November 20th, 2015 Students: Justin Hong, Zach Rieger, Cristobal Silva Company: XPO Logistics (NYSE: XPO) Action: Long Price Target: $50 (60% Upside) Executive Summary November 20th, 2015 Investment Thesis Executive Summary Investment Thesis 1. CEO with a phenomenal track record of consolidating industries, management team with substantial industry experience, incredible alignment of incentives with shareholders, and significant insider ownership. 2. Mr. Jacobs has evolved the strategy to fit a model that we believe works—one toward offering an integrated multimodal solution with execution capabilities. In contrast to the market, we believe XPO´s business model became robust with the acquisitions. It was the leap from a roll-up into a global franchise. 3. XPO is uniquely leveraged to powerful secular trends in the 3PL industry. XPO’s scalable technology platform and management’s history of successful integration make it an ideal consolidator in an industry that is highly fragmented. 4. One-time costs associated with acquisitions mask a profitable and attractive core business. Core business is highly cash-generative, growing at 10% organically and generating return on invested capital (ROIC) of 16%. 5. XPO trades at 6.1% 2016 FCFE and 7.1% 2017 FCFE yield, which in our opinion is a compelling valuation for a company with double digit EBITDA and FCFE per share growth. In addition, XPO´s presents an attractive asymmetry with 6:1 upside-to-downside ratio. Price Target Our 12 month price target is $50.00 (5.1% and 7.5% FCFE yield 2017E and 2018E, respectively) which represents 60% upside from today’s share price of $30.93. 3 Business Overview Company Summary Company Overview Key Market Statistics XPO Logistics (“XPO” or “the Company”) is a top ten Share Price (11/14/2015) $30.93 global provider of supply chain solutions. XPO 52W High $50.96 enables customers to operate their supply chain 52W Low $21.33 more efficiently and at lower cost. Avg. 3-Mo Daily Volume ($MM) $40.99 Bradley Jacobs consolidation the fragmented Short Interest (% of DSO) 24.2% logistics market started in 2011, with the purchase of Shares Out (MM) 132.91 Express-1, a express carrier that operated an asset- Market Cap ($MM) $4,111 light model with almost $200 million in revenue. Adj. Net debt ($MM) $5,800 Today, XPO has more than $15 billion of revenue and Min. Interes t ($MM) $836 $1.1 billion of pro forma 2015E EBITDA. Its integrated EV ($MM) $10,747 network includes approximately 84,000 employees at Revenue 2016E ($MM) $15,758 1,469 locations in 32 countries serving over 50,000 Adj. EBITDA 2016E ($MM) $1,198 customers. EV/EBITDA 2016 8.97x Asset-heavy (Acquired from Con-way) XPO Logistics Freight (27.0%) Transportation (36.5%) Contract Logistics (36.5%) Less-than- Truckload Brokerage Last-Mile Europe Global truckload and and Forwarding (3.8%) (15.8%) (23.3%) Intermodal Expedite (2.5%) (%) % Consolidated Revenue 2015E Pro forma (12.5%) (5.7%) 4 Investment Thesis November 20th, 2015 5 Investment Thesis Thesis #1: CEO Bradley Jacobs is the next “Outsider”. He has created a team of seasoned industry professionals in a performance-driven culture Bradley Jacobs´ track record Value Added Research (VAR) Jacobs founded and led four highly successful “When he gets into a company or industry, he companies, including two public corporations that becomes obsessive…Brad must work over 80 hours he grew through successfully consolidating a week.” – Former Employee historically fragmented industries. “How do you integrate that (Con-way) with a 1.) United Rentals (1997 – 2007) French freight forward and give one face to the • Built world´s largest equipment rental company. customer? I do not know! But if anybody can do it, • United Rental stock outperformed S&P 500 by 2.2x then Jacobs can do it. I have to say that.” – during his tenure Logistic industry consultant 2.) United Waste Systems (1992 – 1997) • Created 5th largest solid waste business in North “What is special about Jacobs is that, as a great America. capital allocator, he is flexible and adaptable and • United Waste stock outperformed S&P 500 by 5.6x from he is not anchored to say “well this is my strategy 1992 to 1997 and I will be a truck brokerage so I will only buy truck brokers”. He is seeing the environment and 3.) Hamilton Resources (1984 – 1988) he is seeing the transport industry in front of him, • Grew global oil trading company to $1 billion and if it changes and see more opportunities somewhere else he is very open to change and do 4.) Amerex Oil Associates (1979 – 1983) something different.” – Buy side analyst • Built one of the world´s largest oil brokerage firms 6 Investment Thesis Thesis #1: CEO Bradley Jacobs is the next “Outsider”. He has created a team of seasoned industry professionals in a performance-driven culture “We believe that aligning the interest of the employees with the goals of the organization and with the shareholders is critical. We believe that that's part of the secret sauce.” – Bradley Jacobs, CEO Management Compensation Insider Ownership Management compensation includes elements Bradley Jacobs owns 14.5% of XPO. that are heavily weighted to variable compensation. The other executives own around 2% of the Company. The performance-based equity grants to XPO NEOs are subject to the achievement of two performance goals: • Stock price must trade at or above $60 for 20 consecutive trading days prior to April 2, 2018. • The company´s fiscal year 2017 adjusted cash earnings per share being at least $2.50. CEO with a phenomenal track record of consolidating industries, management team with substantial industry experience, incredible alignment of incentives with shareholders, and significant insider ownership 7 Investment Thesis Thesis #2: The asset-light vs. heavy discussion has prevented investors from understanding the economic and strategic rationale of the last two acquisitions Overview on Norbert Dentressangle (ND) acquisition • Norbert Dentressangle • On April, 2015 XPO announced the acquisition of ND. The price paid (including debt) was $3,530 million. • ND is a provider of contract logistics (50% 2014 revenues), transportation (25%), freight brokerage (20%) and global forwarding (5%) • ND´s 26% of contract logistics revenues are generated in the United States (ND bougth Jacobson Companies on August 2014 by $750 million, 9.8x EBITDA) • ND had 2014 Revenue and EBITDA of $5,500 and $388 million, respectively. • EV to EBITDA multiple paid pre-synergies is 9.1x. • We estimate cost synergies of $115 million, which translates to an effective multiple of 7.0x (versus an average of 10.5x 3PL M&A transactions). 8 Investment Thesis Thesis #2: The asset-light vs. heavy discussion has prevented investors from understanding the economic and strategic rationale of the last two acquisitions Street view on Norbert Our View Dentressangle (ND) acquisition • Leader in the raising and fragmented truck brokerage business in Europe. 15%+ growth in the truck brokerage market • Immediate cross-selling opportunities as the leading transatlantic contract logistics provider “Jacobs went too far too XPO signed a contract with Zara to execute their e-fulfillment in quickly” North America within 22 days after closing • Pro forma, XPO has #1 market share in last-mile providers in Europe Sector growing at 30% yoy Signed a contract with Ikea in UK • 3Q15 Results “The integration would be European transportation EBITDA increased by 26% challenging. It would be European logistics EBITDA increased by 17% difficult to increase • Within the first 8 months, XPO: Leveraged technology platform (XPO Freight Optimizer, CRM) profitability” Changed the compensation plan Shut down unprofitable business 9 Investment Thesis Thesis #2: The asset-light vs. heavy discussion has prevented investors from understanding the economic and strategic rationale of the last two acquisitions Overview on Con-way acquisition • Con-way acquisition • On September, 2015 XPO announced the acquisition of Con-way. The price paid (including debt) was $3,000 million. • Con-way is the second largest provider of less-than-truckload (LTL) services in North America (63% 3Q15 revenues). • Through its subsidiary Menlo Logistics (asset light), Con-way is a top 30 global contract logistics provider (27% 3Q15 revenues). • Con-way also participates in the truckload business (10% 3Q15 revenues) • LTM Revenues and EBITDA of $5,700 and $510.6 million, respectively. • EV to EBITDA multiple paid pre-synergies is 5.9x. • XPO expects to increase profit by $170-$210 million within next 24 months. • We estimate cost synergies of $200 million, which translate to an effective multiple of 4.2x. 10 Investment Thesis Thesis #2: The asset-light vs. heavy discussion has prevented investors from understanding the economic and strategic rationale of the last two acquisitions Street view on Con-way Our View acquisition • The acquisitions are responses to what is changing in the industry and what Jacobs has learned as a result of the ND acquisition. “Shippers are increasingly looking to 3PL to not only help them “This acquisition does not make design solutions for their challenges but also to execute” – Joe sense. The integration is not a Carlier, Penske Vice President of Logistics “Commerce’s increased need for same-day and next-day delivery” piece of cake” – Jeff Berman – Logistics Management review LTL capacity is going to get tighter • Controlling LTL capacity and becoming a true “one-stop logistics and execution shop” increases customer retention • LTL is not as cyclical as the truckload business. • LTL supply capacity is currently tight, which has given pricing power to LTL “It adds cyclicality to the carriers business model in a moment • After the acquisition capex increases only nominally from 2.5% to 3.3% as that the economy is moving a % of sales towards recession” • “In the LTL business you can make the truck last 15 years and cut capex to almost nothing in downside scenarios.” – Buy-side analyst 11 Investment Thesis Thesis #2: The asset-light vs.