Customers of XPO Logistics, Inc.’s (NYSE:XPO) less-than-truckload (LTL) business should brace themselves for a more rapid-fire pace of rate hikes, if comments made Thursday by XPO Chairman and CEO Brad Jacobs are any indication.
Jacobs also said that XPO “made a mistake” by relying disportionately on the business from a single customer, which was never identified but is known to be Amazon.com, Inc. (NASDAQ:AMZN). Late last year, the customer began pulling $600 million of business from XPO, or two-thirds of its spend with the company. Before then, it represented between 5 percent and 7 percent of XPO’s total revenue. The hit to XPO was severe, and Jacobs vowed Thursday that, in the future, no one customer would account for more than 2 percent of the company’s business.
Jacobs, speaking to analysts about a 200 basis-point year-over-year LTL decline in the first quarter as well as a lower-than-expected pace of increase in LTL contract renewal pricing, said the company has “been a little behind our rivals on raising rates, and we have to play catch-up.”
In January 2019, XPO announced a 5.9 percent increase in its published rates, which is known in the LTL trade as a “general rate increase,” or GRI. The increase has been absorbed by customers, with 90% of it resulting in higher revenue, according to Jacobs. The pace of LTL GRIs will often mirror that of contract rate increases, but not always. Prices for contract renewals in the first quarter rose by 3.7 percent, down from 4.9 percent in the fourth quarter. Jacobs said the company will closely monitor rate renewals as it focuses on boosting that percentage.
For the first time in a number of quarters, XPO reported a decline in its LTL weight per shipment, which Jacobs said was due to a change in mix toward lighter-weighted merchandise and fewer heavy industrial goods. The LTL unit’s margins in the quarter were primarily impacted by inclement winter weather, he added.
North American LTL posted a first quarter operating ratio – the ratio of revenues to expenses – of 87.6 percent, its best first quarter operating ratio in 20 years. Jacobs noted that the LTL unit has doubled its earnings before interest, taxes, depreciation and amortization (EBITDA), which is XPO’s key barometer of success, since the unit was acquired in September 2015 as part of XPO’s $3 billion acquisition of transport and logistics provider Con-way Inc.
Jacobs said XPO has no intention of pricing the LTL business to function as a loss leader, saying it is not a strategy the company pursues with any of its operations. At the same time, he said LTL will often serve as a “portal” to expose customers to other XPO services. According to the company, 55 of its top 100 customers use five of its services.
Rate increases may also be needed to offset rapidly rising labor costs. Wages of XPO’s global warehouse workers have risen 8 percent year-over-year, while 30 percent of those workers received 10 percent wage increases, Jacobs said. Higher labor costs have become a fact of life across XPO’s network, Jacobs said. Its customers would likely accept higher rates because they, too, are experiencing the same phenomenon, and because the rate hikes would continue to be offset by XPO’s ability to drive down their supply chain management costs and operate more efficiently.
XPO’s first-quarter results, reported late Wednesday, included a first quarter EBITDA record (albeit with some help from a $21 million gain from asset sales), a sequential tripling of the LTL unit’s yield, and a quarterly record of $1.1 billion in customer wins, were received favorably by analysts who had put XPO into the “show-me” category after two consecutive disappointing quarters. Perhaps the best performance came from brokerage, where net revenue rose 9.5 percent and net revenue margins increased by 420 basis points, trends influenced by the collapse of, and continued weakness in, spot rates.
XPO, which was launched in 2011 with a core objective of consolidating the brokerage industry through acquisitions, is finding current brokerage valuations too pricey to pursue M&A, Jacobs said. He expects brokerage margins to decline over the long-term as more widespread use of technology reduces costs, makes brokers more efficient and allows them to operate profitably without relying on rate hikes to do so. Digital tools will disintermediate human involvement in the process, thus reducing selling, general and administrative (SG&A) costs, Jacobs said. Lower margins will be countered by more business that will be transacted at lower selling and administrative costs, he said. Many brokers will fall by the wayside, leaving a group of good-sized, digitally enabled players to occupy the field, he said.