After reporting a first quarter where revenue grew 147.7% to $282.4 million, I had the chance to speak with XPO Logistics' (NYSE: XPO ) CEO Bradley Jacobs about the company's progress, its achievements during the first quarter, and the future of the company itself. While the information during this 25-minute call was broad, there were four answers to questions that really stood out, which are likely important to current and prospective investors.
XPO Logistics is a non-asset based truck brokerage firm, which has grown from annual revenue of $177 million to a revenue-run rate in excess of $2 billion in three year's time. This growth has been achieved via an aggressive acquisition strategy combined with cold starts. And if Jacobs succeeds in reaching $7.5 billion in annual revenue by 2017, this $1.4 billion company is sure to appreciate. Therefore, with Jacobs being so accomplished, and successful to this point, it's hard to bet against him, and is especially fun to pick his brain. Questions and responses are followed directly by my reflections in italics.
Brian Nichols: What's qualifies as a major account? XPO had 33 in the first quarter -- how many do you'll have total?
Bradley Jacobs: These are companies with at least $1 billion in (annual) revenue; mostly Fortune 500 companies. They have a lot of freight; we sell them truckload, expedite, last-mile, and intermodal (in the last month). We have over 200 major accounts of 14,000 total.
Reflections: XPO's ability to sign major accounts is one of the most overlooked data points for the company, as these produce long-term business, including quantity, and a lot of business. Jacobs went on to say that 33 was the most it ever signed in one quarter. Essentially, these large accounts produce more business which translates into higher revenue.
Nichols: How did the weather affect your intermodal (rail) and trucking business in the first quarter?
Jacobs: The weather caused service issues for the rails, which drove business that had been going on the rail to the road, which then tightened trucking capacity; average revenue-per-load increases because the hauls are longer, those that are usually intermodal. A big part of our growth was that we were able to get our hands on capacity; we now have 26,000 carriers. The weather impact was temporary, but we gained new customers who had hit a wall with their usual capacity providers, and were able to build stronger relationships with our existing customers.
Reflections: The above answer is very interesting and telling about a quarter in which almost every company blamed the weather for weakness, because in this particular case, bad weather actually helped XPO Logistics. This is a company that's not only acquiring companies and revenue, but also carriers, meaning its capacity wasn't near as tight as peers who weren't prepared for the slowdown in intermodal.
In fact, the acquisition of intermodal giant Pacer likely helped XPO Logistics in this situation, as it was able to shift customers to other divisions of its business. Thus, no matter the weather, XPO Logistics's growth continues.
Nichols: Can you boost Pacer's margins?
Jacobs: Pacer made $27 million last year before we bought them, so they were fairly profitable. But their margins were lower than their competitors. We are going to improve that by reducing their empty miles; about 39% of total miles for Pacer are empty versus an industry average of about 25%. This is a big deal: Every 100 basis points of improvement equates to $1 million of bottom line contribution. If you do the math that could be another $10-$15 million of profitability enhancement over time. So we are very excited about capitalizing on the position we have with Pacer as the third largest intermodal provider in North America, and largest in Mexico, which serves China as our trading partner. There is going to be a lot of growth where Pacer is located and the billions of dollars being spent on infrastructure, making us well positioned.
Reflections: The reason I asked this question was because one of the biggest hits on Pacer prior to the acquisition was its lack of profitability compared to its peers. However, Jacobs makes a good point, and much like the rest of his business, he plans to piggy-back XPO customers off Pacer customers to decrease empty miles, and it's this ability that helped to drive 50% plus organic growth in the first quarter. Hence, Pacer is obviously a huge piece of the XPO equation long-term.
Nichols: Will there be more acquisitions in the high-margin, last-mile space?
Jacobs: We will definitely do more acquisitions in last-mile; there's no question about it. We do have discussions right now, nothing definitive. We are number one in last-mile and are also the largest facilitator of deliveries in appliances, building materials, and top two in home electronics. This is a high margin high growth business. The high growth comes from outsourcing from big box retailers and e-commerce, who outsource all their last-mile; margins in this area are going up as well.
Reflections: Last-mile logistics is a big piece of the XPO Logistics story, and Jacobs has positioned the company to thrive in this space. The reason is because the hauls are longer and therefore have higher margins.
Already, Jacobs has acquired 3PD and Optima Service Solutions in last-mile, and these acquisitions along with 75% organic growth in last mile, was the primary reason that net revenue margins increased 620 basis points in its freight brokerage business during the first quarter. Thus, whether or not they plan more acquisitions in the space is highly relevant to the investment outlook of the company.
In looking at XPO Logistics's earnings report, the above topics are ones that are very important to the growth being created, but may be missed by many retail investors who don't fully understand the story. This is a company that has come so far in such a short period of time, and with the most ambitious of goals. So, with that said, and in closing, I will leave you with one last quote by Jacobs, which ended our conversation: "We have positioned ourselves in expedite, intermodal, in Mexico, and last-mile, giving us a lot of wind at our back. I'm excited about where we're going, we are on track to achieve our goals, and hit our milestones as we have all along, including 2017 revenue of $7.5 billion and EBITDA of $425 million."
For those of you unfamiliar with XPO Logistics, the above quote pretty much sums up the investment outlook.
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