In an article published Wednesday morning, I looked at the positives and negatives from XPO Logistics' (XPO) most recent quarter. I noted that the company's CEO Bradley Jacobs and his team were making all the right moves for long-term growth, but may not be providing the immediate gratification that investors in a volatile market seek. Overall, I was encouraged by the company's strategy, for long-term growth, but felt as though the company must become more aggressive in acquisitions to maintain the confidence of investors.
Following the XPO article that was published post-earnings, I was fortunate enough to speak with Jacobs and Scott Malat, the senior VP of strategic planning. I was given this opportunity to clarify and address some of the operational issues from the company's most recent earnings report, from an investor's perspective. We discussed a wide range of topics, which include: guidance, acquisitions, and cold starts. Below is a summary of the conversation that took place.
XPO Logistics Q4 highlights:
- revenue up 6.4% year-over-year $44.1 million
- gross margin $7.2 million up 11.6% over 2010
- net loss $1.5 million compared to a gain of $820,000 in the year prior.
- EPS (0.27) compared to 0.10 year-over-year
The single largest issue for investors is not the company's revenue but rather the lack of acquisitions and the high costs associated with building this billion dollar company. I asked Jacobs about expectations and when investors can expect to achieve profitability. He responded by saying:
"We are only giving guidance on revenue. We are trying to see how the cold starts and acquisitions unfold. The acquisitions will result in sizable revenue but with cold starts it's a much slower process."
The first area of focus for XPO Logistics has been to find and hire an experienced executive team that could aid in long-term growth. But now that the executive team has been put into place, I asked Jacobs, what can investors expect next?
Jacobs responded by saying, "we have three next steps." He added,
"We want to keep rolling out cold starts because they are great investments off capital with long-term growth potential. Another area is to optimize the businesses we already own. And as acquisitions come along we must buy companies that are scalable and that have the potential to grow."
He went on to say, "the IT platform is critical and gives us the ability to supply and integrate companies as well."
The company's strategic plan revolves around growth through acquisitions and cold starts. So far, there has been one truck brokerage cold start in Phoenix, Ariz. and a second location scheduled to open in April. In addition, the company also added three freight forwarding locations in Newark, Charlotte, and Atlanta. The company operates in three segments and posted a year-over-year gain in all but one of its segments: the freight forwarding business. I asked Jacobs about the outlook for freight forwarding and why he is choosing to focus on freight forwarding when it's the company's only declining business.
Sometimes when you are in a battle it's best not to retreat. Our freight forwarding unit is a $70 million business in a $150 billion industry.
But we plan for the majority of our acquisitions to be in truck brokerage.
We could eventually become the second- or third-largest player with acquisitions and cold starts in truck brokerage. We are building the company for the long-term and believe this industry has the best potential.
After hearing his response I wanted him to elaborate on how the company plans to become so large. Therefore, I asked him about specific numbers, and how many truck brokerage cold starts the company plans for each given year. Jacobs responded by saying,
In absolutes we want 20 cold starts in truck brokerage over the next five years. Our goal is to have 5 new brokerage locations by the end of 2012 but the number depends on the number of quality people that we can find.
After discussing cold starts we turned our attention back to acquisitions, which is the primary area of interest for investors. In regards to the company's lack of acquisition activity, Jacobs said, "It's not a board game where you just move pieces and make it work. After you buy them you have to integrate and optimize them. We now have the accounting and finance team in place and present to move forward with this plan. But you must have the pieces in place for acquisitions to be successful"
The difference between cold starts and acquisitions is a discussion among investors. We want to know what level of revenue can be expected from the large number of cold starts that are expected. Therefore I asked him to take me inside the process of a cold start and its growth; more specifically to explain the level of growth that is expected from a particular location.
The success of a cold start depends on the location, some will do better than others. But on average we hope for $5 to $10 million in the first 12 months. But when you scale over a period of five years we expect $50 to $100 million. And to give you an idea of profits, on EBITDA, we want 5-7% over a five year period. Our Bounce brokerage was a cold start and went from $0 to $30 million in three-and-a-half years.
To conclude I wanted to talk about the much anticipated IT platform. The company has put a significant amount of emphasis on this platform and its importance for future growth. As a result, I wanted to know why it's so important and asked Jacobs if the IT platform will initiate aggressive growth and if it's needed to achieve this level of growth. He responded,
Not having this IT platform has held us back. We are going to customize the platform for expedite but in freight forwarding the system has been okay.
Jacobs then went on to talk about the Bounce system:
The Bounce people have not been using the right system. In Bounce, the new IT is an advantage because the current one is too slow, so the added speed will give significant improvements and allow for organization and the integration of new cold starts and acquisitions.
Jacobs finished by saying the company's five year goal of several billion dollars in revenue is realistic. He said that the company's ahead of schedule with IT, has built its executive team, and is improving the results of the operations. He made it very clear that the company has laid out investments to scale the business to a larger level and that the company is in active discussions with potential acquisitions.
As of now, investors can deal with quarters of loss, if it increases the possibility of the company reaching its billion dollar goal. The largest single interest for investors is acquisitions and cold starts; therefore investors should feel confident in Jacobs' final remark:
We have a prioritized list, and there are 50-60 companies that are potentially actionable with billions in revenue, we are focusing on the best of these.
As an investor this gives me reason to be optimistic.
This interview has been edited for length, grammar, clarity, readability and syntax.
Disclosure: I am long XPO.