our newest location in Kansas City which we opened in March. Our brokerage cold starts already have an annual revenue run rate of over $190 million. A year ago the run rate was roughly $78 million. So we've increased our brokerage cold start revenue by 2.5 times in about 12 months, and will continue to grow them fast.

Looking ahead, we expect our profitability to ramp up through the second quarter and the rest of the year. Our last-mile business is starting to see a bump in the spring season in new housing, the positive impact of the Pacer acquisition will start to show up in our second quarter results, and will continue to drive organic growth, improved productivity and gain operating leverage over our fixed costs.

With the $400 million of revenue we expect to acquire between now and year-end, we're on track for a run rate of $2.75 billion by December 31.

We've delivered a strong start to the year and will continue to push pace on our many initiatives for growth.

Now we're going to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions).

And from Deutsche Bank we have Rob Salmon on line. Please go ahead.

Rob Salmon - Deutsche Bank

Brad or Scott, could you guys had highlighted kind of the stepped up to get your synergies. Could you give us a sense of how closer you expect to achieve those cost synergies? And how much of a benefit you guys are receiving from the adjustments you've made to Pacer Logistics second?

John Hardig

Hey Rob, it's John Hardig. Yes, the Pacer synergies when we stepped it up to about $15 that's made up of about a third of corporate overhead savings, about a third of public company and IT consolidation savings and about a third from improvements in the logistics business. We expect to achieve about -- roughly about $6 million of that by the end of this year and then the rest kind of going into 2015 and 2016. Some of the IT savings are going to take a little bit of time to achieve.

Rob Salmon - Deutsche Bank

Perfect, that's really helpful. And then when we are thinking about the Pacer or intermodal imbalance I know that that's been something which has been -- something that's constrained Pacer's profitability in recent quarters. Can you give us a sense how much you can able to leverage your expedite and some of the automotive tracks that you guys handle in terms of balancing out that two way flow?

John Hardig

Yes, Rob, you are exactly right. That's a big opportunity for us to drive incremental savings on top of that $15 million. No benefits in there included in those $15 million of cost savings.

Right now empty miles are roughly about 39%. If you look at peers it's more like the mid 20s percent. Every percentage point decline in those empty miles could drive about $1 million to the bottom line. So a lot of opportunity to drive additional savings. We're just getting going on those initiatives and stay tuned.

Operator

From BB&T Capital Markets we have Kevin Sterling on line. Please go ahead.

Kevin Sterling - BB&T Capital Markets

Brad, let's kind of start with Pacer, so the integration is going well. How many, and may be you can ballpark it for me, how many of Pacer's customers did not use truck brokerage, expedited or freight boarding or last-mile in your suite of services that you've already been able to may be cross-sell that to?

Brad Jacobs

Well most of Pacer's customers were using Pacer strictly for intermodal. Some of them but a very small percentage were also doing truck. Pacer didn't have last-mile. So there is no last-mile there. Pacer did have an expedite, they call it just in time but an expedite group and have little bit of expedite business and we've now merged that expedite business with ours. We've merged the truck brokerage business with ours and the intermodal just one solid organization integrated throughout United States now for us. And we merged the sales forces.

So we had a three day sales from it. And the first week, after we bought the company and we had their top sales to our top sales who have been now just XPO salespeople one organized group and we came up to go to now market strategy and we re-divided up the list of customers. And went two customers one-by-one and talk about what share of wallet we're getting in each of the different modes and how can we be more assistance to them and how can we offer them more services and what's the right way to go about them. We've had some wins even in the first few weeks, but still early stages for that.

Kevin Sterling - BB&T Capital Markets

And I think you mentioned kind of within announcing the Pacer acquisition, a lot of your customers reached out to you guys asking about intermodal. So may be how many of your customers in the past did not use intermodal and now looking to XPO for intermodal?

Brad Jacobs

So if you look our customers and if you look at their -- the moves that we're making for them, we're doing about 25,000 loads a day now. About -- take out the last mile and look at just the truckload customers, about a third of them are going over 600 miles and of that third of the volume over half of it is business ex -- could be and may be should be converted to intermodal, we got a big effort going on to do just that.

Some of those loads aren't close enough to refer, some of that traits is a little too time sensitive or delicacy going by rail but a whole bunch of it is right for conversion to intermodal and these are mostly small and midsize customers. The large shippers have discovered intermodal and they still were finding their networks and still -- still more penetration to go. But from our view, the big, big penetrations are those small customers; it's quite a large amount.

Kevin Sterling - BB&T Capital Markets

Okay. Thanks Brad. And then, I think in the press release you've mentioned your strategic accounts team had signed 33 new major accounts in the quarter, I think they're far and major accounts. And where do you want to grow that major account base, say a year from now?

Brad Jacobs

In our depth initiating strategic account is a company that has at least a $1 billion of revenue in their business. Ideally, like to categorize them by transportation stand but it's hard to get that accurate information on every small customers. So we just benchmark it by the size of their business.

So all those 33 companies that came on board is -- as new customers for us, they are a billion or multibillion dollar companies. Now, where we want to grow that, we want to grow that really big. Because there is a lot of business out there, lot of freight to move, and we've a very compelling value proposition on a multimodal capability to offer them. So that's something that should be billions of dollars overtime.

Kevin Sterling - BB&T Capital Markets

And one last question from me and I'll get back in queue. Scott, you talked about April some capacity loosening up kind of what and I think that's we've heard. Is there any other trends you could share with us that unfolded in April now winter has thawed?

Scott Malat

No, sequentially, look -- we're still tight. Overall the market is still. Truckload capacity is relatively tight. Sequentially it's loosing incrementally for the last five, six week. Producees then did off to a little later start than usual. You started to see produce only in last few weeks and it's only in the southern part of Florida and Sothern Arizona. It will make its way up and you will start to see some things coming out of South Carolina and Georgia and producees like I said, just getting going and starting to tighten up capacity in the Southeast certainly.

Operator

From KeyBanc Capital, we have Ryan Cieslak online. Please go ahead.

Ryan Cieslak - KeyBanc Capital

Predaceous just to ducktail off that last question, I just wanted to maybe get your perspective right now on the truck brokerage market following the first quarter has been you've some puts and takes of how much it was weather-related and how sustainable it is? Else, I wanted to get your view on how you're looking at the market or how you view the market going forward and if it's something that is sustainable in terms of an unbalanced or tighter market now going forward. How we should thinking about the earning leverage within your core brokerage business as you will finally be in an environment that is certainly more favorable and it has been in the last couple of years.

Brad Jacobs

Well from our perspective it was a real fun market to be in after two years of real boring market to be in. There was a lot of disruptions, there was a lot of chaos, there were lot of people who had real urgent problem to be solved that we could help them solve them and that's is just a really nice situation to be in.

So we've had lots of supply change disruptions and rail was most disrupted of all of them and then the freight from the rail, it was going to go rail and onto the highway, they already was a tight capacity situation that made it even worse, freights went up a lot, a lot of freight that was regular highways moved to expedite, some of the ground expedite even moved to air charter. So we were pushing all the different levers that we've got on the supply chain there and it works really well and the numbers show that.

Now, fortunately from an overall point of view we don't have all that bad weather forever that's an anomaly and things are starting to get back normal. Capacity is tighter than it was before that crazy weather. Not as tight as it was three or four weeks ago. We've seen a significant loosening in the market. It's not lose but it's not just crazy, crazy type market. We have to spend hours and hours to find a truck. The load truck ratios have gotten little more easily you could find a truck.

Southeast is a tight part of the country right now. Produce season kicked in, albeit late but it did kick in. And you will see some more produce season tightness coming in, in the south, in the -- in the Texas and other parts of the country as the normal seasonality of produce kicks in. But I don't think you're going to see this mega tightness come back unless there is some unforeseen disruptions. You will see a generally tighter market than it was last year. And I don't know how much to attribute that to tightening capacity due to hours of service, due to demographics, due to all that and how much to attribute that to economy, just little by little coming back. Does that more or less give you the color that you're looking for?

Ryan Cieslak - KeyBanc Capital

No, that is actually truly helpful. I appreciate that. I guess the next question I had is just on the gross margin improvement within the truck brokerage line and again a very nice quarter to be able to show that here on a year-over-year basis. I want to get a sense of how much of that improvement I think at this point is under your control I guess going forward. Meaning is there still a lot of opportunity to continue to see year-over-year improvement, aside from whatever the market gives you at this point? Are we sort of getting to a point now where maybe it's little bit more difficult?

Brad Jacobs

Well, we are getting better as we should as the tenure of our reps increases. And I would say where we're most getting better is on procurement, on procuring truck, procuring capacity because we have a bigger network, we've got 26,000 active bedded carriers that we're working with. And we got better technology, we got technology that's now processing all that information that we've got in our network around the country and quickly prompting our carrier reps of who the right carriers to call. So we've seen that the combination of those factors. There is some opportunity for more margin improvement apart from what the market does as a whole.

Ryan Cieslak - KeyBanc Capital

And then, on the acquisition market, may be just any update there what you have been seeing here year-to-date any relative to our expectations and sort of how the pipeline looks right now?

Brad Jacobs

There is lot of discussions going on, there is lot of talk, many of them serious and stay tuned, as nothing to announce today. But we definitely are in serious discussions with a number of very interesting attractive acquisitions.

Ryan Cieslak - KeyBanc Capital

Great. Good to hear. And then, just one last housekeeping question for John. The corporate expense line going forward, now that we will have Pacer fully backed in, how should we be thinking about that, may be for a run rate perspective?

John Hardig

Well, it's going to -- it's really not going to change a lot commodities now because we have -- we really have -- in terms of the corporate spend we kind of built the infrastructure that we need, the scale of a company according to our plan and we should be able to leverage that corporate expense quite a bit as we grow the top-line. So I would expect this quarter to be pretty representative, what we will see the rest of the year.

Operator

From Credit Suisse we have Allison Landry on line. Please go ahead.

Allison Landry - Credit Suisse

Scott, I think in your outlook comments you mentioned that you expect to generate operating leverage in the business. I just wanted to clarify, if you think you will be able to generate positive EBIT in each of the remaining quarters or was the comment more in reference to the full year?

Scott Malat

As we go to the year our EBITDA will scale up our EBIT, certainly, will scale up but with future acquisitions you never know how the amortization is going to turn out. So but our EBITDA will certainly be scaling up through the year.

Allison Landry - Credit Suisse

Okay. So operating leverage on an EBITDA basis, I guess is what you're telling?

Scott Malat

That's right, yes.

Allison Landry - Credit Suisse

And I guess thinking about the 33 strategic new accounts that were added? And I realize the Pacer didn't close until the end of the quarter. But do you think that any of those accounts were somehow related to Pacer for example, did it move certain discussion along further, push him over the hurdle rate, can you give any color on that?

Scott Malat

Yes, absolutely. Of those 33, 4 came from Pacer which we're really excited about it. Deal closed only four weeks ago. We've 1 business with about 12 companies due to cross-selling with Pacer just in the last four weeks. Four of those started shipping and are part of those strategic accounts. And we submitted another -- just now, we just submitted another eight joint customer bids, we are submitting some more now, so off to great start.

Brad Jacobs

Justin Garrabrant, one of our strategic account reps that we took from Pacer closed, what just last week was our largest, whatever $51 million award but it was with an existing customer, wasn't a new customer. So that's not part of the 33 new accounts.

Allison Landry - Credit Suisse

And then, in terms of the productivity metrics that you saw improvement, could you give us any detail behind those? And is there any way to sort of parse out what you're seeing in terms of these metrics for the more mature employees?

Brad Jacobs

What we've seen is steady improvement in almost every single one of our productivity metrics that we look at since the first quarter of 2013. So as we added people, the new employees up until that point had taken down the metrics in terms of gross revenue and net revenue per employee up until first quarter 2013 even though we kept adding employees, we started to see a sequential uptick and from there we had four consecutive quarter of improvement and now we're up year-over-year on our productivity metrics in terms of gross revenue per person in freight brokerage, in terms of net revenue per person, in terms of number of loads per day per sales rep, in terms of outbound calls per rep, if you look at all of our productive metrics they are all up on a year-over-year basis now.

Allison Landry - Credit Suisse

Okay. Do you think at some point in the future you will provide some of these -- I mean obviously I can figure out the employee ones, but loads per day, per rep, outbound calls, is that something you plan to share with us in the future?

Brad Jacobs

Sure we can break out things in different ways. We would love to break out some of those things.

Operator

From Oppenheimer, we have Scott Schneeberger online. Please go ahead.

Scott Schneeberger - Oppenheimer

Just following up on that last question, how are the attrition trends and how does that weigh into your productivity measures right now and what you expect over the balance of the year? Thanks.

Scott Malat

We had attrition in the low 30s in 2013. We like to get that down. Attrition for us is costly, it's expensive, we've a lot of initiatives in place to drive that down. One of which will get just by the tenure of the reps as you start to see the tenure increase in the reps and the ones that have been there the longest the attrition rates drop significantly. So a lot of that for the new hiring. In the low 30s is that good, we were providing new reps, its okay we like to be better.

Scott Schneeberger - Oppenheimer

Switching it up, we talked a little bit about the truck brokerage business and intermodal and weather impact in the first quarter and into April. Could you address last-mile, what you were seeing there and how that is transitioning from first to second quarter?

Scott Malat

Yes, last-mile is starting to see a spring bump and unusually going from first quarter to second quarter they improved productivity and improved profitability. Especially from the first quarter that had a lot of the weather impacts. So with the weather impacts you had retail stores closing in some cases you had more importantly for our business we backfilled capacity with trucks called rapid response teams. We brought in to make sure that we provide very high level to customer service even during tough times in the weather. We will pay up for that and we took it in margin that we saw 28% margin since then you've seen us move more towards our typical 30% margin in last-mile business.

Scott Schneeberger - Oppenheimer

And then, Brad, you had mentioned earlier a very active M&A pipeline. We can guess at the base of truck brokerage may be some tuck-in in intermodal, tuck-in in last-mile logistics. Is there anything outside of those categories that you're looking to build in the XPO portfolio going forward? Just any hints that things that you would expand outside of that realm. Thanks.

Brad Jacobs

We are looking at some contract logistic companies they are little different from each other we're still getting to learn it more, we like the fact that they had large sticky blue-chip customers and they have high margin and strong free cash flows and high return on capital and more importantly from a strategic point of view it could be some cross-selling opportunities with some synergies with rest of our businesses, some of them are leveraged to eCommerce which is something that we believe in, we haven't decided to pull the trigger on any of them. Other than that almost all of the rest acquisitions are in our standard old verticals intermodal, truck brokerage, last-mile, expedite.

Scott Schneeberger - Oppenheimer

Great, appreciate that. And then one more housekeeping. John, the restricted cash, could you just elaborate how restricted that is, what that is, how restricted? Thanks.

John Hardig

Right. So when we close Pacer, we had to terminate their credit facility and they had about $11 million of letters of credit issued by that -- under that credit facility mainly to support their insurance programs, their commercial insurance for their trucking operations. And so once that facility was terminated we were really forced to cash collateralize those LCs right at the closing. We haven't had an opportunity, yet to get through all the paperwork to issue new LCs under our credit facility. Once we do that $11 million of that cash will be released and freely usable by us.

And then about the other $2 million is related to a captive insurance program the 3PD have and so we really don't have access to the cash until the end of the policy year and then we see what kind of leftover there and sometimes we take distributions but typically that $2 million would be considered locked up. And in terms of the LCs on Pacer we should have that cash freed up the $11 million within the next couple of weeks.

Operator

From FBR Capital Markets, we have John Mims online. Please go ahead.

John Mims - FBR Capital Markets

So, let me ask on Pacer and just kind of a general broad industry question. Capacity additions this year, are you all buying boxes? And what do you think -- to what expense you can forecast peak season now, how do you think your capacity and industry capacity lines up with expected demands?

Brad Jacobs

I'll take the last part and let Scott take the first part. In terms of capacity and price you got to remember in our intermodal business our capacity is lined up on long-term contracts and the vast majority of our customers are on long-term contracts. So we have a kind of built-in spread there and if the market is going up and going down it's not really a big factor in what we're doing on that. There is some part of the business that's part of transactional that's off the -- out of the confines of the logic contract and there we try to play a role to help our customers and to get more demands for real partners. I'll let Scott or John talk about the CapEx.

John Hardig

In terms of the boxes which we do lease it don't show up in CapEx. We are looking at increased returns. We are looking at increase the productivity of our boxes. The empty miles which we talked about before being in high 30s every percentage point that we decline. We will drive about $1 million to the bottom line so that's a big focus this year. We've been adding boxes, increasing the productivity of the ones that we have available to us today.

John Mims - FBR Capital Markets

Okay. That's fair enough. Are you going to keep the Pacer brand or are you going to roll it into XPO and Intermodal?

Brad Jacobs

We are definitely going to keep the Pacer brand in Mexico because everyone in transportation in Mexico knows Pacer. Because Pacer has been there for something like 26 years is the largest cross-border intermodal player, just got a great, great reputation there. And so we switch the brand from Pacer to XPO in Mexico, even the letter "X" is -- you don't know say XPO in Spanish it wouldn't work.

The rest of business we will be switching to XPO Logistics in the fullness of time. We interestingly, we have the Town Hall Meeting in Dublin right after we closed the transaction. We had already printed a logo that has XPO Intermodal and I thought it looked pretty good actually, they didn't want to be XPO Intermodal they want to be part of XPO Logistics, part of the family, part of the organization and completely integrated and that's great, and we will do that with a few exceptions with some specific contracts and customers. In general we are moving towards XPO Logistics.

Operator

From Stephens, we have Jack Atkins online. Please go ahead.

Jack Atkins - Stephens Inc.

So I guess just first going back to brokerage, there was some nice year-over-year margin expansion there which you guys pointed out. But we did see some sequential compression in net revenue margins on the truckload side of the brokerage business. And I think most of your peers have been seeing some modest expansion. Could you may be comment on what drove that? Was there something specific either in the market this quarter for you guys or may be in the 4Q that you were comping against that sort of made that trend a little bit different?

Scott Malat

Yes, Jack, it's Scott. Well year-over-year this is the fourth consecutive quarter we've expanded at. When you look it at versus last quarter on a sequential basis capacity was tighter, revenue per load increased so you see net revenue margin per load increased sequentially. But at the same time we had a lot higher revenue per load. We had a lot higher cost per load. And on a percentage basis that comes down.

But as we look out these are good levels of margin. We had a good margin this quarter and fourth quarter as well. We've been doing well on margins. We're looking to stay in this type of range, although we do have many initiatives to get improvement, through pricing and procuring capacity as we have add data to our database, we should be able to drive improvement beyond the market. But these are good ranges.

Jack Atkins - Stephens Inc.

Okay, great. Thank you, Scott, for that. And then just kind of continuing on the Brokerage side, I think we have seen a large merger in the space fairly recently between two of your bigger competitors over the last couple of months. Do you guys think that that will change the competitive landscape at all, in terms of going after some of the larger customer accounts?

Brad Jacobs

I don't. I think you can expect M&A to continue in the truck brokerage sector because there is advantage to size. We can serve customers better with size, you can access capacity better when you have a bigger network and you can afford better technology. So I think there will be a trend of more M&A in truck brokerage.

Jack Atkins - Stephens Inc.

Okay. Okay, thanks, Brad. Then last question, John, just kind of a housekeeping item. You mentioned the tax rate in the quarter being lower because of a valuation allowance. But should we expect a little bit lower tax rate for the next couple of quarters or I know in the past you guys have been kind of been guiding us to a 30% tax rate. Just how should we be thinking about that from a modeling perspective?

John Hardig

Right. Jack, so we -- part of why the tax rate end up being lower is that our intangibles that we booked for Pacer ended up being less than we initially estimated, and so that's -- we got less -- a smaller DTL came onto the balance sheet with that acquisition. So that tax rate was lower than we initially anticipated with the Pacer deal.

The tax rate should be between 10% to 15% for the rest of the year. So it's going to run about the same level.

Brad Jacobs

Thanks, Jack. Jack we were thinking about you watching the news last few days. We are happy to hear that in Arkansas the weather didn't hurt you. Glad to see you're doing great.

Jack Atkins - Stephens Inc.

Thanks, Brad, I appreciate it. Came through okay.

Brad Jacobs

Good.

Operator

From Thompson, Davis & Co. we have David Campbell online. Please go ahead.

David Campbell - Thompson Davis & Co.

Thank you very much for all of your comments. I am absolutely amazed at the NLM revenues. I mean, Landstar never came close to getting that kind of growth, and you did it in the first month of acquiring it. So it does lead me to say, was it a competitive factor that drove? Because I know that in the expedited space, there has been some tough times and some people have gone out of business, have cut back. Was that a factor or was it just your sales? I know, of course, how much of it was the market, the market and the whole disruptions with supply chains?

Brad Jacobs

Well, first of all, I'm glad you pointed out that. Because of all the different things that happened in the first quarter, I agree that what happened in XPO NLM and in Expedite was just amazing. And it was really the most interesting thing. Here we bought a company that was managing about 500 and some odd million dollars of gross transportation spend and we managed more than half of that in the first quarter. So if you annualize the first quarter, we've done $1 billion run rate for managed transportation spend there.

But having said that, I don't think we can pat ourselves on the back and say we're better operators than Landstar because, truth to be know, we had two real favorable factors going first in the first quarter. Number one, the auto customers are very prolific right now and big users of expedite and it is very active, extremely, extremely active, it productions up and we're benefiting from that. And second, because Expedite is at the bottom or top of the food chain, depending how you're looking at the end of the food chain with all the weather disruptions, a whole bunch of freight turned into Expedite.

David Campbell - Thompson Davis & Co.

All right. So you don't think it was from competitive reasons?

Brad Jacobs

I wish I could say we were just great and we were fantastic and we were very good. And people worked long hours. I mean, I was out in South Field and other places in our Expedite Group in the first quarter and they were tired. They're working long, long, long hours servicing customers, huge, huge amount of volume coming in there.

But I think the main reason why we did so great there was, we were just in the right place at the right time, good time to be an expert. It's not always the case in the first quarter, it certainly was.

David Campbell - Thompson Davis & Co.

So, well that leads me to suggest it may not be sustainable.

Brad Jacobs

Expedited is lumpy and funky. And it's -- sometime its great and sometime it's not great. I think expedited as a whole; we are going to do very well in because we've got the leading position in that sector where we manage more Expedite than anybody now. And we've got a nice integration between the Expedite we've gotten Gainesville; the Expedite has gotten Buchanan and Metro Detroit in the Southfield and other places. And working together in a very coherent organized way, but the external factors do affect that.

David Campbell - Thompson Davis & Co.

Just -- it just looked without NLM, there wasn't a lot of sequential growth?

Brad Jacobs

We had growth; we had really good growth in Gainesville Expedite. I don't have a number off the top my head, but I know it was really, really substantial. And we also had growth in Buchanan as well. But NLM is really where it stores XPO NLM.

Operator

From Sage Asset Management, we have Barry Haimes online. Please go ahead.

Barry Haimes - Sage Asset Management

Great quarter. I had a couple of questions. One is congrats on the better margins in brokerage and, as you point out, some of that is self-help and volume leverage. But I wonder if you could just characterize how pricing has been as you have moved through the year so far. And then separately but related, your ability to reprice, how much volume do you have under long-term contract? I'm under the impression it is not that much. But what we sure ability to, in a rapidly changing market, reprice in a way that you were still making money? And I had one more after that. Thanks.

Brad Jacobs

Okay. Good morning, Barry. Thank you for question. On the pricing rates are up roughly 20% year-over-year they are up a little more than that a few weeks ago but that will be a little bit down to up about 20%. In terms of how much business we have under contract we have fixed prices and truck brokerage it's roughly about a quarter and it terms of repricing that we don't reprice it while we're still under contract. While it's under contract that's the deal and we perform without any deviation from that, sometimes that works in our favor sometimes that works against us so be it contract is a contract. We normally have somewhere between 4% and 8% of money losing load in the first quarter we had about 12% money losing load and substantially more.

Having said that we had got a whole bunch of extra freight that wouldn't have gotten otherwise, we can have that contract business so it deepened our relationship with those customers where they saw us performing.

Barry Haimes - Sage Asset Management

Great. And then one other question, the Burlington Northern has had some pretty well-publicized issues with the weather in Chicago and so on. In terms of Pacer's ability to maybe get new business, sell new customers; has that been an opportunity for you guys? Thanks.

Brad Jacobs

It's hard to say where business is coming from because the question you don't know this is indelicate question sometimes to ask customers particularly when you're in a pinch. But I think in general terms it's just mathematical if a certain vendor goes down then that business goes somewhere else.

Operator

From Princeton Opportunity Partners we have Robert Hoffman online. Please go ahead.

Robert Hoffman - Princeton Opportunity Partners

I just wanted -- one of the challenges of cross-selling in any organization is getting the incentives right because obviously different people's commissions might be different if they sell directly versus they pass the baton. Can you just talk a little bit about how you think about that and obviously it seems to be working in the first quarter because that's where a lot of your growth came from, the ability to pass from brokerage to Expedite? Can you just flesh that out a little bit for us?

Brad Jacobs

Yes. Good morning, Robert. So we have a real simple philosophy about that, we paid full commission to both sides. We don't deduct them, we pay the full commission and why do we do that because we will take the minor hit on the SG&A and we want to promote cross-selling, don't want people following their customers. We don't want people holding their opportunities. We want to be going to the market as one coherent organized company that sells a multimodal solution of truck, intermodal, last-mile, Expedite, Freight Forwarding, LTL, managed trans and for each customers we want to be offering everything that we've got.

So sales people will sell for what's in their pocket as the commercial fit and what's an incentive is we don’t want to disincentivize people to, we want them to share their customers.

Robert Hoffman - Princeton Opportunity Partners

That is interesting. Is that sustainable? I mean, do you think you can keep that going? I mean -- it just seems like if there is a customer that normally uses both, how do you deal with that?

Brad Jacobs

We have our single point of contact for every customer, we're up to about 14000 customers now and a rep in XPO is literally assigned to that and that he or she has a prime relationship manager for that account. But sometimes you bring in subject matter experts; you bring in other vertical experts other people with more expertise to help fulfill the customers' requirements.

Everybody is on saleforce.com and every customer is in there and it's a big thing to step on someone else customer.

Operator

From Thompson, Davis & Co. we have David Campbell online. Please go ahead.

David Campbell - Thompson, Davis & Co.

One thing I forgot to ask -- John Hardig, you went over it kind of fast, I couldn't get it. You said there was a $4.5 million, is that a $4.5 million fee? And I assume -- and I don't know where that fee is.

John Hardig

It's actually -- that was the fee we paid to our bankers for the bridge commitment to close the Pacer deal and that actually hit the P&L on the interest line.

David Campbell - Thompson, Davis & Co.

So it's not going to happen again in the second quarter?

John Hardig

Yes.

Brad Jacobs

Unless we do another deal we have no commitment letter involved.

John Hardig

Asking another deal, no.

Operator

Thank you. We will now turn it back to Brad Jacobs for closing remarks.

Brad Jacobs

Thank you, Operator. Thank you everyone for participating in the call. We look forward to speaking to you at the next opportunity. Have a great day. Bye.

Operator

And this concludes today's conference. Thank you for joining. You may now disconnect.

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