Exel''s Opportunities

Exel''s Opportunities

Copyright 2004, Traffic World, Inc.

In new business and old, the results from British giant Exel suggest that logistics are reaping the gains of an expanding global economy.

Exel added some $1.3 billion in new business in 2003, pushing the company''s overall revenue up 8 percent to $9.3 billion. And CEO John Allan says a raft of new contracts will help Exel top the figure for new business in what he expects will be a strong 2004.

Overall, Exel''s preliminary results for 2003 show logistics was a profitable trade in 2003: before-tax profits at Exel grew 10 percent to $273.5 million. Those results may be encouraging for the logistics industry, suggesting an economic recovery is building logistics demand worldwide.

Exel won more than $500 million in new contract logistics business in the United States alone last year, including a major contract with Goodyear and expanded contracts with Sun Microsystems, Texas Instruments, NEC America, DaimlerChrysler, Visteon, SCJohnson, The Home Depot, Williams-Sonoma and 3M. Exel Direct, the company''s fulfillment unit, reported more than $37 million in new business. Its customers include Crate & Barrel, JCPenney, LifeFitness, Sears Logistics Services, Maytag and Best Buy.

The only fly in the ointment was Exel''s U.S. freight management business. "Challenging" conditions in the U.S. market bit deep into freight management profits last year, dragging down profits in that sector around the globe. The weak U.S. dollar also hurt Exel''s bottom line.

With 74,000 employees in more than 120 countries, Exel is one of the leading global logistics operators, offering supply-chain management, forwarding and warehouse and transportation management services to many of the world''s largest manufacturers and retailers. It is fast becoming the leading retail logistics company in the United Kingdom.

The company saw across-the-board growth in contract logistics last year, with contract logistics revenue rising 12.5 percent in Europe, the Middle East and Africa to $3.3 billion, 28 percent in the Americas to $1.5 billion and 17.1 percent in the Asia Pacific region to $196.3 million.

Allan said the company''s new business wins include "chunky" contracts as well as "bread and butter" business, with a wide geographic spread. In addition "we have got a pipeline (of potential new business) to support us growing at the same rate or even better going forward," he said.

Exel''s pipeline typically contains one-anda-half to two times its existing business volumes, he said, and that has not changed in recent years.

The increases reflected many new supply-chain contracts Exel won last year in the United Kingdom, securing new business with retailers Marks & Spencer, House of Fraser, Burton''s Foods, Heinz, Scotts UK and others. Healthcare, automotive and technology were strong.

Exel''s success also reflects $205 million in global acquisitions last year, including Unidock''s, a leading Brazilian 3PL; Cappelletti, a 3PL in Milan, Italy; and Pharma Logistics, a European healthcare supply-chain services business with operations in Belgium and Italy.

Allan does not expect to see any dramatic increase in contract logistics this year. "We would not expect further margin expansion in the Americas," he said, where "we would aim to sustain rather than improve" margins.

The business in Asia/Pacific is relatively small and since Exel is currently "investing in the fabric of the business," contract logistics is unlikely to yield large margin increases there, he said. "The main potential for growth is here in Continental Europe," said Allan.

Freight management revenue grew 6.4 percent in Europe to $1.47 billion; 9.5 percent in Asia Pacific to $1.2 billion; and fell 3.3 percent in the Americas to $1.5 billion. Operating profit from freight management services in the United States plunged 83.8 percent, from $29.9 million in 2002 to $4.9 million in 2003. The company is working to turn around its U.S. freight management unit, integrating the domestic business with Exel''s international business and rationalizing its U.S. network. This will involve "somewhere south of 100 people in total" and the elimination of 12 to 15 offices, said Allan.

Also on the agenda is culling low-yield business to improve the balance sheet. "We still aim to have the business back into profit in the second half of 2004," he said.

Allan pointed to differences in air freight volumes as a good indication of the current global trade picture. It ships about twice as much cargo to the United States out of Europe as it does the other way, he said, but 13 percent of the group''s air freight is ex-Europe to the Asia Pacific region compared with 17 percent in the opposite direction. "So Europe is a net exporter to the Americas and a net importer from Asia/Pacific," he said.

Allan sees "tentative signs of a significant uptick in air freight out of the U.S" this year. Volumes out of Asia remain strong and Europe is the weakest market of the three, with single-digit growth rates as compared with double-digit elsewhere.

Gyrating currency exchange rates are another major consideration for a global logistics player.

The decline of the U.S. dollar against the euro has been dramatic over recent months but "there is no evidence that trade flows are impacted by changes in currency," Allan said, although he acknowledged that these effects tend to be delayed.

The balance of trade between the two regions may shift but, as Allan pointed out, companies that have made long-term commitments by building new factories will not pull out of a region simply because exchange rates are less favorable. "You have to distinguish between strategic and tactical sourcing," he said.