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XPO Logistics, Inc (NYSE:XPO)

JPMorgan Aviation, Transportation and Defense Conference

March 05, 2013 3:40 pm ET


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

Scott B. Malat - Chief Strategy Officer


Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

All right, so we're -- okay. I guess we are ready to go with the next presentation, we're running a few minutes behind. But it's a real pleasure to have another rapidly growing company and focused on brokerage and a variety of other [indiscernible] and transportation [indiscernible] and pre-acquisition focused. So we have Brad Jacobs, it's a pleasure to welcome him. And Scott Malat is also up here. And so Brad, you can take it away. Thank you for joining us, and we'll have plenty of time for Q&A after his presentation. Thank you.

Bradley S. Jacobs

Thank you, Tom, and thank you all for coming to our presentation at the end of the day, near the end of the day. XPO Logistics is a company that we took control of in September 2011. It was doing about $177 million in revenue. Today, we're on a $500 million revenue run rate, nearly tripled it, and our goal is to be at a $1 billion revenue run rate by the end of this year. We want to be a 3PL that's providing world-class service to our customers here in North America and be at a revenue of about $4 billion to $6 million by 2016.

There's 3 prongs to our strategy of how we intend to achieve this: acquisitions, cold-starts and scaling up, and I'm happy to report that we're on track or ahead of every goal that we have achieve -- we set out.

In the last 4 months, we've been very busy. We've built our brokerage division to the 17th largest in the United States. Our expedite group is the fifth-largest expediter in the United States. We've opened 17 cold-starts in the last for 14 months, 8 in truck brokerage. We've expanded our branch network to 60 offices, including 3 in Canada. We've completed 6 acquisitions in the last 9 months, including 2 in the last 2 weeks. We have grown our headcount from 200 to over 900. We opened a national operations center in Charlotte, which didn't exist in March and now has about 200 people there, including about 125 doing carrier procurement. We've rolled out advanced training and mentoring programs, which is critical to our growth strategy. We've initiated a big investment in IT, including 2 major upgrades. We established a national accounts team to market to large tier 1 accounts. We raised $289 million in a common equity and a convertible bond offering last year. And most importantly, we've established a culture that's very performance-driven, very accountable, high-octane and providing the foundation to build the much larger company that we intend to build.

So let's go through the 3 prongs of the strategy, starting with acquisitions. Acquisitions is something I'm familiar with. In my last 2 companies, we completed nearly 500 acquisitions. The lay of the land in this business is we see it being a very large fragmented growing industry. On the one hand, we've got 250,000 vendors, carriers, very fragmented, most of them small. Other hand, we have millions of customers, shippers of all kinds of stripes. In the middle, we have 10,000 licensed truck brokers. But interestingly, that's so fragmented and so much in early-stage consolidation, there's only a couple dozen that have more than $200 million of revenue. So 99% of the 10,000 truck brokers out there have very small amounts of revenue and profit. There's a big market share shift, and I think this is critical to understand the lay of the land, going from the small brokers to the large brokers.

We've approached about a -- over 1,000 of those 10,000 brokers for acquisition, and we've whittled down the list over the last 1.5 years to about 100 that we are serious about and if we could agree on valuation and terms and so forth, we'd probably make a good fit. We won't have time or the resources to buy all of them, but that's the list that we're very concentrated on, on talking to and think 1 plus 1 could equal more than 2.

With each acquisition, we're not just looking at it from a financial perspective. We obviously do look at it from a financial perspective, but much more than that, we look at what's special about this company. What does it bring to the table to us? What are the synergies? What's the culture like? What's the people? What's the customer? How can we scale it up? What will it look like once we put them on our technology and share our 22,000 carriers with them?

Last week, we announced the acquisition of a $27 million broker in Chicago called Covered Logistics. It focuses on manufacturing, consumer, postal and oil and gas, diversified customer base, deep talent bench, highly scalable. I spoke to Tuck Jasper a couple of days ago, who was one of the 3 owners of it, and he's all fired up about, with our resources behind him, building that up to a $100 million business over the next several years.

The week before last, we acquired a company called East Coast Air Charter. East Coast is a non-asset air charter broker for expedited. Expedited is something we have a specialization in. We are one of the biggest expediters in the country. We love it because customers need it, they value that service. These are customers that have urgent freight that needs to be moved right away, and they're willing to pay for that service. So typically on expedite, you get a few hundred basis points higher margin.

The growth in expedite comes from the cross-border business in Mexico, the cyclical growth in auto, life sciences, government, oil and gas. We have a non-asset model for truck brokerage. We have an asset-light model for expedite. We have exclusive relationships with over 400 trucks. We don't own the trucks; they're independent operators, but they get all their miles from us. So we own that capacity.

East Coast Air Charter is a specialization of expedite, which is when a customer has a really urgent need, there's something to be delivered. And, let's say, going only from Detroit to Mexico and it can't go on a truck because it has to be there this afternoon, then it goes by air charter. And that costs more money and the margin's usually better.

East Coast Air Charter came to us actually not through our M&A team but through our operating guys who have been doing business with East Coast for the majority of the 16 years it's been in business. It's a business we know very well. We've done a lot of business together solving customers' problems. They have an innovative technology that's a reverse auction process that customers like. It's transparent to the customers, and it gets done very quickly right in front of their eyes.

The growth plan for East Coast Air Charter is to cross-sell that through all 60 of our locations now. So any employee throughout the whole company, all 900, can sell air charter. That's a business we intend to take from $43 million of revenue last year to triple digit millions of revenue over the next few years.

In October of last year, we acquired Turbo Logistics. Turbo Logistics was doing about $124 million when we bought it. It's now grown organically through some customer wins. It's about $10 million or $15 million more than that. It's been in business for 28 years, so it's extremely talented, deep bench of management, very experienced, long, long relationships with its customers. I recently went on 22 customer visits with the Turbo team. Very great loyalty from those customers to Turbo after doing business with them for so long. With our resources, with our larger carrier base, with our technology, we expect to go deeper into those relationships and get greater share of wallet from those customers.

Turbo had 4 locations: Chicago and Dallas, which we immediately integrated into our Chicago and Dallas office, pumped up both of those offices with lots more energy and experience; had another office in Reno, Nevada near the University of Nevada, we've already moved that office in Reno to a larger office and we've begun to hire people to expand it; and it had a headquarters in Gainesville, Georgia, which I'll come to in a minute. Their focus is on servicing large Fortune 500 customers, which is a big growth plan for us.

In August of last year, we purchased a leading Canadian company called Kelron Logistics. It had been doing about $100 million in revenue, had been in business for over 2 decades. With Kelron, we gathered -- we gained over 1,000 new customers, mostly tier 1 customers that now we can get greater share of wallet with. And we gained a network effect like we do with all our acquisitions where we just don't get that business, we get the synergy. We get all the data, all the information about their carriers and all the pricing and lane history, import that into our IT system and all 60 offices share that information, which is very, very helpful. We got similar synergy with the Continental acquisition, with the BirdDog acquisition and that's something that's very important to us as we build out the company.

So that's acquisitions, prong 1. Prong 2 is cold-starts. Cold-starts, I also have a lot of experience with at United Rentals. We did 250 cold-starts over -- just over 3 years. And after a certain point, we got it down to a science, very methodical. The key to cold-starts in my experience is the people, starting with who the branch president is, who the leader is. We've opened 17 cold-starts in the last 14 months. 8 in truck brokerage, 3 more than we planned, 8 in freight forwarding, 1 in expedite. We give the cold-starts access to our technology, our carrier capacity in our Charlotte office, access to our recruiting programs, access to our training programs, and they grow pretty quickly. This year, we're targeting 3 new cold-starts, and we're looking around about a dozen cities that we've studied the demographics and they're favorable for both industry people, which we like to recruit about 1/3 of the organization from, and another 2/3 for people first or second job out of college that we put through our training program. Cold-starts have a much higher return on capital than acquisitions because the investment capital is much less, less than $1 million. Takes longer, but the return is better.

Part 3 of our strategy is to scale up and optimize the operations, both the cold-starts and the acquisitions. I want to give you 3 examples that are quite promising in our network. In Charlotte, in addition to our carrier capacity, we've got a guy called Drew Wilkerson who came out of C.H. Robinson, and his task is to build up the sales organization in Charlotte to several hundred people, perhaps more than 500 people over time. And he's already built it up in just a few short months to several dozen people.

In Chicago, we hired a guy called Uptim Hoomiti [ph], who is a senior salesperson at Echo. Chicago is a demographic that has been very favorable to the truck brokerage business. There's many industry stalwarts there, including several of the ones you saw on the panel just before us. Our goal is to build up our Chicago office alone to the same size as some of those companies in Chicago.

I mentioned Gainesville, the former headquarters of Turbo, a few minutes ago. David Coker is our branch President there. He's been in the business for over 2 decades. He's in a building that holds 400 people, it only has 150 people there now. Our plan is -- his mission is to grow that another 250 people over the next few years. So there's lots of growth embedded in the 60 locations that we have right now even before the acquisitions and the cold-starts that we tend to do.

Let me switch gears for a second and look at the overall market and how we look at it. So there's about $350 billion of for-hire, over-the-road trucking. About $50 billion of that is presently going through brokers. At a $500 million revenue run rate, which I'm very happy we've achieved in a short period of time, we're still only a small part of the market. We're 1/100, we're 1% of the brokerage market. Our goal is to get about 10% of the market, our fair share. Our way to do that is to go after 2 types of customers: small and medium-size enterprise businesses and large tier 1 customers. We weren't really marketing actively to the large tier 1 customers until the last few months till we got to a certain critical mass. Now that we've got to that size, we're very actively going after those customers. We've put all of our salespeople on We assigned each customer one point of contact, each carrier one point of contact. We try to differentiate ourselves with giving them world-class customer service and a commitment to doing world-class customer service.

One of the ways we give them world-class customer service is the benefit of the advanced technology that we've invested in and we've developed. We have 2 people at the head of our IT group that are phenomenal. Mario Harik is our CIO. He has done similar projects of sophisticated IT rollouts for distributed networks in his previous 3PL company, Oakleaf, and in other companies he worked before that. Under him, we have Dave Rowe, who's our CTO, he was CTO of Echo Global Logistics, a company that's very -- whose IT is very well regarded. And our -- we have over 100 IT projects at any one time going on. I want to highlight one project that's our crown jewel of our technology, and that's our XPO freight optimizer. The freight optimizer accomplishes the 2 most important things, in our opinion, that technology needs to do for a broker. It helps with price discovery, it helps with truck finding. So on price discovery, most of the industry, the smaller brokers, stick to the lanes that they've been doing and they don't venture into new lanes because they don't know how to price them. They price them to high; they don't get the business. They price them too low; they lose money. So they don't really grow into new areas.

In our price -- in our freight optimizer, we take -- we conglomerate lots of external databases and, more importantly, internal data of what's going on in realtime and in the last 48 hours in pricing in specific lanes and aid the salesperson to know what to price each load for. This is of huge, huge advantage in giving that person confidence to price accurately.

On the truck finding tool, we have over 22,000 carriers in our network. But every time we get a load and we make a contract, we agree to take the freight before we've got the carrier lined up, we don't go through all 22,000 carriers obviously. The computer looks through the system and through an algorithm, picks out the top 10 carriers that are likely to want that load and maybe take it at a price that's favorable and do a win-win transaction.

So I've spoken about our strategy and our business plan, which I think is well thought out and is a very good one and supports a lot of value creation. It comes down to management, though. It comes down to operational excellence. It comes down to execution. And for that, that comes down to who the people are. So I'd like to talk a little bit about myself for a minute, and then I'd like to turn it over to Scott Malat to talk about some of the other people in our management team whose skill set matches this business plan, that's how they were selected.

I'm a career CEO. I've started 4 companies prior to XPO. Each one of those companies ended up becoming a billion- or multibillion-dollar enterprise. The last 2 were publicly traded. Two ago, my company was called United Waste Systems. Many of you may have invested in it. We built it up to the fifth largest solid waste management in the country. We sold it to Waste Management in 1997 for $2.5 billion. From when we took it public in 1992 to -- until 1997, our stock created a lot of value for our shareholders. We outperformed S&P by 5.6x. I'm very proud of that. At United Rentals, another company I started, we became the industry leader within 13 months. Today, it still is the world's largest equipment rental company, and I'm very proud that it's a Fortune 500 company and will do over $2 billion of EBITDA this year. In the 10 years that I ran United Rentals, we outperformed the S&P by 2.2x. Both United Rentals and United Waste, the whole premise there was how can we position ourselves with the customer so that we're endeared to them, that they appreciate the service and they want to come back for more with us as opposed to going to competitor. That same customer-centric focus, where the whole organization is supporting the customer-facing salespeople, is the same premise as what we're doing here at XPO.

So now I'd like to pass the presentation over to my close business partner, Scott Malat, who's involved in every aspect of the business. And he's going to talk about management and also the financials.

Scott B. Malat

All right. Thanks, Brad. So we put a team together, a management team whose skill set matches the rapid growth strategy we've put into place at XPO. I'm not going to go through all the names on the list, but I'll point out a few of them. John Hardig, our CFO, knows the transportation space inside and out. He was a banker in the transportation world over the last 15 years at Stifel, Nicolaus and before that at Alex. Brown. He helped to lead manage some of the largest transportation IPOs over the last few decades, including C.H. Robinson and Hub Group and Roadrunner, among others.

Lou Amo is our VP of Carrier Procurement. He sold -- he's held senior roles at both the carrier and the shipper, so it gives him a unique perspective into the space. On the shipper side, he worked for Electrolux. On the carrier side, he work for Union Pacific. He's in charge of our capacity of over 20,000 carriers that are in our system. We tend to specialize in carriers and fleets that have less than 100 trucks. Lou's team is great at building relationships, so we treat our carriers respectfully, professionally. We give them miles at fair rates, and that's a large part of what's driving our success.

John Tuomala is our VP of Talent Management. He's tasked with building a talented workforce of several thousand over the last several years. It's something he did on a larger scale, very successfully at a company called Compass Group North America. He's put together an innovative program where we utilize online interviewing, we have psychometric testing, and we have large recruiting events where candidates are able to meet a large number of XPO employees.

And Marie Fields is our Director of Training. She's got 15 years of industry experience, the last 12 of which were at C.H. Robinson. Before that, she worked at a company called American Backhaulers in some operational roles. She's worked in managing the training of new hires, of the onboarding process, of systems training, of sales development across the spectrum. She's built for us a leading-edge training platform that goes over several months and has several different areas of classroom-based and it's got structured simulation-based on-the-job training, continuing education, mentorship programs and, possibly most important, direct coaching from experienced branch presidents that we have in each office.

Let's go through some of the -- a couple of the key financial statistics. We did $177 million in revenue in 2011. We did $279 million in 2012, and now we've surpassed the $500 million revenue run rate. In the fourth quarter, our revenue was up 146%. Freight brokerage was a big leader of that, up 760%. And we had growth in our other segments as well. Our liquidity position is very strong. We have $250 million in cash. The way that we think about that, we'll set aside $20 million for the cold-starts, for technology, for cushion and the rest will be earmarked towards acquisitions.

Looking out into 2013, we expect to continue to scale up the business. We plan to double the revenue run rate to at least $1 billion. We're going to acquire at least $300 million of historical revenue run rate. We're targeting positive EBITDA by the fourth quarter. And in freight brokerage, we're going to open at least 3 more cold-starts.

It's important to point out that management owns over half of the shares of XPO. So our interests are entirely aligned with the shareholders to create substantial long-term value.

I'll just sum it up. We're on track or ahead of our plan to build a multibillion-dollar company at XPO. We're in an industry that's large, it's growing and it's fragmented and it's in only the very early stages of consolidation. We have a robust pipeline of acquisitions, we have significant potential from our startups, and we have a well-defined process for integrating and scaling up our operations. We're building a passionate, world-class culture of customer service. We have a highly experienced management team that's intently focused on our goals. Employee morale is high due in large part to the -- to a number of growth initiatives we have in place at the company, so our runway to grow the business significantly through market penetration lays in front of us.

We'll turn it over to questions.

Question-and-Answer Session

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Great. Thanks, Brad, and thanks, Scott. I have maybe 2 to kick it off, and then we have plenty of time for other questions from the audience. Brad, I think you mentioned that you were initially focused on small and midsize customers. And then more recently the last couple of months, you've really evolved that to add a focus on getting in with large customers as well. What is the value proposition you bring? Is the competition to get in as a broker whether it's getting in the route guide or just getting some regular spot business with those customers? Maybe just characterize your strategy and how difficult it is to make inroads with the large customers.

Bradley S. Jacobs

We inherited most of these relationships with the large customers, primarily through the Kelron acquisition and the Turbo acquisition because they had been doing business with these large tier 1 customers already prior to us buying them. And our strategy here is now just go deeper with them, just ask for more, bid more aggressively, get more lanes, get more business. Now we've got more capacity. That's one thing that we find with the acquisitions, even a small one that we did, Continental Freight in Columbia, South Carolina. Once they have access to our capacity, we have 125 people and growing in Charlotte, just dialing for diesel all day long. It's a very high energy, dynamic organization that's just got a lot of relationship with trucks. That in Columbia, they were able to bid more aggressively, get more business with their existing customers because they have the capacity. So that's the strategy we -- not as much going after new customers, although we will, but just go deeper with the existing ones. Now you asked about what's our value proposition. Our value proposition is service, service, service. So all customers want few service failures. All customers want on-time pickup, on-time delivery. All customers want effective track and trace and transparency to that. But the large tier 1 customers especially want that. They want almost 0 performance failures, service disruptions. So if we can guarantee them that, if we really can give them excellent customer service and listen to what their needs are, which are fairly simple, the ones I just mentioned, and perform on that and execute on that, I think we can get more and more business. And in the panel that was on before us, one of the speakers was saying just that, that over time you can go deeper into an account -- with those large accounts and a small portion of that account can turn into a very big customer over a period of few years.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay, great. And how do you view the competitive dynamic? I think we see a number of players that are very focused on growth, the panel prior to your presentation. Obviously, you're very focused on growth and the tremendous ramp-up in -- through acquisition and organic. Do you think there is -- do you bump into the other players a lot, is that an issue? Or given your approach with either existing large customers or small customers, do you feel like you really don't bump into a lot of large broker competitors?

Bradley S. Jacobs

This is a highly competitive business, and so is rental, and so is waste management and so is oil. Any business is a good business, but if we enterprise, it attracts competition. That's what keeps everyone on their toes and keeps everybody honest. But the people who are good at it take market share from the people who are mediocre. The people who are continually innovating, people who are investing in technology, people who are investing in training, people who are recruiting the right people to begin with who have the skill sets and the personality to get this job done, people who are passionate about customer service, and as Scott was mentioning, treating the carriers with the respect that they want and deserve, they'll take market share in my opinion. It's not just about price, there is a component of price involved, but it's much more about service. In the 22 customer visits that I've done in the last few weeks, without any doubt -- well, almost all, not all, almost all of them emphasized service over price. There's a few that emphasized price more than service, but the vast majority of them emphasized service and lack of service failures as the #1 thing. When we ask them, so what do you want, what do you have to do to get your business get more of your business, it's lack of service failures.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

So do you feel like you bump into the other players who run the panel previously or C.H. Robinson, do you have visibility to that or, as you'd say, it's not something you necessarily experience bumping into other big brokers a lot?

Bradley S. Jacobs

Robinson's in pretty much all of the main accounts. They've been around for a long time and they're there. Coyote, we've run into on -- particularly on food and beverage customers and that very large marquee accounts. Echo and Freight Quote are much bigger than we are in LTL, and they have a much stronger presence than we do at present in LTL. And when we do LTL, they're almost always there.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay, great. So do we have any questions at this point from the audience? It looks like we have one towards the back. Can we get a mic over there?

Unknown Analyst

You've expressed many times that it's your technology that allows you to scale and offer the level of service that your customers want. Could you -- do you have a sense for how your technology compares to the other players in the marketplace, like CHR and the LTL guys, et cetera? And then sort of when you talk about investing in technology and algorithms and optimizers and whatever else it is that sort of allows your employees to do a better job, what is the rate of change that is sort of necessitated that allows you to keep your edge by continuous investment? Or is it a step function kind of development where once you have a good mousetrap, it will last you for 10 years before someone else comes up with something that displaces that?

Bradley S. Jacobs

So there's truckload and there's LTL. Those are -- they overlap a little bit, they're just kind of separate worlds. On LTL for technology, we're behind the curve. Companies like Echo, like Freight Quote have far better technology than we do on LTL. It's -- they've had many years to develop it and it's finely tuned to customer needs. We're working on LTL, but we're behind the curve on that. We'll get up there eventually. On truckload, the lay of the land is as follows. There's 10,000 truck brokers. There's about a dozen, 15 or so that have pretty good technology. And all the rest, in my opinion, I think it's objective, really don't have great technology. They doesn't have price -- they don't have pricing tools. I mean they price off the public load boards, like with -- there's the DAC and the Internet Truckstop, some of the load boards that are like the Craigslist of freight. And it's really not accurate information, it's kind of just out there. And on the truck finding capability, it's also a tale of two cities with the largest ones know how to do it. And the 99% of the smaller ones, they have a few core carriers, maybe they have a few hundred of them or a few dozen of them and they keep using the same ones. And that works many times, but a lot of times they miss a lot of opportunities because they don't have the market intelligence of what truck to go ask. They don't have that network effect, they don't have a big enough carrier base, they don't have the technology to organize it and get to the right guys right away. So in terms of the last part of your question, in terms of the -- is it a step function or is it a gradual thing, I don't know the answer to that. I do know that continual investment technology is absolutely important. And what's leading-edge, cutting-edge technology here now in 2013 will be archaic 5 years from now. There's all kinds of developments going on in technology apart from what's going on in our industry in terms of Google Glasses and voice to text and lots of things that are not yet applied in the business marketplace but will be in. We're going to have to keep up with that.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Do we have any other questions from the audience? Let's see, we have a little bit more time here. I have a couple more, but if you do come up with questions, let us know. Brad, you mentioned the importance of service. How do you handle that? You don't have your own trucks. You probably have a large group of carriers that you work with. So what specifically do you do to drive a better service experience versus what a shipper may achieve with another broker?

Bradley S. Jacobs

I think there's 3 areas that are of core strategic importance that drives our service levels. It's recruiting, it's training and it's IT. From a recruiting standpoint, we have some pretty innovative programs to make sure we get the right people in the door, people with a high need to win that are going to compete and do a good job and want to work with the customer. Once we get them in the door, we need to empower them through training. And our training lasts over several months in all different areas and aspects of the business, both from a classroom-based training, and like what we had said, and -- but also structured simulation and then on-the-job training and mentorship programs. And then our technology is what needs to empower these people as we ramp them up to do a great job for our customer in terms of track and trace, in terms of carrier procurement in those areas, as Brad said, as long as we price effectively and then we find the right truck for that load. And what is the right truck for that load? We have all kinds of algorithms that spend time on that. Is it the lowest cost truck? In some cases it is, but it's also about reliability. We rate our carriers internally about the reliability that they've shown to our organization, and we use our algorithms to figure out which ones we'd like to use. It's on-time performance, it's safety records, it is who has a truck there at that specific time. It's also about relationship building, there's certain carriers that we'd like to work with and continually make sure that we give freight to and create stronger relationships. So there's a lot of pieces of that technology that creates strong bonds between us and the shipper and between us and the carrier.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay, great. One more look here for the audience who have questions. What -- I think when you look at the regulations, so we had a couple of the asset-based carriers. We had Werner and [indiscernible] this morning that presented. And each of them talked about the regulatory challenges that would really -- they thought would be very challenging for the small guy, right? And so EOBR, CSA, hours of service. And so how would you view that in terms of impact on your carrier base? And specifically in terms of CSA, do you filter your carriers based on CSA so they have to meet a certain criteria, you won't use them if their CSA scores are, I guess, lower or as better as, say, beyond a certain threshold?

Bradley S. Jacobs

Well, here's how we look at it. Most of things are going to hit at the end of the year or middle of the year. They haven't hit yet. There's a lot of anticipation that is going to hurt capacity, and that's the general -- overwhelming consensus. But to be fair, in the couple of years I've been in the industry, people keep talking about shortages. And every once in a while, it's capacity squeeze due to some weather situation or some disruption. And then capacity comes out of the woodwork and then suddenly, no trouble finding trucks. So there's 2 different ways of looking at this. Mathematically and just gut feel of what's going on in the market, it feels like there's capacity out there. That being said, you can't argue with the demographics, with the regulation, what's going on to the lack of financing to the small truckers. And ultimately capacity is likely to come out of the market in a serious way over a number of years. That's going to be an interesting time. It very well could coincide with when the economy finally comes back rip roaring. So you're going to have a lot more freight and you're going to have fewer carriers, so there's going to be a big imbalance. It's going to be a pretty good time to be a broker.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

And what about managing your carrier base with respect to regulations and in particular...

Bradley S. Jacobs

I deliberately didn't answer that, because our General Counsel doesn't like us talking about that because there's a certain level of liability you get when you discuss that publicly in terms of CSA scores and whether you rely on that or not.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay, fair enough. That -- no problem. Let's see. The -- I've got one or I guess one more question here. I guess I don't see any from the audience. Please raise your hand if you do. What about intermodal? In the scenario that you laid out hopefully sooner than later, but eventually economy comes back, more freight, old fleet, lack of drivers, and so forth, intermodal would seem to participate even more, right, as a solution in long-haul. I think there are brokerage type of approaches to intermodal, but the owning capacity seems to be the bigger -- the containers, Hub, J.B. Hunt and so forth seems to be the better way to participate. So how do you think about XPO can be involved in intermodal? Do you want to be involved in intermodal over time?

Bradley S. Jacobs

Sure, yes, intermodal is a growing space and it's got a lot of attractive qualities to it. We're doing it today at XPO. We are working with the railroads, and we brought some business over. When Kelron came over, they did some intermodal. Turbo did some intermodal. So we are in that business. In terms of going into in a bigger way, we haven't done that yet. We haven't gone very aggressively at that space. We are trying to make sure we're very careful about how we allocate our capital. And in terms of intermodal, whether or not you own that asset or don't own that asset, actually gives you an advantage or a disadvantage. We have to play that the exact right way, and it's not -- we're not in the business of owning assets. We've stayed away from making that -- those asset investments to keep our returns higher and to keep the capital investment lower. So it's an area we're getting into. It's certainly a capability that our customers want, and we're able to provide to them, getting into a bigger way, we're going to make sure we can get that right advantage.

Scott B. Malat

In our discussions and meetings with the rails and we ask them how can we do business together, how can we grow our business, what would work for both, what would be a win-win, their suggestion to us is conversion. There's no reason to go head-to-head with customers that are already doing business with J.B. Hunt and Schneider and Hub and Pacer. How can we convert new customers who are doing long haul, who really aren't thinking about particularly small and medium-sized shippers, who really aren't thinking about mode. They're just thinking about getting their freight from point A to point B. So that's something that's probably a big part of our efforts going forward.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

But the way you think about the business, it's unlikely you would embrace a more asset-based, owning containers type of solution.

Bradley S. Jacobs

Well, we don't rule out having some boxes because there's some business, you can't get it unless you have some boxes. But to date, we haven't done that.

Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division

Okay. With that, we're just about out of time, so Scott Malat and Brad Jacobs, thank you very much for joining us.

Bradley S. Jacobs

Thanks, Tom.

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