XPO Logistics posted strong second quarter earnings, including a record operating ratio for its LTL division. But it was several initiatives that it launched during the quarter that were the highlight of the three months for the LTL and logistics company.
In both its earnings call with analysts and a pre-call interview with FreightWaves, CEO Brad Jacobs effused more about logistics or technology-driven launches—though where one category ends and other begins is unclear--during the quarter.
The second quarter featured an adjusted operating ratio of 84.3%, improved slightly from 84.6% in the corresponding quarter of 2017. The company said its records going back 30 years indicate it’s the lowest OR the company has ever posted in its LTL division.
But it was the launch of XPO Connect that may have been the most significant non-financial news of the quarter. The phone-based app, distributed to both shipper and carrier clients of XPO’s brokerage division, had what Jacobs said in his interview with FreightWaves was a “cold start” launch in April. Jacobs said the projections were that by the end of the quarter, XPO might have “a few hundred” users of the app. Instead, it signed up 6,000. “It’s been just an amazing trajectory,” Jacobs said.
The services provided by XPO Connect were all available through the company’s portal previously, Jacobs said. But XPO Connect enables voice activation and order-taking, where a driver can show his availability through a voice command and the tool will show the available loads, all on a mobile phone. “It’s not just for truckers,” Jacobs said. “Our customers can be on the same platform and get full visibility through all modes, intermodal, trucks, last mile. And they have the ability to do it without typing anything.”
XPO Connect offers rates, displays load postings and has what Jacobs called “self-learning algorithms.” “It doesn’t waste time,” he said of the system. It can do such things as recommend to a driver where a load to backhaul can be located, and has complementary information such as weather and refueling data.
Coincidentally, XPO reported a drop in employment in the company’s brokerage business. It wasn’t just XPO Connect, but Jacobs said all technology investments have allowed XPO “to do more things in an automated way without doing intervention.” There are XPO tools that perform “track and trade” capabilities that might have been done by a human broker previously. It hasn’t eliminated the need for human brokers, Jacobs added, noting that a certain percentage of XPO Connect users are just getting their “toe in the water.” “People still like to call a human being now and then,” he added.
XPO Connect’s early success was just one of the things touted by Jacobs in praising the company’s brokerage division on the company’s earnings call. According to a transcript of the call provided by SeekingAlpha—FreightWaves also listened to the call—the freight brokerage group of XPO overall had “an amazing quarter.” Revenue was up 27% and net revenue grew 46%. Margins were up to 16.2%, which was a 220 basis point jump from the second quarter of 2017. Brokerage is “hot” for XPO, Jacobs said, because the company has relationships with what he said was about 38,000 “core carriers that we give freight to every day. And the shippers that we have really appreciate that we performed on contracts last year, even when we were underwater.”
A second major initiative announced by XPO during the quarter is a futuristic facility developed in the East Midlands of the U.K. in cooperation with Nestle. Jacobs said he did consider the $77 million, 638,000 square feet facility as “groundbreaking…creating the next generation facility.” He rattled off a long list of technologies that are going to be implemented or at least tested at the site, including various types of drones and robotics. There will also be a lab to test more innovations. “Every single type of technology that occurs in a warehouse is going to be tested there and will be compared to one another,” Jacobs said.
A third initiative XPO launched during the quarter is XPO Direct, which allows customers to share space in existing XPO facilities. XPO Direct enables XPO customers, who are using its other transportation services, to store goods at XPO sites to enable their own rapid delivery of products. Scott Malat, XPO’s director of strategy, said on the call that XPO Direct is available now at 75 XPO facilities, with plans to bring that to approximately 100. He added that it’s expected that XPO Direct can be an annual billion dollar business in a few years. The selling point? About 95% of the U.S. population can be reached within one or two days of the network.
On other issues discussed either in the FreightWaves interview or on the earnings call:
- XPO is still acquisitive, but Jacobs did not sound like a man in a hurry. He said XPO put together a list of about 250 potential M&A targets a year ago, got it down first to “a few dozen” and then just one dozen. “And we’re in different levels of discussions with them,” he said. “We are patient. We are disciplined. We are only going to do a deal when we have a deal that will likely create immense shareholder value. And the reason that we feel that patience is that if we continue to grow EBITDA in the 15%, 16%, 17%, 18% range, with the leverage we have on the balance sheet, and then taking free cash flow and paying down debt, each $1 we pay down creates a $1 of equity value. So, we don't feel any pressure to do M&A.”
- The driver squeeze is not an issue at XPO. Jacobs said in the interview that its LTL division, which theoretically would be feeling the brunt of a labor squeeze, had 8% turnover last year. The company had 600,000 applicants for all its jobs last year and expects to get 900,000 this year. Its earnings press release said XPO has more than 97,000 employees.
- XPO’s Last Mile business is growing faster than the rest of the company. The Last Mile business at XPO is not a parcel-delivery operation, but rather a network of contract carriers that deliver and install a customer's product, such as a dishwasher, into a consumer's kitchen. Jacobs noted that organic revenue growth for Last Mile was 16.5% in the quarter, while for the whole company it was 11%. “It’s growing faster than the rest of the business on average so if we hold our present network today, if we didn’t add new acquisitions, it would comprise a larger percentage of our business,” Jacobs said. But acquisitions could change its growing percentage inside the business.
- Malat said in North America, the year-over-year average cost of truckload capacity in the quarter was more than 20%.
- Wall Street didn’t appear impressed with the earnings although they met all expectations. At 1:30 p.m., XPO stock (NYSE: XPO) was trading at $98.12, a drop of $1.80, down 1.82%. It was performing worse than most of its trucking or 3PL peers. Amit Mehrotra of Deutsche Bank wrote in his quick comments after the earnings release a day before the call, “Net/net, we’d characterize this as a very solid, albeit uneventful Q for XPO, though we expect shares to be up tomorrow on encouraging organic growth trends.”