In its earnings statement and a call with analysts a day later, the management of diversified logistics and less-than-truckload (LTL) provider XPO tried to paint the company’s second quarter as strong. And the company did beat Wall Street estimates.
But the performance of the company’s LTL division has raised a lot of eyebrows, including those on Wall Street. On a day when equity markets overall are slightly down, XPO stock is down a lot. At 11:25 a.m., XPO was down 15.44% to $73.25.
The numbers out of XPO’s LTL division were almost uniformly ugly. Pounds per day were down 19%. Shipments per day were down 15.1%. Gross revenue per shipment dropped to $282.61 from $299.84. The one bright spot — and it was touted by XPO management — was the increase in gross revenue per hundredweight excluding fuel, generally viewed as a proxy for yield, which was up 1.9% from the second quarter of 2019.
By comparison, Old Dominion suffered a lesser 12.1% decline in tonnage and Saia saw an 8.9% decline. In terms of operating ratio, XPO posted an adjusted operating ratio of 90.1%, while Old Dominion’s operating ratio actually improved 10 basis points, to 77.8%. Saia’s OR deteriorated 250 basis points to 91.5% from 89%. But the fall in XPO’s OR for its LTL division was striking: on an adjusted basis, the 90.1% rate marked a deterioration of almost 10 full percentage points, or 980 basis points.
The performance of the LTL division led to an exchange between Deutsche Bank analyst Amit Mehrotra on the company’s Friday morning earnings call with analysts. Mehrotra late Thursday put out a post-earnings release report that negatively compared the performance of XPO’s LTL division to the performance turned in at Old Dominion and Saia.
“The performance in the LTL business was very weak relative to the competitors,” Mehortra said on the analyst call. He then questioned whether the XPO business was hard to “manage,” given its breadth. He also noted that the company had been planning on a strategic breakup that would have left the LTL division as the remaining operation at XPO. That plan was scrapped earlier this year.
“There’s tremendous value to focusing and you guys aren’t able to do that,” Mehrotra said. He noted that XPO’s tonnage decline was “way down more than your peers.”
He questioned CEO Brad Jacobs as to whether management of such a large company could “focus the business when it is so diversified.” An inability to focus would have made a breakup of XPO “that much more valuable.”
Jacobs said there were “two big factors” that led to the significant drop in OR at XPO’s LTL division: the drop in tonnage and “an intense focus on employee safety.” But he added that the company also is “highly selective on the freight we take on” and that XPO’s LTL division has “a strong bias toward yield over market share,” which during a period like the pandemic amplifies a decline in tonnage occurring because of economic factors.
The “good news,” Jacobs said, “is that each month in the quarter was better than the previous month” in LTL. Year-on-year, tonnage in April was down 24% from 2019. By July, he said, the decline was in unspecified single digits.
Jacobs also pushed back against the idea that the LTL division’s management is not getting sufficient direction from a corporate management also supervising a growing business with an increasing footprint in logistics and last mile.
As to Mehortra’s suggestion that the company might be getting too big to be properly managed, Jacobs was emphatic. “The answer is no,” he said. The management running the LTL division is “tremendous” and has doubled earnings before interest, taxes, depreciation and amortization (EBITDA) in the past four years.
“The third quarter (OR) for the LTL division will improve sharply from the second quarter” and will be much closer to where it was about a year ago,” Jacobs said.
Jacobs also said he was not “fully knowledgeable” about what was going on at its competitors.
“When the quarter started, we didn’t know what was going to happen,” Jacobs said. “Our goal was to make sure people didn’t get sick and die, and we succeeded there.”
Mehrotra’s criticism didn’t stop with the earnings call. In a report to clients after the call was over, while maintaining the Deutsche Bank “buy” rating on XPO, Mehrotra said “the vulnerability of XPO’s earnings base is much higher in reality than in theory, possibly due to the company’s significant diversification, which doesn’t allow for proper focus and/or accountability when the going gets tough.”
He called XPO’s results “the worst across the entire transportation landscape.” The company “will (and should) always trade at a big discount, implying the sum of its parts will always be worth much more than the whole.”
“The only way around this is to break up the company … so each piece can realize its full potential,” he wrote.
No other questions about the performance of the LTL group on the call were quite as explicit as Mehrotra’s. But other analysts have taken note. In a report on the XPO earnings, Merrill Lynch’s Arial Rosa and Ken Hoexter, after conceding it was “an exceptionally difficult quarter,” added that XPO “does seem to have struggled more than many of its peers in adapting to the volatility,” citing the deterioration in OR relative to XPO’s peers.
The bottom-line performance of the company was touted by its management largely because it beat expectations. In his review of the earnings, Morgan Stanley’s Ravi Shankar said the company’s adjusted EBITDA of $172 million was more than the Morgan Stanley forecast of $146 million and the consensus EBITDA forecast of $163 million. Free cash flow of $121 million was well above consensus and Morgan Stanley forecasts.
XPO reinstated guidance on EBITDA after having withdrawn it at the start of the pandemic. Many companies withdrew their guidance; not as many have reinstated it. XPO said it expects to generate “at least” $350 million of adjusted EBITDA in the third quarter. In the second quarter, that figure was $172 million.
“Given the ongoing uncertainty, we are a little surprised that XPO chose to give us 3Q EBITDA guidance which likely means a) they are confident in the continued macro rebound, and b) the guidance is probably very conservative,” Morgan Stanley wrote about the move.
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