XPO Logistics, Inc. (NYSE:XPO)
Deutsche Bank 2012 Aviation and Transportation Conference
September 6, 2012 3:20 PM EST
Bradley Jacobs – Chairman and CEO
Scott Malat – Chief Strategy Officer
Hey everybody, we’re going to delve back into the transport world before we have two more shipping panels. But hopefully you can hang with us as we’re getting deeper into the program here. But XPO Logistics, one of the more exciting small cap news that we cover and here to present we’ve got Chairman and President and CEO, Bradley Jacobs and Chief Strategy Officer Scott Malat. So without further ado I will turn it over to Brad.
Thank you, Justin. And thank you very much for attending this presentation and thanks to you on the webcast for tuning is as well. XPO is an exciting story as Justin said. We’re a relatively small company, $175 million in 2011 revenue. On track to do about $500 million revenue run rate by the end of this year and have a plan to create a top line of $4 billion to $6 billion over the next several years. And our strategy to do that is three pronged. Selective acquisitions in a methodical way, cold starts of Greenfield locations of primarily truck brokerage operations and to aggressively grow those acquired and homegrown operations organically, mainly by hiring sales people and giving them support from a centralized operation center that we’ve established in Charlotte, North Carolina.
In the last nine months we’ve completed 12 cold starts, including seven truck brokerage cold starts and two acquisitions. The management team that we’ve put together has a skill set that matches this very ambitious business plan and I have a slide in a few minutes that will go over some of the names. By way of background of myself, I’ve been a career CEO. I’ve been Chairman and CEO of four companies that I started from scratch and each one of those companies we built up to billion or multibillion dollar enterprises. The two most recent ones were United Waste Systems which some of you may know, you may have owned it. We took it public in 1992 and by 1997 we had built it up and we sold it to Waste Management for $2.5 billion creating substantial shareholder value.
Their earnings compounded at about 55% CAGR during that period while we were public and we outperformed – our stock price outperformed S&P by 5.6x. I started United Rentals in 1997 and ran it for 10 years and became the largest rental company in the world and we outperformed the S&P by 2.2x during the time that I ran it.
The reason that I’ve picked transportation logistics and specifically this truck brokerage model to be my next venture is it’s large, it’s growing and it’s fragmented. So if we’re going to create a $5 billion company we have to find an industry that is 10 times the size of that or more. Transportation logistics is clearly that. Logistics worldwide is about $3 trillion. US logistics is about $1 trillion. US trucking is about $350 billion and only about $50 billion of that or about 15% currently goes through brokers. The other $350 billion goes direct between a shipper and a carrier. So we’re positioning the company not just to compete for the $50 billion that’s going to brokers right now, but for the $300 billion that’s not yet going through brokers, but we think will.
We have reason to support our belief that that 15% brokerage penetration is going to increase. If you look at the trucking business which goes up and down straight with GDP, you compare that to truck brokerage which has been growing at two to three times GDP over the last decade. So that tells us that there’s an outsourcing trend already happening that’s just going to continue and that makes sense because from an economic point of view it is profitable for a shipper and it is profitable for a carrier to use a broker rather than go to direct many times. If you’re a shipper, instead of making two or three calls to some trucking companies thinking you’ve checked out the market, you’re better off calling a C.H Robinson and Echo and hopefully an XPO and indirectly through the brokerage market, check out tens of thousands of carriers availability. You’re more likely to get a better deal by going through a broker.
Similarly, if you’re one of the 96% of the 250,000 trucking companies in the United States who have less than 20 trucks, you are better off using a broker rather than just going through the roller decks. You can’t afford to have a roomful of sales people checking out the market, knowing the prices, knowing the availability of freight. You can make a call to XPO and we will find you freight for your truck. So I think over time that 50% penetration is going to up a lot. This is a very similar bet as I made at United Rentals in 1997 where I thought a similar percentage of penetration, mid teen percent was too low and equipment needed to be rented more to make economic sense too and lo and behold today over half of construction equipment in America is rented.
In addition to being a large market, a growing market, truck brokerage is very, very fragmented, much more fragmented than in other industries that I’ve consolidated. So you have on one hand you have 250,000 trucking companies for vendors. On the other hand you have literally millions of retailers, manufacturers, industrial, commercial enterprises of all sizes needing to ship goods. In the middle of that the truck brokers. You have over 10,000 licensed truck brokers in the United States. It’s a large number. It gets more interesting. Of those 10,000 truck brokers, only 25 of them have more than $200 million of revenue. So literally 99% of the 10,000 truck brokers out there have less than $10 million of EBITDA. Most of them have less than $10 million of revenue.
So very lots of small truck brokers. The small ones will be at a significant competitive disadvantage to the few larger ones who have better recruiting, better training, better IT, better well thought out compensation plans, better cultures in general. Look more critical mass. Another advantage of this fragmented nature of the truck brokerage business that I like a lot is it creates a large potential acquisition universe. One of the wrinkles to the business is while we don’t have assets, we don’t need capital to grow the business to invest in fleet of trucks which we don’t own, you do have to finance the working capital. You have to pay the truckers fairly promptly. You don’t get paid by the shipper till about a month after that. So you have a working capital gap of about a month.
So for a small company it’s hard to grow and financing that working capital. That can lead to a motivation to sell. In our acquisition strategy, our plan is we look at lots and lots of acquisition opportunities and we try to find ones that we can grow, ones that are $10 million or $100 million, but could be $30 million or $300 million three of four years later. So ones that we can really have a visible business plan to triple the size of the revenues in a few years and our primary sweet spot has been where most truck brokers are which is between $25 million and call it $200 million in gross revenues, although we are looking at a handful of companies smaller and bigger than that range.
The whole trick on the acquisitions for us is the scalability of it. How much we can scale them up, post acquisition and the plan for scaling involves several punches. One is, get them onto our IT system as soon as possible, get them hooked up to centralized capacity in Charlotte, North Carolina so loads can be covered there and all the back offs and tracking trace can be done there. And to aggressively expand the sales forces by hiring large numbers of sales people, training them and getting them on the phones.
Let me go over two of the acquisitions that we’ve done. In May, we bought a 32 year old business called Continental Freight Systems headquartered in Columbia, South Carolina. Has decades of relationships with distributors and manufacturers, particularly in the Carolinas and in the southeast. About $22 million revenue that our plan is to take that $22 million revenue, move into a larger space that we’ve already identified, hire about 50 people primarily from the University of Carolina down the road, train them through our training program and build that up to 75 person, $75 million operation fairly soon, like within a couple of years.
That’s the plan we’ve already been executing on it. By hooking them up to our IT to Charlotte, North Carolina operation center, we’ve been able to now reach a level where we’re covering over half of the loads from what was called continentals, now called SPL Logistics Columbia through Charlotte internally and these are largely loads that they would have had to turn down before us buying them because they didn’t have access to our capacity. I’m pleased to say we’ve completed the acquisition or the integration of that acquisition in 90 days.
A more recent acquisition we did about three weeks ago was Kelron Logistics was one of the top five truck brokers in Canada and it’s about a 20 year old business, offices in Toronto, Montreal, Vancouver and also one down here in Cleveland, doing about $100 million of revenue and brought to us a very strong base of over a thousand customers and carriers. They were immediately migrated into our database that we start to do business with in a bigger way. So there’s two way synergies when we buy a company. What they bring to us and what we bring to the table for them
Now, acquisitions are a part of the story and an important part. Equally important or arguably even more importantly are our cold starts. These are Greenfield locations which instead of going out and buying out a company, we rent space, we get furniture and computers, we hire people, some from the industry, some new and train them, we connect them with our IT systems to our Charlotte organization and we empower them to go out and sell, go out and get freight. Get freight and then hand it over to Charlotte to go cover the freight and handle all the rest of the transaction after that and it works smashingly well.
We said we were going to do about five truck brokerage cold starts this year. We’ve already done seven here in September and they’ve succeeded very well. The three that we started between January and May now are on a run rate just shy of $20 million of revenue. so we hope by the end of the year that the seven truck brokers that we bought throughout the year will be on a $40 million revenue run rate and when you think about our total invested capital will be low single digits millions of dollars and already without even a full year of each of all those operations will be on a $40 million revenue run rate hopefully.
So when cold starts work, we hire the right person to lead it, when they hire the right people under them, when you train them right, when you incentivize them right, when you give them the right IT, they really work and the returns on capital can be phenomenal. And Scott will talk about a cold start that was part of the company that we acquired a year ago that’s give you a example of how that worked very well. We’re targeting to open about a couple dozen cold starts over the next several years. We think this can be a big, big driver of the company.
I’ve mentioned in part of several of my slides about our national operation center in Charlotte. It is at the core of our infrastructure because this is where we have the share services. So all the collect credit and collections, accounts payable, accounts receivable and all the back office and we also have carrier procurement. So we have 55 people just what we call dialing for diesel, calling trucks all day long to get capacity. They’re in Charlotte. We’re hiring about a dozen more in that division every month. So we should be about 100 people just calling truckers all day long by the end of the year. That should be a couple of hundred people year out from now and this gives us a tremendous power because we’re in, we have knowledge, we know what’s going on in lanes, we have density in those lanes, we have pricing information, we know how to quote and also gives us access to trucks fast for customers who need access to customers fast, to get capacity fast.
The last slide in my part of the presentation is some members of our management team and I don’t have time to go through and every one of them. I’d like to. I spent most of my 2011 working with Heidrick & Struggles and Spencer Stuart interviewing people for these jobs and I pick people who I just fell in love with. Each one of these people bring a lot to the table. Sean Fernandez, for example, our Chief Operating Officer is a career operating guy. Met as an operating guy Fortune 500 companies, speaks the exact same language as I do. I knew 15 minutes into the interview I was likely to offer this guy a job.
We run the business old school. We divide it. We have 50 locations. Three in Canada, 47 down here including roughly about half agents, half company stores and we divide the company up into profit centers and each one of those profit centers we close the books promptly at the end of every month. We do a variance analysis from what we had forecast and what we’d done the previous year. That’s just a meat potatoes way we do the business, which is Sean’s forte. So I feel very relaxed having in the operations themselves someone of Sean’s caliber as a COO. It means we can take on acquisitions. We can take on cold starts at a pretty significant pace.
Our CFO, John Hardig, some of you may know because he was a leading investment banker in transportation over the last couple of decades at Stifel Nicolaus and Alex Brown. He bid managed, led managed, he was the lead manager for some of the prominent IPOs in the space, including C.H Robinson and Hub. Mario Harik and Dave Rowe are our two technology heads. Mario Harik is the Chief Information Officer and reporting to him is Dave Rowe, our Chief Technology Officer. Mario was the CIO of 3PL that got sold last year called Oakleaf. He’s done exactly what’s required here in terms of the IT rollout and Dave Rowe was the lead technology person at Echo. He was one of the first employees there and he led the team that developed and implemented their entire IT program which is very well regarded in this industry.
The only other person I’d mention today is Greg Ritter, our SVP, Brokerage Operations. Greg was with 22 years with CH Robinson and he started Knight Brokerage for Kevin Knight and built that up and he’s a dynamic ball of fire that’s well known in the industry and he’s been the prime person who has recruited the seven cold start leaders and he plays a big role in our Charlotte operations as well.
Well, with that I’d like to pass the presentation over to Scott Malat.
All right, thanks Brad. I joined XPO in October 2011. Previously I was the senior transportation analyst at Goldman Sachs. I covered air, rail, trucking and shipping sectors. So Brad took you through the first two parts of our strategy, the acquisitions and the cold start. I’m going to take you through the third part which is optimizing our existing operations. We have three different businesses within XPO, truck brokerage, expedited transportation and freight forwarding. The real focus in the growth is going to come out of the truck brokerage, but we have some opportunities to grow the other two divisions as well. So let’s start in that truck brokerage division.
So when we took over XPO last September, it had one brokerage office in South bend. It’s a great example of a cold start because it grew from zero to $30 million run rate over three years and it was really only backed up by a few hundred thousand dollars worth of invested capital. We’re going to continue that growth by adding sales people onto the organization. If you went to South Bend you’d see motivated sales people hitting the phone. They’re calling and getting freight. What’s interesting about it is they had limited technology, they had limited institutional knowledge, yet they were able to scale it up at such a good rate. We’re layering in our IT, our recruiting, our training programs and we’re going to continue that growth and we expect our cold starts to ramp up at an even faster rate.
Next is our expedited transportation division that’s doing business as Express One. This is a form of truck brokerage, but it’s for freight that needs to be picked up very quickly and delivered in an expedited way. So think manufacturers of high value goods and just in time auto part suppliers. This is light truck brokerage in that it’s non-asset. We don’t own the trucks. We contract out with the owner operators to move the freight. We’re a little under $100 million in revenue in that business in expedite and we’re one of the top five players in the space. So the strategy here is adding more sales people to get more miles to our owner operators.
So not only are we going after the traditional expedite market and mining that market and getting more business, we’re focusing on three high growth areas for us we’re under indexing, cross border Mexico, temperature controlled and defense. When you add up those three divisions in the last quarter combined we were up 21%. Also, I want to mention our new southeastern hub. We opened an office in Birmingham, Alabama that was just this past August and it’s to take advantage of the shipping production down to southern states.
The third business we’ll go over is our freight forwarding business. Here we have a tiny, tiny share. We\re a $65 million player in a $150 billion market. The strategy is to build truly a national network of both company owned and agent owned offices. This is going to take 35 offices. Today we’re at 27. That’s including the four that we’ve added in Los Angeles, Charlotte, Atlanta and Newark.
So to fuel that growth that we’re talking about we’re hiring great people and we’re empowering them with great technology. We’ve put in place a scalable platform across the company. We rolled out the first phase of the platform in March. We added pricing tools in July and those pricing tools are getting more data into the hands of our sales people. Each acquisition we do as more pricing history and lean history that helps us to purchase transportation more efficiently using our IT platform.
From a financial standpoint, we ended 2011 with $177 million in revenue. we added $122 million through acquisitions. We had 12 cold starts, seven of them in brokerage. We have organic growth. With future acquisitions, we expect to hit our target of $500 million revenue run rate by the end of the year. Our liquidity remains very strong. We had at quarter end $191 million in cash and no debt. So, if we think about that and break it up, $10 million will go to cold starts and technology, $10 million will go to cushion and the rest will go towards acquisitions. We’re also in the market for an accounts receivable facility to raise some low cost debt.
Finally, it’s worth noting that XPO management owns over half of the company’s diluted shares. Our interests are entirely aligned with shareholders to create substantial long term shareholder value.
Let’s sum it up. It’s an attractive industry. it’s large, growing and fragmented. It’s great for us to create long term value creation. We’re on track or ahead of schedule with the three parts of our plan that are going to get us to a multibillion dollar company. Acquisitions, cold starts and optimizing existing operations. Employee morale is high due to the growth initiatives we have going. We’ve got a highly skilled strongly motivated management team that’s intently focused on our goals.
With that we’ll open up for questions.
Thanks guys. I’ll kick it off with a few and then open it up and see if the audience has anything. Brad, you started with your track record and obviously an impressive builder of companies. A year into this endeavor, what do you think? Is this harder than you thought it would be, easier than you thought it would be, in line with where you thought it would be? Where is the truck brokerage industry compared to the successes you’ve had in the past?
Pretty much where I expected it to be a year ago. A year ago we had very specific goals. We wanted to take a $175 million company and double its size within a reasonable period of time through acquisitions and cold starts. Today we’re on a revenue run rate of about $325 million to $330 million. So we’ve almost done that. It’s not on a full year. And we said we were going to do $250 million of acquisitions for the year. We’re on track to do that by the end of the year. We said we would do five cold starts in truck brokerage. We’ve done seven. We’ve also done four other cold starts in freight forwarding ex freight that weren’t planned but were opportunistically interesting. So I think in general we’re either on track or ahead of where we wanted to be on everything.
All right. In terms of the acquisition pipeline you just said that $250 million still feels achievable this year. Can you talk a bit about the number of opportunities you’ve been vetting, you’ve been successful in culminating to what the expected mix is to get to that $250 and then what your pace thoughts are for the next couple of years?
It’s very difficult to give precise predictions in a short period of time about acquisitions because each acquisition is unique and has a life of its own. But if I had a guess I would say we’ll do two to three acquisitions between now and the end of the year and that will add up to about $125 million in revenue.
And then from a cold start standpoint you talked about your plans were to hopefully open five. You’ve actually opened seven. From speaking in the past, I would guess that that means you’ve identified seven people you felt comfortable with running these things for you. In terms of your constraints around that, if you find more people are you going to be accelerating that path on cold starts? Or is that something that you want to pace differently as you think about it and look out?
I want to do as many cold starts as possible that we have highly qualified people that we think we have overwhelmingly high probability to succeed. So as we find more good people, we don’t say well, we’ve got only this number we can do this year because from integration point of view, cold starts are easy compared to an acquisition. With cold starts, it’s really a few hundred thousand dollars of risk capital and it’s renting a room about the size of this room and it’s fronting the salaries of the draws for some of the people, some from the industry, some not from the industry. It’s giving them access to our infrastructure for recruiting, for training, for IT and so forth. So it’s not a whole lot of risk.
How does that talent pool look as you’ve gone out and tried to identify those folks and how has the sale been in terms of trying to get folks to buy into XPO?
Well, Greg Ritter has headed that up and Greg interviewed over 200 people who were already qualified, prequalified and we hired seven. There were another two or three we would have liked to have hired by now and we’re still courting and they have to work things and so forth. But I think that we’re seeing good people. We’re seeing highly qualified people, but the thing we want to be careful with a cold start is we want to feel very confident this person is going to succeed because we don’t want to start them and then close it down. We’ll inevitably do that as we do dozens of them where we, if it’s small fields that don’t work out, we’ll have to close them. We want to minimize that amount of closing. We want to minimize change with in front of the customer and in the industry and in the market. So we’re careful of who we hire on that. They’re using our name so and they really represent us in all day long.
How competitive as you’re looking for that talent for these acquisitions? There’s companies like Coyote and TQL that have grown to scale but still like you guys aren’t nearly the size of a CH Robinson in this market. As you’re going out and I would assume even private equity might look at this, how competitive is it to try to recruit that talent or close these acquisitions?
Well, you mentioned two of the fastest growing companies, Coyote and TQL both of whom I have a huge amount of respect for and they’re recruiting as well. Coyote is recruiting in Chicago. That’s mainly where they’re based. So for Chicago we would compete with Coyote for talent. TQL is strong presence in Cincinnati and then has a handful of satellite offices around the country. In those satellite places we would compete. But you’ve got to remember two things. We are hiring branch presidents for the cold start that have been in the business. They’re veterans. But then once we’re hiring the sales people, we’re hiring, this changes, but roughly about a third from the industry and two thirds of people that are just great sales people that we think we can train and they’ll learn the business on the job and through our training program. So there is a much larger universe to hire people in. unemployment is high, particularly for young people.
Do we have any questions from the audience? Mike?
Hey guys. When we last had you at our conference, thank you so much, in June, you had mentioned some growth opportunity with DE expedited transportation on cross-border Mexico, also in controlled pharma and defense. So I just wondering whether or not since that time, have you guys seen any shift in the industry for growth opportunities or how that environment currently?
That environment as rich as it was grew 21% in the first quarter. The largest of those is our cross-border Mexico. Defense we have a lot more opportunity. We’re under index there and we’re much smaller so we’re growing at a higher rate as is in pharmaceuticals. In addition to that, on the expedite business, since we last met you we opened up the office in the southeast in Birmingham, Alabama. We did a good amount of business in Birmingham but with the shift in production and manufacturing down to southern states we thought we could take a larger share of that and put an office there. So that’s another one of our cold starts.
Any other questions from the audience? One in the back.
I was just wondering, the Hub Group came out back in July mentioned that they’ve seen a sharp drop off in the rate of growth of truck brokerage. Where is your outlook? I know you’re optimistic. But Hub being number two in the industry indicated that they saw a meaningful slowing in truck brokerage within a number of deals, especially smaller opportunities out there.
Well, I can’t speak for Hub Group specifically what’s going on there. I’m not informed enough to know what’s going on internally there. I can say overall what’s going on is the economically is soft in general which means there’s less freight than there would be otherwise. At the same time it’s a peculiar kind of situation because there is capacity. It’s not as tight as everyone says it is. We cover loads by noon which a year ago we were covering most of them by noon and then a lot of them by the end of the day and some rolling over to the next day. So there is truckload capacity out there and that keeps changing and it’s different in different lanes. I think overall truck brokerage long term has a promising future. I say that because regardless of what’s going on temporarily, there will be more and more people in all likelihood using brokers than going direct. I feel that pretty strongly. Right now there could be some short term headwinds because you have that confluence of less freight. So more of the freight particularly from the tier one customers are going to their asset heavy trucking companies and less extra freight is flowing over into the spot market. So there’s less spot loads to be fighting over.
One more question at the back and I think we’re out of time.
This is just a very basic question. But how do the economics work for you guys? How do you get your share of the state of freight?
I’m not sure exactly what you mean.
In other words, how do you price your business? How do you get your cut?
How do you guys get paid?
Oh, okay. It’s real simple. So we will get a load and they will price it just for sake of ease $1000. With that it’s ours now. It’s our commitment to live up to pick that up and deliver it for $1000. We will then, it will go into the system right away, goes to Charlotte. Now we have 55 people scrambling to find the best truck, competing to find the best trucks. They get commission on it and we’ll cover that maybe 20, 30 minutes later. Maybe an hour later, whenever it makes sense to, how we sense the market is and maybe we’ll pay $850 to fill in for that. So our gross profit in that will be $150. And gross profits tend to be in the teens of digits margins. So somewhere between 12% and 20%.
Okay. That’s all the time we have. Thanks so much guys, appreciate it.
Thank you, Justin.