XPO making diversification inroads after top shipper loss

XPO making diversification inroads after top shipper loss

XPO Logistics closed business on $1.1 billion in new business to help stem the loss of its top customer. While EBITDA and free cash flow were up in the first quarter, revenue and operating income dropped. Photo credit: Shutterstock.com.

After losing its a massive chunk of business from its largest customer, widely believed to be Amazon, XPO Logistics says it signed $1.1 billion in new business in early 2019 to more than replace the $600 million in revenue that vanished.

Against that backdrop, XPO and its competitors are operating in a weaker freight market, in which brokered shipment volumes are falling, but margins are expanding as spot truckload rates fall in 2019.

Although CEO Bradley S. Jacobs could not legally identify the customer as Amazon, he admits XPO’s customer base wasn’t diversified enough. Big-volume beneficial cargo owners (BCOs) such as Boeing, Disney, and Verizon will always be important, but signing more shippers to spread the revenue out is a priority.

“We made a mistake letting one customer do $900 million in business with us,” Jacobs said on an earnings call with analysts Thursday. “It was too much concentration. Previously if you looked at our top five customers, they were 11 percent of our revenue and our top customer represented half of that.

“Going forward we are going to be much more diversified,” he said. “Our top five customers should be about 7 percent of revenue, and no single customer should be more than 2 percent of revenue.”

XPO is not only planning to diversify but will also grow with existing shippers, known as organic growth, which the company forecasts will rise between 5.5 percent and 7.5 percent this year. It’s also focusing on new business and the sales pipeline of shippers that can contribute to future growth. Each will be critical for XPO to reverse a first-quarter 1.7 percent decline in companywide revenue and a 6.4 percent drop in operating income in future quarters.

Jacobs said XPO is well on its way, highlighting a 3.9 percent increase in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

“We’ve gotten our mojo back,” Jacobs told JOC.com. “Any way you look at it, we’re off to a great start this year.”

The growth in EBITDA, however, is due to an adjustment of $13 million in restructuring costs, primarily severance, and $1 million in transaction, integration, and rebranding costs. Results would have been flat excluding these adjustments.

Top 2019 trucking challenges

This may be a good year, but there is a double-edged sword with falling shipments. Gross brokerage revenue fell 13 percent during the first quarter, while net revenue grew 9.5 percent. If the weaker truckload market persists, it may hurt XPO’s domestic intermodal business because truck rates will be more competitive. Jacobs told JOC.com this didn’t happen in the first quarter.

Although new business is up 15 percent year over year and the company’s sales pipeline reached a record of $4.1 billion, these numbers are snapshots of what could be revenue going forward over various lengths of time, assuming no reductions in customer spending on transportation.

Gross revenue in XPO’s North American transportation unit, consisting of brokerage, less-than-truckload (LTL), last mile, and managed transportation, declined 5.6 percent in the first quarter. Net transportation revenue was flat.

A softer truckload market also means XPO’s LTL business had less spillover freight. This isn’t necessarily a bad thing since LTL carriers don’t like that these shipments tend to be heavy and low-yielding. Jacobs highlighted a 3 percent growth in LTL yields as part of a larger effort to shed unprofitable accounts.

XPO’s LTL gross revenue grew 5.9 percent, but net revenue dropped 2.5 percent.

He also explained a shift from industrial to retail and e-commerce shippers caused a 1.2 percent drop in average shipment weight and a 2 percent decline in pounds per day during the quarter.

XPO Connect

XPO highlighted its new digital brokerage app as a major development for shippers and carriers. XPO Connect is different from Uber Freight, Convoy, or Transfix because shippers can obtain truckload, LTL, and intermodal quotes, putting it more on the level of J.B. Hunt 360 and C.H. Robinson’s Freightquote.com.

“Shippers will increasingly be doing business over the internet and not on the phone,” Jacobs told JOC.com. “This is the trend of all commerce, and that includes transportation and freight brokerage. There will be more electronic interactions and fewer human interactions.”

Digitization will mean lower margins, he said, in other words a lower markup between what a broker pays the carrier and what the broker charges the shipper.

“I don’t think short-term margins come down. But long term, as costs come out of how brokers do business, a good chunk of those costs savings are going to be passed along to customers and that’s going to degrade margins. Having said that, lower margins on a much larger amount of business can still be a beautiful thing and create a lot of value,” Jacobs said.

Yesterday Bob Biesterfeld, chief operating officer of C.H. Robinson, had a different opinion, telling analysts that previous attempts to displace traditional brokers by lowering margins were unsuccessful.

“[First] it was the advent of the internet and online load boards that would bring price and cost transparency and disintermediate brokerage. In the mid 2000s, we had upstart 3PLs [third-party logistics providers] actively pricing freight below market rates in order to take share[s] with large shippers. Recently we have numerous tech-first promising to lower margins, reducing friction and increasing efficiency,” Biesterfeld said. “But through this long-range cycle, [C.H.] Robinson has maintained our margins quite consistently.”

Consumer dependent growth

XPO’s contract logistics division reported a 3.2 percent increase in revenue in the first quarter. The division’s 8.1 percent increase in organic growth shows existing customers are generating more business. Growth came from e-commerce, food and beverage, consumer packaged goods, and aerospace shippers.

XPO could make substantial strides towards reversing its misfortune should business conditions in the consumer-facing sectors remain positive this year. The company released a sustainability report last month and a letter to shareholders from Jacobs highlighting the company’s prior shortcomings, particularly labor related, and how it is moving forward to learn and prosper.

“The turbulence we experienced at the end of last year was only temporary. It gave us a chance to demonstrate our resilience as a company to bounce back and to do so right away,” Jacobs told JOC.com.

Contact Ari Ashe at ari.ashe@ihsmarkit.com and follow him on Twitter: @arijashe.

Comments

These newer solutions are great for transactional, one-time or few-time business... but if you want and need a deep partnership for management of various aspects of your transportation, these Internet-based, tech-heavy "brokers" are just not going to cut it.