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Welcome to the XPO Logistics Fourth Quarter 2018 Earnings Conference Call and Webcast. My name is Melissa, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded.

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 make 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, except to the extent required by law.

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 of the company's website. I will now turn the call over to Brad Jacobs, Mr. Jacobs, you may begin..

contract logistics, Last Mile, labor, technology, transportation and the storage capabilities of XPO Direct. Also in December, our board authorized a $1 billion stock buyback, which we completed earlier this month. As we announced yesterday, the board has authorized an additional buyback of up to $1.5 billion.

While we love M&A, the acquisition that will create the most shareholder value right now is acquiring our stock. As you saw in the release, we brought down the numbers for 2019. We can't ignore the fact that our largest customer is curtailing about two thirds of its business with us.

We had substantial capacity dedicated to this customer in brokerage, last mile and logistics. But we believe the great bulk of these resources should be redeployed over the next couple of quarters. And then there's the macro in Europe, not great.

On the bright side we have a new strategic account organization in Europe that’s very good at getting our message across to large customers with complex supply chains. And to some degree this may help with volatility. We have a number of other tailwinds working for us in 2019 and many of them are substantial.

There's a high demand for our e-commerce services and we expect full-year benefits from the record number of logistics projects we started up through 2018. Also there is the expansion of our last mile hubs and our LTL pricing technology, which we can get into more in our Q&A. Finally, I'd like to tip my hat to our 100,000 employees.

They've created a culture that has led to Fortune magazine naming us one of the World's Most Admired Companies for the second year in a row and the Most Admired Company in our category. We're also honored that we were awarded the third-best place to work in the U.K. in a survey taken by Glassdoor.

We have 22,000 employees in the U.K and I appreciate their enthusiasm and we share that enthusiasm. We have a firm handle on 2019, plenty to be excited about and I'm confident in our ability to create significant shareholder value. With that, I'll ask Matt to review the numbers in more detail. Matt's been a fantastic add to the team.

I hope you enjoy working with him as much as I do.

Matt?.

Thanks, Brad. I'm delighted to be on the team. XPO is an amazing organization. And to those on the call I look forward to meeting many of you in the weeks and months ahead. Now I'll walk you through the numbers, the backdrop and our strategic focus by business unit. Starting with our transportation segment.

We grew revenue in the quarter by 1.8% to $2.8 billion. GAAP operating income declined by 19%, inclusive of a number of charges. Adjusted EBITDA from transportation grew by 3% to $272 million. While our revenue growth moderated, we were disciplined with costs and expanded our adjusted EBITDA margin for the quarter as we did for the year.

In North American LTL, our tonnage declined 1.1% moderating from a 1.5% decline in Q3, as we continued to target more profitable freight. Revenue per hundred weight, excluding fuel, rose 1.1% reflecting pricing initiatives higher rate per shipment and shorter length of haul. We also achieved a 4.9% rate increase with contract renewals.

We're leveraging our labor more efficiently and improving our claims performance both of which are contributing to better profitability in LTL. Turning to freight brokerage. Our technology helped us navigate mixed market conditions in the quarter. Our net revenue increased 6.2% despite the 3.3% decline in gross revenue.

Within freight brokerage, truck brokerage revenue was down a bit more. We're continuing to deploy technology across our brokerage business. In XPO Connect our digital freight marketplace we now have more than 14,000 carriers registered and we've more than doubled the number of digital bids submitted by drivers seeking loads.

We've also grown the number of transactions booked through XPO Connect by more than four times compared to Q3 and we've increased the conversion of digital bids by a factor of three. We attribute much of the success to our counteroffer feature, which negotiates automatically based on real-life market conditions. This is led to better gross margins.

In Intermodal, our fourth quarter revenue increased in the low double digits year-over-year. The peak season was strong. Pricing in Intermodal has recently become more subdued as the truck market loosens, but keep in mind that with our multimodal footprint we're poised to move with the market and capitalize on transportation volume of any kind.

With Last Mile, our revenue tracked flat year-over-year and net revenue declined by $10 million or 13%. For context, the largest part of our Last Mile business is heavy goods delivered directly to consumers on behalf of major retailers and consumer brands. This is our core Last Mile business and we are the undisputed leader in North America.

This core business is performing well and we're continuing to win new contracts with dedicated service which is supported by our national network. We have 85 Last Mile hubs in North America and we're excited to have that capacity for growth. A smaller part of Last Mile for us is direct injection of freight into the postal system.

While we welcome this business, it has lower barriers to entry and it's less differentiated than heavy goods. We had a major impact in the fourth quarter when our largest customer decided to curtail its postal injection. We'll be cycling through this in 2019.

Our European transportation business generated revenue growth of 6.1% in the quarter, which on an organic basis equates to 4.5% growth. This was slower than our third-quarter trend and it weighed on EBITDA.

In France where we have our largest European presence, the yellow vest disruption, so to speak, put a damper on LTLs brokerage and dedicated truckload. Turning to our other segment, the growth story in logistics remains terrific. Segment revenue was up 10% globally in the quarter and 12% on an organic basis.

Operating income was $42 million and adjusted EBITDA was $127 million, up 11% from Q4 of the prior year. In North America, our revenue growth in logistics reflects ongoing strength in consumer packaged goods, food and beverage and e-commerce. In Europe revenue grew 6% higher organically, with the main tailwind coming from e-commerce.

Through 2018, we averaged more than one customer start-up per week in each of the U.S. and Europe. Now in 2019, we have a robust logistics pipeline of active bids and good long-term visibility. We expect some moderation in the pace of new logistics start-ups coming off an exceptionally strong year.

The uncertainty in Europe could be a factor, but the segment overall is definitively in secular growth mode. Companywide cash flow from operations in the quarter was $566 million and free cash flow was $479 million.

For the full year, we generated cash flow from operations of $1.1 billion and free cash flow of $694 million which was substantially above target. Our net CapEx was $408 million. This included growth CapEx of $551 million and asset sales of $143 million. I want to mention the fourth quarter restructuring charge we reported.

It was $19 million or $14 million after taxes. This was largely for severance cost. We expect to realize annualized savings of about $55 million. Before I wrap up, I'll spend a minute on working capital management. This was brought up in the third quarter call as a focus for the company going forward.

In the fourth quarter, we did a good job of controlling our working capital through two initiatives. The first is factoring. Our use of factoring become more significant in Q4 and I want to provide you with some insights. The majority of our factoring relates to large customers in our contract logistics business.

Most of these customers require extended payment terms. At the same time, our logistics business is growing fast which uses more working capital. So factoring is a good strategy here. It's also a low-cost source of funding for us. In most cases, our cost ranges from LIBOR plus 70 to LIBOR plus 110 basis points.

The incremental year-over-year benefit for our free cash flow from factoring was about $200 million. The second initiative is collections. This has been a big focus of our working capital management. With progress on speeding up collections in Q4 we outperformed our own expectations for operating cash flow and free cash flow.

For 2019 we're guiding to adjusted EBITDA of $1.65 billion to $1.725 billion which represents 6% to 10% growth. This range reflect the fact that we'll be managing through the significant reduction in business from our largest customer beyond postal injection. And we're also taking a more cautious view of Europe.

We do think we'll see increasing benefits from our internal growth initiatives in the back half of the year. For the full year, we're expecting free cash flow in the range of $525 million to $625 million. This compares to the $650 million target we shared with you in December.

It reflects the lower growth rate we expect for adjusted EBITDA and the higher interest expense we expect from funding our new share repurchase program. We anticipate net CapEx of $400 million to $450 million and D&A [ph] of $765 million to $785 million.

We're planning cash interest expense of $275 million to $315 million and we're using a tax rate of 26% to 29% with cash taxes in the range of $165 million to $190 million. We expect to be users of free cash in the first quarter, with free cash flow building over the course of the year consistent with our typical seasonality.

So in summary, 2018 was a strong year of growth and profitability, ending on a down note that will impact part of 2019, but we are focused on growth. There are many opportunities for us across the marketplace.

We have a broad range of integrated solutions for customers, leading positions in fast growing areas of the industry and a strong track record as an innovator. With that, I'll turn it back to the operator, and we'll take your questions..

Thank you [Operator Instructions] Our first question comes from the line of Jack Atkins with Stephens, Inc. Please proceed with your question..

Hey, guys, good morning and thank you very much for taking my questions..

Morning, Jack..

So Brad, I guess, the first one is on the receivable factoring, and I appreciate the additional commentary there. But I can't think of another transportation logistics company that does that.

And does that - I guess, can you kind of help us think through why you're choosing to do that now versus in prior years? And I guess, when we see other companies do that, it's really to manage around liquidity challenges.

And you know, is that the case here with XPO?.

Sure. Jack, it's Matt. I'm happy to take that question. Most of our factoring, the majority of our factoring is associated with our contract logistics business. And we believe that factoring is fairly common around or among our contract logistics peers.

And our customers, oftentimes, have facilities in place with money centered banks that are accustomed to working on factoring transactions with them. We have ample liquidity, as evidenced by our buyback and our ability to fund capital allocation at our discretion..

Okay. Thank you, for that color Matt. And I guess the second question Brad for you, bigger picture question.

But the message from yourself and XPO senior leaders during 2018 was that this company was investing for the future, taking excess profits and reinvesting them so that you could drive sustainable double-digit or mid-teens EBITDA growth really regardless of what the cycle is doing.

That's why you guys told folks to expect - not to expect a big surge in profits in 2018 despite extremely strong freight cycle. We've seen a significant reduction in your EBITDA outlook over the last three months.

How do you explain the step function change in your growth outlook when you guys were supposed to be a secular growth story?.

Fair question, Jack. So several quarters ago I was asked if the macro stays the same as it is, what would we grow at? And I said 15% to 18%, which is the level we were growing at, that's on the EBITDA level. If we had the same macro now as we had a year ago, we would still be growing at that level. We don't. The macro softened.

When we saw the softening, particularly in France and the U.K where we have a quarter of our business, we brought down our guidance. We brought down guidance when we saw that 15% to 18% was not there because the macro was deteriorating for the geographies that we have business in. And we brought it down to 12% to 15%.

We had another significant development when our largest customer pulled back at least two thirds of their business and that's just a big development. And that there's no way that you can't bring guidance down when you lose $600 million of revenue on very short notice. I am optimistic that we will get that business back from other customers.

We've got strong, strong people in place, technology in place, access to capacity, we give excellent service. We gave excellent service to that customer. We had had to turn done business from other customers because we had limited resources.

We are going to redeploy those resources over the next couple of quarters and I believe that they'll be utilized in the second half of the year..

Okay. Fair enough. Brad, thanks again for the time..

Thank you, Jack..

Thank you. Our next question comes from the line of Ariel Rosa with Bank of America Merrill Lynch. Please proceed with your question..

Hey. Good morning, guys. So I wanted to start talking about customer concentration. One of the things that I think XPO has touted as one of its strengths is that it's not overly focused on any particular customer.

But here we've seen kind of two quarters in a row where some disappointing news from a particular customer has really put a real dent in results.

And I want to talk about - I kind of want to get your thoughts on the extent to which maybe that perception is changing or how you manage your customer base, maybe it has shifted or should investors be thinking about customer concentration differently from how they would have maybe six months ago?.

Well, in 2018 our top five customers represented about 11% of revenue and you saw that in the K. The largest customer however represented roughly about 4%, 5% of that. Two thirds of that business has gone away. So that's a body blow, no question about it.

Going forward with that customer having downsized, we anticipate that our top five customers in 2019 will represent about 8% of revenue. So customer concentration will be less. But when you lose your - when you lose the majority of your top customer’s business, that hurts. Nothing positive you can say, there's nothing positive, it's only negative.

You mentioned also the House of Fraser write-off in the third quarter. I don't view that as anywhere near as significant as losing $600 million of business from our top customer. That was a bankruptcy. It cost us $16 million. We did not take it as an add back. We deducted it from earnings. And that's that was a miss.

But $16 million of a miss when the full year is $1.5 billion I don't view that as a big significant thing. I view the loss of $600 million of revenue as significant thing that we will really rebound from in the second half of this year..

Okay, great. That's helpful color. And then just on the second question. I wanted to see if you could talk, Brad, maybe about how you see XPO's technology differentiation as a point that maybe puts it apart from peers? Obviously you guys talk a lot about your IT capabilities.

With this customer stepping away obviously they feel that they can replicate that.

I'm wondering if that's a risk that is present with other customers? Or do you feel that your moat is still sufficient to make the business fairly defensible against this kind of thing recurring going forward? And then maybe just really quickly if I could tag on a side note to that question.

Maybe you could talk about the margin impact that we'll see from the departure of this customer?.

On tech, I view what we do in tech extremely positively. We spent about $500 million in tech in '18. We'll spend $550 million in tech this year. And we go over the ROIs of every tech investments that we have very carefully. And if we wanted to, we would have a lot more opportunities to deploy in tech.

What I like about our technology innovations are things like our labor productivity tools. When a company has as many billions and billions of dollars of labor costs as we do, managing labor productivity in terms of rightsizing the headcount, in terms of managing overtime, not too much, not too little, has a big impact.

And the labor productivity tools that we rolled out last year in contract logistics improved our productivity between 2% and 5%. And we are transferring those over to LTL and have a big employee base there too. So in addition to labor productivity tools, we rolled out new inventory management tools in contract logistics last year.

Again, helps us further differentiate ourselves from our competitors. Continued traction with XPO Connect continues. We've got 14,000 carriers sign ups to-date. So the trajectory there's been very, very fast.

And we have a whole bunch of LTL technology that rolled out over the course of 2018 from dynamic route optimization to advance pricing algorithms to AI-based load building to linehaul bypass models and many other features. And if you look at the company in every country in every line of business, automation, automation is a key, key focus.

We have thousands and thousands of robots that just we keep rolling out particularly in contract logistics. In the back office, robotic process automation is having a real positive effect in many places of our organization. So I think in our technology is very strong and gives us an extremely competitive moat.

It's one of the main reasons that customers choose us. Yes, we've lost two-thirds of our largest customer, but we have are 50,000 other customers. And we feel very strong about the technology we bring to bear. More importantly, our customers feel very strongly and they value the technology..

Okay, great.

And the quickly the margin impact?.

Yes. So Ariel, it's Matt, I'll take that. So you should think about margin flowing through because you have to think about contribution margin. When we lose that business, that business erodes, we don't necessarily lose the corporate expense associated with that, not right away. So think about that flowing through.

It's slightly higher than company average EBITDA margin. Now obviously, we have steps in place to defray that impact. That would be more evident in the second half of the year, so it's now a lot to the business based on everything we've told you.

W e're doing what we can do to keep the EBITDA margin flattish, the adjusted EBITDA margin flattish in the first part of the year. And then, you would expect to see certainly embedded in our plan some adjusted EBITDA margin expansion in the second half of the year.

Some of that's associated with cycling House of Fraser in Q3, cycling the particularly painful impact of the direct postal injection business in Q4. But it's also the general recovery we expect as we redeploy some of the capacity in the second half of the year..

Got it. Okay, thank you for the time..

Thanks, Ariel..

Thank you. Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question..

Hi guys, it's James on for Chris. Thanks for taking the question. I wanted to ask about organic growth.

Where do you expect the lion's share of that to come from? And what might the cadence of it be?.

What was the second part of your second question the cadence of the organic growth?.

Correct..

Sure. The organic growth this year should be more weighted to supply chain. It's where we have the highest visibility due to the contractual nature of the business and the new start-ups that we spoke about over the course of 2018. The majority of the business that we're losing with our largest customer is going to come in the transport segment.

So that's where you can to see more pressure on organic growth. As you think about rule of thumb based on what we know this year, looking at FX, looking at fuel, there is one point to point plus of difference between organic growth and reported revenue growth on a full year basis.

That difference is bigger in the first part of the year which is a function of the strength and the dollar. And that gap should narrow as you make your way through the year..

I'll add on to that. If you look at 2018, supply chain contract logistics was a juggernaut. It definitely remains in secular growth mode and we remain in taking market share mode. In Q4, globally our logistics organic revenue growth was up 12.4%.

And we've been averaging more than two start-ups a week and we did a record number of 118 start-ups in contract logistics in 2018, including 28 in the fourth quarter. So all those 118 contract logistics start-ups that we layered in throughout 2018, we'll get the full-year contribution of those here in 2019..

Thanks.

And then focusing a little bit more on Europe, should we expect that to grow? Or should we see the net revenues in decline across 2019?.

Well, in order to answer that question, you got to figure out what your assumption is for Brexit and for France. So in U. K, if there's a hard Brexit that's going to be a negative, if there's a soft Brexit that's going to be a positive.

If there's an extension of Brexit and they just both agree to keep negotiating for longer period of time that - I would give that a neutral. Obviously, if they change their whole position and it becomes remain and they say forget about Brexit, that'd be extremely positive. But from our perspective in our numbers, we've baked in status quo.

And that would change to positive or negative depending on where Brexit ends up. In France, we're also assuming the status quo in the guidance we've given. France, Troy was in France representing us with President Macron's annual event with business leaders. And the tone was a lot different than what is a year ago.

A year ago everyone was bragging about their new commitments and their new expansions and openings and CapEx. And this year, it was quite subdued. We're assuming that the yellow jacket events keep continuing, but that it doesn't go into a recession. But doesn't go 2%, 3% GDP positive.

That the level of malaise, to use a French word, in France continues just the way it is right now. Obviously, if you went into positive GDP and in significant way that would be a positive, if it went into recession that would be a negative. Now we are taking actions in all these situations. There’s things we can control. There's things we can't control.

But even the things we don't control, we can react with those and we can position ourselves for the best outcome in regards to eventuality. So in France we've added two fantastic executives, Jean-Emmanuel Mongnot and Bernard Wehbe who were with us here in Greenwich for a week - a few weeks ago. I'm just very, very impressed with them.

And they have replaced and upgraded about two-thirds of their middle-management teams. So it's a strong morale. It's a strong group. Obviously, we're focused on cost control when there's not a lot of top-line growth. And in Brexit, we are - in U.K. we've had a fantastic team there and on the senior and middle level for a long, long time.

And they're very agile, very capable, very competent to deal with and experienced in dealing with all types of economies..

Thanks for taking the question..

Thank you..

Thank you. Our next question comes from the line of Amit Mehrotra of Deutsche Bank..

Thanks operator. Brad, the company has missed expectations two quarters in a row. It's brought down guidance three times in the last four months. Just given that near-term track record, why - I think there's a real question about why we should believe the company guidance today.

And I think it's an important question to understand, how robust the 2019 guidance is and what are the assumptions that underpin it and how confident are you in achieving that? And what's the likelihood that two months from now, we're looking at flat EBITDA and another down free cash flow number? And then related to that, what are you assuming for the $300 million that remains with the existing customer for 2019?.

Okay. Let me - there is plenty of questions and they are all good ones. Let me unpack them. First of all, I agree with the implication in the first question that is gee, you've missed two quarters in a row and you brought guidance down. So you don't believe in exactly whatever our guidance is and having skepticism is understandable.

And this has not been our track record. This is not who we are. We accurately forecasted our performance for seven years. And then two quarters in a row, we slipped on a banana peel twice. Not good. Having said that, there was a reason why we missed in the third quarter. One of our customers House of Fraser went bankrupt.

And we had – they had been a good customer until they went bankrupt and we had a $16 million write-off there. So we missed. And that's what it was and it's unfortunate. And we've tightened up our controls, so we don't have another exposure like that.

In the fourth quarter, the reason has nothing to do with the bankruptcy, really the main factor was in the middle of December, we were notified by our largest customer who also happened to be our largest customer in postal injection that they were pulling the business.

And that turned into a business that was expected to have a significant profit in December and turned into a significant loss in December. We had a lot of capacity all ready to go and it wasn't utilized and was getting close to Christmas and we kept the people. And we just lost money simple as that. So that blew the quarter. And France and the U.K.

were a little softer. But the real big killer was postal injection. Look that's unfortunate all the things that are unfortunate happened. But those things happened and the results are what they are. You asked about going forward. The guidance that we've given has been brought down significantly. We believe that we can hit that guidance.

It's reasonable, it's well considered, it's a bottoms up guidance, it's been pressure tested. It changed a lot and was brought down this week because on Tuesday we were notified of the bulk of that $600 million going away. So we had to revise our guidance internally within a few days and we believe we've put out guidance that we can hit.

Are we going to beat a little or miss a little bit on certain lines? We could. We're human. But the overall the guidance that we have given is guidance that we believe in. And you've noticed that in our materials, we've especially brought down guidance for the first half of the year, while we're regaining our traction from the business that we've lost.

But I feel good about the second half of the year, because we’ll have had the time to reposition to redeploy those people and those resources, it's not going to happen overnight. It's going to take a couple of quarters. As I mentioned before, we'll get the full year contribution of the 118 logistics start-ups we did the whole year.

Similarly, we'll get the full year benefit of the 85 last mile hub that we layered in through the year. The North American strategic account manager organization's on fire. The closed wons increased 45% in 2018 versus 2018. It's been so successful that we've copied that winning strategy and formed a single point of contact sales organization in Europe.

In November, we hired a great person from DHL, excuse me from DB Schenker and he's now hired 11 SAMs strategic account managers under him. We've four more to go. We've assigned the top 200 customers to that team and I have a lot of positive expectations from them. So the second half has easier comps than the first half does.

The second half we won't - we'll have lapped that House of Fraser write-off. We'll lap that Department of Defense contract. We'll have lapped the fourth quarter last mile loss. So life gets easier as we build back the business that we lost and that we lap these money-losing events that happened in the second half of this year.

I - I'm sorry to interrupt you, but you asked also what are we assuming on the other $300 million that remains with that customer. Most of that business, but not all of that business is under long-term contracts that expire over the next three years. So contractually that business shouldn't go away.

There's other parts of that business that could be at risk, and we've assumed some of it might go away, not all of it. And we haven't assumed all of it will stay..

Okay. Just for my follow-up. There's obviously a lot of highly valuable assets in the business on their own merits, whether it's the LTL business that isn't being impacted by the largest customer moving out, the faster-growing logistics business.

But the implied valuation of the businesses is suffering from like a conglomerate discount of the complexity of the model.

So just given that fact, would you then maybe be more willing in light of what's occurred over the last six months just to spin-off certain parts of the business, bring in new management at those businesses and allow those business to float on their own to get the valuation that they deserve? Is that something that's more possible now?.

our own stock. Because we have confidence in the long-term value of our stock and that's what I want to use the cash for..

Got it. All right. Thank you for taking my questions. Appreciate it..

Thank you, Amit..

Thank you. Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question..

Thanks. Good morning, guys. Brad, in addition to this - the loss of your largest customer, I think you guys closed a couple of warehouses in the last couple of months, one with Verizon and one with an unnamed customer.

Could you give us some more color there? I mean was that loss of business as well? Or were you just kind of moving business between facilities?.

We are always opening and closing contract logistics facilities. So last year, we opened up 118 including 28 in the fourth quarter. We did - when we open a facility, we don't put out press release. The press usually doesn’t pick up on this. Sometimes they do, usually they don't.

When we close a facility, assuming we have certain number of employees, we put out what's called a warn notice, W-A-R-N notice and that becomes widely distributed and gets a lot of just attention. But the number of locations we closed last year you could count on a couple of hands. So we're clearly in growth mode in the contract logistics.

Growth remains very strong there. You saw that in - North America organic revenue growth in the fourth quarter is 17%. And our strength in consumer packaged goods and in food and beverage and e-com, growth is accelerating in these places. Now I feel very, very bullish about the supply chain part of our business. It’s very, very strong.

Now you mentioned a couple of facilities that got a lot of press for closing. Two of them which were one in the East Coast, one in the Midwest that was with our largest customer, so those were contracts that had been many year contracts and the contract were coming up for renewal or for ending. And they chose to end them.

And I don't know for sure whether they brought in-house or not. But whatever they decided to do with them, we respect that decision. The customer is the king and the customer can decide whatever they want to do with those. You mentioned the Verizon facility; we have a great relationship with Verizon. It goes back decades.

They're an important partner of ours. It's strong. We serve them in many parts of the country and we love them. We think they're an amazing company and we wish we had more Verizons. We did close one facility in Tennessee because Verizon is always evaluating its supply chain. They have a complex supply chain, it's a big supply chain.

It's a global supply chain. And they made a decision to transition the distribution of their wireless products out of Memphis to several other distribution centers around the country. So that is just one part of their ongoing process..

Got it. That's really helpful. And just a follow-up on the - on your largest customer, I mean it looks like they've made some moves to pretty aggressively I'd say insource logistics. And maybe even build out their own logistics network.

I mean do you see them becoming a competitor over time as they build that network out?.

Look most of our large customers are our 'competitor'. Most of them have their own trucks, their own fleet. And their dedicated business for the most part they do themselves. And the irregular and difficult and challenging and spot business they largely outsource. And we get a lot of their backhaul business.

So they're running repetitive loads and they have a headhaul, they don't have a backhaul. So they use ad 3PL like ourselves for the backhaul. So there's - it's not like customers are - most customers are not all in in-house or all outsourcing, most of them are a blend. And some outsourced more than others.

And some of the trend is to outsource more over time and some of those customers, their strategy is to insource more over time. So we have $1 trillion ocean that we're swimming in here. The addressable market even just between North America and Europe for the exact services we provide is $1 trillion.

And we've got even at $17 billion, $18 billion we have less than 2% of the total addressable market. So we can be agile, we can be flexible, and we can move to and fro with our changing needs of our customers..

Great. Thanks, guys..

Thank you..

Thank you. Our next question comes from the line of Scott Schneeberger with Oppenheimer and Company. Please proceed with your question..

Thanks. Good morning. I guess if we could focus on LTL for a moment. Brad, you touched on how it performed in 2018.

I was curious, what you're thinking about for operating ratio, volume, price yield, things of that ilk as we look into 2019? And how much of that is a driver for the guidance?.

I think on LTL, the strategy that we've had will continue. So we've been emphasizing more yield improvements than tonnage. We like tonnage. We'll take all the tonnage we can get as long as it matches our system and at a reasonable price. We're not interested in practice runs with tonnage that we don't make a profit on.

And we've had a multi-year process of calling out that freight. And I mentioned early in the call that, for good and bad, almost all of our LTL customers use many other modes of business. So we can't just fire a customer without having influences on other parts of the business.

So we've been getting reasonable yield improvements with those customers and other customers and sometimes that's been at the sacrifice of tonnage. And that strategy is going to continue. We're - we see industrial economy is still good. It's not great like it was a year ago, but still good.

It's positive and growing and we're going to participate in that growth..

All right. Thanks. And then shifting gears, it was asked about the remaining $300 million, but the $600 million that's going away is sizable.

Could you give us a sense of how much of that was the postal injection? And then, how much maybe was other parts of the business? And Matt touched upon the contribution margin, but just wanted to get a feel for how large that postal injection business was and what the other parts are? Thanks..

So you are able see this play out in the financial statements through gross revenue in the last mile segment, which is likely to come down for most of the year because that is where the postal injection business was.

You should think about very high level ballpark a third or so of the $600 million associated with that business and we'll do our best as the years go on to quantify its impact in any given period. The rest of it would be in the transportation. Elsewhere in the transportation arena, some of it in brokerage, a little bit of it in intermodal.

And maybe a smattering of it in the contract logistics business but as we said earlier most of it in the transportation arena..

All right. Thanks very much..

Thank you, Scott..

Thank you. Our next question comes from the line of Kevin Sterling with Seaport Global Securities. Please proceed with your question..

Thank you. Good morning, Brad, Matt and Tavio..

Good morning..

Good morning..

Good morning..

Brad, Switching gears here real quick can you update us how the CFO search is going?.

The CFO search is going well. We did pivot in December what the specs should be when we had the short seller report come out, the stock went down quite a bit. We said, hey, we should we be buying our stock rather than buying companies given the valuation discrepancy.

So we had invested a fair amount of time in looking for CFO who was a CFO of a public company of at least our size and hopefully much more given the amount of acquisition activity that we were planning. So we were looking for someone who has a lot of M&A experience, a lot of integration and multiyear transformation experience.

When we pivoted to, okay that's - we have to deal with reality that is our stock price has come down, our valuation's come down and therefore we should be doing our stock – buy back our stock rather than buying another company. And we need a different type of CFO. So we more or less restarted the search in December.

The good news is that's a much wider pool of candidates than ones who been Fortune 50 CFOs who've had M&A experience. So we've seen a big upflow, a big uptick in CFO candidates. I can put a time frame on it, but I can tell you that we've got good candidate flow..

Got you. Okay. Thank you. And just - I don't want to dwell on it too much, but just understanding the business with your largest customer that's pulling out.

When you guys got in the last mile business with the acquisition of 3PD was this customer, a customer of 3PD? Or had you grown with this customer just recently? I guess my question is had they always - had this large customer always been a customer of 3PD or is it just recently had you grown with them?.

Brad Jacobs:.

:.

Okay. Thank you. And last question here, Brad. We're seeing some shake up in the LTL industry with some companies that are struggling some bankruptcies.

Are you seeing an opportunity there as we see possible further consolidation and in capacity reduction within LTL?.

I was surprised to see the LTL carrier bankruptcy announced recently in the Northeast given that the market environment is pretty good for LTL. To answer your question, yes we have seen an uptick in inquiries from their customers. Some of that freight matches our network and we're happy to take it and others - other part of freight doesn't.

We were in a meeting earlier this week actually in LTL and the phones were lighting up and it was basically from customers looking for replacement capacity there..

Okay. Well that's all I had. Thank you for your time this morning..

Thank you..

Thank you. Our next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question..

Thanks. Good morning.

In terms of the excess capacity related to the customer loss, could you give us a sense of where or rather what segments you plan to redeploy those resources? And then I wanted to get your thoughts on whether this loss of business is also hurting your ability to attract contract carriers in last mile, since presumably the utilization is now a lot lower?.

Hi, Allison. The answer to first part of your question is transportation far more than its logistics. In the logistics segment, it really was a few warehouses. So, not the end of the world. In the other parts of transportation, very significant. And with respect to geography, North America, almost entirely.

The business we have in Europe with that customer is of long-term contractual nature and on the logistics side. You asked another question about our ability to attract contract carriers in last mile. We are doing great in last mile for heavy goods, for big and bulky. That is a different part of the business than what this customer was removed from us.

The business that we did for that customer that left was postal injection, meaning, going into fulfillment centers in the middle of the night and getting lots of parcels and putting shrink wrap around them, and putting on pallets and putting to the truck and zipping it over to the post office. So that business has been very substantially decreased.

In our big and bulky business, we still are the largest one. Our customers love us. The feedback we get from our customers is extremely positive. Carriers like working with us, we have a steady repeatable business. When we gain customers and lose customers, that's you can do that in any business, including that one. But overall that business is healthy..

Okay. And then in - FedEx has also talked about entry into last mile heavy goods maybe in the next 12 months or so. So just curious to know how you're thinking about that and how you're handicapping the competitive risk..

I have a huge amount of respect for FedEx. I think FedEx is an amazingly run company. And they're a great competitor and customer and vendor of ours. So we have a good relationship with FedEx. In this particular case, we're going to be competitive. And we're going to be honorable competitors, competing in the market. They have been amazing brand.

They have amazing sales force. They know how to run a transportation business. So I'm sure they're going to do very, very well. They're going to test pilot that and we'll see them in the competitive arena. We like the positioning we've gotten like the critical mass. We have the technology. We like the long-term.

It's a business in last mile that's a business that takes a long time to figure out and get right. And customers demand extremely high levels of customer satisfaction. If anyone can copy us and get it right, it would be FedEx.

They’re not the only the competitor that we have in last mile that's also a fantastic company that we're seeing in the marketplace. J.B. Hunt has made a big move in last mile, another well-run company. Ryder is coming to the business, another well-run company.

On balance we like having competent competitors, because they know how to run a business for P&L. They know how to run a business for make money. They don't do sloppy pricing. They're rational. And they're honorable. So we welcome the competition and we like our position here in last mile..

Okay. That's really helpful. Thank you..

Thank you..

Thank you. Our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question..

Hey, good morning. Thanks for taking the questions. So maybe just two quick ones here on--going back to the restructuring of the cost structure, Matt, you mentioned that some severance there in the prepared remarks.

Just wanted to get some clarity as to the $55 million is a full run rate for 2019 that's baked into guidance? It seems like it’s separate from the kind of ongoing labor productivity and inventory management. So if you could just run through that in more detail.

And there's just from a big picture perspective, are there any barriers or the cost structure you think will have to take a little bit more time to flex down if the macro doesn't cooperate here?.

Sure. I'll start with that. So the charge that we took was largely for headcount and the severance associated with that. That number of approximately $55 million is an annualized run rate. We're not quite there at the outset of the year, but we're likely to make our way to that run rate reasonably soon.

Keep in mind that we're experiencing labor inflation like everyone else. And we did not execute on this restructuring tactically to counter labor inflation. But if you think about the modeling of the business, there is a reality that we're facing labor inflation in this economy as our competitors in our peers.

And from a modeling process, the proceeds, if you will, or the run rate benefits of the restructuring will aid the earnings of the business, but there’s somewhat of an offset to that from the underlying wage inflation in the marketplace.

You're second question again if you would please?.

Yes, sure.

On the - any structural impediments whether it's labor agreements unions that would take a little bit more time to adjust if volume doesn't hit the guidance or hit the mark where you think it could be?.

That's not applicable to us. We don't have labor agreements in any significant measure here in North America. That's only in Europe..

Okay. And then just quick follow-up on the buyback. Obviously you announced and completed the last one fairly quickly. And I understand you're buying back the best company you think there is right now, which is the XPO portfolio.

When do you think you'd be in the market? Are you watching to see kind of what the market is telling you, which is maybe keep some dry powder for another deal down the road? Just how do you envision that program rolling out here coming on the heels of the other one you just completed?.

Well, we ended the year in about 2.4 net debt-to-EBITDA. If we buy back another $1 billion or so out of the $1.5 billion in the coming, let's say, months for the sake of discussion, that would bring our leverage up to 3.3, 3.4. And then if we use our cash flow to pay down that debt, it will bring our leverage back down to 2.6, 2.7.

So we're comfortable in that range. And we'll take into consideration leverage levels. And we'll take into consideration economic conditions. If economic conditions get better, we'd be more aggressive. And if economic conditions worsen, we'd be a little bit more cautious. But we'd also take into consideration the stock price.

And at various levels, we would be more opportunistic than others. I think you also mentioned something about M&A, Brian. As I said earlier and you intimated, yes, M&A is in our corporate DNA. There's no question about that. We love M&A. We have a very good track record of creating significant shareholder value through M&A.

But today, even though we spent a lot of time and we were getting very close to concluding a long search for good M&A candidates, the best M&A target now is acquiring our own stock. And for that, that's where we're going to deploy the resources for the foreseeable future, not on external M&A..

Okay. Thanks for the color. Appreciate it..

Thank you..

Thank you. Ladies and gentlemen, our final question this morning comes from the line of Todd Fowler with KeyBanc Capital Markets. Please proceed with your question..

Great. Thanks and good morning. Hey, Brad, I guess just to help contextualize. We see freight move around a lot, but with the downsizing of your large customer, can you put some context around what happened specifically in the fourth quarter and the fact that this is across a couple of different service lines and maybe outside of the bid season.

Do you have a sense of why they made this decision at the time that they did?.

I can't speak to their reasoning. I can't speak to their timing. I can't speak to their long term planning. In part, because I don't fully know. What I do know is the customer is king.

And if the customer wants to move in a different direction, whether that's insourcing or whether they want to try out another competitor of ours, or they want to give us more business, while we prefer the third curtain, the first two curtains are their choice. And we respect the customer when they exit us.

And when they do, we act in a very respectful way and take the high road on it and make sure we leave them with the good taste to their mouth as they are going out of the door and that's what we did here and we'll continue to do with them. In terms of timing, it was an unfortunate timing.

We had - guidance that we put out on December 11th without knowing this, within a few days our postal injection business was significantly impacted by the customer’s actions and then here in the last, just literally just this week, we had significant news about the rest of it going. But the customer has the choice.

And the customer can control the timing that’s suitable for them and we respect that..

Yeah. I know, I understand and I was just trying to get some context if there was a service issues, or change in supply chain or something like that, because, again, we see freight move around and just it’s something, I guess, unique that I haven't experienced where it's a cost of couple of different service lines at this time. So that's helpful.

Look I know, we're up against the hour. The question I did want to ask though is with the EBITDA guidance, it still looks like you're looking for let's call it roughly $90 million to maybe $160 million of incremental EBITDA into 2019. Maybe just to close, if you could give us some idea of the buckets where you'd expect to see that EBITDA improvement.

I think previously you've talked about LTL showing $100 million of improvement over a couple of years.

Can you give us some of the buckets of where you’re expecting to grow EBITDA into 2019 given some of the headwinds that you're facing?.

The biggest growth driver in EBITDA and revenues is going to be in the logistics segment. We've got the headwinds on the transportation, because that's the bulk of where this business is going away. And the biggest headwind is going to be in North America where most, almost all of it went away as well.

So that's where you're going to see the biggest growth for the full year. But we expect to see a lot of growth in the second half of the year as we rebound from redeploying those resources. Look we're resilient, we're strong. We're very well positioned in the business. We have excellent employees. Morale is a very, very high.

We have extremely high levels of customer satisfaction, we have fantastic technology. We are very well positioned for the future. We have headwinds, a significant headwind that will work ourselves through over the next couple of quarters. And that's how I see it..

Okay. Good. Thanks for taking everybody's questions in the candor [ph] today. Appreciate it..

Thank you very much Todd..

Okay. Thanks everyone for your questions. We're full available over the next few days and at the upcoming conferences to meet with any and all of you and to answer any and all of your questions. Have a great day. Thank you..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..