XPO executives say they’re not worried about a major economic downturn


Top executives at XPO Logistics Inc. have told investors in recent weeks they don’t share concerns that an economic ‘hurricane’ is about to hit the United States, saying they don’t have no dramatic drop in demand for the company’s services. .

The XPO (NYSE: XPO) The C-suite, led by Chairman and CEO Brad Jacobs, toured investor meetings in May and June to discuss macroeconomic conditions, industry trends and the company’s competitive position in its two main activities: LTL and truck brokerage. XPO has synthesized the questions and answers from the meetings into a 19 page report which was released earlier this month. None of the questioners or respondents have been identified, although in one or two cases it is clear that Jacobs is the responding executive.

In one session, an XPO executive was asked why, after spending four years acquiring and integrating 18 companies, he was selling or spinning off all but his North American LTL business. The executive responded that XPO had “created a stock that relatively few investors were interested in” because it was a complex creature with many moving parts.

“We were a very good company [but] with a low multiple, because the stock market was not in love with us,” the executive said.

To win Wall Street’s love, XPO began shedding nearly all of its assets, starting with its contract logistics business, now known as GXO Logistics Inc., (NYSE: GXO) which was launched last summer. The company sold its intermodal business in March and put its freight forwarding business up for sale. It will exit its brokerage, last mile and managed transport businesses by the end of 2021. It also plans at some point to sell or publicly list its European businesses.

It hasn’t helped much so far. XPO shares, which traded at nearly $91 per share in mid-August, closed Wednesday at $45.70. Analysts, for their part, remain bullish on stocks, with 12-month price targets in some cases well above $100 per share. XPO believes its shares are trading at a low valuation of less than seven times earnings before interest, taxes, depreciation and amortization, the earnings measure favored by Jacobs.

One of the challenges for XPO is convincing investors that it can reduce its net debt – or leverage – to levels of around one times EBITDA. XPO reduced its leverage ratio to twice EBITDA from 2.7 times EBITDA last year. Still, the current ratio remains too high to attract a large swath of institutional money, one executive said.

“We have a list of hundreds of institutions that have [shares of] our competitors or similar businesses, but do not own us,” the executive said. Of those, more than half won’t buy XPO stock because of their current debt, the executive said.

“We think there are around 500 institutions that could open once we [bring] leverage down,” the executive said.

Next phase LTL

XPO executives said they are poised to embark on the “next phase” of the company’s LTL strategy, which is to significantly increase unit revenue while maintaining healthy margins. XPO has focused on expanding margins with a focus on cost reduction since entering the LTL business in 2015 by acquiring Con-way Inc. for $3 billion. To some extent, however, the company sacrificed revenue growth by not investing heavily in the business.

“We entered LTL with the plan to put 3% to 4% of revenue” into capital expenditure and still hit a solid multiple, an executive said. What XPO found was that some competitors invested up to 15% of their revenue in capital expenditures and walked away with twice the valuation multiples, the executive said.

“The market wants to see growth, not just margin expansion,” the executive said. “We are going to invest in the fleet and the network. We will significantly increase our capital expenditures, and we will increase revenue in addition to margin growth. »

Part of that investment will go toward building more truck trailers in-house and adding more drivers, steps that XPO says will reduce its overreliance on expensive third-party transportation known as name of “purchased transport”. Until the pandemic, about 25% of XPO’s line transportation miles were operated by third-party providers, up from 35% in 2015. “The goal is to reduce that percentage to nearly 5% over time,” said an executive.

XPO spent $136 million on purchased LTL transportation in the first quarter, up 44% from the 2021 quarter. Supply chain issues, including an ongoing shortage of embedded microchips in vehicles, are limiting the internal capacity utilization, an official said. “We could take three times as many tractors as what we currently receive” from truck manufacturers, said one of the leaders.

Despite the many investments it will make that will drive up costs, XPO is on track to bring its cost/income ratio – the ratio of revenue to expenses – below 80% at some point. “Investments don’t dilute the path to this,” one executive said. The adjusted cost/income ratio, which started the year in the high 80% range, should average 83.3% for the year.

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XPO’s truck brokerage business, which has had explosive quarters over the past 18 months, is in a different situation. The company is leveraging massive upfront investments in brokerage technology to source or hedge about three-quarters of its loads digitally, one executive said. This level should rise to 95% in a few years, according to the leaders. Improved efficiency and a strong tailwind in the spot or non-contract market made brokerage a high-margin business for XPO.

The company expects further margin improvements even as spot and contract rates decline, an executive said. Most clients want 12-month brokerage contracts to be protected from sudden cost increases, the executive said.

“Shippers don’t want to be burned again by ever-increasing costs,” the executive said. “Even though the cash market is softer now, they don’t know when it will be firm. China is opening up. Maybe in three months there could be a tight market again. »

XPO executives said the company’s customers in general aren’t increasing their inventory levels in response to potential supply chain disruptions, but they want the right levels of the right products in the right places. “They’re not going back to the days” of having two huge bicoastal distribution centers and a third in the Midwest, an executive said. Instead, they are moving towards “right-sized” distribution centers positioned closer to the end customer.

Consumers are unlikely to unlearn their “want it now” behavior, the executive said. As a result, supply chains will become shorter and faster, and will be supported by more fulfillment and distribution centers than in the past.

Pandemic-related plant closures in China, and the specter of them opening soon, are top of mind for LTL customers, according to an XPO executive. North American industrial customers, the bread and butter of an LTL carrier, have been “suffocated by the lack of goods from China”, the executive said, adding that it was “surprising” how point this problem was “pervasive” with XPO customers. .

The FREIGHTWAVES TOP 500 The list of for-hire carriers includes XPO logistics (#8).

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