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XPO CEO explains why the logistics company is splitting its businesses

XPO Logistics, Inc. Chairman and CEO Brad Jacobs joins Yahoo Finance Live to discuss why the company is spinning off its freight brokerage, European, and intermodal businesses.

Video Transcript

BRIAN SOZZI: OK, so big news out of the transportation sector today, logistics giant XPO said it will split its tech-enabled brokerage transportation services from its less-than-truckload business in North America. The company also plans to divest its European business and North American intermodal operation. Let's dive in here with XPO Logistics Chairman and CEO, Brad Jacobs. Brad, always nice to get some time with you. So I've followed your career for some time, you've built this logistics empire, why are you making some of these moves?

BRAD JACOBS: Well, great to see you, Sozz. It's great to be with you. We're making these moves for two reasons. One is operationally by separating the companies into the asset-based LTL and the asset-light truck brokerage, we'll be more focused as a company and we'll be more fit-for-purpose in terms of pleasing customers.

Second reason is from a shareholder value creation, it's a home run because we have a big conglomerate discount. Our stock trades at about 7.5 times EBITDA, our competitors trade at about twice that. And we will solve this valuation discount by making-- allowing investors to invest in a pure-play LTL that's leveraged to the industrial economy or invest in a tech-enabled truck brokerage business which is levered more to the consumer.

BRIAN SOZZI: And Brad, certainly the market likes that. I've read a lot of positive notes out here. Stock is ripping higher. But why do you think you have not been able to command that higher multiple for being a conglomerate? Doesn't it make sense to have all these operations under one roof?

BRAD JACOBS: Not really. The market has spoken. From an investor point of view, there's so many investors who only own a specific-- they only own Old Dominion or Saia or a pure-play LTL but they don't own say a C.H. Robinson, which is a truck broker. And vice versa there's so many investors that own C.H. Robinson but they don't want to be levered to the industrial economy. So by splitting the company up, we're increasing the amount of demand that we have from investors.

JULIE HYMAN: It's Julie here. I guess I'm trying to understand what has changed because as Sozz said, he has followed your career as you have built this company. So is it that investors kind of have changed how they think about these assets? Is there something else that changed in the environment? Or is it a realization on your part that these things make more sense separately?

BRAD JACOBS: Well, if you look back, what we did over the last decade is we bought about 18 companies and then we integrated them and optimized them. And we roughly doubled the profitability of those companies, so that really worked. What didn't work is getting the proper multiple from the investment community, because we were a smorgasbord of many different things, asset-light, asset-heavy. And that part didn't allow us to get the full multiple. Now by separating the companies, by doing another spin, we'll be more attractive to various universes of investors.

BRIAN SOZZI: Brad, we-- allow us to tap into your many years of experience in this industry, gas prices are going through the roof, diesel prices are going through the roof. What is this going to do to not only the economy but just the trucking industry?

BRAD JACOBS: Well, the trucking industry, it depends what part of the trucking industry you're in. In LTL, fuel is a pass-along, so we pass along that pricing to our customers and they have to eat it. And that's just the way it works, it's a cost-plus transaction.

From the economy as a whole-- so it's not really net bad for us. For the economy as a whole, it's bad because it's going to slow down the growth of the economy. So eventually, that will be a negative thing.

JULIE HYMAN: And how eventually, and what kind of effect are you seeing on your business, even if you're passing through, right? One would imagine there are certain costs for you guys that are going up. I don't know if labor costs are going up, et cetera. So talk us through what you're seeing on that front.

BRAD JACOBS: Well, our LTL business is humming. Last year we had the second-best operating ratio, the second-best profit margin in the entire industry. If you look at the six years that we've owned it, we've generated over $3 billion of net cash. And we've-- we're on track to nearly triple the EBITDA.

And going forward this year, we're adding over the next-- well, actually next two years, we're adding 900 doors, we're expanding our capacity by 6%. So we're going to not only just grow the operating margin but also grow the top line too. And we're addressing the driver shortage through our more than 130 driver schools that we have across the country.

BRIAN SOZZI: Brad, how concerned are you about a recession? You live-- you've seen a lot of different historical periods here. A lot of folks have not seen gas at over $5 and everything going on in this world. I mean, do you think that's possible for this year?

BRAD JACOBS: Well, I've seen a few recessions over my career. They're not fun. I don't know that we're close to a recession. I mean, right now the consumer is very, very strong and the industrial economy is in its early innings of growth.

We do have to watch the effects of the war, the European war, and how that affects the world economy. We do have to affect-- look at how oil prices affect the world. And we do have to see how the Fed lands the plane in terms of raising interest rates in a careful way. But we're not close to a recession absent some big geopolitical jolt, we're just not there. There's too much strength in the economy right now.

BRIAN SOZZI: Well, we appreciate your optimism. And again, congrats on that spin. I know there's a lot of work that goes into actually doing stuff like that. XPO Logistics Chairman and CEO, Brad Jacobs good to see you.

BRAD JACOBS: Thank you.