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XPO Logistics, Inc (XPO)

March 12, 2013 6:30 pm ET

Executives

Scott B. Malat - Chief Strategy Officer

Unknown Analyst

Will be held in the Pine room, following the presentation. With that, I'll turn it over to Scott.

Scott B. Malat

All right. Thanks very much. XPO Logistics is a growth company. In September of 2011, our CEO, Brad Jacobs, agreed to invest up to $150 million of his own money and took control of XPO Logistics and put in place a business plan to create a world-class third-party logistics company in North America. So in 2011, we took over the business. The company did $177 million in gross revenues.

Very -- thanks very much. Well, so as I was saying, in 2011, XPO Logistics had $177 million in gross revenue. We've grown that to an over $500 million annual revenue run rate, and we plan to double that to $1 billion, at least $1 billion, by the end of this year, and to several billion dollars over the next few years. We're doing that through 3 prongs: First, selective acquisitions; second, cold starts or greenfield locations; and third, scaling up those acquisitions and greenfield up or -- and cold starts, by investing in salespeople, by investing our training and our technology. I'm happy to say that we are on track or ahead of plan on each part of our strategy.

So we've had a busy 14 months. We've grown to the 17th largest truck broker in the United States, as measured by Transport Topics, and we continue to move up the ranks. We've completed 17 cold starts, 8 of them in truck brokerage, completed 6 acquisitions in the last 9 months and 2 in the last month alone. We're now up to 60 offices, and we've taken headcount to over 900 people from 208 at the beginning of 2012. We opened up a national operations center in Charlotte last March, and as of now, we're over 200 people in Charlotte, and there's about 125 in carrier procurement.

We've created a leading edge training program. We rolled out a scalable IT platform and 2 major upgrades. We've put in place a national accounts program to market to large Fortune 1000 customers, and we've raised $289 million in funding in order to fund our future growth, in both the common stock offering and convertible debt offering. But most importantly, we've created a performance-driven culture, it's high octane growth and we've really created the basis for a much larger company.

So let's go into the first part of the strategy. I'm going to give you the lay of the land in the truck brokerage industry. It's large, industry's growing and it's fragmented. With respect to fragmentation, on one side, there's 250,000 truckload carrier companies. And on the other hand, there are countless numbers of shippers across the United States. And in the middle, there's 10,000 licensed truck brokers, and only 25 of those 10,000 licensed truck brokers have over $200 million in gross revenues. So literally, 9,975 truck brokers in the United States have less than $200 million in gross revenues, basically less than $10 million in EBITDA. Many of them have less than $10 million in revenues. So we went through those 10,000 truck brokers. We met with over 1,000 of them, using our full-time acquisitions team, and we've whittled them down to a short list of 100 companies. These are the most scalable. These are the companies with the people and the culture that we can grow significantly. And it's not about what the company's doing today. What we look very closely at, what can we make this company into, what can this company do 3 years from now and 5 years from now. Let me give you some examples.

Most recently, we bought a company called Covered Logistics, just 2 weeks ago. It has $27 million in gross revenues, based outside of Chicago. Their business was in manufacturing and consumer and postal and oil and gas. We were attracted to the deep talent of the company, and the deep talent in the area outside of Chicago where there's very strong transportation talent. Tuck Jasper is an experienced leader. He's staying on to grow the business. We gave him access to our shared carrier pools, they have access to trucks, to our capacity. We moved them on to our IT platform, and then we have specific plans in place to grow that company to over $100 million in gross revenues over the next several years.

Also in February, we acquired East Coast Air Charter, ECAC, the non-asset air charter broker for expedited. We already have a very strong presence in expedite. We're a top 5 player in the space. This is an offshoot of truck brokerage. Again, we don't own the trucks. But it's for freight that needs to be picked up very quickly and moved in an expedited way, so think about high-value manufacturing and just-in-time auto parts suppliers. Sometimes, a truck just won't do the job and you need to procure the capacity through airfreight. ECAC actually came to us from our operations people, they had been working with ECAC for the last 16 years in our Expedite division, so we knew the company very well, and we love expedite. Customers need it. They're willing to pay for excellent service. It's got some growth areas in terms of cross-border Mexico, in Life Sciences and government, got a strong -- we have a strong franchise in auto in that business as well, and it's asset light. Again, we don't own the truck, but we have exclusive arrangements with over 400 trucks to move our freight. ECAC has some innovative technology to reverse auction that they use to procure capacity that shippers love. And what's exciting to us is that we can now sell airfreight across all of our 60 offices.

Turbo Logistics, we acquired in October. It was doing $124 million at the time, and now we've grown it to close to $140 million and we're scaling up from there. It's been in business for 28 years, due to an exceptionally strong management team. So there were 4 offices. The first 2 in Chicago and Dallas, we combined into our Chicago and Dallas offices. We got a lot of synergies, and we create a lot of energy in those offices and we grew them quickly. The Reno office was right next to the University of Nevada, which is a great place for us to recruit new salespeople. We already moved them into a larger facility and we're already hiring. Their headquarters in Gainesville was their largest office. There's significant growth opportunities that I'll talk about in a few minutes. Their customers were mostly large, Fortune 500 customers, and we have a real opportunity to grow share of wallet. We give them access to our capacity and our trucks and our IT, and we give them access to our financial capacity, and we can grow the wallet with those customers.

Another attractive acquisition we acquired in August, Kelron Logistics, it's $100 million in truck brokerage revenue. They've been in business for over 20 years. They have over 1,000 customers, mostly large shippers. Not only do you get the relationships with the shippers, but you actually get a network effect. You get the carriers and the lien history. So by getting the relationships of carriers and the lien history from what you pay -- what they paid for those liens, we can purchase transportation more efficiently across all of XPO, and we've had similar synergies with our other acquisitions, including Continental and BirdDog before that.

In addition to the acquisitions, our second strategy is to grow through cold starts. These are new greenfield locations. We've opened up 17 over the last 14 months, 8 of them have been in Truck Brokerage, that's 3 more than planned. Eight of them were in Freight Forwarding and 1 in Expedite. What we're looking for in these new offices are great branch presidents. We're looking for ambitious people that know the business, they're charismatic, they're a leader, and they can grow the business fast. Give them access to our capacity, which is over 22,000 carriers. It's our recruiting programs, our training, our technology, it's especially attractive if the office is located in an area with access to talent, so -- a specific talent. So we're targeting about a dozen or so locations across the United States that have very good industry talent in transportation, and then also talent outside of transportation, people coming from their first or second job that would fit the profile for what we're looking for in our salespeople. We plan to open at least 3 new offices this year. Cold starts have incredibly high returns on capital, and that's because invested capital is so little. We -- our invested capital is less than $1 million. And when these work out, they can grow to tens or even hundreds of millions of dollars in an office.

The third part of our strategy is scaling up and optimizing our -- both our cold starts and our acquisition. I want to give you 3 examples of some operations that are very scalable. In Charlotte, we hired a guy named Drew Wilkerson. He came out of C.H. Robinson, a large player in the space. He's ambitious, he's young, he's got great sales experience, and we plan to hire over 500 salespeople there that are sitting right alongside our carrier procurement national operations center we have in Charlotte.

We're already up to a few dozen, just over the last couple of months, and our goal is to hire 1/3 from the industry, and 2/3 that are in their first or second job out of college, and we're off to a good start. In Chicago, that's led by Abtin Hamidi, who came out of Echo Global Logistics. That's a big industry town. There's a number of players in Chicago that have offices with over 750 salespeople, and we're going to try to grow to -- around, to a similar size.

And then from our Turbo acquisition, we acquired a Gainesville location, Gainesville, Atlanta. It's run by David Coker, who has 2 decades of experience in the industry, and he's building it in the location that right now houses 115, has room to grow to about 400 salespeople. It's about an hour outside of Atlanta, and has excellent access to talent. So my point here is, we have lots of growth embedded in our network, that we already have, so that's even before acquisitions and new cold starts.

Customers are going to drive the growth. The way that we look at the market is that truck brokerage is a $50 billion industry. We're now up to a $500 million run rate, so we have about 1% share, so we're still extremely small. We have a lot of runway to grow. We want to get to about 10% market share, or $5 billion by 2016.

There's countless small and medium-size businesses. There's 1,000 larger-sized shippers. We put all of our salespeople on salesforce.com for a single point of contact with all of these accounts, and we're going to differentiate with passionate commitment to world-class service.

So one part of the way we've been providing world-class customer service is through IT. We're empowering our salespeople with cutting-edge IT. We have over 100 IT projects right now in the pipeline, but our top focus is on the XPO freight optimizer. This has 2 things: It has pricing tools, and it has truck finding capabilities. From a pricing perspective, in this industry, pricing has done relatively inefficiently. People get in the lane, they get in a load and they price it based on what their knowledge is of the market and they just come off the couple -- it's not done efficiently. Our system brings together internal and external data, brings together algorithms with all kinds of things from business conditions to the truck capacity that's available out there, to help our salespeople price effectively in the right way on a load. On the other side, we work with over 22,000 carriers, so which is the right carrier to call? Our team has spent a lot of time figuring what is the right carrier, is it the lowest-priced? Is it the carrier that we want to create the best relationship with? Have they been very reliable for us in the past? And all those algorithms come out with the top 10 carriers out of our 22,000 carriers that we should call first to move that load.

So that's our strategy. Now it's about execution, it's about operational excellence and it's about management. Our CEO, Brad Jacobs, has started 4 companies from scratch, each one of them have turned into $1 billion or multibillion dollar companies, and he's created substantial value for shareholders. The last 2 were public. Many of you, here and on the webcast, might have benefited from investing in United Waste and United Rentals. He grew United Waste into the fifth-largest solid waste company, before he sold it to Waste Management for $2.5 billion. He started and ran the company from 1992 to 1997, and over that time, it outperformed the market by 5.6x.

Immediately followed United Waste with United Rentals that he started, and in 13 months, he grew it to the world's largest equipment rental company. Over the 10 years that Brad ran it, from 1997 to 2007, United Rentals outperformed the market by 2.2x. If you ask Brad about his success, what was -- what drove that? It's a passionate commitment to listening to what the customer wants. It's a passionate commitment to world-class customer service, and that's what's driving our success at XPO Logistics today.

Now we put together a management team with skill sets specifically matches our strategy for rapid growth. I'm not going to go through every name on the list, but I'll point out a few of them and our key focus areas of recruiting, training and IT. In IT, which is critical to our success, we've hired 2 great people. Mario Harik, is our CIO. He's a brilliant guy, very well known in the technology world. He built a platform just like ours for a company called Oakleaf Waste Management. He's also led similar projects for Fortune 500 companies. He hired an extremely strong group of technology people in Cambridge, right outside of MIT, with mostly MIT people, that's where Mario had come out of. He also brought on board Dave Rowe, our CTO who reports in to Mario, great addition to the team. He developed and led the implementation of a well-regarded IT system for one of our competitors, Echo Global Logistics.

Lou Amo is our VP of Carrier Procurement. He's held senior roles both on the carrier and the shipper side, so he really brings a unique perspective to the business. On the shipper side, he worked at Electrolux; on the carrier side, Union Pacific. He's in charge of our capacity, so of those over 22,000 in our system, he works with our carriers and we tend to specialize with carriers that have less than 100 trucks. Lou's team is great at building relationships. And we treat carriers respectfully, we treat them professionally. We give them miles at fair rates, and that's driving a large part of our success.

John Toumala is our VP of Talent Management. He's tasked with building a talented workforce of several thousand over next several years. It's something he did successfully on a larger scale at Compass Group North America. He's put together some innovative programs, with online interviewing and psychometric testing, and large recruiting events where candidates are able to meet a good number of XPO employees.

Then last, I'll bring up Marie Fields, our Director of Training. She's got 15 years of industry experience, the last 12 of which were at C.H. Robinson, where she managed the training process and onboarding of new hires and systems training in sales development. Prior to that, she worked at a company called American Backhaulers in operational roles, both as a dispatcher and carrier salesperson. She put together a leading-edge training platform. Our sales recruits come -- go through months-long training, classroom-based, structured simulation, on the job training, continuing education, mentorship programs and then they have, most importantly, direct coaching from experienced branch presidents at each of their offices.

Go over some key financial statistics. The company did $177 million in revenue in 2011. We then grew that to $279 million in revenue in 2012. We've now surpassed the $500 million annualized revenue run rate. In the fourth quarter, our revenue was up 146%. That was driven largely by freight brokerage, which was up 760%. We had growth in our other segments as well. Our liquidity is strong. As of February 1, we had $250 million in cash. The way that we think about that is, we'll set aside $20 million for cold starts, for technology and for cushion, and the rest will go towards acquisitions.

Now looking out into 2013, we expect to continue to scale up the business. We plan to double the revenue run rate to over $1 billion by the end of the year. We're going to acquire at least $300 million in historical annual 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. Important to point out that management owns over 1/2 of the shares of XPO. So our interests are entirely aligned with shareholders to create substantial long-term value.

So just to sum it up, we are on track or ahead of our plan to build the company into a multibillion dollar third party logistics company. We're in an industry that's large, growing and fragmented, and it's only in the early stages of consolidation. We have a robust pipeline of acquisition targets. We have significant potential from our cold starts. We have well-defined process for integrating and scaling up our operations. We're building a passionate, world-class culture of customer service that's led by a highly experienced management team that's intently focused on our goals. Employee morale is high due in large part to the good number of growth initiatives we have in place at the company. We have runway to grow the business through market penetration significantly.

I'll turn it over if anyone has any questions.

Question-and-Answer Session

Scott B. Malat

All right. Well, we're going to have a breakout session, and be happy to take any more questions there. Thanks.

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Source: XPO Logistics' Management Presents at Credit Suisse 15th Annual Global Services Conference (Transcript)
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