XPO Inc (XPO) 2011 Q3 法說會逐字稿

Greetings and welcome to the XPO Logistics third-quarter conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

During this call, the Company will be making certain forward-looking statements which by their nature involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. The forward-looking statements in the Company's earnings release or made on this call are made only as of today; and the Company has no obligation to update any of these forward-looking statements.

You can find a copy of the Company's earnings release, which contains additional information regarding forward-looking statements and also includes important information regarding non-GAAP financial measures, in the Company News and Key Facts section on the Company's website at www.XPOLogistics.com.

It is now my pleasure to introduce Brad Jacobs, Chairman and CEO. Thank you, sir; you may begin.

Thanks, Dan. Good morning, everybody. Thanks for joining us for the first earnings conference call for the new XPO. With me here today are Scott Malat, our Senior Vice President of Strategic Planning; our CFO John Welch; and Troy Cooper, Vice President, Finance.

As you know, at the beginning of September we closed the Jacobs Private Equity investment into Express-1 Expedited Solutions, and we changed the name to XPO Logistics. Since then we have put a lot of energy into assembling exactly the right management team to implement our business plan.

Today I can tell you that we have almost all of those individuals in place. They have specific expertise required to execute our strategy and to build XPO into a multibillion-dollar logistics company.

There's three prongs to our strategy. First is to selectively to accretive acquisitions. Second is to open cold starts around the country, and we will be opening the first one in Phoenix this month. And third, aggressively grow our operations.

This morning I want to describe to you the people who will be driving this growth. On the acquisition team, we have hired two very experienced M&A professionals.

Tom Connolly is someone you probably know if you are in the business. Up until last week he was a senior transportation banker at EVE Partners. EVE is one of the leading M&A boutiques specializing in logistics. It's a firm we have a very close relationship with, and Tom has been in the middle of quite a number of deals in the space.

Also on the M&A team is Dick Metzler. Dick has been in transportation for about 35 years. He was with FedEx, DHL, GE Capital, and Greatwide. He brings a ton of experience in business development to the team.

Our Chief Operating Officer is Sean Fernandez. Sean is responsible for running the day-to-day business in a profitable, customer-centric way. Sean is a meat-and-potatoes operating guy par excellence; he has been blocking and tackling operations for over 20 years at Fortune 500 companies like NCR, Avery Dennison, and Arrow Electronics. Sean heads out to the Midwest later this week to introduce himself to the troops and to get the ball rolling.

Working right under Sean is Greg Ritter, Senior Vice President Brokerage Operations. Greg was 22 years with C.H. Robinson; he is a ball of fire. His first mission is to open 20 greenfield truck brokerage locations around the country, something he has experience doing before, and we want to grow each of them to substantial revenues.

Cutting-edge technology is a key part of our strategy, and our CIO is going to be Mario Harik. Mario's job is to create one integrated IT system for the entire Company. It will be used for truck brokerage, expedite, and freight forwarding.

Mario has a graduate degree from MIT, and he's got a lot of practical experience that is relevant to our strategy. He has been CIO or chief technology officer for several important companies. Most recently he was CIO for Oakleaf, which is a 3PL that was sold a few months ago.

We have also hired Troy Cooper as VP Finance. Troy was my favorite controller at United Rentals. He has a particular skill to be able to go through dozens of pages of financials and distill them down to the six or seven numbers that really matter -- the ones that explain why the business is performing or not performing and, more importantly, what are the KPIs and metrics that can drive the business going forward.

Lastly we have also hired Gordon Devens to be our General Counsel. Gordon, in addition to being a great lawyer -- he comes out of Skadden, Arps -- spent 15 years with AutoNation, where he most recently was associate general counsel. At one point, he was in charge of business development there, and he has been involved in about 250 acquisitions, which is obviously valuable experience that he brings to the table.

So that is the team. Tonight they meet with the new XPO Board of Directors, and tomorrow we have a kickoff management meeting, and then some of us will be heading out to our operations in Buchanan, South Bend, and Downers Grove; and others will hit the acquisition trail.

I am now going to turn the presentation over to Scott to review the quarter. Many of you know Scott from when he was the senior equity analyst at Goldman Sachs covering transportation, or before that when he was at JPMorgan or UBS. He is wearing many hats here at XPO, analyzing anything that needs to be analyzed, whether it's in finance, acquisitions, or the performance of our business units.

Also together with the CFO and me, Scott will be the point person for the investment community. Scott?

All right. Thanks, Brad. First we will go through the results from the quarter, then we will spend some more time on our go-forward strategy.

For the quarter, results were mixed. Express-1 and CGL did not show growth in net revenues. But the positive highlight was revenue up 45% and operating income up 78% at our Bounce truck brokerage division.

We're going to go into the results of Bounce in a minute, but this is a good example of the type of growth we can get from small brokerage offices. And this is key to our go-forward strategy as we replicate these offices across North America.

For the overall Company, revenue of $47.4 million was up 7%. This was a function of the strong growth at Bounce we talked about and more higher-revenue international moves at Express-1.

Gross margins of 17.3% were down 100 basis points from last year. That was primarily due to lower margins at Express-1.

SG&A increased $2.5 million from a year ago. That includes two buckets here. First, $1.6 million in fees related to the recruitment of executive hires. And second, $700,000 in indirect fees related to the equity investment; that includes things like legal, accounting, consulting, and some other costs.

Aside from those two cost items, SG&A was up 4% from last year and was in line with the second quarter. Just keep in mind, as we brought on the new management team we expect SG&A to increase in the fourth quarter. We're investing in the management infrastructure to support our accelerating growth.

Net income for the Company was $190,000 versus $1.73 million last year, but EPS was a $5.38 loss. EPS includes a $45 million charge related to the equity investment. This charge is non-cash and is an accounting reconciliation for the beneficial conversion features of the equity investments. It is basically a reconciliation of the difference in the estimated fair market value of the conversion feature versus the proceeds from the transaction.

For our share count, given the loss in net income our basic and diluted share count were equal at 8.25 million shares. For illustrative purposes, as of the end of the quarter -- specifically for September 30 -- and using a share price of $12.20, our diluted share count included 8.3 million common shares; 10.7 million shares from the preferred; 4.6 million shares to account for the warrants; and 403,000 shares to account for the options.

Let's talk about the business units separately. The comparisons here will be year-over-year. First, Express-1. This is our expedited transportation division.

While revenue increased 9.4%, to $23.4 million, gross margin was pressured. So net revenues were down 5.7%. This was due to a higher percentage of shipments placed through third-party brokered carriers this year.

A good number of these brokered loads were international shipments in Mexico and Canada, where we use third-party brokers by design. There are also other loads where our fleet of exclusive independent contractors were unavailable, which leads us to a big focus on recruitment and retention of owner-operators and fleet owners. Lower SG&A was a partial offset to the margin pressure, so operating profit was down 2.5% to $2.5 million at Express-1.

Moving on to CGL -- it's our freight forwarding segment -- revenues were down 9%. While the segment had a greater number of customers than last year, it was not able to offset lost revenue from some larger accounts.

A positive offset was an increase in international business, which in freight forwarding has a higher margin. SG&A was also down from a year ago, cutting down on administrative costs. So as a result, operating income for CGL was up 16.6% to $624,000.

On Bounce, our truck brokerage business, as we said this was the really strong point in the quarter. Revenues were up 45% to $8.2 million. This was largely driven by an increase in the number of transactions.

Even though this business is small, it is important because we expect to replicate this. Bounce was a cold-start operation that has ramped up to about a $30 million revenue business, and we think the cold starts that we are planning across North America are going to have a lot more support in technology and best practices than Bounce did.

Also in Bounce, SG&A did not rise as fast as sales. It made up 63.3% of net revenues versus 70.2% last year, which all together led to operating income for Bounce that was up 78% to $500,000.

Let's move on to our go-forward strategy. The plan varies by division, but there is some commonality. So in three parts -- first, targeted acquisitions.

The targets we are looking at are non-asset based transportation companies that would benefit from greater scale and potential access to capital. Our sweet spot is in the range of $30 million to $200 million in revenue. Our top focus is on brokerage, where we think we can get the most scale.

We're also looking into complementary opportunities in freight forwarding, intermodal, and expedited. The first phase of acquisitions we're expecting to use existing cash and expanding our credit facilities.

The second part of our strategy is organic growth. Here we think there is a lot of opportunity to scale up relatively quickly.

We are opening up new offices; again, our top priority is truck brokerage. Phoenix is the first of what will be an aggressive rollout schedule. The medium-term goal is 20 new offices.

Also on organic growth, in freight forwarding we have 23 agent locations and two company-owned. We're aiming to open 10 more freight forwarding offices, both agent and company-owned, over the next two years.

The third part of our strategy includes optimizing our operations. Across our businesses we are expanding sales and services.

Our first step will be adding truck brokers along with carrier procurement. Also, at our expediting business Express-1 we're adding salespeople to target specific opportunities in specialized services such as temperature controlled and defense. In Express-1 we're also very focused on expanding our carrier recruitment and retention.

In freight forwarding, the increased sales force will be targeting national accounts. Our forwarding business has tended to have smaller accounts. And forwarding will continue to target growth internationally, mostly in Asia and Latin America.

Also within optimized operations comes the new technology platform. And then there are just best practices that we are instituting. We're putting the right metrics in place to better focus the business. We are trying to better leverage our scale -- just basic block and tackling.

I'll turn it back to Brad.

Thanks, Scott. So it's all coming together very nicely. It's very exciting.

We have developed a high-octane business plans to grow both organically and through acquisitions, and we have taken great care to assemble a team whose track records line up with what we are planning to do here.

So now I would like to open it up to questions. Operator?

(Operator Instructions) Matt Brooklier, Piper Jaffray.

Yes, thanks. Good morning. Hey, just looking at your truck brokerage operations, you have a very ambitious plan to open I think roughly 20 new offices moving forward. Is there any kind of rough timeline with respect to when you expect to have those offices opened? Or is this kind of a rough goal at this point in time?

I think two to three years is a reasonable goal. I think if we open at least, say, five cold starts in the first year and then more than that in the second year, we will go as fast as we responsibly can.

I think one of the gating factors is -- how quickly can we hire great people who have proven track records of building businesses from scratch to $50 million, $100 million or more? And depending on how fast we can recruit great people, that is as fast as we can build out the network.

Okay. So roughly a two- to three-year time frame with respect to opening those new offices. You also -- I think you mentioned in your comments earlier -- wouldn't be opposed to also making acquisitions within the truck brokerage space.

Yes. Not only would we not be not opposed, but we are firmly in favor of doing acquisitions in the truck brokerage. And we are talking to quite a number of truck brokerage operations to buy.

Okay. The model there I guess it's a company-owned model, but also open to looking at agent-based models as well within truck brokerage?

The bias is more towards the store-owned employee model rather than agents.

Okay.

But we are not ruling out agents either. If you look at the three businesses we have right now, we've got an owner-operator model at Express-1 Expedited; we have got an employee store model at Bounce; and we've got a hybrid at CGL, where we have 23 stations that are agents, plus we have two store-owneds in Miami and in Tampa doing international.

We're opening up in Charlotte other store-owned location, and we have about 10 stations that we have got circles on the map and plans in progress to open over the next, call it, year to 18 months. And most of those actually will be store-owneds. They won't be agents. But in some of them they will be agents.

Okay. Within truck brokerage, you had really nice top-line growth. Was that all, I guess all same-store sales? Or were there some new office openings during the quarter?

No, it was all same store. Bounce is basically two big rooms in South Bend, Indiana, with about 30-some-odd salespeople and support people in them. They are calling shippers and carriers all day long and booking loads and covering them.

By adding -- I think we added about eight new salespeople year-over-year, revenues was up 45% and operating income was up 78% on a year-over-year basis. So I think if you want to look through the quarter and probably zone in on what is the most instructive data for what -- in terms of what we're going to do going forward, it is looking at what Bounce did.

Because Bounce is an example of opening a cold start from scratch in truck brokerage, and three years later here it is doing $30-something-million in revenue, and $1 million to $1.5 million in EBITDA, and on a trajectory to continue to grow fast. So, we would like the new cold starts that we are starting to grow even faster and larger than that. But that kind of growth is really quite impressive.

Yes. Just turning you to the expedited business, you had a decent amount of gross yield pressure. It sounds like what drove that -- more loads brokered out versus using your owner-operator network.

How hard is it right now? We have heard more about increased driver turnover and the driver market getting tighter, but how hard is it right now to recruit -- find and recruit and retain, I guess, owner-operators? As you look out, what is the plan to gain more owner-operators moving forward and be able to I guess retain them?

Wow, it is super tough. The owner-operator universe is finite and not growing, and there is a lot of competition between many different organizations to recruit those owner-operators. Owner-operators are eking out a living, and they are switching for a few cents a mile.

And it is tough. It is tough to keep them. The turnover rate of owner-operators in our Group has been 60% to 70%.

When I was criticizing our people for such high turnover -- because at rentals we had in the teens-percent turnover, and we weren't satisfied with that, because there is a lot of cost to that turnover -- they educated me that we are actually on the positive end of the spectrum. Some of our competitors have over 100% turnover on a yearly basis of their owner-operators.

So we need to spend more time on studying what are the best ways to recruit and what are the best ways to retain owner-operators. It's not just what you are paying them per mile and how many miles you give them. But we are really going into that more deeply.

We have already started reviewing all our marketing and advertising campaigns for owner-operators. I met the week before last with our recruiting group in Buchanan, and they have got some ideas, and we are going to start acting on them.

Okay. 60% to 70% not a terrible turnover number.

Yes, I have to get used to those high turnover numbers.

All right. Thank you for the time.

Jeff Kauffman, Sterne, Agee.

Brad, just listening to the growth plan that you are outlining, I understand some of this is internal, some of this you are going to have to purchase. If I capitalize the amount of money it is going to take you to achieve the acquisitions as part of, say, CapEx -- and I think of it as money that needs to be spent for the business -- what kind of revenue growth do you need to achieve for the businesses to be self-funding, to incorporate your growth strategy?

Well, that's a good question. Let's look at different scenarios.

Let's look at one extreme scenario where capital markets close, even more closed than they are now -- because they are not fully closed now -- but close completely and stay closed completely for an extended period of time. So in that scenario we have got about $70 million of cash on the balance sheet. We've got a $10 million line of credit that we could expand probably to 3.5 times existing and pro forma acquired EBITDA. So we've got some extra tens of millions there.

So we would have roughly $100-some-odd-million dollars of spit to do acquisitions, cold starts, support the IT rollout. And that could double the size of the Company, and then we would keep growing the Company internally by adding salespeople. So that is one end of the spectrum.

All the way at the other end of the spectrum we say capital markets open up; our stocks goes up; we decide to tap the equity capital market and raise hundreds of millions of dollars over several years; and we match that with debt at a 3.5 times EBITDA basis. And we would be able to grow the Company far substantially larger than just organically growing it. But we would have dilution from that.

So we have got a business plan that will work with no capital markets raises. We have a business plan that will work with being able to raise lots of capital.

We have got a business plan that should work in a growing economy better than in a downturn, because we'll have more freight. But we have a business plan that will also work in a recession, because our margins should expand as carriers need -- as carriers value brokerage more in order to get less dead miles.

And we should in principle be able to buy companies at 1 or 2 turns less, as they are more motivated to sell. So I think we've got a flexible business plan that will work in all different types of capital markets and economic scenarios.

Okay. Well, that answers one of the questions. Let me ask the other one a different way.

I think you outlined five brokerage terminals this year; 10 that you are looking to add on the logistics -- I don't think in the next 12 months all 10. Plus attracting the right managers, attracting the right people; you're going to have some costs associated with that. Plus working capital that you're going to have as you expand the freight forwarding business, letters of credit, what have you.

How much cash do you think it takes to achieve those objectives in the first year or two?

Without doing any acquisitions, but just doing the things that you just mentioned, doesn't require a whole lot of capital. For each cold start you are talking $100 million of incremental cost for each location. It's basically rent, it's salaries, it's office furniture, it's computers, and not too much more than that.

Then you've got the centralized location where you will have IT and shared services that will leverage out as you grow the various businesses. That shared services will require something in the under $10 million range. That is the whole IT and the shared services will be.

Then the other component of your question, about what will it cost to add the agents, that costs minimal. That's in the hundreds of thousands of dollars each. It is basically similar to a cold start, where you are getting real estate and fronting salaries for a few months.

Okay. Well, I would argue you are in the right environment to do this. So best of luck to you and congratulations. Thank you.

David Campbell, Thompson, Davis & Company.

Morning, Brad. Good morning, Scott. Just wanted to get an explanation what happened to the Concert Group revenues and profits in the quarter.

CGL was down, and we are not satisfied with the results in that division. There really wasn't a good explanation as we met with management over the last couple weeks to review the numbers -- other than a little bit of lack of focus, the company was being sold, people weren't really drilling down with discipline and exclusive attention on hitting the numbers.

I think we are back on track there. As you may know, we promoted Dominick Muzi, and he is doing day-to-day operations there now. He seems very invigorated and focused on getting the right clarity of attention on hitting the numbers.

He's got a good business plan in place. He's got a plan to focus the time of the RSDs -- of the regional sales directors -- more on gaining new business. And he has got a good plan to open -- he has targeted very, very thoughtfully which markets he wants to open new locations in, and I think he's going to do a good job.

I gather from your comments that your domestic business was down and the international was up. Is that right?

That's correct. Which is not totally surprising.

Yes. Well, I think that the international business has probably always been their strongest side ever since they -- ever since the company bought into the Tampa operation.

Well, with such a small piece of the international business -- we're $10 million or $15 million out of $150 billion. So no matter what is going on there we should be able to grab market share and grow.

Right, yes; that's for sure. That's for sure. Okay.

Can you -- I take it there was $2.3 million of extraordinary costs, but they are really not extraordinaire. You're going to have the increased costs for your personnel, etc., in the fourth quarter.

So how do we look at the -- I mean, where are we headed in the fourth quarter in terms of salaries and purchased services costs? I assume the $2.3 million was in purchased services.

Yes, there will still be some headhunter costs that will show up and some of those other costs in the fourth quarter. Then starting in the first quarter hopefully the numbers will be cleaner.

But the bulk of the headhunter costs are behind us. We are not going to hire another 10 people on the senior level that we're using executive search firms for.

Right. Right.

David, the costs we broke out were more one-time in nature. We will be layering on some costs that offset that as well when you go into fourth quarter. That is why we didn't break out any adjusted EBITDA number. It is just telling you what the breakout was.

Right.

You will see, David, higher SG&A, because we brought on good people and good people cost money, and we are going to have higher salaries and compensation and T&E as a result of that. But I am totally comfortable with that, because we must do that in order to be committed to a business plan that is going to create a multibillion-dollar company.

We have got to have the management infrastructure in place and the costs that come associated with that in order to have the backbone to do that.

Right, right, right. So you are going to have some growth in salaries and related costs, but you will have less costs in purchased expenses in the quarter -- in the fourth quarter.

That is a fair statement.

Yes. Can you give us an idea on revenue trends, how the quarter went July, August, September? How it is going on in October, sort of by division?

Let me give it to you in Group, because it was more or less the same trend. July was horrible. July was a scary month.

August came back nicely and September had a nice seasonal boost from it. So the direction was up over the quarter, but it started off pretty shaky.

I don't think that was specific to our Company either. We have heard that from other companies as well. Maybe not as extreme, but the same general trend.

No, no, you're right. That has been the case. So October continued at that seasonally higher level?

You know, October was better than September overall. We are still going through the numbers; it is early November. I am not convinced that October was a bigger boost over September as October has been over Septembers in previous years.

But we are still drilling down in the numbers. It is too early.

I can tell you one thing. There's two different factors going here.

One is just external market conditions and just doing the best you can with either headwinds or tailwinds there. Secondly is internal focus of the Company. And like any company that is up for sale and is in the middle of a sales process, there's insecurity, instability, uncertainty, and people aren't focused totally on doing the business.

And now we are focused on doing the business. So I think from the things that we can control internally, apart from the market environment, we feel very good about where we are. I think the morale is good in the Company.

Underlying all the monthly trends you had the problem at Concert Group. So I assume they probably didn't contribute much to any improvement in September.

Actually they did. They did have a better September than they had in August; it was just short of plan.

I am not overly worried about that. CGL I think it was just a question of focus, and that focus is clearly back. I was in Downers Grove two weeks ago, I met with everybody. And people seem upbeat, people seem focused, people seem committed to running the business very well and I am confident they will. I am hopeful they will.

Right. I haven't been through all of the press release. I don't know -- do you have the SG&A expense by division in there?

Yes.

Okay.

It is broken out.

Okay, good. Well, I need to go through the details of the expense and profit and loss statement, and then perhaps I will get back to Scott. But thanks very much for your help.

Justin Yagerman, Deutsche Bank.

Hey, good morning, guys. It's Rob Salmon on for Justin. I guess circling back to Scott's -- to Jeff's earlier question about the scalability of your overall business, could you talk a little bit about your IT systems? Certainly you guys stand to benefit as you grew your business organically and add some tuck-in acquisitions.

How much growth would you need before you'd have to make a major investment in the IT system?

Okay. So we've got three divisions, and we have got two IT systems -- which is one IT system too many. We have one IT system that is working very well in expedite, and it's the most commonly used expedite software.

Bounce is also -- the truck brokerage unit -- is also using that same expedite software, which is a handicap because it's really not set up for truck brokerage. The growth that they've been showing at Bounce is even more impressive to me considering the handicap they have with using not the most perfect software. So that is going to have to get upgraded.

On CGL, they have a system that is an off-the-rack freight forwarding that has been customized for us, and it seems to be okay. The agents like it; the people in Downers Grove like it. But it's not fully integrated.

So I think what we're going to do is we're going to have a two-pronged strategy there on IT. Number one is a short-term strategy.

So for the cold starts and for Bounce will probably on a short-term or medium-term basis migrate over to one of the obvious choices, a TMW or McLeod or MercuryGate etc., and at the same time be designing a system that will be one integrated system for the entire Company. So that when we buy a company we say log off; here's your new username; here's your password; here is the tutorial. Welcome to the new system.

We want to have that well thought out in advance of going gangbusters on acquisitions. Not that we can't start doing acquisitions, we can; but before we do lots and lots of acquisitions, I very much want the IT to be very far along in its development.

And that is going to cost some money. That is going to cost in the single digit millions of dollars. And I am perfectly happy to spend that money because we critically need it. We have to have one system throughout the whole organization.

And that will probably take about 18 months to roll out.

Okay, that's helpful. I guess as you move over to the new system, particularly in Bounce, it feels like you guys could gain some productivity benefits from that. Could you talk a little bit about your longer-term expectations of growing the business from productivity gains -- based off of kind of transactions per employee or however you guys are thinking about it -- and how that fits into your I guess overall growth objectives, whether it be internal or acquisition?

I completely agree with the thesis that as we improve the IT situation in Bounce, and as we narrow down the dozens of metrics that they are following to just the more key performance indicators, and if we adjust in an intelligent way compensation, that we can improve the productivity in terms of loads per day, in terms of revenue per load, with the existing headcount that we have there.

Having said that, we will still add more headcount because there is $50 billion of truck brokerage business out there, and we are doing a whopping $30-something-million of it. So there is plenty of market share to gain.

No, that makes a lot of sense. I guess shifting gears to the expedited business, it sounded like you were calling out a little bit of some wage pressure on the owner-operator side. Could you talk about your expectations either for a driver pay increase or for sign-on bonuses to try and expand the owner-operator side of the business?

I don't have a fully baked plan yet to how we are going to achieve our goal to be a company of choice for owner-operators to come to. We've got thoughts in process. We had a nice brainstorming session a couple weeks ago.

Jeff Curry, the President of that division, has been calling and e-mailing with some great ideas that he has been getting from his people. And we are doing some focus groups with the drivers themselves. But we don't have a completely developed plan yet.

That is one that is very high up on Sean Fernandez's list when he goes out there, is to spend time with the recruiters and the drivers and figure out exactly how we are going to excel at this. But we have got to do it. We have got to crack that nut, because without capacity what have you got?

So we have got to increase our capacity. We have got to increase our owner-operators. We have got to decrease turnover.

It is not just if we pay them for the mile -- and they don't work for us, obviously. They are owner-operators that we have exclusive arrangements with, so they can change at any time. We don't own them.

No, that certainly is an issue the industry is struggling with right now. But I really appreciate the time and best of luck, guys.

Jason Seidl, Dahlman Rose.

Hey, Brad. Hey, team. Brad, on Express-1 in the quarter, we have heard a lot about a very condensed peak season, very tight inventory levels. Are you seeing any restocking right now? Could that potentially help Express-1 here in the current quarter?

I don't have visibility into it that deeply to really know the answer to that question. The expedite business is doing -- it's got an uptick; but I've got a feeling that is a little more seasonal and it is not something big, structural going on in the external market. I just don't know the answer to it.

Okay. When you are looking at your buildout on the brokerage and logistics side, are you thinking trying to do just straight dry van stuff? Are you looking a lot at maybe the more refrigerated market, which might be a little bit more nichey?

We've heard a couple companies for sale pop up here in the last year. I just wanted to know your thoughts of the mix of that business going forward.

Dry van is the biggest majority of the business out there. So if we are going to become a multibillion-dollar company we are going to a lot of dry van.

Having said that, reefer is great. And we are not just doing refrigerated in -- we are not just targeting refrigerated in truck brokerage, but we are targeting temperature control in expedited as well.

In one of our recent operating reviews the guys were very excited about the opportunity for doing more temperature control. They are doing -- getting all the certifications and upgrading the fleet and doing all the things that are required in order to get approved for government work, for Department of Defense work and some of the Defense contract work that requires temperature control. So that is a specialty we are looking at as well.

So, we will dabble in everything that is probably in the end proportionate to the mix it is in the overall population.

All right. Sounds good, guys. Appreciate the time as always.

Todd Fowler, KeyBanc Capital Markets.

Thanks for taking my question and congratulations on putting the team together.

Thank you, Todd.

Sure; thank you. Brad, I was wondering if you could talk a little bit more. I wanted to go back to the conversation on Bounce and the growth here during the quarter. Not having the full history I guess with some of the growth rates, you're maybe seeing a bigger than expected growth rate more recently.

The eight new salespeople here in the quarter, what is the base that that would be on?

You mean the amount of -- the revenue?

No, just the actual number of employees. I think you mentioned that you've got a new eight new salespeople on a year-over-year basis. What is the starting point for that? How many salespeople are we talking about in total than?

Last year we had at this time in the high 20s, I want to say about 27, 28. And this year, we have about 33.

Okay. Then of the 45% of gross revenue growth, do you have a breakout between what would be the volume component, what would be a pricing component -- you know, fuel and mix? Those sorts of metrics for the gross revenue in Bounce.

Don't have it offhand, sorry. But we can get it to you.

Okay, great. We can follow up on that. Then I guess thinking about -- obviously it's one thing to attract salespeople and attract people into Bounce from the sales standpoint. Can you talk about access to capacity within -- there has been some conversation about owner-operators within Express-1 -- but attracting capacity to the brokerage network? Both within the existing location and then your thoughts as you expand to the de novo offices, attracting capacity to really I guess what I would call the XPO platform at this point.

Yes, Greg Ritter, who I mentioned in my opening comments is someone we hired, he was with Robinson for 22 years. He's been in the business forever, has an amazing Rolodex of people who are in sales and are in carrier procurement.

We did hire in Phoenix for the first cold start not just a President to run then, Rob Martin, who worked for Greg in the past, but also a director of procurement, carrier procurement as well as sales.

So, we will have to hire people, and we will hire people who have long-term relationships with carriers and we will invest in that. That is in our budget and that is something that we are going to do.

We don't want to rely just on the load boards to get the capacity, and we are not now. But we want to decrease the amount of use of the load boards and more have our own carrier procurement people with relationships with specific carriers.

Do you have a sense at this point of your capacity on the brokerage side? How much of that -- is that like 80% comes from 20% of the carriers in your network? Or is a pretty diverse at this point? I mean, are you really sourcing a lot of capacity outside of a core group of carriers?

It's diverse. And what's interesting is I looked at a list of our top 20 carriers at Bounce and you would only recognize four names. So we are really using small and medium-size carriers more than the top 10.

Okay.

I mean I think I saw Covenant, I saw Werner, and one or two others; and all the rest were just very small, small carriers. Which is fine, which is great, because that is a carrier base that we are providing a real good service for. They may not have a huge salesforce. And they are good with us too, so there is some loyalty.

Sure. That makes sense. Then the last one I had, this goes back to a couple of the earlier questions on basically what you need to grow revenues at versus the investment that you are making in the business, and also some of the questions about some of the one-time costs in the quarter. But maybe just ask it a different way.

At this point exiting the quarter and as you think about 2012, what is the run rate that you are thinking about for corporate expense for the business? Either where it is positioned now or where you think it will be during 2012. How should we think about what the ongoing, recurring corporate expense for the business is at this point?

Corporate expense? You mean -- well, let me back up. We're going to open an office in Greenwich; that is where our corporate headquarters ends up being. Almost everyone I have hired other than the M&A team, who are going to be traveling all the time anyways, lives within an hour's drive of Greenwich. It's very convenient.

There we will have rent of several hundred thousand dollars. We will have about seven or eight senior executives there and admins. Each one of those executives will have salaries between $250,000 and $475,000 and will have target bonuses in a similar amount.

You will see non-cash expense for equity because that is really how I have incentivized the management team on the top is with restricted stock units and stock options. We can give you a detailed breakout off-line later if you'd like.

Yes, sure. Maybe I can follow up on that. I was just thinking about the $3 million that you broke out in the release of corporate expense. It sounds like that there is some number nonrecurring recruitment and indirect fees here in the quarter. If I was to think about what that number was going to be on a recurring basis going forward, that is the number I was trying to give that.

Maybe gave me an enough of that, but it sounds like it's going to probably be in the $3 million to $5 million range for an annual basis going forward.

Yes. Yes, yes.

Okay. Well, I can certainly follow up with the other details that I need. Thanks for the time this morning.

Perfect. Thanks, Todd.

Good luck.

Thank you.

Mike Baudendistel, Stifel Nicolaus.

Thanks. Wanted to ask a question about the longer-term growth strategy. You gave some great detail there.

I think I read that you wanted to grow to $700 million in EBITDA annually. Assuming that growth is relatively unabated and you become one of the largest brokers in the country, what would differentiate your business model at that point?

We're never going to -- well, never is a long time. I don't expect in the next five years to be the largest. C.H. Robinson has been in the business much longer than us, and it's going to be almost impossible to catch them. I don't think it is likely we will catch Landstar or Hub.

TQL, a private company, is right up there at a little over $1 billion. We will see who is bigger five years from now. They have $1 billion advantage over us at the moment, and we are doing acquisitions in addition to cold starts, so we might be able to be bigger than them in five years from now.

In terms of the differentiation, one interesting thing about this business is it is fairly commoditized, a little bit more than most other industries that I have been in. There is not a huge differentiation of service quality of the bigger companies, one to the other.

They are all fairly well-trained. They all have fairly decent IT. They are all customer-centric companies, and they are pretty well-run companies. It is really about hustling and about really getting productive and really focused on dialing for dollars and dialing for diesel.

I would say this, though, I think there is a big differentiation between the larger companies and the smaller companies. The quality of the IT is better at the larger companies. They can give fewer turndowns. You can give more quotes, so you turn down less business.

You can give more adequate accurate quotes. You're on the market; you're in the flow more, so you're not giving off-market quotes. You go more to the top of the [teledata] of the shippers. And when you are asking for quotes from carriers it is because you have real business to give.

So for all of those reasons and the quality of the training programs I think there is a differentiation between the larger companies en masse and the smaller companies en masse. I am not so sure that I can confidently tell you that despite our best efforts we are going to be significantly better at truck brokerage than the larger companies.

Great. That's helpful. Then I am sticking with the strategic theme. Most of the large carriers or large brokers focus on a transaction business models, kind of one transaction at a time. A few have tried to maybe differentiate themselves by going into a little bit more of a collaborative effort with shippers, focusing a little bit more on nonrecurring lanes. Do you have any thoughts on that over time as you gain scale?

I didn't quite follow the question.

Okay. Most are focused on one brokerage transaction at a time. You know -- I need a load of today, do you have a carrier for that?

A few of the brokers have taken an approach where they would like to work a little bit more collaboratively with shippers and service freight that is kind of in the same lane on a more recurring basis. Is that anything that -- do you have any thoughts there?

Oh, okay, so transactional versus more longer-term contractual business?

Right, yes.

Yes, the bulk of our business at first is going to be transactional, no question about that. Much lower barrier to entry and much larger business, actually.

The contractual business is attractive and is still tens of billions of dollars in size. We certainly will chase that, but that is a second priority over the transactional.

Okay, great. One final question. You talk about you want to pursue all these acquisitions, but you don't want to have any that have assets. Does that include intermodal containers? If there is an intermodal company that you think a business model would be augmented by having its own containers, either owned or leased.

Yes, well, you know, for the intermodal piece of the business we were struggling a little bit to figure out exactly what our strategy is going to be there. Because I think you do need containers. You have got to be asset-light; you can't be non-asset.

I think I'm starting to get to the point where I think you need to have significant capacity locked up contractually with the rails. I am not so sure five, 10 years from now being an IMC without any capacity and certainly without any containers there is really a place for that.

I think the world is moving more towards the JB Hunt, Hub, Pacer type models that have a little bit more asset intensity. Not a lot, but a little bit asset intensity and have deeper relationship in with the rails.

I am not quite sure what we are going to do on intermodal. We have got to be in intermodal sooner or later, because it's part of the flow and it will help service our customers to be a one-stop shop. But I am not quite sure how we are going to approach it.

In answer to your specific question about containers, when we do do intermodal I think we will have to have some containers. But not a huge amount, because we want to keep a very low CapEx model.

Helpful. Thanks very much.

[Tim Fronda], Sidoti & Company.

Morning, gentlemen. Thanks for your time. It seems like you had a nice increase in Express-1 shipping to Mexico and Canada. Do you see this as a major growth opportunity? How do you plan on capitalizing on this?

We love the Mexico business. I mean, Canada is fine too, but Mexico is a much larger growth. The people out in Michigan are very excited about what we are doing on the Mexican business.

We don't actually go across the border into Mexico. We go right up to the border. We go to Laredo, Texas, and then we hand off to a company we do a lot of business within Mexico. But -- we don't like the risk profile for a lot of different reasons in Mexico.

But that's a growing trade lane, and it's something that we are participating in. And it's mostly on the expedited side.

Great. Are you expecting price increases next year? How do you expect that to impact margins?

There will definitely be price increases from the carriers, fairly much across-the-board because capacity is tightening. You have the new CSA -- the regulatory environment and the demographic situation. There is no question in my mind that rates are going to go up on carriers next year.

That is not necessarily the end of the world for us, because we are middlemen. We are in between the carriers and the shippers and we pass that along. But that is something that is in the works, in my opinion.

Do you have any idea how many employees you expect to hire over the next 12 months for each of the business lines?

Well, let's build that up ground-floor. If you've got the -- let's look at the cold starts. Each one of those cold starts will start off with just a handful of people, five or so people. You will have a president, you will have sales, you'll have carrier procurement, you'll have some support.

But each one of those cold starts if they are successful will grow to 50 to 100 employees over three to five years. A general rule of thumb in the brokerage business is roughly -- there's a lot of exceptions -- but roughly $1 million of revenue per head, per headcount. So if we got each one of those up to say $50 million to $100 million, you'd expect to have headcount of 50 to 100 or so at each one of those cold starts.

On the three existing businesses that we have, in Express-1 in Buchanan, which is the expedited business, that will be completely related to and proportional to how successful or unsuccessful we are at increasing our owner-operator base. It will be proportional to that.

As we increase capacity -- as we increase the number of owner-operators we will increase sales and support. And I really couldn't put a number on that yet, because I don't know how successful or unsuccessful we will be at growing our owner-operator base.

I am hoping that we will come up with a strategy and execute it well, that we are wildly successful; and there are some examples of competitors that have done that very, very well. There was a company that is owned by a private equity company that is a competitor of ours that was roughly the same size as our expedited unit several years ago, that now is 2.5 times our size.

So it can be done organically, and hopefully we are going to do that. But I don't know the answer to that.

On the Bounce side -- so Bounce is one unit that is doing truck brokerage. Right now it's got 30-some-odd employees in South Bend. If we add over time -- I'm not saying next year or even over the next two years. If we add another say 50 employees, that is a business that could be doing -- and we get some productivity measures improving -- we could be doing $70 million to $100 million of revenue with that extra headcount.

On CGL, it is mostly an agent-based model. So even though we have a few dozen people in Downers Grove doing all the back-office stuff, the agents in the field are really not our employees. They are not on our payroll. So as we add new agents then that doesn't add to headcount for us.

As we add new stores, as we had new locations like we are opening in Charlie, there you will have offices that are minimally staffed. Usually about five or 10 people to start with, and that will get by for a number of years.

As I mentioned before, Dominick has a plan to open about 10 over the next -- let's give him a couple years. He said a year, but let's give him two years and just -- things may slip. Each one -- some of those locations will be store-owned and some of those will be agents. Let's just say for the sake of argument it's half and half. So maybe we're adding another 25, 30 people over the next couple years on the payroll at CGL.

This ignores the acquisitions, obviously. With acquisitions as we buy companies they will go on our payroll.

Right, great. Thanks for your time. Good luck.

Thank you.

Kevin Sterling, BB&T Capital Markets.

Brad, just have kind of a big-picture question for you. As your XPO Logistics name is getting traction and getting out in the public domain, do think you are now beginning to show up on the radar screen of larger shippers? Maybe as your salesforce makes calls, do you sense they are gaining traction with larger shippers?

Do you mean is our sales force -- I'm not quite sure what you mean. You mean is our sales force getting better relations with the larger shippers?

Yes, exactly. As you guys grow, as you are starting to grow, maybe gain a little bit of scale, is that relationship with the larger shippers growing? Are they kind of maybe -- hey, let's consider using these guys?

Yes, there is more dialogue going; I am aware of that with the least three of the top 10 shippers. But I am not jumping up and down and bragging about that, because let's face it, the top 10 shippers are really smart and they are very aggressive on -- they have rooms full of large numbers of salespeople in multiple locations, and they know the market really well and they price very competitively.

They don't need us so much as medium-size and smaller carriers do. Now, that is on the carriers side.

On the shippers side, we absolutely have gotten better inroads with shippers, larger shippers, the very large shippers. I want to make sure that our performance is there to support it. I want to make sure our infrastructure, IT, the quality of our business gets off on the right foot with those new accounts.

But yes, those large shippers are certainly open-minded to any way that they can get more capacity. And we have had dialogues with quite a number of larger shippers about using us, and I want to make sure we are top notch before we go too full throttle with them.

Got you, got you. Okay. That's all I had. Thank you and best of luck.

Scott Schneeberger, Oppenheimer.

Thanks. Good morning, guys. I have two; I will ask them both upfront just to get them in for time. Brad, you spoke earlier about -- got into a little bit about how you set up the incentive comp for the senior executives. If you could elaborate a little bit as to why the structure you chose? And then also a little bit on how you are going to incentivize the compensation for the mid-level workers as well. Thanks.

Good. On compensation, here is the philosophy. The philosophy is that people should be rewarded for performance in the business that they are actually controlling. So in general, lower base salaries, higher incentive compensation.

On the senior level, these are individuals who are touching the entire Company. So I felt to align their interests with the shareholders as a whole and share price appreciation made a whole lot of sense.

On the field level, I am not crazy about stock options in the field. I have had mixed results doing that in previous companies.

Sometimes it is kind of random. People get options at certain prices that happens to be the day they joined, and that doesn't necessarily produce fairness. And people who perform well may not get paid as much as people who didn't perform well. So we are not really big on putting a lot of equity in the field.

What we are really big on is low base salaries and then sort of eat what you kill. Big incentive compensation for producing results.

We have salespeople at Bounce, for example, that are making well over $100,000, which may not sound like a lot to someone in Manhattan or in Greenwich, but in Buchanan that is a nice salary. That is a nice total compensation. But the guaranteed base of that compensation is only about $30,000 or actually a little bit less.

Great, thanks. Then just how do you think the look of the business will be with regard to mix of your segments looking out two to three years, given the plans you are setting forth?

My sense is two or three years we are going to be largely truck brokerage. Truck brokerage is a business that I really understand, that I really relate to, that I really feel comfortable with, given my background in oil brokerage in my earlier years.

I have spent the most amount of my time over the last year and a half meeting with truck brokers. There is an addressable market of $50 billion and it's growing. I think that 15% penetration rate that goes through the 3PLs right now is going to increase over time. So I am super excited about truck brokerage.

Having said that, expedited is something that is going to grow. It's only a $5 billion or so -- actually even a little bit less than that -- addressable market. So it's never going to be -- we are not going to build a $5 billion company in expedited because we would have to have 100% market share, and that is certainly not going to happen.

But we are going to grow expedited. It is a nice business. It is a real business. And shippers appreciate it and we can do cross-selling from it.

We will continue to grow that as well, but not as much as truck brokerage. We won't be doing cold starts and lots of acquisitions in expedited.

On the freight forwarding part we are going to grow it. We are going to grow it by opening new stations. We're going to grow it by buying some complementary companies. We are going to grow it by attacking the international markets.

In principle that business is 3 times the size of truck brokerage. It's about a $150 billion global market.

But I am going to go a little bit slower on freight forwarding than truck brokerage, because freight forwarding has a few more moving parts to it. It is more global, which is opportunity but it's also a little more risk. So I don't think that will be as big a part of the business several years from now as truck brokerage.

Thanks, good luck.

It appears there are no further questions at this time. I would now like to turn the floor back to management for closing comments.

Thanks, everybody, for participating on our first XPO Logistics call. We look forward to seeing you in person and talking to you on the next conference call. Have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time and thank you for your participation.