Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 2: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 1: Tracy Obviously, over the last few years we've done tons
Speaker 1: of episodes about freight logistics, trucking, warehousing, etc. And one
Speaker 1: of the things that has always struck me is just,
Speaker 1: you know, all of this crucial stuff, how sort of
Speaker 1: chaotic and help together with tape and glue. These industries
Speaker 1: often seem.
Speaker 2: To me, Can I tell you something. My husband and
Speaker 2: I are rebuilding the shed in Connecticut and just getting
Speaker 2: the lumber for the shed. Is this massive production that
Speaker 2: involves us like renting a truck and having to like
Speaker 2: negotiate it from some lumberyard and then like bring it
Speaker 2: back and forth piece by piece. The industry of all
Speaker 2: the movement of these physical goods and products, it seems
Speaker 2: so difficult at times, and it also seems sort of
Speaker 2: ripe for opportunity. But then you also hear stuff like
Speaker 2: Convoy going out of business, right, the freight broker that
Speaker 2: was supposed to be using new technology to revolutionize trucking
Speaker 2: and things like that, And so I don't know, there's
Speaker 2: like this tension between moving physical products and then using
Speaker 2: tech to make the whole space more efficient totally.
Speaker 1: It's one of these areas where it seems like, oh, yeah,
Speaker 1: there must be more simple. Like I remember one of
Speaker 1: our first sort of eye opening episodes with Stinson Deane
Speaker 1: talk about how lumber is distributed and so much of
Speaker 1: these communications just on sort of message boards or boards
Speaker 1: that might resemble Craigslist. And then you know, we've talked
Speaker 1: about it with Craig Fuller and Rachel Kremac and freight
Speaker 1: waves and the idea that you know, you look at
Speaker 1: how trucking brokerage works, these load boards and this is
Speaker 1: all this crucial stuff that's sort of at the center
Speaker 1: of how the economy works. And it's like they're in
Speaker 1: WhatsApp groups. Yes, anyone can anyone pick up a load
Speaker 1: in Akron and bring it to El Paso next week,
Speaker 1: and this is how it all works.
Speaker 2: It seems so informal, and then of course it leads
Speaker 2: to these inefficiencies like trucks running around empty basically what's
Speaker 2: it called dead heading? Basically yeah, yeah, and things like that,
Speaker 2: And I guess the question is, like, what is the
Speaker 2: sticking point here? Is there something like fundamental about moving
Speaker 2: physical goods? That is, I guess, resistant to new technology,
Speaker 2: or is there maybe something about the industry where you
Speaker 2: know people are making while they were people are making
Speaker 2: lots of money from lack of transparency in the industry,
Speaker 2: and so they themselves are resistant to new technology. It
Speaker 2: kind of reminds me of the bond market sometimes and.
Speaker 1: Stocks absolutely tracy. It sounds like, given the headaches you've
Speaker 1: had with your new shed, that you could really use
Speaker 1: some efficiency gains in the world of building products distribution,
Speaker 1: could you.
Speaker 2: Not, Yes, especially since I keep messing up the ridgeboard
Speaker 2: on the roof. I can't get it straight, and then
Speaker 2: every time I mess it up, we have to go
Speaker 2: and get more lumber. So yes, yes, please.
Speaker 1: Well, we do literally have the perfect guest, someone whose
Speaker 1: career I think almost is so odd. Lotsye, in all
Speaker 1: of the topics that we discuss. Over the years, he
Speaker 1: has started, depending on how you count, between five and
Speaker 1: seven companies, started an oil brokerage, the founder of United
Speaker 1: Waste Systems, which rolled up waste collection companies sold to
Speaker 1: Waste Management, United Rentals, and then the creator of the
Speaker 1: logistics conglomerate XPO, which also spun off a freight brokerage,
Speaker 1: A logistics company, et cetera. We are speaking, obviously to
Speaker 1: Brad Jacobs, who just a few days before this recording
Speaker 1: announced the creation of a new company called QXO, which
Speaker 1: intends to be a market leader in the space of
Speaker 1: building products distribution. He plans to make billions of dollars,
Speaker 1: and he's the author of a new book, how to
Speaker 1: make a few billion dollars.
Speaker 2: I like how in the press least for the new
Speaker 2: company in qx so he basically says he aims to
Speaker 2: make billions of dollars. So it connects very well with
Speaker 2: the book.
Speaker 1: Well, he has a track record of making billions of dollars.
Speaker 1: I would love to make billions of dollars. So maybe
Speaker 1: we'll learn something. Brad, Thank you so much for coming
Speaker 1: on out laws.
Speaker 3: The pleasure's mind.
Speaker 4: Look, some people think in millions, some people think in trillions.
Speaker 3: I think of billions.
Speaker 1: That's it's a very very reasonable middle ground middle graund here.
Speaker 1: So you say you're going to build a market leader
Speaker 1: in building products distribution. There's a lot to get into,
Speaker 1: but let's just start here. When you look at the
Speaker 1: industry right now of building products distribution in the pre
Speaker 1: QXO world, what does it look like to you. What
Speaker 1: do you see when you look at that industry.
Speaker 4: Something that's really big. First of all, it's eight hundred
Speaker 4: billion dollars between North America and Europe, so it's large,
Speaker 4: and it's very fragmented. You've got seven thousand distributors here
Speaker 4: in North America, you have thirteen thousand in Europe, so
Speaker 4: that's a lot a lot of independent companies and a
Speaker 4: handful of the companies it's mostly privately owned companies. I
Speaker 4: see an industry that's growing. It's been growing at seven
Speaker 4: percent compounded annual growth on the top line for the
Speaker 4: last five years. I see an industry that is rich
Speaker 4: with acquisition targets, so it's an opportunity to scale up.
Speaker 4: And I also see an industry that could use more technology.
Speaker 4: There's a handful of companies doing some cool things in technology,
Speaker 4: but by and large, the industry as a whole is
Speaker 4: behind where logistics is. It's not where the logistics industry is.
Speaker 2: This is exactly what I wanted to talk to you about.
Speaker 2: So in the press release you say I think tech
Speaker 2: enabled company or something like that. What does that mean
Speaker 2: exactly in this context? What is the technological opportunity that
Speaker 2: you see here.
Speaker 4: It's a few things. Number one, it's how you interact
Speaker 4: with the customer. And right now mid single digits percent
Speaker 4: is done over digitally and ninety something percent is done
Speaker 4: face to face, and that really should be reversed eventually,
Speaker 4: over time, not right away. You should see more and
Speaker 4: more penetration of digital on that. So that's number one
Speaker 4: the e commerce penetration. Number two pricing. Pricing could be
Speaker 4: more methodical, could be done electronically, could be done by AI,
Speaker 4: could be done by machine learning, and be interactive and continuous.
Speaker 4: And thirdly, the inventory, so this is a business has
Speaker 4: a big transportation logistics element to it because you're buying
Speaker 4: a bunch of products wholesale, you're storing them in dcs,
Speaker 4: and then you'll distribution side like warehouses fancy word for warehouses,
Speaker 4: and then you're delivering them in delivery trucks to the
Speaker 4: end user. So there's a lot of transportational logistics here.
Speaker 4: And the dcs or warehouses that I visited so far
Speaker 4: not a whole lot of automation, and there they should
Speaker 4: be highly automated. Now handful of companies aren't doing automation,
Speaker 4: but they're the exception, not the rule, and it really
Speaker 4: should be the rule, because as we know from Jexo
Speaker 4: Logistics where we have a couple hundred million square feet
Speaker 4: of warehouses around the world, automation is where it's at,
Speaker 4: that's where it's going, and that's what customers want. It
Speaker 4: takes out costs and increase safety, it's faster, it's more accurate.
Speaker 3: There is a.
Speaker 4: Thousand reasons why automation makes perfect sense for the inventory part.
Speaker 4: And then it's not just the picking and packing that
Speaker 4: needs to be automated, it's the actual inventory management. So
Speaker 4: these distributors have lots and lots of skews and getting
Speaker 4: it just right of not having too much and then
Speaker 4: tying up capital but not having too little and then
Speaker 4: disappointing customers so you can fulfill their demand. This has
Speaker 4: to get right. And GXO, for example, has had a
Speaker 4: client Boeing for years and years and years. It went
Speaker 4: back to a new breed before we bought them, and
Speaker 4: they do the parts management for that all around the
Speaker 4: world on a global basis, and that's done technologically. That's
Speaker 4: done not by people fraging out.
Speaker 3: You know, I think we.
Speaker 4: Need this many parts of this year, and we need
Speaker 4: that many parts there, it's doing it methodically, using lots
Speaker 4: and lots of data and using algorithms to understand that
Speaker 4: to get the inventory just right. And here in the
Speaker 4: billing products distribution space, I think there's a big opportunity
Speaker 4: to optimize the inventory management. And then the last component
Speaker 4: of technology that excites me is basic route optimization, meaning
Speaker 4: you've got delivery trucks and it's still being done the
Speaker 4: way it was done in trucking like fifteen years ago.
Speaker 4: For the most part. There's again there's exceptions to the
Speaker 4: rules and find companies doing good stuff, but by and
Speaker 4: large it's not optimized in a typical distribution company you
Speaker 4: have right now, and I think we can bring that
Speaker 4: to the table pretty quickly.
Speaker 2: So I have a billion questions already, not a million
Speaker 2: or a trillion, just a billion. But just so we
Speaker 2: understand the business. What part of the supply chain are
Speaker 2: you actually targeting here?
Speaker 4: Is it the.
Speaker 2: Wholesalers who supply lumber yards or lumber yards that supply
Speaker 2: builders or both.
Speaker 4: We're buying wholesale selling retail. But there's three different categories
Speaker 4: and markets. There's residential, it's non residential, and it's infrastructure.
Speaker 4: So residential is like you like your apartments, your houses.
Speaker 4: People who need floors and windows and doors and roofing,
Speaker 4: tile and so forth, HVAC. Then there's commercial. Commercial can
Speaker 4: be any kind of building that's not a house.
Speaker 3: It could be a school, could be a church.
Speaker 4: It could be a factory, it could be a town hall.
Speaker 4: It could be just anything that's not people living in
Speaker 4: it but has a roof protecting from the elements. And
Speaker 4: the third category would be infrastructure. So infrastructure is roads, bridges, tunnels,
Speaker 4: all the pipes underneath the ground. And if you look
Speaker 4: at these three sectors, one thing that excites me about
Speaker 4: this is all categories there are old. Houses are over
Speaker 4: forty years old. Commercial facilities are over fifty years old.
Speaker 4: A lot of the infrastructure underneath America is over a
Speaker 4: century old. I mean it really needs to be repaired
Speaker 4: and lots of activity has to be done here. This
Speaker 4: is an industry that's not going to go into the metaverse.
Speaker 4: This is an industry that's not going to be disrupted
Speaker 4: by AI. It's can be enabled by AI. And that
Speaker 4: was important for me when I looked at five hundred
Speaker 4: different opportunities, because quite a lot of them I have
Speaker 4: serious questions about whether they'll still exist in five.
Speaker 3: Or ten years.
Speaker 1: Can I ask a question? So with the XPO and
Speaker 1: that family of companies, I guess, why is QXO a
Speaker 1: separate company that needs to be Okay, it's in building
Speaker 1: supply distribution. If you have a freight company, if you
Speaker 1: have a logistics company, if you have a freight broker.
Speaker 1: Why can't your existing companies simply move deeper into this space?
Speaker 1: Why is it important for it to be focused on
Speaker 1: its own Because when you describe, you say, okay, well,
Speaker 1: the transportation system is like where trucking was fifteen years ago,
Speaker 1: and I want to we'll get into sort of this
Speaker 1: date of trucking. Why is it not that existing logistics
Speaker 1: related companies can just offer services to this industry.
Speaker 4: I mean, we couldn't be a real pure play focused company.
Speaker 3: So the XOS, the GXO, RXO, XPO, they're very focused.
Speaker 4: Now we divided the company up into three very carefully
Speaker 4: designed units. You got GXO being supply chain, being warehouses
Speaker 4: around the world. It's got a thousand warehouses and that's
Speaker 4: all it does. Really, it really does warehouse warehouse warehousing.
Speaker 4: It's an inch wide and a mile deep on warehousing
Speaker 4: does it really, really, really well. And then you have
Speaker 4: on RXO it's the asset light transportations, the tech enabled
Speaker 4: brokerage model, and it also has the last mile delivering
Speaker 4: right people's houses. And then thirdly you have XPO, which
Speaker 4: is primarily an LTL carrier less than truckload carrier that's
Speaker 4: mostly in North America. And we divided the company up
Speaker 4: into those three categories because that's what our owners told us.
Speaker 3: That's what our shareholders told us. Our shareholders told us.
Speaker 4: Look, we don't want all these things altogether. We want
Speaker 4: to have more defined pure plays that we can invest
Speaker 4: in the industrial comeback and then we'll invest in XPO
Speaker 4: for LTL or want to go more consumer, or we
Speaker 4: want to go make a play on e commerce, which
Speaker 4: we'll go more with with GXO. And that's worked really well.
Speaker 4: I mean, we were getting a conglomerate discount for our multiple.
Speaker 4: We were trading like eight times Ebada. Today those three
Speaker 4: different companies trade at double digit multiples of Ibada, and
Speaker 4: that in addition to improving the Ebadah, the multiple on
Speaker 4: Ebadah improved too, so it made sense to split those up.
Speaker 4: So I don't I think we would be going backwards
Speaker 4: from a shareholder perspective if we if we started becoming
Speaker 4: more multifaceted and blended distribution together with the xos.
Speaker 1: Let's talk a little bit more about your plans for QXO.
Speaker 1: And so you mentioned it in the US there's seven
Speaker 1: thousand companies and in Europe there's thirteen thousand, and you
Speaker 1: know you're gonna hit their grown running have billions of revenues.
Speaker 1: You're gonna buy up a bunch of companies and.
Speaker 3: Roll it up.
Speaker 1: My understanding, you know, going back to the United Waste
Speaker 1: days and when you sort of started building that up,
Speaker 1: it was acquiring different types of assets, so distribution but
Speaker 1: also landfills, et cetera. You know, and I think when
Speaker 1: people think about roll ups in the traditional Pe sense,
Speaker 1: they're like, Oh, I'm gonna go out and I'm gonna
Speaker 1: buy twenty you know, h VAC companies and we're gonna
Speaker 1: unify their back end and take out some dead and
Speaker 1: make them all leaner and operation and six sigma and
Speaker 1: all that stuff. It feels like you're thinking much more
Speaker 1: holistically in terms of buying different parts of the supply
Speaker 1: chain to work together. Can you talk a little bit
Speaker 1: about what assets you need to buy to make QXO work.
Speaker 3: So you mentioned it correctly.
Speaker 4: At United Waste, we bought landfills, we bought transfer stations,
Speaker 4: we bought collection companies, and that became one integrated supply chain. Yeah,
Speaker 4: and it worked really well because we took out a
Speaker 4: lot of cost as of doing that. We had an
Speaker 4: end to end solution for customers and they loved it,
Speaker 4: and that's why our earnings compounded a fifty five percent
Speaker 4: kager and not coincidentally, so did our stock price. So
Speaker 4: I get that. So you have to create a company
Speaker 4: that works for the customer, that the customer appreciates the
Speaker 4: service that you're providing so they wire money from their
Speaker 4: bank accounts to yours. So it's very very important to
Speaker 4: do that here in QXO. In our building products distribution company,
Speaker 4: we're going to stay very focused on distribution, meaning distributing
Speaker 4: building materials to the three segments that I was just
Speaker 4: talking about with Tracy in terms of residential, non residential,
Speaker 4: and infrastructure. And I'm going to stay right on those
Speaker 4: three things and I'm going to toggle between them depending
Speaker 4: on opportunities as they arise. Attractive opportunities, We're going to
Speaker 4: be opportunistic, and how we think the five to ten
Speaker 4: year outlook looks for each one of those.
Speaker 2: So you mentioned infrastructure and just connecting this back to
Speaker 2: the landfill business that we were just discussing. Reading your book,
Speaker 2: one of the things you talk about is the reason
Speaker 2: you were able to buy up landfills at that time
Speaker 2: was partly because of new environmental regulations that made them
Speaker 2: more costly for the existing owners to actually run, and
Speaker 2: so a lot of people wanted to get rid of
Speaker 2: their landfills. I guess, at reasonable prices and you snap
Speaker 2: them up. When you talk about infrastructure spending, it seems
Speaker 2: like part of your mo is maybe looking at what
Speaker 2: the government is doing, what the government is spending its
Speaker 2: money on, and taking that opportunity into account. How much
Speaker 2: does that figure into your planning? And the other story
Speaker 2: you tell in the book is at one point you
Speaker 2: bought up a bunch of road rental companies in anticipation
Speaker 2: of six hundred billion dollars of infrastructure funding, but that
Speaker 2: didn't really work out. So I guess, like, how are
Speaker 2: you evaluating the opportunity and the risk here?
Speaker 4: I'm not counting on government handouts, the government handouts or
Speaker 4: the cherry on top. It's extra and it's great and
Speaker 4: we'll take it. But that's not what the business plan
Speaker 4: is based on. The business plan is based on that
Speaker 4: the infrastructure is very aging and there's got to be
Speaker 4: spent about two trillion dollars in order to fix it up.
Speaker 4: Whether that happens at this pace or that pace, or
Speaker 4: from this pocket or this pocket, it doesn't really matter.
Speaker 4: It's going to have to happen. Because so you mentioned
Speaker 4: you have a house in Connecticut, so you know what
Speaker 4: I'm talking about. Driving from Connecticut to the city is
Speaker 4: a bumpy ride. Says these things have to get fixed
Speaker 4: and or later. And then on residential, you look at residential,
Speaker 4: the average house is forty two years old. I mean
Speaker 4: when I was a kid, it was ten years old.
Speaker 4: That was an old house. So it's a lot of
Speaker 4: repair and modeling is going to happen. There nothing to
Speaker 4: do with the government, the governments. I don't think the
Speaker 4: government's not going to pay Tracey Alloway to repair and
Speaker 4: remodel your house.
Speaker 1: They might pair to install heat pumps, insulation and other
Speaker 1: sort of you know, clean energy advances.
Speaker 4: Yeah, and there is one company, Watsco, who specializes in HVAC.
Speaker 4: That's capitalizing on that and making it a ton of
Speaker 4: money doing that. But I'm not counting on that. I'm
Speaker 4: not building a business plan based on government large ass.
Speaker 4: That's nice and it's an extra kicker, but that's.
Speaker 3: Not the guts of the business plan. You know.
Speaker 1: I mentioned in the beginning that one of the big
Speaker 1: eye opening things is Tracy and I have learned more
Speaker 1: about these industries is how load tech communication is, and
Speaker 1: you know, freight brokerages where it's still based on phone
Speaker 1: I think we heard right right, Maybe facts is still
Speaker 1: or maybe in the last few years there's no more facts.
Speaker 1: I'm not sure. These websites and WhatsApp groups that you
Speaker 1: know super retro in building supply distribution. When you talk
Speaker 1: about how load tech it still is, you know, let's
Speaker 1: say Tracy works with some local provider of lumber or
Speaker 1: whatever she needs, Like, what is the process by which
Speaker 1: the current status quo these these goods are delivered to
Speaker 1: a regional distribution center or to her house.
Speaker 4: So a couple things there. Let's start with the beginning
Speaker 4: part of your question about truck brokerage. Truck brokerage is
Speaker 4: not as old fuddy duddy as you may think it's
Speaker 4: evolved quite a bit in the last ten years.
Speaker 3: Now.
Speaker 4: In twenty eleven, when I got into the truck brokerage business,
Speaker 4: it was just as you described. It wasn't low tech,
Speaker 4: it was no tech. It was one hundred percent people
Speaker 4: talking on phones to each other and in very slow
Speaker 4: book way. We didn't have factors. It was still email,
Speaker 4: but it was not very machine to machine. Fast forward
Speaker 4: to today, OURXO which was the truck brokerage spin off
Speaker 4: of XPO that Drew Wicklinson runs that business. Now ninety
Speaker 4: seven percent of their orders are either sourced or covered
Speaker 4: electronically digitally, So that's come a long long way.
Speaker 3: Now. Rxo's at the forefront of that.
Speaker 4: It's been the leader of technology because we invested in
Speaker 4: that right from the beginning.
Speaker 3: That was our vision.
Speaker 4: But even the whole industry, it's not ninety seven percent,
Speaker 4: but it's over half. Over half now he's done electronically.
Speaker 4: So that's brokerage. That's where brokerage has gone. Now. Distribution
Speaker 4: is kind of where brokerage was ten years ago, maybe
Speaker 4: eight years ago, because there are, like I said, there
Speaker 4: are a handful of companies are starting to do this digitally,
Speaker 4: but overall, it's an industry. It's still single digits percent,
Speaker 4: so it's going to penetrate much much more than that.
Speaker 4: There's so many things depending on the type of product
Speaker 4: we're talking about that it should just be ordered on
Speaker 4: your phone or on your website. You should not have
Speaker 4: to go somewhere and stand in line.
Speaker 3: It's not necessary.
Speaker 2: What are the sticking points to technology adoption in distribution?
Speaker 2: Because I imagine, you know, if you went to a
Speaker 2: company and you said, I can make your inventory management
Speaker 2: a lot more efficient using technology, it seems like a
Speaker 2: slam dunk for them. Maybe it costs a lot of
Speaker 2: money and that's the issue. Maybe on pricing, if you
Speaker 2: say I can make your pricing a lot more transparent,
Speaker 2: maybe there's less of an incentive for them to improve that.
Speaker 2: But like, what are the major hurdles that you see here?
Speaker 4: It's really just doing it. It's a question of companies
Speaker 4: putting money there. This is a very low capex business,
Speaker 4: very very low capex. The conversion from EBIDATA free cash
Speaker 4: flow is enormous. In some companies, the cashual is more
Speaker 4: than an income, so there's very little investment in capex.
Speaker 4: I don't mind investing in CAPEX for technology. In fact,
Speaker 4: I want to and I will because that was the
Speaker 4: big driving force of our success at XPO, was being
Speaker 4: ahead of the curve on technology. So we're definitely going
Speaker 4: to do that there, and that's all that's required.
Speaker 3: Now.
Speaker 4: You have a lot of companies that are private equity
Speaker 4: owned private equity because of their structure, their nature, and
Speaker 4: they have to give them money back to their investors
Speaker 4: after seven or so years. Sometimes it doesn't make sense
Speaker 4: for them to invest hundreds of millions of dollars into
Speaker 4: technology because they're gonna be flipping it, so why should
Speaker 4: they do that? I get that, And sometimes companies have
Speaker 4: a lot of pressure on short term earnings the quarter
Speaker 4: of the year and they don't have an investor base
Speaker 4: that's got a long term view of So my investors
Speaker 4: always have been the ones looking for the big kill.
Speaker 4: We're not looking for just like two hundred basis points
Speaker 4: more than.
Speaker 3: We're in the market.
Speaker 4: We're looking for big, big, big returns. So XPO is
Speaker 4: thirty two X and rentals today is more than one
Speaker 4: hundred xs of.
Speaker 2: One hundred bagger, pretty one hundred.
Speaker 4: Plus bagger actually, And that's the kind of investors that
Speaker 4: invest in me ones that want big, big returns and
Speaker 4: are patient money that can hold a stock for a
Speaker 4: few years and make a big bet on that. And
Speaker 4: those kind of investors totally get it that you've got
Speaker 4: to invest in technology in order to have the J curve,
Speaker 4: so that in years three, four five, you're a category
Speaker 4: killer and you have a big competitive advantage against companies
Speaker 4: who haven't been investing in technology. So I'm definitely going
Speaker 4: to invest significantly in technology.
Speaker 1: The United Rentals chart is absolutely insane. There's a four
Speaker 1: dollars stock in two thousand and nine. It looks like
Speaker 1: it's basically an all time high right now, but over
Speaker 1: five close, So extremely well done on that.
Speaker 4: You know, well, I can't take full critical because I've
Speaker 4: been gone for a while.
Speaker 1: But your original investors, the ones that just help buy
Speaker 1: and hold, very pleased with you. I'm sure I'm freight brokerage, though,
Speaker 1: I will. You know, I want to. I want to
Speaker 1: get back to that because you know, I know there's
Speaker 1: like different models and you mentioned that. Okay, it's way
Speaker 1: more digital than it used to be. But on the
Speaker 1: other hand, there are still big basically freight trading floors
Speaker 1: or things that resemble a trading floor. And I went
Speaker 1: to the headquarters of a Arrived Logistics in Austin, Texas,
Speaker 1: and there's a lot of you know, and we talked
Speaker 1: to their CEO, and you know, there's a lot of
Speaker 1: X Big ten or Big twelve or sec athletes working
Speaker 1: the phones. In those places. It looks like kind of
Speaker 1: a stock brokerage. And the one side of the room
Speaker 1: they're talking to shippers and the other side they're talking
Speaker 1: to carriers, et cetera. Like there's still a lot of
Speaker 1: humans involved in the process of freight brokerage.
Speaker 3: And then when.
Speaker 1: People think, it's like, oh, why can't we just have Uber?
Speaker 1: And Uber of course also is a freight business. And
Speaker 1: then Tracy mentioned Convoy, which I think was going to
Speaker 1: try and uberize the industry and it recently failed, didn't.
Speaker 1: I recently had to sell for basically nothing. Is my understanding,
Speaker 1: why are there still so many humans involved in the
Speaker 1: business of connecting shippers and carriers.
Speaker 4: There's fewer number of humans now per revenue, per dollars
Speaker 4: per shipment than there were two years ago, and five
Speaker 4: years ago and ten years ago, and that's the trend.
Speaker 4: I bought a company called NLM from land Start back
Speaker 4: in must have been twenty fourteen or so, and it
Speaker 4: specialized in freight brokers, mostly for the automobile industry, but
Speaker 4: other industries too that had expedited requirements, like they needed
Speaker 4: like a factory floor was going to close down unless
Speaker 4: they had a machine or a part, and they needed
Speaker 4: it like in two hours, like right away, and they
Speaker 4: were willing to pay premium prices for that because the
Speaker 4: cost of not getting it was really quickly. This business
Speaker 4: blew my mind because I went.
Speaker 3: Out to go and visit it.
Speaker 4: It was moving over billion dollars for fready a year,
Speaker 4: a pretty sizable firm.
Speaker 3: And it was totally quiet.
Speaker 4: They were like a few dozen people there and they
Speaker 4: were basically taking care of the computers.
Speaker 3: And there was none of what you just described.
Speaker 4: There was no It wasn't like the old fashioned New
Speaker 4: York's docking steeing trading floor from trading places thirty years ago.
Speaker 4: It was very automated. And I said, this is the
Speaker 4: future of brokerage. This is where brokerage is going, where
Speaker 4: it's more machine to machine and automatic, automated tech driven
Speaker 4: tech forward, not dependent on human beings. Now, there still
Speaker 4: is a role for human beings in in almost any
Speaker 4: business because of human relationships, and that's important, but the
Speaker 4: actual transactions, increasingly in almost every industry and including truck brokerage,
Speaker 4: should be done digitally.
Speaker 1: That's what they're not right now, right. I mean, there's
Speaker 1: a lot of email and they say like, hey, we
Speaker 1: need this in North Carolina, and I mean I see
Speaker 1: it all the time, or I mean it may be digital,
Speaker 1: but it's email and a human reading the email XO.
Speaker 4: Ninety seven percent of the shipments are either covered or
Speaker 4: sourced digitally, and they are growing at three times the
Speaker 4: industry average. And that's why they're growing at three times
Speaker 4: the industry averages because it's tech power. It's done by technology,
Speaker 4: not by us mere mortals.
Speaker 2: How much does pricing power matter, for instance, in the
Speaker 2: new distribution business that you're starting, Like, how much of
Speaker 2: the strategy depends on consolidating and then being able to
Speaker 2: get pricing power in the market. And the reason I
Speaker 2: ask is because if you look at something like freight brokerage,
Speaker 2: I mean one of the criticisms of that market was
Speaker 2: a lot of people lowered their prices in order to
Speaker 2: get market share, so get people using their apps or whatever.
Speaker 2: And then when they started raising prices in order to
Speaker 2: actually make money. People just switched platforms right like. It
Speaker 2: was very easy to switch. So I guess how do
Speaker 2: you manage those things? You know, the scale and the
Speaker 2: pricing power in.
Speaker 4: Building products distribution. The business plan is not to raise
Speaker 4: prices to the end customer. However, the business plan is
Speaker 4: to low are a cost of sourcing of procurement. And
Speaker 4: that's not a difficult thing because as you get bigger
Speaker 4: and scale up, you're a bigger buyer, you're a bigger customer,
Speaker 4: and you had a better break. A lot of these
Speaker 4: products are sold on a rate card. Basically, it's not
Speaker 4: much negotiated. It's a rate card. If you buy this price,
Speaker 4: this amount, this is what your price is. You buy
Speaker 4: a larger amount, you get a lower price. You buy
Speaker 4: an even larger amount, you get an even lower amount.
Speaker 4: And that's part of the business model, is to scale
Speaker 4: up and get the procurement savings and then to actually
Speaker 4: pass along some of that to the end user and
Speaker 4: keep some of that for ourselves.
Speaker 1: How big do you have to get then, so again
Speaker 1: going back to your ambition to be a multi billion
Speaker 1: dollar company in Europe and the US, and to have
Speaker 1: that sort of power to get good prices from the
Speaker 1: original list sellers, Like, how much do you have to
Speaker 1: buy in order to get the scale that you want
Speaker 1: to sort of hit the trajectory you're aiming for.
Speaker 3: We're going to buy. We're also going to grow.
Speaker 4: So the industry is growing at seven percent, so I
Speaker 4: would hope to go more than the industry orically, but
Speaker 4: you're right, the main growth is going to come from
Speaker 4: M and A. And we've already put out revenue targets.
Speaker 4: We should be at a billion dollar at least a
Speaker 4: billion dollars revenue run rate after year one the end
Speaker 4: of year one, we should be at least five billion
Speaker 4: dollars revenue run rate after.
Speaker 3: Two or three years.
Speaker 4: And my vision is to be at tens of billions
Speaker 4: of dollars in revenue over the next decade. And I
Speaker 4: see a very clear path to do those numbers.
Speaker 2: So Joe and I both read your book How to
Speaker 2: Make a Few Billion Dollars, and I enjoyed it, and
Speaker 2: I have to say, it's not what I was expecting.
Speaker 2: I was expecting a biography, but like, actually it's sort
Speaker 2: of conceptual in many ways. So at the very end,
Speaker 2: for instance, you have a list of thought experiments, including
Speaker 2: one that's very similar to imagine yourself as a banana,
Speaker 2: or imagine that you're related to a banana. Human DNA
Speaker 2: is fifty percent related to banana DNA, right, Like, what
Speaker 2: inspired that direction in the book, because again, it seems
Speaker 2: kind of unusual. You don't get many billionaires writing, you know,
Speaker 2: lists of thought experiments, and there's also a timeline of
Speaker 2: technology advancement.
Speaker 4: Okay, so let's start with the thought experiments. The purpose
Speaker 4: of the book, as you can tell from the title,
Speaker 4: is how to make a few billion dollars. And in
Speaker 4: my experience, I've met so many very successful people, many
Speaker 4: people who are much more successful than I am, and
Speaker 4: they're very different from each other in many many different ways,
Speaker 4: and they're identical in one trait. They think differently than
Speaker 4: most people do. And I think that's a big insight
Speaker 4: that if you want to create something big, something amazing,
Speaker 4: something very successful, and it doesn't have to be just
Speaker 4: making money, by the way, making money is just one
Speaker 4: thing in life. But if you want to accomplish anything huge
Speaker 4: in life or in business, you got to figure out
Speaker 4: a way to think differently, because if you think the
Speaker 4: same way everyone else thinks you're going to get the
Speaker 4: same results that everyone gets, which is like the average results.
Speaker 4: If you want super average results, you need to think differently.
Speaker 4: And I've made it my discipline, my hobby, my passion,
Speaker 4: my pastime to think differently and use different techniques of
Speaker 4: self hypnosis and meditation and cognitive therapy and mindfulness and
Speaker 4: thought experiments. And I come up with all these things.
Speaker 4: I mix and match all these different schools of consciousness,
Speaker 4: so to speak, and I come up with my own thing.
Speaker 4: And it helps me get out of my little way
Speaker 4: of thinking, and it helps me think in a more
Speaker 4: unbounded way, and that helps me think big and move fast,
Speaker 4: which is the mantra of making a lot of money
Speaker 4: in business.
Speaker 2: So, speaking of thinking differently, there was one part of
Speaker 2: your book where you talk about doing due diligence on companies.
Speaker 2: And you've spoken about this a lot before. You do
Speaker 2: a lot of research before you make these decisions. But
Speaker 2: you also mentioned that you have been working or have
Speaker 2: worked with a guy who was a twenty five year
Speaker 2: investigator and polygraph examiner for the CIA. So you have
Speaker 2: him interviewing the executives of companies that you're going to
Speaker 2: take over.
Speaker 4: Absolutely and so we could have a whole podcast just
Speaker 4: on Philly. He is the world's expert in detecting deception,
Speaker 4: so yes, he was, come on, I think he'll do it.
Speaker 4: I think he'll do it. He's actually written two books
Speaker 4: on it, and it's right out. There's right there and
Speaker 4: how to Spy the Lie and I Find the Truth.
Speaker 4: I think the other want to get the truth? And
Speaker 4: very interesting books. So he was a polygrapher. He was
Speaker 4: the most senior polygrapher in the CIA, and everyone in
Speaker 4: the CIA has to get wired up every year make
Speaker 4: sure they're not a spy. And he learned that you
Speaker 4: asked the question, which is the stimulus, and then there
Speaker 4: was a response. Now the polygraphy measures your galvanic skin response,
Speaker 4: your stress response, your heartbeat, your sweating, and so forth.
Speaker 4: He also noticed that there were other things besides that.
Speaker 4: There was body language, There was language. Language was the
Speaker 4: language that people used in order to answer a question.
Speaker 4: There were clusters of traits that were the hallmarks of deception.
Speaker 4: And he created a whole method of detecting deception and
Speaker 4: it's a very disarming technique. A great conversationalist.
Speaker 3: You would never think he's not.
Speaker 4: A difficult guy or an interrogate or anything like that.
Speaker 4: And I've studied him very carefully, and I've worked with
Speaker 4: him for oh decade and a half.
Speaker 3: Now I'm still not as good as he is on that, but.
Speaker 4: I've studied how to detect deception, and so is my
Speaker 4: senior management team. They've all taken his courses. They've all
Speaker 4: taken his training, and we find it so beneficial. We
Speaker 4: find it beneficial in due diligence on companies because guess what,
Speaker 4: sometimes people don't tell you the truth when they're selling
Speaker 4: their companies. They exagger a little bit. And guess what
Speaker 4: in job interviews, we're interviewing people. You know, people sometimes
Speaker 4: spend they don't tell you the straight story. And if
Speaker 4: you can figure out what's blogny and what's true, wow,
Speaker 4: you can save a lot of aggravation and a lot
Speaker 4: of money and a lot of you can avoid a
Speaker 4: lot of mistakes. So I do believe that learning the
Speaker 4: art and science of detecting deception, and and we've used
Speaker 4: Phil Houston, he goes his nickname is Dick to Houston
Speaker 4: to do that.
Speaker 3: To teach us. That's really helped us a huge amount.
Speaker 1: So all of these industries that you've worked in, Like
Speaker 1: I don't know if it was always the case, but
Speaker 1: these days there's something like I guess I would say
Speaker 1: sexy about a lot of these sort of you know,
Speaker 1: like I see people on Twitter like talking about like.
Speaker 2: Self high chain so hard, no, like for real, like.
Speaker 1: Self storage, or I want to buy up h vacs
Speaker 1: and you hear stories about x ex Wharton MBAs and
Speaker 1: the first thing they want to do is get some
Speaker 1: friends together and roll up in the local pool management
Speaker 1: company or hvac or whatever, or you know, a chain
Speaker 1: of laundromat to whatever. These physical things that exist in
Speaker 1: the world that aren't going to disappear or go anywhere.
Speaker 1: You spent a year figuring out which industry you'd attack next,
Speaker 1: building products distribution? Is there a system for identifying industries
Speaker 1: or types of companies that you use to go after next.
Speaker 4: I have a system, and I read about it in
Speaker 4: the book I put the process that I use in
Speaker 4: order to study an industry and in order to study
Speaker 4: a specific company, and to make a long story short.
Speaker 3: I get a lot of the.
Speaker 4: Important information and I don't waste time on the unimportant information.
Speaker 4: And I've been doing this long enough I know what's
Speaker 4: important what's not important. And we do a lot of
Speaker 4: diligence online before we even meet people, and then we
Speaker 4: try to use the time of the people we're talking
Speaker 4: to very politely, very judicially, so we're not wasting their
Speaker 4: time and asking them things that we can find out
Speaker 4: from other sources. But we want to know all the
Speaker 4: important stuff. And when we're looking at an industry, we're
Speaker 4: looking at a company, what are we trying to figure out?
Speaker 3: At core?
Speaker 4: We're trying to figure out whether it's an industry or
Speaker 4: a company fast forward five years, seven years, ten years,
Speaker 4: what's the revenue going to be, what's the profit going
Speaker 4: to be? And what's the cash flow whether it's inflows
Speaker 4: or outflows over that period of time. All the hundreds
Speaker 4: of other questions that we're using for due diligence are
Speaker 4: all important, but they distill down to those three questions,
Speaker 4: how do I figure out over the next half a decade, decade,
Speaker 4: what's the revenue going to grow, what's the profit going
Speaker 4: to grow? And how much cash is it going to
Speaker 4: generate or use up? And in the end, it comes
Speaker 4: down to how much money would we put in and
Speaker 4: how much money would we get back, and it's no
Speaker 4: more complicated than that. And if you stick to that
Speaker 4: basic concept that I just mentioned, you will make a
Speaker 4: lot of money, you will create alpha. If you deviate
Speaker 4: from that, if you don't pay attention to that, you say, well, yeah,
Speaker 4: the return on capital's not so great, but no, there's
Speaker 4: no butt. You're gonna have a finite amount of money
Speaker 4: and then five ten years later you're going to have
Speaker 4: created a revenue stream and a profit stream, and you'll
Speaker 4: have generating cash flow between now and then.
Speaker 3: That's gonna determine.
Speaker 4: What your stock price is and how valuable your company is,
Speaker 4: and all the due diligence ends up being about that.
Speaker 2: You do seem to have a connection with the physical space, though,
Speaker 2: which I mean Joe and I clearly.
Speaker 4: Share, and I take issue that it's not sexy.
Speaker 2: Oh no, we agree.
Speaker 1: We agree. That's why we spent the last three years
Speaker 1: talking about.
Speaker 3: Yes.
Speaker 2: And the other thing I was going to say is,
Speaker 2: when I first went into financial journalism, I wanted to
Speaker 2: be a commodities correspondent because there was like a romanticism
Speaker 2: with this idea of like moving large amounts of stuff
Speaker 2: around the world. So I guess my question is what
Speaker 2: is the attraction there, Like, is there something innate about
Speaker 2: the physical space that attracts you to it, or is
Speaker 2: it more about the market opportunity. You mentioned this earlier,
Speaker 2: the idea that you know, like people are always going
Speaker 2: to have to move things. This isn't a business that
Speaker 2: is going to disappear overnight.
Speaker 4: It's more opportunistic than conceptual and abstracts, more concrete. It's
Speaker 4: here are industries that my playbook, the Brad Jacob's Playbook,
Speaker 4: is applicable. And that playbook involves a lot of M
Speaker 4: and A and a lot of and a lot of
Speaker 4: optimization of what we buy, and those techniques apply to
Speaker 4: the industries I've been in some of the industries that's
Speaker 4: really not the play that's not fragmented enough. You really
Speaker 4: can't buy enough. Bigger isn't necessarily better. Maybe the long
Speaker 4: term trend is not so so fantastic. So I looked
Speaker 4: into many, many, many other things, but I dismissed them
Speaker 4: because they didn't check all the boxes. That's one happened
Speaker 4: to check all the boxes. But I looked at many
Speaker 4: other things. I looked at many other industries that well,
Speaker 4: I looked at I spent a lot of time going.
Speaker 3: Back to my roots.
Speaker 4: As you probably know, my first ten years in business
Speaker 4: were in energy, was in oil and gas. So I
Speaker 4: spent a lot of time down in Texas looking at
Speaker 4: oil and gas properties. And there are some really cheap
Speaker 4: properties for sale and like two or three times cash flow,
Speaker 4: and they have twenty thirty year lives, so you can
Speaker 4: get your money back in a couple of years for years,
Speaker 4: and then you have just pure profit year after year
Speaker 4: after year for a long long time. So I got
Speaker 4: really excited about that. As a generally, I'm a value person,
Speaker 4: so I said, Wow, this is really really deep value.
Speaker 3: But I I.
Speaker 4: Talked to the seventeen or so sovereign wealth funds and
Speaker 4: pension plans that have invested in XPO in the past,
Speaker 4: we have a great relationship with, and almost all of
Speaker 4: them said, hey, I get it, but we're not going
Speaker 4: to invest in that. And because ESG and because the
Speaker 4: oil and gas business went through a bad patch there
Speaker 4: for a while. But I like going industries that have
Speaker 4: gone through a bad patch and get better values there.
Speaker 4: But I couldn't see a way that I could raise
Speaker 4: many billions of dollars to finance energy. In fact, I
Speaker 4: even read in the lobby waiting to come up here
Speaker 4: in Bloomberg, I saw a new fund is being raised
Speaker 4: by a couple of guys, talented guys who left Warburg
Speaker 4: and they were in their energy department, and they're they're
Speaker 4: raising a seven hundred and fifty million dollar fund. They
Speaker 4: could probably deploy twenty billion dollars. They're not going to
Speaker 4: raise twenty billion dollars. They're gonna raise seven to fifty
Speaker 4: million dollars. That's my point. So part of my strategy
Speaker 4: is to go to my good old friends in Singapore
Speaker 4: and Canada and Middle East and get funding to go
Speaker 4: out and do M and A. And I don't see
Speaker 4: how I could do that in energy, for example.
Speaker 1: Last question for me, so you mentioned that you have
Speaker 1: to start with the nuts and bolts. What is the
Speaker 1: cash that this company is going to throw off over
Speaker 1: the next three, five, ten years, et cetera. And then
Speaker 1: you said people come up with a button to justify
Speaker 1: something that's not. What are the lies that investors tell
Speaker 1: themselves or entrepreneurs tell themselves that cause them to make mistakes.
Speaker 4: They go for the shiny object of the moment. What
Speaker 4: happens to be to go back to the sexy thing
Speaker 4: sexy at the moment, and what's sexy the moment may
Speaker 4: not be very sexy in five or ten years. You
Speaker 4: have to look at what's the real business here, and
Speaker 4: what's the demand going to be over time, and what's
Speaker 4: the supply of that service or product over that period
Speaker 4: of time. And you have just look at it in
Speaker 4: a very elementary, fundamental way like that, and then you
Speaker 4: can predict how much value going to create. Many many
Speaker 4: investors and many many business people, many boards even don't
Speaker 4: even think like that. And it's shocking, really because it's
Speaker 4: so fundamental to value creation.
Speaker 2: I have a completely self interested topic as my last question.
Speaker 1: It's going to be about the shed that you're building.
Speaker 2: No, actually, it was going to be about journalism, which
Speaker 2: is you know, the book and a lot of your
Speaker 2: businesses today have been about technological opportunity and disruption, and
Speaker 2: you have a sort of throwaway line in the book
Speaker 2: about AI and how it's going to mean that many
Speaker 2: jobs in journalism are likely to become obsolete, which you know,
Speaker 2: fair enough, I won't necessarily argue with that, But as
Speaker 2: a thought experiment, what would be your play on AI's
Speaker 2: impact on journalism, Like if you had to do something
Speaker 2: in the journalism space, right now, what would it be?
Speaker 3: I looked at media.
Speaker 4: I looked at it, couldn't find the right thing. I
Speaker 4: looked at a number, a handful of companies actually that
Speaker 4: were doing media ads, advertising in media.
Speaker 3: But I got nervous.
Speaker 4: About what's going to happen from a regulatory front when
Speaker 4: some of the European rules, which are much more stringent
Speaker 4: about the advertising, the cookies and sharing the information, when
Speaker 4: that comes over here, and maybe that business would get disrupted.
Speaker 4: So I get nervous about that. I didn't didn't see
Speaker 4: the right ending for that.
Speaker 2: Okay, can I have the lumber?
Speaker 3: Yes?
Speaker 4: I will, definitely, You're going to be customer number one, Chase,
Speaker 4: I probably will.
Speaker 1: Brad Jacobs, thank you so much for coming on ovlogs.
Speaker 1: That was a bladder my pleasure. Thank you, Tracy. I
Speaker 1: think I know how to make a billion dollars.
Speaker 3: Now.
Speaker 1: I'm going to call up my friends in Singapore. I'm
Speaker 1: going to call up my friends at some Middle East
Speaker 1: sovereign wealth funds, and I'm gonna talk to the people
Speaker 1: that I know who have built incredible software technology for
Speaker 1: the world of physical distribution, and then find a new
Speaker 1: industry to take over. Okay, I got the playbook.
Speaker 2: Now you have to do it, and you're gonna are
Speaker 2: a CIA investigator as well.
Speaker 3: Right, I got it.
Speaker 1: I feel this is it.
Speaker 2: Okay, well great, I'm glad we've solved that. No, that
Speaker 2: was such a fun conversation and it is interesting. Like, Okay,
Speaker 2: Brad has clearly done a lot of businesses, five or
Speaker 2: seven depending on how you count, as you mentioned, but
Speaker 2: there does seem to be this common thread throughout all
Speaker 2: of them, so like a a lot of them have
Speaker 2: been in the physical space, and again, like it seems
Speaker 2: like there is that perpetual opportunity there in that the
Speaker 2: business of moving stuff getting rid of stuff isn't going
Speaker 2: to go away, and Brad was talking about that. But
Speaker 2: also the idea of all of that, I guess because
Speaker 2: of the way it developed, is just so fractured to
Speaker 2: the point and like localized, so that that's a place
Speaker 2: in the economy where there are still opportunities for scale
Speaker 2: and efficiencies. So even though the businesses sort of range
Speaker 2: across a large variety of things, like it does seem
Speaker 2: there is this commonality.
Speaker 1: It's super interesting too to think about. Again, Yes, the
Speaker 1: unequal distribution of technology today, the idea that there are
Speaker 1: some warehouses around the country that are very automated and
Speaker 1: very up to date, and others that have never felt
Speaker 1: perhaps the competitive pressure to need to do so. Or
Speaker 1: even in freight brokers, the idea that there are some
Speaker 1: brokers that resemble giant trading floors and some not. I
Speaker 1: find that to be really fascinating. Also this idea of
Speaker 1: just like, Okay, if you have access to the capital,
Speaker 1: you can get scale from day one. And obviously so
Speaker 1: many entrepreneurs like are what is going to take to
Speaker 1: get scale? Well, in theory, if you have the money,
Speaker 1: you can be big from day one and get the
Speaker 1: best prices from the vendors.
Speaker 2: Yeah, and we have to have what was his name,
Speaker 2: Dick Houston on the show.
Speaker 1: Also, just one other thing that is interesting is just
Speaker 1: this idea that there's some businesses that are very attractive
Speaker 1: but the capital isn't there. And so that comment at
Speaker 1: the end about certain energy assets being cheap but no
Speaker 1: one wants to put up the money for them, like
Speaker 1: someone is going to capture that alphas.
Speaker 2: Yes, except in the media business, I guess there's no hope. Okay,
Speaker 2: shall we leave it there?
Speaker 1: Let's leave it there, all right.
Speaker 2: This has been another episode of the Oudlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 1: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 3: Check out our.
Speaker 1: Guests Brad Jacobs's new book How to Make a Few
Speaker 1: Billion Dollars. You can have the playbook to Make a
Speaker 1: Few Billion Dollars yourself. Follow our producers Kerman Rodriguez at
Speaker 1: Kerman armand dash O Bennett at Dashbot and Kelbrooks at Kelbrooks.
Speaker 1: From our odd Lots content, go to Bloomberg dot com
Speaker 1: slash odd Lots, where we have a blog transcript and
Speaker 1: a newsletter. And check out our discord discord dot gg
Speaker 1: slash odd Lots, where listeners are chatting twenty four to
Speaker 1: seven about these topics, including lots of a transportation channel,
Speaker 1: which I suspect there will be much a much discussion
Speaker 1: of this episode.
Speaker 2: And if you enjoy odd Lots, if you want us
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Speaker 2: Thanks for listening.