XPO Logistics is about to lose $600 million in business from its largest customer, but that’s not all bad news, especially for the company’s other shippers. It’s a blow that would bankrupt many smaller companies, and XPO certainly would have liked to retain that business, but "that’s okay," Chairman and CEO Bradley S. Jacobs said in an interview with JOC.com Thursday.
“We made hay while the sun shined. We always knew that big customer would eventually want to do this work themselves or diversify,” he said. “We still have $300 million in supply chain business with them.” Jacobs did not name the customer, but the lost business involved injecting bulk shipments of e-commerce parcels into the US Postal Service delivery stream.
“This was where we were picking up packages in the middle of the night, shrink-wrapping them, and hauling them to the post office in the morning,” said Jacobs. If he seems rather calm about losing that business, perhaps it’s because it wasn’t always profitable. “We had a loss in that business in December,” he said shortly before releasing XPO’s fourth-quarter earnings.
“We can’t ignore the fact that our largest customer is curtailing two-thirds of its business with us,” Jacobs said, “but they’re starting a process of insourcing a lot of their logistics. We had substantial capacity deployed with this customer, and now we’ve got to realign that (capacity) to other customers, and then it will be utilized again. It will take a couple of quarters.”
XPO legally could not identify the customer, but industry analysts believe it is likely Amazon, which has been developing its own delivery and fulfillment network, including ocean non-vessel operating authority, fleets of cargo planes, and networks of local delivery companies. If so, the transfer of business from XPO is another example of Amazon’s impact on transportation.
Entering a new, slower growth phase
Since its inception in 2011, XPO’s story has been one of acquisition and growth that could be described as exponential. Starting with a $150 million investment, Jacobs transformed a $177 million company into a $17.3 billion logistics enterprise with asset- and non-asset-based operations and global reach — an astonishing growth record in only eight years.
But exponential top-line growth becomes much more difficult at $17 billion than it was at $177 million, as sheer financial mass becomes a drag on velocity. XPO enjoyed solid growth in 2018, increasing its gross revenue 12.3 percent and operating income by 21.1 percent. But the company has clearly entered a phase in its maturation in which its revenue will grow at more “normal” rates — especially factoring in the loss of $600 million in business in 2019.
While that may be frustrating for investors, who have seen XPO’s share price drop from a recent peak of about $114.50 per share last September to the $50 per share range in February — after a 250 percent increase in value from January 2016 through January 2018 — it’s good news for shippers, who are benefiting from increasingly integrated services across XPO’s portfolio.
The share price drop has been attributed to lower guidance issued by XPO last fall, a short-seller firm’s attack in December on the company’s management and financials, and possibly a Teamsters union-led campaign challenging XPO’s work practices and alleging abuses XPO has denied at warehouses, port drayage, and less-than-truckload operations.
For this year, XPO expects revenue to rise 3–5 percent, with organic revenue growing 4–6 percent. The company lowered its expectations for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), saying it expects an increase of 6–10 percent to $1.65–1.73 billion in 2019, down from a December target of 12–15 percent growth and a prior projection of 15–18 percent.
After years of building value through acquisitions, Jacobs says the only company XPO is interested in acquiring at the moment is XPO. The company in early February repurchased $1 billion of its own stock and has won board approval to buy back $1.5 million more shares. “While we love M&A, the acquisition that will create the most value is our own stock,” Jacobs said.
The fourth quarter wasn’t the break-out peak period that XPO or its customers might have expected earlier in 2018. North American transportation revenue growth was muted. Truckload freight brokerage revenue dropped 3.3 percent to $742 million, while last-mile logistics revenue was flat at $287 million, in part because of the loss of that bulk parcel revenue.
In contrast, North American brokerage revenue was up 16.1 percent for the full year at $2.9 billion while last-mile logistics revenue rose 10.2 percent to top $1 billion. XPO completed the rollout of 85 last-mile hubs across the US in 2018, and technology initiatives “will keep driving the growth going forward,” Jacobs said. “For the time being, we’re where we need to be.”
Less-than-truckload freight revenue rose 4.8 percent excluding fuel surcharges and 6.1 percent in total to $929 million in the last quarter. For the full year, XPO Logistics’ North American LTL revenue climbed 5.2 percent to $3.78 billion, making it the third-largest US LTL carrier last year in terms of revenue, following Old Dominion Freight Line and market leader FedEx Freight.
XPO hauled less tonnage and fewer shipments, but made more money off that freight, increasing gross revenue per shipment by 5.4 percent and revenue per hundredweight, also known as LTL yield, by 2.9 percent, including fuel surcharges. The unadjusted LTL operating ratio, a measure of profitability, dropped to 89.2 percent, and after adjustment, 87.3 percent.
That’s the best fourth-quarter operating ratio for the LTL operator on record, Jacobs said. The LTL trucking unit’s operating profit increased 31.6 percent in the fourth quarter to $100 million, and rose 21.5 percent to $458 million for the full year. XPO’s LTL revenue in Europe climbed 8.2 percent to $252 million in the quarter and 14.9 percent to $1 billion for the full year.
E-commerce is the driver, technology an enabler
Slower growth, whether in the US economy or at XPO, is still growth. And e-commerce remains the key driver for growth across the company’s business lines, from contract logistics to last-mile delivery of bulky goods. “We’re excited about the potential for the last-mile business,” Jacobs said, primarily the home delivery of larger online purchases, such as appliances.
XPO’s total logistics revenue, including contract logistics, climbed 10 percent in the fourth quarter from the last period of 2017 to $1.6 billion — $645 million in North America and $947 million in Europe. For the full year, XPO’s logistics revenue rose 16 percent to $6.1 billion, with $2.4 billion coming from North America and $3.7 billion from Europe.
The logistics business faces some political headwinds in Europe, however. Supply chain uncertainty is intensifying in the United Kingdom as the deadline for Brexit approaches. And in France, the gilets jaunes (yellow vests) protest movement has led to logistics disruptions, Jacobs said. “There are work stoppages and days when you can’t drive into cities,” he said.
Absent the growth associated with large-scale acquisitions, one of the biggest drivers for expansion at XPO will be its investment in technology, which is set to keep pace at about $500 million a year. “A few years ago, before we developed our own warehousing management system, it wouldn’t have been possible to implement 118 startups in a year,” as XPO did in 2018, Jacobs said. That was up from 91 warehousing startups in 2017.
Much of that technology investment is now aimed at platforms that can integrate the various services in XPO’s portfolio in customized fashion for shippers. For example, the company last April launched XPO Direct, a “shared-space distribution model” for omnichannel and e-commerce retail customers, and digital freight marketplace XPO Connect.
By December 2018, XPO Direct included more than 90 of the company’s facilities, both last-mile hubs and logistics warehouses, which served as flexible stockholding sites and cross-docks for e-commerce freight. Those sites plug into brokerage capacity and XPO’s own assets. XPO Connect is a cloud-based marketplace designed to connect shippers to capacity.
“We’re applying this technology across the brokerage business,” Jacobs said. “In the fourth quarter, we grew the number of transactions handled through XPO Connect more than four times over the third quarter. Everything ending in an ‘-ect’ at XPO is growing fast.”