The roll-up third-party logistics provider posted a loss for 2015 due to many acquisition-related costs, but operating performance improved with the help of new logistics contracts, according to CEO Brad Jacobs.
XPO Logistics continued to incur operating losses in the fourth quarter of 2015 as well as for the full year, but its adjusted net income improved as the company began digesting four major acquisitions made last year, including multi-billion dollar deals for European logistics powerhouse Norbert Dentressangle and the U.S. motor carrier and logistics provider Con-way Inc.
Multi-year contracts with new customers in Europe helped XPO achieve higher than expected operating income, according to the roll-up third-party logistics providers’ most recent financial statements.
CEO Brad Jacobs said in an interview XPO recently landed a $600 million contract over five years with Iceland Foods, a supermarket and online retailer in the United Kingdom specializing in frozen foods. The contract is the largest ever for XPO and bigger than any contract received by predecessors Con-way or ND.
XPO also won contracts from Swatch for trucking service and Matchfusion.com, as well as a multi-million pound contract renewal from General Motors in the UK, Jacobs told American Shipper.
“Our concept of offering a comprehensive suite of services is resonating,” he said.
The company reported a net loss of $63.1 million for the fourth quarter quarter, compared with a net loss of $9.9 million for the same period in 2014, and lost $191.6 million for the year compared to $63.6 million a year prior.
But adjusted EBITDA in the fourth quarter increased to $217.6 million. The company’s net income during the same three-month period of 2014 was $42 million. For the full year, XPO reported adjusted operating profit of $493.1 million compared with $81.4 million for 2014.
Overall earnings are more difficult to compare at the moment because results from the acquired companies inflate the overall picture, but they do show the company is on track to meet its previously stated targets for adjusted EBITDA and revenues.
The adjusted full-year earnings, for example, exclude one-time transaction costs of $201 million and a one-time gain of $9.5 million related to the sale of intermodal equipment.
And total net revenues in the fourth quarter skyrocketed 420 percent year-over-year to $1.6 billion. Gross revenues – a portion of which is pass through expense for purchased transportation on the brokerage side – increased 223.5 percent for the full year to $7.6 billion.
XPO reaffirmed its full-year target of at least $1.25 billion of adjusted EBITDA in 2016 and its 2018 target of about $1.7 billion of adjusted EBITDA.
The company’s organic growth provides a window into how the integrated third-party logistics provider may perform once all the new acquisitions are fully operating as part of XPO for an extended period of time.
In the fourth quarter, XPO’s organic adjusted EBITDA grew 33 percent and organic revenues grew 8.4 percent, minus any comparisons for fuel surcharges.
The company’s freight brokerage, last mile, expedited and global forwarding experienced a 280 basis point gain, or 2.8 percent, to 21.7 percent. Organic revenues for the transportation segment decreased to 2.7 percent, but if fuel and intermodal are excluded, organic revenues would have grown about 10.2 percent.
XPO completed the Con-way deal in October and said has already trimmed $50 million in annual cost savings. Previously announced reductions of 190 administrative and back office personnel from Con-way’s less-than-truckload subsidiary accounted for about $20 million of the savings. XPO also parted ways with top executives from Con-way subsidiary Menlo Logistics.
“We’ve restructured the entire organization, made it flatter, more lean, with clearer accountability,” said Jacobs.
More overhead savings will be realized as soon as XPO finalizes contracts with suppliers, according to XPO’s founder. XPO has issued several requests for proposal worth more than $1 billion ranging from tractors, trailers, fuel, tires, office supplies and even line haul. XPO operates trucks between its LTL terminals, but some of that line haul is outsourced to third parties and Jacobs said Con-way hadn’t bid the contract in seven years.
XPO said it remains on track to deliver $170 million to $210 million of profit improvement for the Con-way operation within two years. The transportation research arm of financial services firm Stifel more conservatively pegs XPO’s projected savings at $135 million per year.
Jacobs said that the downturn in U.S. freight shipments has actually benefited XPO, which is still heavily non-asset based and has a major truck brokerage division. Factory output has declined the last four months and orders for factory goods fell in 2015, partly due to a drop in exports in reaction to the rising value of the dollar and economic weakness in China, Europe and Japan. The weak manufacturing sector has led to a freight recession, even while the service sector and consumer purchases have kept the U.S. economy growing.
Truckload brokerage represents $3 billion in business for XPO. Jacobs explained that brokerage is an arbitrage operation that signs one-year contracts with shippers to provide committed capacity at fixed prices. When the market softens and it’s time to procure transportation on the spot market at lower rates, XPO is able to pocket the difference.
XPO’s brokerage margin has increased in 10 of the past 11 quarters, he added.
On the less-than-truckload side, volumes are down across the industry, but the carrier market is much more consolidated.
Jacobs said big carriers, such as XPO, FedEx Freight, YRC Freight, Old Dominion and ABF Freight System, control the majority of the capacity and have maintained pricing discipline even as shipment volume has decreased. XPO’s LTL pricing in the fourth quarter, for example, increased 3.6 percent.
XPO’s transformation from a simple truck brokerage into an end-to-end supply chain provider is creating extensive cross-selling opportunities, Jacobs said.
“The addressable market is $1 trillion. We only have 1.5 percent of that. So there’s opportunity to grow,” he said.
XPO is implementing a new strategic plan for improving its LTL network. Part of that network optimization work includes analyzing in which lanes to raise rates a bit, and where to lower rates, Jacobs said.
XPO posts 33% gain in Q4 organic net income as it digests acquisitions
