XPO, Inc. (XPO) Earnings Call Transcript & Summary

Okay. Everyone, we're going to get going with our next panel. Really happy to have XPO Logistics here. We've got Brad Jacobs, Chairman and CEO. We've got Matt Fassler, Chief Strategy Officer. Thank you, guys for being here. We're going to go right into questions.

And so Brad, we're starting with everybody just sort of on revenue trends and where we are. Are we at the bottom yet? You guys have a great view of the globe. So if I just look through this, first quarter on the call, you talked that April revenue was down 20% to 25%; logistics, relatively better than that; non-LTL, relatively worse. You talked about some improvement in France and Spain, maybe some signs of a bottom in the U.K. and the U.S. So that's what you've said. Maybe just give us a more current update going around the globe, going through each of the businesses.

Okay. Sure. First of all, thanks for the invitation. Love to be here. Appreciate it. The trends are pretty much the same, Scott. April was the bottom, assuming there's no second wave. May is less bad than April was. Geographically, it's the same. Asia is almost back to normal. In Europe, France has come back sharply, still not where it was, but it's come back sharply off the bottom. Spain after that, U.K. after that. And then we're -- U.S. at the end there. U.S., you see some signs of some green shoots, but it's not a real robust rebound, but it certainly stabilized and hasn't gone to get any worse. And then if you look at how we see the company positioned after this is over, after the COVID is behind us, I think we'll emerge much stronger. I think we'll emerge much better for several reasons: Number one, we have an outsized exposure to e-comm, and e-comm has been booming even through this whole pandemic. And I don't think that's -- I think that's secular. I don't think that's a specific event-driven thing. We're going to benefit from all the billions of dollars we've invested in technology. I believe the outsourcing trend is going to accelerate because shippers have attached a greater portion to stability and outsourcing more of their supply chain to people who do this for a living, people who have invested in the technology. And we have the #1 e-fulfillment platform in Europe. We have big reverse logistics. We have big omnichannel logistics. So all that e-comm and supply chain in general is going to be outsourced more. I think we'll have a better cost structure. There's going to be more warehouse automation. We're a leader in that. Digital freight marketplace, XPO Connect also has a lot of good traction to it. And we have those 10 levers that represent a pool of up to $1 billion of opportunity to improve EBITDA, that are still valid, and we're still making progress on almost all of them.

I got off mute, sorry. That's great. So we just had our private LTL panel. And I think directionally, we heard that relative to the bottom that -- on the LTL side that happened in early to mid-April, that we've seen sort of a 5% to 10% bounce off the bottom. Directionally, does that seem about right for what you're seeing on the LTL side relative to the bottom in early April -- early mid-April?

I think bouncing off the bottom is a good statement. We haven't given an update on May. I think we felt across the board in the U.S. that April marked the bottom. There could be some glimmers of light in LTL. Nothing I'd want to quantify. But certainly, we feel like we hit that baseline when the shutdowns hit their trough. And since then, the world is opening up a bit, and I think you're going to see that ripple through our businesses in the U.S. as it did in Europe.

Okay. And by the way, for everyone dialed in, if you have any questions, make sure to submit them, and I'll get to them. Matt, I have another follow-up for you. You talked about on the call about 77% of the costs are variable. Can you help us break that down by businesses? Is it right to think that non-LTL transportation maybe is the most variable with the most purchased transportation; LTL, the least variable. Is that directionally the right way to think about it?

So to recap what we said on the call, as we've said for a while that our cost structure coming out of last year was about 77% variable, 23% fixed. Within that, actually, the contract logistics business is showing itself to have the most flexibility in this environment. That's somewhat a function of the customers we have and the resilience that they have through a downturn. It's also a function of the kind of contracts that we have that are really built to give us downside protection. So when you look at that formula, I think you'll see that the contract logistics margins and variability of cost looks quite good. To your point, the LTL business has a bit more of a fixed cost structure. It is a network business. And then our nonasset businesses in North America and Europe would be somewhere in the middle, closer to the company average. But there's one other point I want to make. That is the way we saw our business last year. And I think as we enter the downturn and we engage in our planning, it was thinking about that as the baseline as we move through the quarter, week by week and then move through the year, we're working to bend that cost curve. Fixed costs are only fixed if you let them be fixed. We're looking to chip away at some of those. And particularly in our network businesses, I think we're doing very, very well, moving our variable costs down commensurately or better than the volume pressure that we see. So 77%, 23%, and that's the right way to model the business. But we think we can hopefully do a bit better than what's implied by those numbers, particularly as we move through the year.

So is the idea that, hey, you were -- you've never been able to be in March and know that April is going to be terrible relative to March. But we sort of knew that this time around. And so maybe you could get a little bit more ahead of this than what you've seen in prior downturns. Is that maybe a fair thought?

I think -- well, I think there's 2 items: First of all, again, one thing that we do know is that when -- if revenue slows down in contract logistics, we have hedges, we have protections that help us maintain the kind of P&L and margins that we aspire to in that business. Secondly, to your point, we had -- it didn't feel like a lot of notice, a little bit of notice, and we're acting aggressively to address costs across our lines of business, to your point.

Okay. So my -- can you guys hear me?

Pretty great.

Okay. My headset just died because it's been going for 8 hours straight. So I'm on my computer. Hopefully, you do not hear screaming 8-year olds and 6-year olds and 1-year olds, but we'll do our best. So Brad, I want to go towards -- think more strategically for a few minutes. So you made -- you said on the first quarter call that the strategic review process is completely off the table, where it's behind us. We don't want to talk about it. I guess I'm curious on why once we get back to normal, we don't reconsider this. If anything, what we've seen in the last few months is that pure LTL valuations have gone even higher. So why not refocus on the strategic review process again, once things get back to normal?

Well, for one, we're going to focus on after the pandemic, after the pandemic. But while we're in the pandemic, that's not something we're spending any time on whatsoever. From a strategic point of view, we have alternatives. We have options. We have choices. We can pay down debt. We generate -- we have a "great problem." We generate a lot of free cash flow. So what we do with that free cash flow, we have choices. We can pay down debt. Every dollar we pay down debt should increase equity by that same dollar. Recall that 2022 at some point, the noncall period is ending. We can always do M&A if we so choose. We can always invest in CapEx. We have tons of CapEx opportunities, particularly in technology that have very high returns. And we can consider all kinds of strategic alternatives. We were the seventh best-performing stock in the Fortune 500 in the last decade. That's because we take our duty to make the choices to allocate capital very seriously. And whatever of the different choices we have in a very disciplined way, where it has the highest return on capital, that's what we choose to do. And we'll continually revisit that at each point in the time frame.

So naturally, if we're not thinking about selling or spinning off logistics or non-LTL, naturally, then do we go the other way and say, "Hey, we want to be backing and making acquisitions." And if that's right, do we think about U.S.? Do we think about Europe? Is it LTL? Is it logistics? Is it large? Is it small? Where do you think you start to refocus on M&A in the future?

Well, M&A is one of the alternatives we have, certainly not the only one. And I gave an interview to a trade magazine a few weeks ago. It's an hour interview, and we spent like maybe 3 minutes on M&A, and then the entire article was about M&A. So I've learned or I'm learning to be a little more quiet about M&A. So we'll just leave it that M&A is one of the alternatives we have. And if and when we do something on M&A, we'll announce it at that time.

So what are -- you generate a lot of cash, what else would it be for? Because it strikes -- when you do M&A and you do the right M&A, you lever up for M&A and then you naturally -- if you execute the deal right, then you naturally delever, which lets you do the next one. Whereas buying back stock doesn't necessarily have that same impact, right? So is there naturally -- is there a preference for M&A or not necessarily?

There's a strong preference to whatever creates the most amount of shareholder value. That's our mission. We take it very seriously. We look at it objectively. We do it by numbers. If buying back our stock creates more alpha than doing M&A, we're going to buy back our stock. If doing M&A creates more value than something else, we'll do M&A. [Audio Gap] debt with our cash makes the most amount of sense, that's what we'll do. We will always be, rationally in a disciplined way, evaluating the different alternatives for our cash.

Okay. That's fair enough. So let's go to LTL for a few minutes. Margins improved 300 basis points last year. I think over 400 basis points in the first quarter. How should we be thinking about LTL margins, not for the quarter, but just for the year? And then more importantly, longer term, do you think there's -- is it a goal to get to towards an 80% OR in LTL? Do you think that that's a possible place to get to?

I'll be extremely disappointed if we didn't do better than 80% OR over time. It's not going to be in the second quarter. Second quarter, I think the whole industry is going to see unfavorable ORs given the significant decrease in the revenue. But long term, absolutely, absolutely, we should be able to, every year, have better OR than the previous year. And to get up to $1 billion of EBITDA, we will certainly get to $1 billion EBITDA in LTL. The question of the time frame is not clear because we don't know exactly how the pandemic is going to play out. But if you look at the first quarter, it really showed what we can do from an operational execution, from an operational excellence point of view. We had -- adjusted operating income was up 32% year-over-year. New business won was up 22%. Load factor. Load factor was up 520 basis points. Dock productivity was up 8% largely due to our Smart labor technology. We purchased transportation line-haul better by 7%. We brought down empty miles by 23%. So lots of very tangible progress being made at our long-term plan of -- to continually improve the profitability of LTL. And a lot of that's due to the technology projects we have there, the pricing algorithms, the P&D optimization, the dock productivity, the line-haul optimization. So there's many different work streams we have going on in LTL that are already showing demonstrable results, and that momentum will continue.

One of the other -- the factors driving the margin improvement, you talked about load factors, I think, improved 500 basis points. Where are we relative to where we want to be? How much more to go is there on load factor?

Well, we're going to keep pushing on load factor because every 100 basis points is $10 million of EBITDA. And there's no cost associated with. So it's pure profit improvement. That's a core objective of ours. It's just to keep hammering at the load factor. It's an important long-term lever. If you look at us versus the industry leader, Old Dominion on load factor, they're still much better than us. So we have a long way to go to get to -- look at it this way, we have a great opportunity to get to best-in-class on load factor.

Okay. What about LTL pricing trends? Are you seeing -- is that getting tougher in a weaker volume environment? I think yields out of fuel were up 2.6%, yields -- revenue per shipment were flattish. What's the underlying pricing environment you're seeing in LTL right now?

I'm happy to take that one. Pricing is holding. Our GRI is holding. One of the reasons you're seeing a divergence between the measures that you cited is mix. It was true late in Q1. And to some degree in April, some of the higher-yielding verticals, like certain parts of auto and retail, saw tonnage down more than some verticals with lower prevailing yields. But the market remains rational. And importantly, we're deploying our pricing tools, and pricing is 1 of our -- 1 of the 10 levers that Brad cited. And there's particularly big opportunity in LTL to help us drive that yield and drive profitability. I'm particularly excited about the work we're doing in price elasticity, which is helping us make the right proposals to the right customers. Our proposals have a better chance of sticking, and the yield tends to flow through. We're also automating more of our responses to more RFPs for some of our local customers, which is leading to faster responses and better conversion with those customers.

Okay. Someone submitted a question. How is the e-commerce final mile volume increase offsetting the decline in B2B revenue? And then also, what is the impact of the differential in margins between the 2 segments? So -- and I think that second piece is you hear from UPS and Fedex say, oh, our B2C is up a lot or our B2B is down a lot. The net of it is it's bad for mix and margins, which is a small package comment. Should we apply the same logic to your business, I guess, is the second part of that question.

I'm happy to take that one. So think about our final mile business. So our final mile business is primarily final mile for big and bulky goods. That business did exceptionally well for us in Q1. Organic revenue accelerated to 9%. We saw ample demand for lawn and garden equipment, for home appliances, consumer electronics, home fitness equipment. We have a very strong presence in all of those areas, and it contributed to that strength. In the last couple of days, you saw results from the 2 largest home improvement retailers in the country. Both of them generated very strong same-store sales in their April quarters. Both of them spoke favorably about the month of April. They spoke favorably about the start of May. So that bodes well for B2C. And our last mile business is, of course, almost entirely a B2C business. If you want to talk about B2B, obviously, LTL is more of a B2B business for us. We've spoken about the tonnage declines that we have there. Within that, some of those same B2C kinds of customers have done well and continue to do well. Those are some of the verticals within LTL that have stronger trends: general merchandise retail, home improvement retail and some other areas like that. As a company, our exposure to the consumer is 50% or more. So we're very well diversified and very well balanced, such that the macro trends we see now are trends that we're able to manage well.

Okay. So on the non-LTL side of the business, EBIT results were sort of breakeven in the first quarter. Can you break that down between U.S. and Europe? Do you think you get back to profitability in the second quarter? Or is that tougher? Any thoughts there?

Yes, Scott, for Q2, we'll see. I think given the headwinds that we saw entering the quarter -- and we spoke about those. I think every business is likely to look softer for the quarter overall than it did in Q1, even as we think we hit the bottom very early in Q2, and that trends are likely to improve progressively for all of our businesses as we move through the quarter. In every area of our business, if I think about the long term -- and this is true for European transportation and the North American non-LTL transportation. We intend to drive margins over time that are higher than the margins that we generated in 2019. And there are some very good lines of business here for us. The areas that you reference include the last mile business that you cited a moment ago on the prior question. There we're, of course, the leader in North America in final mile for heavy goods. They include our freight brokerage business, which we're driving forward with XPO Connect. And in European transportation, we've got -- we are the leading LTL provider in France and Spain and a top LTL provider in the U.K. as well as a major truck broker in the European arena. So these are excellent businesses for us. And as you ask about, "Hey, can you get back to last year's number?" We can get there and go higher, we think, over time.

Brad, I want to get your perspective on the new set of Uber and Uber freight from earlier this week. And does this change in any way the way you think about the long-term direction of margins, gross margins in this business? Does it change the way you think about deploying technology and capital into brokerage at all?

I really doesn't, Scott. We've had this path of growing our truck brokerage business largely organically now for almost a decade and investing heavily in technology and listening carefully to our customers what they want the technology to do, listen carefully to our people what they want the technology to do. And we started pioneering that in 2012, and it's worked very well. You saw the results of the first quarter in truck brokerage in the first quarter. So what our competitors are doing, that's -- it's interesting to hear, but it doesn't really affect what we're doing. We have a path, and we're continuing on the path.

But you don't say, hey, a potentially disruptive competitor may be less disruptive. And now we want to refocus and accelerate the growth of this business. We shouldn't think about it like that.

We've already been accelerating the growth. So this doesn't make us more accelerating or less accelerating. Probably would help the market, what's going on there, but that's not a huge deal. It's interesting.

Okay. Your comment, you said a bunch of times about generating hundreds of millions of dollars of free cash flow. Have you said directionally if you think that's more or less free cash flow than you did last year? And with $400 million, give or take, of free cash flow last year, have you made -- do you have a directional view more or less?

I think we had more free cash flow than last year. Matt, do you want to take that?

Yes, sure. So Scott, last year, we did, and we'll see where the year turns out. We've said hundreds of millions of dollars. I think it's too early to guide the year more precisely than that. In the first quarter, as you saw, we overdelivered on free cash flow, and that was a function of strong working capital management. For the year, we're reducing our CapEx from our original plan by at least $200 million. If earnings are lower than they were a year ago, and the Street is modeling EBITDA down for the year, then our cash taxes will also be lower. Those 2 items alone get us at least $300 million of tailwinds versus our original plan. On working capital -- and this is kind of the swing factor, it depends how we close the year. If sales are sluggish, it will be a source, and it's a hedge that we've built into our model. If we finish with sales momentum, it can be a use, but that would mean as the world is recovering, that we're regaining revenue momentum. We'll take that. In either of those scenarios, we have the ability to deliver the cash flow ranges that we discussed and to surpass that threshold that we gave you a few weeks ago.

Okay. Great. Someone is asking, if you can add some more color to your -- Brad, to your comments about warehouse automation. Are you seeing more customer interest in this due to social distancing from COVID? Or is that just a bigger-picture statement on the evolution of supply chains?

Well, we have a very good window into that because, as you know, we have a 15-year joint venture with Nestlé to create the warehouse of the future. And that's opening. That's opening -- it was going to open in May. It will probably now get delayed a couple of months because of the COVID thing, but it's to the point of opening. And so we see pretty much every single vendor of warehouse automation pitching to us. They want to attach their wagon to our star because it's very high profile. And there is a lot of demand from our customers, our contract logistics customers to figure out ways to make warehousing more cost effective, make it more efficient, make inventory more accurate, have much greater visibility at every moment in time where the goods are. And warehouse automation is the secret to that. It's the secret to all of that. So that's accelerating. For sure that's accelerating. That already was a fast-growing trend, warehouse automation. That's going to increase now. And of course, we're a leader in that. Scott, we don't hear you. You went mute again. There you go.

I was muted. What other longer-term changes do you see in supply chains as a result of COVID? There's a lot of people talking about reshoring, near shoring, whatever the right word is. Is that something that you believe is going to be happening at an accelerated pace? And beyond that, what are the other things that you see?

I do think that you're going to see more nationalism. You're going to see more government-mandated manufacturing within the country, particularly for critical things, for essential supplies, things to do with health, for example, pharmaceuticals. And I think, in general, between the tariffs and this whole COVID thing, yes, I think you're going to see more shorter supply chains. You're going to see less Asia, U.S. and more domestic U.S. Of course, that works to our advantage in principle because we don't do a lot of international freight forwarding. We do some. We do a lot of domestic transportation. We do a lot of domestic warehousing, both here and in Europe. So it should benefit us.

And Scott, just in addition to everything that Brad said, if companies are looking to reposition elements of their supply chain, we have the consultative capability to help them figure out exactly how they want to do that. And if they need to build new infrastructure, it's something that we can work on with them in terms of implementation. So if the world moves in that direction, there's some ways for us to help companies that could be helpful to our business as well.

Okay. And Brad, when you talked about outsourcing is going to accelerate, is that a contract logistics sort of a comment? And as you think about the logistics business, do we -- what's more likely, in your opinion: Getting to a sustained sort of double-digit growth rate? Getting to a double-digit margin? Is it sort of -- a combination of the 2? Where do we want to see this contract logistics business get?

I'll answer the first part, and I'll let Matt answer the second part. Although I'll just say on the second part, we do look at all of those, but we look at, more importantly, how those lead to return on capital. So we look at every one of our businesses and all our capital allocations on how much money we're putting out and how much money we're getting back. And how quickly are we getting it back? How long is that in stream going to last? It's really our return on capital focus, the way we allocate capital and make decisions on that. With respect to the first part of the question about the outsourcing, that does affect many parts of our business, including our managed transportation, for example. But it most affects our contract logistics. So contract logistics is largely done internally by companies themselves. It's being increasingly outsourced to good operators of contract logistics, which there's not -- it's different than some other lines of transportation logistics. We have dozens or hundreds or thousands of choices. There's really not a whole lot of choices in contract logistics. So the gating factor more has been the capacity of providers or vendors to provide that service. And we are very, very good at that. So I think the more that's being outsourced now, we should benefit from that. I think the growth rate long term for contract logistics is -- whatever it was, it's higher now post COVID. Matt, do you want to take the second part of it?

And Scott, I think the question was on margins and contract logistics. Can you just be a bit more precise, and I'll get you a short answer.

Yes, Matt, the question was sort of, do you see potential to either get to a double-digit growth rate in contract logistics or potentially a double-digit margin and -- or maybe both?

Sure. So I think we can get to both sustain double-digit top line growth and double-digit EBITDA margins. There's a point, and we're not there yet, and we weren't there last year either for context, where we would consider capping the margins and reinvest in the upside in growth. We're not at the point where we have to do that quite yet. And to Brad's earlier point, we're very focused on ROI. So I'd encourage people to focus less on the margin per se and more on where it takes the return on capital of the business. Now we've got a number of drivers to help us get to those margins. Our Smart workforce productivity platform, which initially was developed in North American contract logistics, drove labor productivity up 5% where it was implemented in the first quarter. We're reducing our loss makers in Europe, and European contract logistics profitability is another 1 of our 10 levers. Smart is, too, by the way. We've exited some low-margin business. And I want to talk to XPO Direct, of course, XPO Direct was solidly profitable for the first time since launch. It took only about a year to achieve profitability. You asked about e-commerce earlier. Of course, XPO Direct is a unique offering that we have in North America to help facilitate fulfillment for a number of our e-commerce customers, both brands and retailers. And then in European contract logistics, we have a number of great revenue drivers coming on. Waitrose, we had spoken earlier in the year about our new contract there. It's a 3-year deal, about $85 million a year. It's our second-largest contract ever in European contract logistics. Brad spoke to the Nestlé warehouse of the future. That's a 15-year deal. In addition to serving our customer there, it's going to be a test bed for lots of our new automation ideas, working with many vendors to test automation that can be rolled out on a global basis from there on in. And then, of course, later this year, we expect to close on our acquisition of parts of Kuehne + Nagel's U.K. contract logistics business. And we're going to get access to some great verticals there from them, including their presence in technology, in e-commerce and in the food and beverage arena. So there's a lot of ways we see driving revenue in contract logistics in Europe.

Okay. That's great. I think, unfortunately, we got to wrap it there. We're a few minutes behind schedule now. But Brad, Matt, thank you so much. Really appreciate you guys being here, and be well. Stay safe.

Good to see you. Thank you.