"Once I settled on transportation, I first looked at an
asset-heavy trucking company roll-up, but I couldn’t figure out a way to create
the kind of shareholder value I was looking for. I wanted a higher return on
capital. Then I discovered C.H. Robinson and Expeditors International of
Washington. C.H. Robinson is the leader in truck brokerage, and Expeditors is
the largest U.S.-based freight forwarder.
I love these two companies. They’re both non-asset based, which is a
business model I understand because of my oil brokerage days. They have no debt
to speak of. They throw off free cash flow in all parts of the economic cycle.
Their returns on capital are 20% to 30%. So I started looking very intently at
brokers, and I liked what I saw.
There are four verticals within the brokerage space that, together,
represent a very large acquisition universe — about $200 billion in
aggregate. All four are non-asset based, meaning the companies don’t own the
trucks, ships or planes. They manage the logistics of how freight moves from
one point to another by matching shippers with carriers. XPO is already in
three of the four verticals.
The first is truck brokerage.
It’s a really attractive model, very straightforward — basically, it’s like a
trading floor, with a bunch of salespeople talking to shippers and carriers.
Our people are matching freight loads to trucking companies and making a
spread. We don’t own any of the trucks. We’re brokers; middlemen between the
shipper and the carrier.
Domestic truck brokerage is around $50 billion a year. It’s very
fragmented — more than 10,000 licensed truck brokers in the U.S., and 99% of
them have revenue under $200 million. In other words, only about 25 truck
brokers have revenue over $200 million. Lots of opportunities for consolidation.
There should be a big opportunity for penetration as well. Truck
brokerage is a classic outsourcing service that delivers value to both shippers
and carriers, and yet of the $350 billion of freight that’s moved on
the ground in the U.S. each year, only around $50 billion, or about 15%,
of that freight currently goes through brokers.
I believe that the 15% penetration number is going to go up. It’s a
similar bet to the one I made when I got into construction equipment rental. I
thought the trend was for rental penetration to grow because the economics of
the customer favored rental, and in fact that happened.
There’s a similar incentive to outsource freight arrangements. Brokers
offer a real value proposition by excelling at their core competency, which is
to efficiently manage the flow of traffic. So there’s a fundamental economic
benefit that should drive penetration. In addition, I think that as we grow
XPO, our technology, size and professionalism will help attract business from
the 85% who don’t currently use brokers.
If you look around the room, literally every single thing here —
including the clothes you’re wearing — was on a truck at some point. It’s an
exciting landscape. The trucking industry isn’t going away, and neither is truck
brokerage."
Vertical
number two, freight forwarding,
involves trucks as well because freight needs to travel by ground
transportation to get to an airport or seaport or rail yard. If the freight is
continuing on overseas, it also requires an ocean carrier or air carrier.
Freight forwarding is a global business, so it has the advantage of exposure to
the growth rates of other countries, many of which are growing faster than the
United States. Freight forwarding is a $150 billion industry worldwide.
It’s a big ocean to go fishing in.
So those are two of
the four legs I’m planning to grow XPO on: truck brokerage and freight
forwarding.
Then there’s an area
of the business called expedited
services. It’s like truck brokerage, but it’s for freight that needs to be
moved very quickly. XPO’s Express-1 unit is already a major player in
expedited; it’s ranked as the fifth largest expeditor in the U.S. by the Journal of Commerce . We get paid a
premium price because the customer needs something picked up really fast and
delivered in a time-sensitive way. There’s room to grow the business through
acquisitions, as well as organically by recruiting more owner-operators.
Expedited is vertical number three.
And the fourth leg,
which is the only one XPO is not in yet — but we intend to be — is intermodal, or rail. I’m looking for a
good intermodal broker to buy for a platform.
So the company is
already established in three of the four legs, which gives us momentum going
into this next phase. That’s a big plus. And there’s something else I like
about XPO. I like the people. They have a good reputation in the business, and
they’ve built a strong company culture. They just haven’t had access to enough
capital to grow the company on the scale I am contemplating.
They weren’t alone in
that. I’ve met with a lot of brokerage companies, and almost every one of them
told me they’d be several times the size they are if they had had access to
capital. One big issue is the time lag between accounts receivable and accounts
payable. A trucker needs to get paid quickly. They’d like to get their money in
a week, which is faster than the shipper will pay. The shipper might pay six to
eight weeks down the road. That’s not good enough for the trucker.
The
key is to fund that gap. A lot of brokers hit a ceiling where they can’t
finance growth. There used to be hundreds of banks lending to these small
companies, but that kind of lending decreased dramatically starting in 2008. It
can be a home run for a capital-constrained company like that to sell to XPO,
because we can provide both working capital and growth capital.
We believe that we
can create shareholder value by acquiring companies on accretive terms, and
then enhancing returns by growing these operations organically through the
addition of more salespeople. The salespeople, in turn, should be able to
outperform because they have access to the resources of a larger organization
with an expanding network of relationships. It’s a win-win.
We are very excited
to embark on our efforts to build a much larger and even more profitable
business through the opportunities available to the new XPO.
Potential Questions and Answers
Can you walk us through how you envision your
capital structure?
We’ll have over
$70 million of cash on the balance sheet at closing. We should be able to
spend that on sensible acquisitions within a reasonable period of time.
Depending on whether we buy smaller companies or larger ones, and how we
structure the purchase prices, we expect to get an additional $8 million
to $14 million of EBITDA from that spend. There’s not a lot of debt right
now; about $3 million. There’s some goodwill on there. The biggest asset
is receivables.
What is your line of credit?
XPO presently has a
$10 million line of credit. That could be increased, though.
What about leverage?
We were highly
leveraged in the last two companies I ran. This time it’s a non-asset business,
so I don’t see the justification for the same level of leverage right now. I’m
happy to borrow against the receivables, though, because the write-offs in this
industry are typically less than 1%. In addition, I’ve had banks propose lines
of credit of up to three times EBITDA, but I haven’t made a final decision
about what the total leverage should be.
What’s your timeframe for spending the
$70 million?
I’ll probably want to
do one or two acquisitions later this year. That would double the size of the
company. Then I might stop a bit, integrate, transfer best practices, optimize
IT, arrange financings. It’s a very disciplined process. Bite, digest,
reassess.
What kind of multiples are these companies going
for?
It’s a bell curve.
The bulk fall into a band of six to eight times EBITDA, which is where I have
the most interest. Smaller companies go for about four or five times EBITDA.
And there are a few gorillas I could buy at multiples of eight to 10 times
EBITDA. These are higher EBITDA multiples than I’m used to, but because of the
minimal capex requirements, they’re actually lower multiples of free cash flow.
What sort of multiples were they getting a few
years ago?
The multiples have
been pretty stable. You see a fairly delineated band of acquisitions based on
revenue size.
What do you look for in a target acquisition?
I want to buy
companies with good growth trajectories. The targets don’t have to be huge. In
fact, in truck brokerage, there are only about 25 companies in North America
with revenues of over $200 million. I’m mainly interested in smaller companies
between $25 million and $200 million gross revenue, that’s my sweet
spot. I want to take those companies and grow them. It’s usually easier to grow
a $50 million company five-fold to $250 million, than to take a
company doing $500 million and get it up to $2.5 billion. But there
will be exceptions to the rule, and every deal is unique. Acquisitions aren’t
cookie cutter. The common denominator is that I want to buy from people I like,
and who have integrity. I want to take care of the people whose businesses I’m
inheriting. Many of the key risks of a business plan like this come down to
people.
Where are your acquisition targets located?
The 10,000-plus
brokers I talked about are everywhere. Metro areas, small towns. A lot of them
work out of inexpensive office space around transportation hubs: Atlanta,
Chicago, Dallas, Jacksonville, Charlotte, Memphis — but they’re literally all
over the country. Remember, the majority of this business is done over the
phone or electronically, not in person, so you don’t necessarily have to be
based near the customers.
How do you choose target acquisitions?
Due diligence. I’ve
talked with about 120 companies. I have a pretty good nose for this. I also
have industry experts working with me, together with boutique M&A firms.
What were the best and worst acquisitions of your
career?
The worst strategic
one was a whole series of acquisitions where we got off the path of equipment
rental and bought into highway technology, which is roadwork signs, barriers
and highway striping. We bought all these highway companies on the expectation
that infrastructure spending would significantly increase when the government
implemented the TEA-21 bill. But many of the projects stalled when the states
couldn’t come up with their share of the funds, and the revenue growth just
wasn’t there. Also, the IT system that we were using to run the rest of the
company didn’t fit the highway tech operations. We ended up selling that
business at a loss of a few hundred million, so it definitely wins the booby prize.
The best acquisition
may have been a Michigan landfill we bought at United Waste for about $4
million. The EPA awarded us a major expansion, and a year and a half later it
was worth $40 million. Another home run was a software company called Wynne Systems
that we bought early on at United Rentals. They made powerful software with the
politically incorrect name of RentalMan that we used to integrate all the
rental businesses we rolled up into the company. We couldn’t have done the
hundreds of acquisitions we did without RentalMan.
How will you grow a company
once you acquire it?
I think we can create
substantial value by financing the growth of these businesses after we buy
them. Working capital and growth capital are pretty close to a magic bullet.
There’s not much capex, but you have to finance the receivables and you have to
bankroll the new hires. Hire hungry, talented salespeople at a low base and a
big upside incentive, fund their training for a few months, and it’s not that
hard for the winners to build a million dollar book after a year or so.
In a nutshell that’s
how you ramp up in this business. If you buy a brokerage with $30 million
of revenue and you add 30 to 40 bodies, you can double the revenue in time.
I’ve looked at many companies that have executed this business plan, but most
of them don’t have the capital to sustain it.
Do you plan on keeping the Express-1 brands?
One of the items that
will be in the proxy for shareholder vote is a proposal to rebrand the parent
company from Express-1 Expedited Solutions, Inc. to XPO Logistics, Inc. The
expedited unit, which is headquartered in Buchanan, Michigan, will still be
called Express-1, Inc. Our freight forwarding operations, based in Downers
Grove, Illinois, will remain Concert Group Logistics, Inc. And the truck
brokerage unit, which is based in South Bend, Indiana, will keep the name Bounce
Logistics, Inc. Only the parent will change to XPO Logistics.
Where do you expect XPO to be in the future in
terms of revenue and EBITDA?
I’d like to be at
$4 billion to $5 billion in revenue and hundreds of millions in
EBITDA. There are a lot of acquisition opportunities out there. If I had a
billion in cash, I could spend it on good acquisitions within a few months.
However, I expect our pace will be more measured than that.
Do you view your plan as easy to accomplish?
No, it’s not an easy
plan to execute; it’s not for the fainthearted. There’s a lot you can mess up
with acquisitions and integration. Acquisitions come with headaches. But the
biggest challenge can be managing the human aspect — it’s important to watch
out for the well-being of the people who work for the companies you’re buying.
It’s a change for them, and it has to be a change for the better. One big thing
I’ve learned from the hundreds of acquisitions I’ve been involved in is to
sincerely respect the employees, be visible, do town hall-type meetings.
Solicit their advice; employees have a lot of great ideas. And don’t just go
through the motions — think seriously about the feedback you get. I have a lot
of experience in creating this kind of healthy, inclusive company culture.
Can you walk through why bigger is better for a
3PL?
The bigger you are,
the less business you have to turn down because you can’t find the capacity —
and when you do get business, you should be able to find less expensive
solutions because you have a larger universe of carriers to choose from. There
are margins to harvest if you are a bigger player. Suppose I’m a broker and I
have a shipper who pays me a thousand bucks to place a truckload. I book the
load for $850 and make a $150 spread. But if I become part of a bigger
organization, I can tap into everyone else’s carrier base as well. Maybe that
lets me locate a carrier who is happy to take the load at,
say, $800. Now I have a 20% spread instead of a 15% spread.
There are other
benefits to size — for example, you turn down less business. It was kind of
shocking to me, when I started studying the industry, to see some companies
turn down as many as one out of five customer calls. If you can’t fill a load
you lose the sale, and you’re not at the top of the customer’s call list
anymore. The turn-down rate should decrease as the universe of accessible
carriers increases.
With more volume, we
should also be able to negotiate better discounts with the carriers, which
should improve margin from another direction. And that’s in addition to
leveraging scale in areas like SG&A.
Do you think more private equity groups will follow
you into the industry?
I expect more
consolidation, but there aren’t a lot of PE firms with my “serial acquirer”
approach. What I’m doing takes a higher tolerance for risk and quite a lot of
consolidation expertise. There are a lot of moving parts to this particular
business plan. I don’t see droves of people copying me. There have been a few
dozen PE investments in this space already, and many have been quite
successful. But the typical plan has been to buy a company or two, add
financial leverage, strip out the costs, play the cycle and sell it at the
right time. I’m trying to do something more transformative.
Why do truckers use brokers?
Look at it this way:
96% of trucking companies in the U.S. have fewer than 20 trucks, according to
the American Transportation Association. Only about one out of every 10 trucks
on the road is owned by a public company. If you own a couple of trucks, you
can’t afford to have people on the phone all day trying to find you freight.
It’s also not your core competency. Using a broker is a good value proposition
for most carriers — it’s the most cost-effective way to find freight.
Why do shippers use brokers?
Some large shippers
manage freight logistics very efficiently themselves, like Walmart. But once
you get past the top thousand corporations, it’s often handled willy-nilly.
Most shippers don’t have a department of people to check out carrier prices all
day long. They may have a handful of trucking companies they use, and when they
have product to move they call two or three trucking companies and try to get a
good price. That’s not efficient. They should be calling 3PLs like XPO and
tapping into a network of tens of thousands of carriers. That’s one of the
reasons why I believe that, in the future, brokers will handle much more than
15% of the logistics. There are millions of shippers in North America that need
transportation solutions.
Will you target certain types of shipper customers?
We go after all kinds
of customers. The three main sectors are retailers, manufacturers, and supply
chain logistics management companies.
What is your management team going to look like?
I have a team from
XPO that I like and respect. A couple of them will be taking on some different
responsibilities, more involved with acquisitions. I’ve hired Spencer Stuart
and Heidrick & Struggles to find a COO, CFO, chief acquisition officer,
chief information officer, controller and vice president of investor relations.
I’ve told both search firms to show me only world-class candidates.
What will be your largest operating cost?
When you’re a
non-asset-based 3PL, your largest cost is sales compensation. And compensation
is mostly variable, because most of it comes in the form of incentive bonuses.
If revenue comes down, the house doesn’t get hit as badly as an asset-heavy,
fixed-cost business does. On the flip side, though, you don’t get as much
operating leverage in the upswings. The profits are less volatile throughout
the cycle. Most brokers stay profitable and cash positive even during
downturns.
What is the profile of a salesperson you would
recruit?
It’s a business where
you have to make 99 calls a day to do one or two deals. So you have to hire
people who psychometrically test high on “need to win” and low on “need to be
liked.” A salesperson will have a base of $25,000 or $35,000, but can make many
times that amount on the incentive compensation. Once you get the right people
in the system and integrated on the right IT, it can be really powerful.
When we do an
acquisition, we’re buying a list of carriers and shippers, but we’re also
“acquiring” the people who have those relationships. The risk is if many of the
people leave after the acquisition. We’ve got to treat our people right
financially, and make the atmosphere one that people gravitate towards. If we
have a culture that genuinely respects our employees, and pays them
competitively, they’ll want to stay.
You’ve made a point about the importance of IT. Why
is that?
It’s the backbone. IT
allows people to do their jobs more professionally and use metrics as
benchmarks. It gives you an accurate financial grasp of the business. C.H.
Robinson and Expeditors have stupendous IT. The best-run companies tend to
customize the software for their own businesses. We’ll probably go that route.
I like to zero in on
a few key metrics that really matter to the people on the front lines. We’ll
have daily metrics for gross profit generated, minutes spent on the phone,
turn-down rate, profit per load — about a dozen KPIs. At United Rentals, it was
much more complex than anything we’ll be faced with at XPO. We had 750
locations at United Rentals and we had to figure out how to get all of them to
talk to each other. I’m used to tackling complex IT challenges.
How do you compare the roll-up opportunity in
logistics to other industries?
