XPO Logistics' CEO Discusses Q2 2012 Results - Earnings Call Transcript

XPO Logistics, Inc. (XPO)

Q2 2012 Earnings Conference Call

August 7, 2012 8:30 am ET

Executives

Bradley S. Jacobs – Chairman and Chief Executive Officer

John J. Hardig – Chief Financial Officer

Scott B. Malat – Senior Vice President of Strategic Planning and Investor Contact

Analysts

Justin B. Yagerman – Analyst, Deutsche Bank Securities, Inc.

Bill J. Greene – Analyst, Morgan Stanley & Co. LLC

H. Peter Nesvold – Analyst, Jefferies & Co., Inc.

John G. Larkin – Analyst, Stifel, Nicolaus & Co., Inc.

Kevin W. Sterling – Analyst, BB&T Capital Markets

Scott A. Schneeberger – Analyst, Oppenheimer Securities

John R. Mims – Analyst, FBR Capital Markets

Ryan T. Bouchard – Analyst, Avondale Partners LLC

David Pearce Campbell – Analyst, Thompson, Davis & Co.

Tim Fronda – Analyst, Sidoti & Co. LLC

Ryan Cieslak – Analyst, KeyBanc Capital Markets

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2012 XPO Logistics Earnings Conference Call. My name is Ann, and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

Before we begin the call, 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 could 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 this 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 Investors section on the company’s website at www.xpologistics.com.

I would now like to turn the presentation over to your host for today’s call Mr. Brad Jacobs, Chairman and CEO. Please proceed sir.

Bradley S. Jacobs

Thank you, operator and good morning everybody. Welcome to our second quarter conference call. With me today are John Hardig, our Chief Financial Officer, and Scott Malat, our Chief Strategy Officer. We have lots of news to share with you this morning.

First I’m happy to report that we’re either on track or ahead of schedule with each of the three core components of our plan; acquisitions, cold-starts, and optimization of operations.

Starting with acquisitions, as you saw last night we purchased Kelron Logistics on Friday. Kelron is a $100 million revenue truck broker based in Canada with offices in Toronto, Vancouver, Montreal and Cleveland here in the States. We’ve met a large number of the Kelron employees, and they’re going to be a great addition to our team. I’m sure we have many of the Kelron people listening to the call, and I want to take this opportunity to welcome them to XPO.

Kelron’s built up strong relationships in the industry over 20 years. They serve more than a 1,000 customers, with about 2,500 carriers. With the addition of Kelron’s relationships and lane history, there should be a positive effect on the whole XPO system, both in terms of pricing and in finding trucks. We’re giving the Kelron team access to our carrier capacity in Charlotte, and moving them onto our IT system. We expect this to create efficiencies that will pay off as we add sales people to each of their locations.

This is the same model we implemented with Continental Freight Services, which we purchased in May. The Continental team has been a great addition to XPO. Continental has already integrated on to our IT and accesses our carrier capacity on a daily basis. This is working exactly like we anticipated. For example about a third of the loads originating at the Continental branches are being covered through our operation center in Charlotte, the majority of these loads are ones that Continental would not have been able to cover before the acquisition, so it’s incremental business. We expect to continue to see a significant increase in the number of continental’s loads flowing through Charlotte from continental in the third quarter.

In May, we hired Drew Wilkerson to run continental. Drew was Strategic Sales Supervisor at the Columbia office of C.H. Robinson, and he is off to a great start. The plan is to triple the head count and revenue at continental over the next several years. So, our acquisitions are moving along nicely, and we’re very much on track with our target of acquiring $250 million of revenue this year.

Now, let’s talk about the cold-starts. We announced six new locations last night, foreign truck brokerage, one in expedite and one in freight forwarding. All of our brokerage locations are run by industry veterans with strong track records. As you may recall, our original projection was to open five new truck brokerage locations by the end of 2012. Our four latest truck brokerage cold-starts bring us up to seven.

We expect these new branches to perform like the first three, which are scaling up as projected. We are seeing steady sequential improvement. Revenues are growing, and what’s more important is that the gross margin percentage generated by our first three cold-starts increased every month in the second quarter.

And in July, their margin was significantly above where it was in the second quarter. The margin improvement in our cold-starts is largely a function of the success we’re having with carrier procurement at our national operations center in Charlotte.

We now have roughly 15,000 carriers in our network, up from about 8000, when we took over XPO last September. Our people are doing a better job every day at finding the right truck for each load, and this is at the heart of our long-term strategy. We have 64 people in Charlotte now providing shared services and carrier procurement and this includes a team of 41 people solely focused on carriers. We plan to have over a 100 people by year-end, developing carrier capacity in Charlotte, and we intend to triple that number over the next three years.

We also opened an expedite cold-start in Birmingham last week. This will serve as the southeast regional hub for our Express-1 division, and will tap into the manufacturing sector as production continues to shift to the Southern states.

We already have customers and owner operators working with us in Birmingham, and we are moving loads. AT CGL, our freight forwarding business, we opened the Los Angeles branch in April. This is obviously a major market with the ports of LA and Long Beach representing an important international opportunity for our network.

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