XPO Inc (XPO) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the XPO Logistics Fourth Quarter and Full Year 2011 Results Earnings Conference Call. My name is Janata, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. Before the call begins, let me read a brief statement on behalf of the Company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the Company will be making certain forward-looking statements within the meaning of applicable securities laws, 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.

A discussion of factors that can cause actual results to differ materially is contained in the Company's SEC filings. 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.

During the call, the Company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the Company's earnings release and the related financial tables.

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

I would now like to turn the conference over to your host for today, Mr. Brad Jacobs, chairman and CEO. Please proceed.

Thank you. Good morning, everybody, and welcome to our fourth quarter conference call. With me here today are Scott Malat, our Senior Vice President of Strategic Planning; John Hardig, our CFO, who joined us just last week; and Troy Cooper, our Senior Vice President, Finance.

Since our last quarterly call, we've achieved four major milestones in our business plan. First, with John's hiring -- we've now filled out the senior management team. John knows this industry inside and out, and we're very happy to have him here.

Second, we've kicked off our program to open cold starts across the country both in truck brokerage and in freight forwarding. In December, we opened our first truck brokerage cold start in Phoenix, headed up by Rob Martin. Rob previously worked at Knight Brokerage and CH Robinson, and he and his team are experienced pros at scaling up brokerage operations. Phoenix is off to a good start, and they're already moving freight with an impressive list of customers.

I'm also pleased to announce that we've hired Tim Thomas to open our second truck brokerage cold start, which will in Ann Arbor, Michigan, and which we expect to start operating in April. Tim comes to us from Allen Lund and, before that, CH Robinson. We expect Tim and his team to also get off to a fast start.

We're on track to reach our goal of five new truck brokerage cold starts by the end of this year and 20 in total over the next several years. I'm also happy to report that we've opened three new freight forwarding locations in Newark, Charlotte and Atlanta. We want to open a total of ten freight forwarding locations over the next couple of years, so we're moving at a good clip on that.

The third milestone is our IT platform. This has been a priority for us, and we're preparing to roll out phase one in a few weeks. A single scalable IT platform for the whole company is key to support not only the growth of our cold starts but also the integration in growth of the companies we'll be acquiring.

The fourth area we've put a lot of energy into is optimizing our current operations, and we're having success there. In our Express-1 Expedited business, we improved our gross profit by 18%, as we increased our cross-border Mexico activity, as well as the volume of our temperature controlled loads.

In truck brokerage, we grew our gross profit by 27%, by increasing the size and productivity of our sales force. In freight forwarding, we have a number of initiatives to kick-start the business, including the new openings I mentioned a minute ago. In the fourth quarter, we stabilized freight forwarding revenues, following declines earlier in the year.

The next milestone that's in our sights is acquisitions. Though we don't have any closed transactions to announce today, we can share with you that we're in active negotiations with a number of targets. And acquisition activity should pick up now that we have the management team and IT in place.

Two things I'd like to say about the acquisitions we're currently working on. They're primarily truck brokerage, and they're all highly scalable, which is the main characteristic that we look to acquire. Our acquisition pipeline is robust, so please stay tuned.

I'd now like to turn the call over to Scott, who will review the financial reports. Scott?

Thanks, Brad. For the quarter, our business unit showed improvement, although the planned costs of putting our executive team and infrastructure in place reduced our profitability. We continue to grow our Express-1 and freight brokerage businesses, and we're starting to see the early results of the plans we put in place to drive growth in freight forwarding.

Starting with our expedited transportation division, Express-1, gross profit increased 18%. The key to this growth was the expansion of our cross-border Mexico and temperature controlled businesses, as Brad mentioned. We increased revenues by 52% in these two areas combined. In addition, we brought more discipline to pricing and were able to boost our margins. We were named carrier of the year in our category by two important customers, UPS Freight and Whirlpool.

Looking forward in expedited, we're focused on our owner-operators. We've done an extensive examination of our recruiting efforts. We've put a new recruiting software package in place. We've added recruiters. We've revamped our messaging to highlight the Express-1 value proposition, and we've enhanced our referral program, all of which will help us recruit quality owner-operators. Most important, we're working hard to get all our owner-operators more miles across high growth verticals.

In freight forwarding, while our revenues were down 5% from a year ago, revenues were relatively flat with the third quarter, so we think we've stemmed the tide. Our customer base has been more consistent after some project-based business from 2010 came to an end. And we're going more on the offensive; our plan is to add more stations to gain critical mass.

With truck brokerage, we continue to grow our Bounce Logistics unit at a very strong clip. Revenues increased 27%, and operating income was up 43%. To keep up the momentum, we've started to add new salespeople, and we're working in a number of ways to make our current sales more productive through best practices and our new IT platform.

When we add up these three business units, the operating income from our segments increased 31% on a year-over-year basis.

On the cost side, we invested in an expanded senior management team and infrastructure. This resulted in a $2.1 million EBITDA loss in the quarter. However, this loss includes $1.2 million in one-time compensation and recruiting related fees, and $882,000 of non-cash, equity-based compensation. EBITDA would have been roughly breakeven for the quarter without these costs.

We expect roughly $11 million in additional expense in 2012 from our investment in the senior management team and infrastructure. We expect $4.5 million to $5 million to come from non-cash, equity-based compensation.

With respect to liquidity, we currently have $74 million in cash. We're in the market for a debt facility that will allow us to borrow against receivables both on our existing business and on acquisitions as we complete them.

As we look out across the year, we're targeting revenues exiting 2012 to be on a run rate of at least $500 million. We expect roughly half of that run rate to come from our existing operations and cold starts, with the balance from acquisitions.

The important thing to consider as you think about that run rate is the substantial growth built in beyond 2012. This year, we'll be expanding our sales force for both our cold starts and acquired companies. We expect these investments to result in significant growth above that $500 million level as we move into 2013 and beyond. That is in addition to the growth from the next round of cold starts and acquisitions.

To put the earnings power of that $500 million run rate into perspective, we would expect to reach a 5% to 7% EBITDA margin over the longer term, in line with what we see at most of our peers.

Lastly, we also wanted to mention we're going to be in Boston for the UBS Small/Mid-Cap Conference on February 28th. And we're going to be presenting at the JPMorgan Aviation Transportation and Defense Conference in New York on Wednesday, March 14th.

With that, we'll ask the operator to open the floor for questions.

(Operator Instructions)

Your first question comes from the line of Peter Nesvold with Jefferies. Please proceed.

Good morning, guys.

Good morning, Peter.

So I guess the IT platform is closing up or closing in -- on the timing of that, and the first acquisition, so there's not a lot, maybe, that we can measure yet from the outside. Brad, I guess -- so maybe one question might be, if you're 90 days further into this strategy what's been the biggest surprise as you've been putting together some of these actions?

There's more lack of surprise than there is surprise. I think they're going pretty much on plan. The cold starts, a little ahead of schedule. Acquisitions, a little bit behind schedule, but they're coming along. The IT is on track. The senior management team -- I'm very, very pleased with what we ended up putting together and that's now complete and behind us last week.

So some ahead schedule, some behind schedule. Overall, not too many surprises.

Do you anticipate we'll see an acquisition before the next quarterly report?

I do.

And do you anticipate that will be a platform deal, will that be a large deal, or do you see yourself starting with some smaller deals first?

I'd rather not comment on that. But we're talking to many people right now, and we're in active negotiations with a number of different targets, both small and large.

Then last acquisition question. How quickly do you anticipate you'll go through the cash that you have on hand that you have allocated for acquisitions?

Months, not weeks, certainly not years.

Okay. And then, from an industry standpoint, how would you describe -- I mean, capacity seems to be fairly balanced right now. Some of the other brokerage operations we're seeing, that's setting up a difficult environment. How does that impact your ability to get yield at this point?

Well, right now, we're so small. We're just a tiny, tiny little percent of the truck load brokerage market. We're able to grow market share even in a flat market. So in truck brokerage, our gross profit grew by 27%. That's not because the market as a whole has been growing 27%, it's because we're adding salespeople and grabbing market share.

So I think for the long foreseeable future, we should grow at greater than the industry average.

All right. Thank you.

Your next question comes from the line of Justin Yagerman with Deutsche Bank. Please proceed.

Hey, good morning, guys.

Good morning, Justin.

Wanted to ask a quick question on the expedite side. You know, I know the focus is primarily on truck brokerage from an acquisition standpoint. But if you had a decent opportunity on the expedite side, is that something you would consider?

Yes.

Okay.

There's a number of expedite companies that we're talking to. I was the keynote speaker at the Sylectus Conference, which is the big industry software -- a couple weeks ago in Orlando. And I was with over 200 of our competitors. And Dick Metzler, one of our M&A guys, was with me there. And we had some great conversations with a lot of people who were interested in selling.

It's a little different than buying a truck broker, because it's not quite as sticky -- when buy an owner-operator model, and the history of expedited acquisitions hasn't been as sticky in terms of post-acquisition continuity as truck brokers.

And you can hire -- you can sign up truck brokers, independent contractor -- excuse me, owner-operators with a signing bonus of $5,000 to $15,000. When you go to buy an expediter, you're going to pay much more than that for owner-operator. So, the buy versus build conundrum is a little stronger there.

No, that's fair, and that's good color. Thanks. In terms of the thought process on the cold starts, just trying to get my head around how much they're going to add and what the profitability expectations are from maybe day one to a quarter out. How should we think about Phoenix from a contribution standpoint in the coming quarter? And how should we think about Ann Arbor in terms of its ramp as you get that open?

Justin, it's Scott. On the cold starts, we would expect $5 million to $10 million in revenue in the first year. Some are going to do a little bit better, some a little bit worse. Example of Phoenix, where we brought in a very strong team and good relationships that they brought in and experience, we'd expect that to be more of our strong point of probably toward the higher end. And then other ones that we get later on could be lower.

The real goal here is to get the average of the 20 that we open to $75 million. Let's say between $50 million and $75 million. Some are going to be higher than that and top out at hundreds of millions, and some are going to top out at $10 million to $15 million. So you hope to average around $75 million each.

What's the timetable to get that --

From a --

-- full potential run rate, do you think?

Sorry, what was that?

What's the timetable to get to that full potential run rate? So if I've got a potential of $50 million at my cold start, how long would you expect me to get from zero to that number?

We tend to think in terms of five years to get to your potential. In terms of profitability, the first -- the first year -- the first six months are not profitable. You turn breakeven pretty quickly. Your costs are highly variable. So in the third quarter, you could be breakeven on an EBITDA basis. Free cash flow is a little bit after that, because you have to fund the working capital gap.

Got it. Okay. And then, I guess the last question would be on the IT system, and how immediate of an impact do you think that we'll see that have on results from a bottom line standpoint? Is there going to be costs involved in terms of Q1 costs that we should see with the startup of the IT system?

Where would we see that impacted -- on the margins, because you'll get better optimization of freight matching? How should we think about that?

Justin, so the IT platform is included in our target for $11 million in incremental SG&A. It's around $2 million in that -- of spend in 2012. We look to spend in the neighborhood of $10 million over the next several years in IT. Some of that will be capitalized, some of that will be expensed.

In terms of the impact from the IT system, I think what you'll see there is a ramp-up in revenues. We'll do a better job at pricing capacity to get more business. We'll get less turn downs. I think we will source capacity better along with the experienced team that we're bringing on with source capacity. But I would really expect that as we ramp up our business, that's what's going to support that growth.

Great. All right, guys. Thanks for the time. Appreciate it.

Thank you.

Your next question comes from the line of Kevin Sterling, BB&T Capital Markets.

Thank you, Operator. Good morning, gentlemen.

Hey, Kevin.

Brad, when we look at your cold starts, it seems like you're having some early success in Phoenix with a good team and relationships. Is Phoenix the model you plan to roll out to other cold starts where you bring an experienced team, or will it be slightly different as you ramp up future cold starts?

Each cold start revolves around one person, the branch president. And that branch president has to be somebody who is very experienced in this business, is not learning on our nickel, someone who's been there and done that. Someone who has a demonstrated track record of proven success, of growing the brokerage operation from preferably stand-still or almost still-still, to something tens of millions or even hundreds of millions of dollars.

And we're on an eager, thorough search for the best possible people, and we're interviewing lots and lots of candidates for those positions. That person then goes ahead and recruits people either from the industry, which in the case of Phoenix is what Rob decided to do, or from the industry and new recruits, people right out of college, for example, or just new people altogether.

And that's -- will be a little bit different in each location, but what will be the same in each location is that branch president will be the big leader for each branch.

Thank you, Brad. Are you having some success in talking to potential branch presidents?

Yes. Yes. I mean, Greg Ritter basically spends three-quarters of his time just doing exactly that.

All right, great. Kind of switching gears here, as you think about the expedited business, what are your customers thinking about -- because we look at inventories to sales are very lean inventories. Are your customers -- are you seeing business strengthen in the expedited market? I know you talked about any potential acquisition opportunities.

What's your customer feeling, I guess, as regarding business trends as we look out to 2012, particularly as it relates to lean inventories and just-in-time inventory?

Our sense is it's kind of flat. I wouldn't say it's as buoyant as the truck brokerage part. But because we don't have a significant market share in a few fast-growing sectors, we just haven't focused on them as much the last few years, we have an opportunity to take market share and compete there.

For example, the cross-border Mexican business, very fast-growing for all the reasons I'm sure you know about, about Mexico being the next China with the cheap labor and so forth. And auto and pharma doing a lot of things in Mexico. A lot of that lends itself to expedite and hot loads. So we're chasing that very, very aggressively and trying to take market share in the cross-border Mexican business and succeeding.

We're also chasing more pharma business because that's a nice niche that has lots of volume that we weren't chasing so intensely, and we're having success as well. And then, all the defense related business. Now, defense as a whole is not growing very much because of what's going in the defense budget as a whole, but our market share on that was very, very slim. Almost negligible. So, we're putting a lot of resources on competing and grabbing market share on that as well.

So we're chasing the highest growth segments, and we expect to take market share there.

Okay, great. Just kind of another follow-up, switching gears a little bit, do you see any intermodal opportunities out there?

Yes.

Okay.

Yes. Earlier this week, when we had our M&A recap of what we're working on with Dick and Tom and Scott and John and I, of the main ones that we're working on, there are three intermodal opportunities, and it's something that we're interested in. As with all the acquisitions, it's a question of price and how scaleable the business is and how compatible we are with the sellers.

Okay. Great. Just one last question. This is actually a question for John. And, John, I'm just curious as to the opportunity that you see at XPO Logistics. I know you recently joined. I'd just like to maybe hear your thought process as to why you joined and the opportunity that you see as CFO.

Sure, Kevin. You know, hey, I've covered this industry for a long time, and I've always recognized that there was a huge opportunity in the freight brokerage market. And when I learned that Brad was putting together a team and going to start a process to build a company in this industry, I just thought here's a person who really could do something special and build a very large company with very high quality in a very short period of time.

And then, as I saw the team he was putting together and the plan that they put together to follow, I just thought it was a compelling opportunity, one that I thought I could add a lot of value to and was a unique opportunity for me personally. So I think the opportunity here is just a compelling one.

Okay. Well, great. That's all I had. Thanks so much for your time today and best of luck.

Thank you, Kevin.

Your next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed.

Thanks. Good morning. Brad, it was my understanding that you might make a sizable acquisition to procure an IT platform, yet you seem to be very aggressive with what you're doing organically. Could you speak to that? Is this it, and how you're going to go and just build, or is there additional padding you're going to do from outside?

We're doing it a little bit different than I did in my last job, where we bought an IT company. Here, we hired Mario Harik, our CIO. And within a very short period of time, he's really canvassed the entire industry, both in terms of competitors and developing relationships with CIOs of the competition and with all the vendors.

And we put out an RFP to quite a number of vendors, and I'm very happy to say that we've designed a system -- I should say Mario's designed a system -- Mario and the other MIT grads that he's recruiting for our little IT group in Cambridge, Massachusetts -- that will be one single IT platform for the entire company that gets us where we need to go. And that will start rolling out in a few weeks.

So, when I hired Mario, he was very adamant with me of, are we going to give him the finances -- are we going to give him the money, the capital to really develop a serious IT system. I said, unequivocally yes, no question about that. We need IT. We need to be competitive on IT. We have to have as good or better IT as anybody else in the industry, and we need it fast.

Thanks. Switching up a little bit, the cross-border Mexico, temperature controlled activity, could you speak to some of the challenges there? Sounds like you're aggressively pursuing. Just curious what you face on the challenging front.

On the challenge -- it's a good question. We've been growing so fast in the temperature controlled and in the cross-border Mexico that it's kind of tough to say. There's just a lot of share out there. It's actually a market that's growing from a kind of cross-border perspective. We do use partners in Mexico to move the goods, so we don't face many complications there. Things are just very quick and steady. A lot of big opportunity in Mexico.

Thanks. Just one more from me -- kind of a broad question. But, Brad, curious how you're spending your time, what your view is on integrating everybody in the early stages. Or, is it just everyone go attack your task? Just kind of an organizational question from a high level. Thanks.

Well, it's certainly not everybody go about the task. It's very much integration and optimization. Sean and Troy are all over the operations. They're not working on acquisitions. They're not working on investors. They're hardly working on any M&A, although they do pipe in on some of those calls.

They're really spending 95% of their time on operations and maximizing the profitability of the businesses that we own in all three of our business units, and we've been showing very good results in that matter.

Now, you asked me how I'm spending my time personally. So I'm spending my time about, oh, I'd say about a third to 40% on M&A, mostly with Tom and Dick. I'm spending some amount of my time on investor relations. I've been going out with Scott, and now John will help as well on that.

And I've been spending some of my time with Troy and with Sean on budgets and on MORs, and in understanding what our strategies and what our plan is specifically to maximize the profitability of each one of our divisions.

Thanks. Good luck.

Thank you.

Your next question comes from the line of Bill Greene with Morgan Stanley. Please proceed.

Hey there. Good morning, guys. Hey, Brad, I'm curious, when you do these, can you remind us on the acquisition front whether or not equity would ever be a component, or is it really just small enough that you can do it with the balance sheet capacity you have?

Our strong bias is to not give out equity in acquisitions if we can avoid it or unless it makes a real lot of sense to. The simple reason being my experience over the years is when you give equity in acquisitions, they don't hold it for a real long period of time.

So I'd rather -- and also, you don't necessarily get full credit as you would with a cash deal. So I'd rather sell the equity when the stock price is more appropriate to real institutions that are in the business of owning stock and give cash to sellers.

Now, having said that, there will be exceptions. There will be times where, like with the senior management team, where I've heavily given out equity for compensation, where we want to align the financial interests with the people who we're acquiring with the acquisition with all the shareholder base.

So mostly in the acquisitions, you want to structure the compensation for the post-acquisition compensation to be correlated to the profitability improvement in that business. But in some cases, in some acquisitions, the people that are coming with the acquisition are of a certain caliber and a certain interest and a certain age in some cases, where they'll be involved with the Company as a whole, not just with the company that we're buying.

In those cases, it makes more sense to have their financial interests aligned with the senior management team, with the shareholders in terms of giving them equity with a lockup.

Makes sense. So, how do you think of kind of a timeline in terms of increasing float in the public markets for XPO? What's sort of the right way to think about the timing on that?

I think it all depends on the stock price. If the market rewards us with a higher stock price after we've done some acquisitions and after the cold starts start performing, we post some good numbers on the board, we could issue some equity. We have tons of opportunities to use that capital in very accretive ways.

We don't need that. We don't need that right now. Over the next five years, we're going to need equity. We're going to need somewhere between $100 million and $400 million of equity in order to get up to $4 billion to $6 billion in gross revenues. But we don't that now. Right now, we've got enough cash in the balance sheet. And as Scott was talking about before, we're in the market for an asset-backed loan against the receivables that will give us some more liquidity.

We could always do -- if we had a specific acquisition opportunity that exceeded our current cash on hand, we could always do some quick private placement with a number of people who have expressed interest in doing that with us.

Okay. And when you look at the acquisitions that you're currently looking at, are these at all auctions? Is there any competition for this kind of roll-up approach? Or, what's the dynamic there?

Almost none of them are auctions. Almost none of them have bankers, because most of the ones we're looking at are on the smallish side. So most of the ones we're looking at are between $30 million and $150 million in revenue. So, EBITDA is $1 million to $4 million, something like that.

And, there, you don't have private equity interested in that, by and large. You don't have too many other strategics going on that smallish kind of level. So, there really is little or no competition on almost all of those.

Having said that, we're also looking at some others that are larger. And once you start getting up to $10 million, $15 million plus in EBITDA, there's often a banker, more often than not, and there's often a process. And if it makes sense, we'll participate in those processes.

Okay. And then, Brad, I realize that each individual of your management team will be incentivized on certain individual goals. But when you look at it as a whole, what are the key drivers to management getting paid? Or, is it sort of growth on pure sort of organic earnings, or is it the number of acquisitions you do, or how do we think about what the right drivers there are?

The right drivers are creating value. So you create value here by, first of all, getting revenue. You don't have revenue, we're not going to be able to create profit. Secondly, creating profit. How are we going to create profit? We're going to create profit by the cold -- in three different ways.

The cold start program, we're off to a good start. We've already got five of them going. And we'll roll out, according to the plan, a total of ten freight forwarding locations over the next couple of years on freight forwarding. On truck brokerage, we want to roll out about 20 over the next several years. We have 30 cold starts between freight forwarding and truck brokerage. Those are very, very good long-term returns of capital; excellent returns of capital, because not too much capital goes into them. But they're diluted at first, and they're slow, and they take time. That's all right. That's one part of the Company that's growing. And to the extent we're successful at that cold start program, we'll create value.

The second wing is acquisitions. On acquisitions, the key there is to make sure we do good acquisitions -- make sure we do acquisitions that we have a good relationship with the sellers, that we have a good plan in place to scale up those businesses after we buy them. That if we buy a business doing $50 million of revenue, that we're growing that; and two years later, after the acquisition, hopefully that's a $100 million business.

So are they scalable businesses? How well do we integrate them, how well do we optimize them? And optimizing is on both levels, on the cold starts and on the acquisitions. So, running a tight ship and doing all the professional management practices that Sean and Troy have been putting into the field.

Does that answer your question?

That was very helpful. That's great. I really appreciate all the time. Thank you.

Thank you.

Your next question comes from the line of Tim Fronda with Sidoti & Company. Please proceed.

Good morning, gentlemen.

Good morning, Tim.

Just with the acquisitions, for this initial round of acquisitions, do you expect to limit yourself to the cash on hand, or try to utilize debt immediately for that?

Well, we have about $74 million of cash. We're in the market for an accounts receivable loan that will be an accordion that will expand with the receivables of acquisitions that we buy. That holds us over for the first round of acquisitions, unless we do a larger acquisition, in which case then we would either do one of two things.

We would either leverage up temporarily to three or four times EBITDA, something like that, and then re-equitize when it made sense. Or, depending on the stock price, we would go right to equity.

But we're very, very sensitive to the price at which we issue equity, because when you look at the five-year model, the creation of value depends on several things; how many cold starts we do, how successful those cold starts are, how many acquisitions we do, how successful they are, what prices, what multiples we pay for them, how much we increase them afterwards, and how much equity and at what prices we dilute at.

So, we're sensitive to the prices. So, we're going to have to be opportunistic and agile to thread between the debt market and the equity market. We don't want to get leveraged up a lot for a long period of time. That's not our plan.

Okay. And on the SG&A side, I know you said to expect another $11 million in additional expenses. Is that going to increase quarter after quarter? When do you see that sort of flat lining?

Well, SG&A will decrease as a percentage of revenue, as revenue increases, so as we add on the acquisitions. SG&A, as a pure number, I don't envision cutting that back. I've been adding to SG&A as an investment in the future. Now, that's an unorthodox business plan, and it's an unusual business plan to take a company that was doing $11 million EBITDA and then add $11 million of cost for the senior management team and infrastructure.

But that is the business plan. That was the business plan from day one. And I feel very comfortable with that business plan, because now we've got an infrastructure in place to grow the Company rapidly to a very large size over a five-year period.

Great. Thank you for your time.

Thank you.

Your next question comes from the line of John Larkin with Stifel Nicolaus. Please proceed.

Good morning, gentlemen.

Good morning.

You were talking a minute ago about your preference to use cash in compensating sellers in the acquisition arena. Do you also believe in earn-outs as a way to keep people focused on delivering the results that they promise at the time of the sale?

Many times, yes. Earn-outs are not something we invented. They've been around for a long time -- when you can't bridge the gap on seller expectation versus our expectations and also to motivate the behavior of the people post-sale to earn.

Having said that, it depends who the seller is. If the seller is someone who is older in age and is going to be leaving the business and hasn't been really involved in the day-to-day business and has basically been sort of absentee owner, then there's really no purpose in giving an earn-out usually.

If the sellers are people who are going to stay with the business and build up the business, then it makes a heck of a lot of sense to be giving earn-outs.

Thank you. Next question relates to a little more granularity on the market segment focus of each of the businesses. You were sort of helpful in the expedited business talking about pharmaceuticals and so forth.

But if we do the same sort of deeper dive in the other businesses -- in brokerage, there are a lot of different ways to come at that -- truck load dry van, LTL, reefer, flats, short haul, regional, long haul. Is there any particular focus, or is it more of a comprehensive set of truck brokerage services that you plan to offer?

Well, our goal is to get big. And in order to get big, we can't be restricted to just doing reefer, to just doing flatbed, just doing short haul. We're going to ultimately end up doing mostly dry van because there is mostly dry van. Having said that, we will mostly participate in all the verticals. Why not?

Okay. Then on the air freight side, is that more of a domestic focus, international focus, combination of the two?

Both. It's both. CGL's been doing domestic air and international air.

Okay. And then on the intermodal side, is that something that would be a standalone unit, or would that be part of the truck brokerage operation? Do you envision your truck brokerage folks also selling intermodal, or would it be a standalone business?

It would be integrated. So there would be -- we haven't done it. I don't want to get ahead of ourselves here. We haven't bought any intermodal companies. If we did buy an intermodal company, I would envision that being physically located where it's located, but integrated on an IT basis and on a compensation basis and on a corporate culture basis with the other parts of the Company to cross-sell.

And when we had our national sales meeting a couple weeks ago down in Florida, we had salespeople from Bounce. We had salespeople from CGL. We had salespeople from Express-1. We had all of our salespeople and one -- national salespeople.

And one of the hot themes of the conference was, wow, there's a lot of opportunities to cross-sell here and share customers and to get greater share of wallet of customers that one of our divisions has a great relationship with, and maybe the other two divisions aren't even doing business with yet.

Okay. Thank you. And then, also, I'm intrigued by the fact that you have kind of a dual path acquisition program. One is a fairly aggressive set of cold starts with very good people that you're recruiting from competitors, it sounds like. And then the acquisition program.

How do you handle a situation where, let's say you have great success with a cold start in Phoenix, and one of the acquisitions you're looking at is sort of focused in that same general geography? Would you integrate the two, let them operate separately? What's the philosophy there?

It really comes down to customers more than physical territory. Because each one of the cold starts, each one of the acquisitions has a telephone and a computer, and it's coast to coast. So it's really a question of customer management -- territory management of customers and who owns that customer relationship.

Got it. Then just, lastly, sounds like your MIS people are up in Cambridge. I gather the corporate group is more in Connecticut. Is that a fair assessment, or is it more of a virtual corporate office?

Well, I mean, no, that's correct. However, we're all on the road more than half of the time. So we're all -- there's not a whole lot of shippers and truckers here in Greenwich or in Cambridge. So, we want to go where the customers are and where the business is, and that's in the field.

And acquisitions -- we try to visit the acquisitions rather than have them come here, though sometimes they like to come here. So for all those reasons, we're on the road a lot. And it will remain that way for years.

So there will be no corporate headquarters, per se --?

No, no, no. There's definitely -- no, no, I'm sorry. I give you a misimpression. There absolutely is corporate headquarters. And right now, legally and technically, it's in Buchanan, Michigan. But little by little, it's transferring over to Connecticut. We're in a temporary building, Building 9 of Greenwich Office Park, and we're moving to permanent facilities in Building 5 in May. And that will be the corporate office. It's a small corporate office.

I don't want to have a big cost center that is a bunch of people giving PowerPoint presentations to each other all day. We want to have a dynamic corporate office that's very vibrant, very dynamic, in the field, working on acquisitions, working on cold starts, working on budgeting, working on MORs, working on customer calls, in the business, in the flow being very productive.

Got it. Good answer. Thanks for taking my questions.

Thank you.

(Operator Instructions)

Your next question comes from the line of David Campbell with Thompson Davis & Company. Please proceed.

Good morning, Brad, and Scott.

Good morning.

You know, on the expedited side, they had a -- the Company had a terrible fourth quarter 2010, particularly for about six weeks in that quarter. That expedited business was terrible. And so, you had a very easy comparison in the fourth quarter compared to last year.

And the revenue -- the gross revenues were down, actually, from the first quarter of 2011. So, it's hard to see the progress that you're talking about. If you got more business in Mexico and in refrigerated, you must have lost business somewhere else. So, what is the short-term outlook here? I mean, you got to have some -- it's going to be a lot tougher comparison in the first quarter on the revenue side.

First of all, I agree with you that the results in CGL need improvement. On Express-1, that's where we're getting the business in Mexico. That's where we're getting the other specialty business. On freight forwarding, sometimes things -- when you're doing a lot of reengineering and a lot of change and hiring people and firing people and promoting people, sometimes they get a little worse temporarily before they get better.

I think we're on the right path there, and I think the promotion of Dominick there leads up, is a good move, and he seems to be very well by the troops, and I think we're on the right path there.

Just to follow up on Express-1, we were being more disciplined on price. So if you take a look at our gross profit, we were up 18%. That's where we were focused more. So on the top line, you're right, we were being more disciplined and we gave up some of the business that was a little less profitable and we really focused on the business that is most attractive to us.

Express-1 normally had 22% gross margins in years past. What was it -- 20% in this fourth quarter, right?

I believe it's 21, 20.9.

So --

We got back to where we --

Is that your target for that business, back to 22%?

Yes, 21% to 22% is a good level to use.

I mean, gross margin is one part of the puzzle. It's the amount of margin dollars. If the amount of margin dollars is larger but the actual gross margin percentage is a little bit lower, that's fine.

Right. Right. I understand. So, there, you're continuing to see pharmaceuticals as a potentially -- and defense as a potentially increased business for the expedited Express-1 business? Is that right?

Absolutely. We're investing very heavily to compete very aggressively for the Mexican business, for the pharmaceutical business, for the defense related business. There are some costs associated with that, but that's perfectly fine. We're investing for the future on that. We're going to be very much in the mix on those. Sean is very, very excited about those three verticals.

And what about the first quarter? Can you give us any idea on what's going on in terms of revenue trends, either by businesses or in total? Obviously, the SG&A is going to go up above the fourth quarter level so you're looking at another loss, perhaps, in the first quarter unless you get some significant revenue growth.

Business trends in the first quarter January was [mezz to mezz], as with most of our competitors. February picked up. You know as well as I do, the first quarter in this business, it's all about March. So, let's see how March gets going. There's some optimism about March. Let's see how it is.

Yes, right. And, Brad, you mentioned that the IT is starting phase one. I think you called it phase one in March. What are the other phases? Where do you go with it that you won't have in March?

Oh, long ways. Customization to all our idiosyncrasies of how we like to measure the business. So all the KPI, all the metrics, all the ways we want to stack rank the performance of individuals and groups and divisions against each other.

And that's an iterative process. It's going to take time. As we get more and more input from the users of the system of what to tweak and changes that people would like, and that's going to be a continual process that will never end.

I mean, the best of our competitors, with respect to IT, are never resting. They're always completely modifying the IT system to improve it and to continue improvement over and over again. And that's what we plan on doing as well.

But the first phase was let's get on one system. We had all these different systems there, and they weren't the ideal system either. So we wanted to get on this system that's more efficient, more effective for what people are doing and consistent across the Company.

And then each of the salesmen and people servicing the accounts are going to learn this new system? Are they in training now, or expect to train them in the second quarter, or what's going on there?

Some have been in training, and they'll go in in phases. We're not going to take everyone off and do training all at the same time. So, that will be enrolling classes over the next few months.

Okay. And as far as acquisitions are concerned, is there a biggest problem, or are they all different problems? Whether it's price or a competition or -- what would you say some of the biggest problems have been in finding acquisitions?

I don't see any problems. I mean, the problem is that none of the acquisitions that we're working on just happen to time with an earnings announcement. But c'est la vie -- that's the way it works. We're not going to hurry up an acquisition just to time it with an earnings announcement. We're going to do acquisitions when they're ready to be done. So we're working on quite a number of them at the same time, and we're moving each along as fast as responsibly it makes sense to move them along.

And as far as SG&A is concerned, it's 9.6 in the fourth quarter, but some of that was nonrecurring, I guess.

Correct. Yes.

Yes, so I guess we're going from about an $8 million quarterly base to, call it, $10 million in 2012. Is that the way you'd look at it? Before -- excluding acquisitions.

I would look at corporate SG&A.

Pardon me?

I would look at -- so, when you talk about the SG&A of each of the businesses, we can talk about that. But I would look at corporate SG&A, and we have an incremental $11 million from 2010 that will be in -- from 2011 that will be in 2012. $4.5 million to $5 million of that is non-cash comp.

When you get into the business units, the SG&A will ramp up and is a little bit more variable with the acquisitions that we take on, and with the cold starts.

Okay. So the -- but the $11 million is a continuing number? It's not going to stop in 2012. Hard to tell -- it depends on your revenues, obviously. But the $11 million is on a $9.6 million base or $8 million or just what?

The $11 million is on the full year 2010 $10.2 million SG&A rate. And some of it as you said, David, it is nonrecurring, either head hunter fees, the make whole payments, the legal fees as related to the negotiation of the contracts, relocation fees, and those kind of things should not recur.

And it should not grow much. That stays a little bit more fixed in nature as you look into the out years and you leverage that as you make acquisitions and the cold starts.

Right, right, right, right. Sorry to take things so long here, but I just wanted to make sure I understood it as best I can. The fully diluted shares, 22.9 million, is that what we should use for 2012 on a profit basis?

You could. The warrants are a piece of that, which will depend on share price. We basically have 19.5 million shares when you count up the common and the preferred. And then the warrants, which is warrant coverage for 10.7 million shares with a strike price of $7, you can account for it based on what the stock price is using the treasury method.

Right, right. Okay. And the revenue -- I think it's pretty much -- a lot of my questions have been asked and answered. Systems integration phases, I understand pretty much that, what that has to be done. Okay. Thank you very much, for your help.

Thank you, David.

And this concludes the Q&A portion for today's call. I would now like to turn the call back over to Mr. Brad Jacobs for any closing remarks.

I think we had another question. If we have another question in the queue, Operator, we'd love to take that.

We do have a question from the line of Robert Hoffman with Princeton Opportunity Partners. Please proceed.

Thank you. Wow. Brad, if you could just let us know -- what we were just talking about warrants, how do you think about when you might exercise those? Obviously, they're in the money now. Is it something that you would exercise them in the near term, or is that something that you don't picture exercising until you get close to expiration?

I don't know. I'm not sure. I mean, it's an option to exercise. So, like nature, it's uncertain. There could be scenarios where it made a whole lot of sense both for me and for the Company to issue -- to exercise them in the near immediate term. Or, they may just sit there for nine years and 11 months and 29 days.

Yes. It seems to me it comes down to hopefully the Company will need the cash, and so it's a matter of do you want -- are you better off personally exercising to help provide that cash or getting that cash from somewhere else?

That's exactly right.

Okay. Thank you.

Thank you. Operator, any more questions in the queue?

At this time, we have no further questions.

Thank you, everybody, for participating in the first XPO conference call where we had the company owned for an entire quarter. We look forward to seeing you at the conferences that Scott mentioned, and I'll talk to you on the next conference call. Have a great day. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.