Buoyed by Con-way acquisition, fast-growing XPO expands its logistics footprint

Fast-growing XPO Logistics, an entity that didn’t even exist five years ago, is growing revenue at a faster pace than even the Greenwich, Conn.-based conglomerate expected on the heels of finalizing its $3 billion purchase of Con-way Inc.

In its most recent quarterly earnings report, XPO said it:
-reported $166 million of adjusted earnings before interest, taxes and debt (EBITDA), significantly exceeding target;
-achieved organic margin improvement across all businesses;
-exceeded expectations in Europe with adjusted EBITDA growth of more than 26% for transport and 17 percent for logistics;
-expected more than $30 million of annualized savings from actions already taken with Con-way integration;
-named former Roadway executive Tony Brooks as president of less-than-truckload business; and
-issued full year targets for adjusted EBITDA of at least $1.25 billion in 2016, and at least $1.7 billion in 2018.
  
In its third quarter earnings, XPO Logistics, Inc. reported gross revenue increased a whopping 256.5 percent year-over-year to $2.4 billion, and net revenue increased 542.4 percent to $1.1 billion. Even as top line revenue grew, its losses grew as debt piled up from a series of acquisitions for the company that is on target for $15 billion in annual revenue—the third-largest U.S.-based ground transportation provider after UPS and FedEx Corp.
  
“In our first full quarter of global results, we drove adjusted EBITDA to $166 million, significantly exceeding our target,” Bradley Jacobs, chairman and CEO of XPO Logistics, said in a statement.
 
“In our transportation segment, we improved margins year-over-year by optimizing our pricing and lowering our cost of purchased transportation in truck brokerage and intermodal, last mile, expedite and global forwarding,” Jacobs added.  “We’re operating our logistics segment more profitably worldwide, and we’re executing on an exciting pipeline of cross-selling opportunities. Our European operations overall are performing well ahead of expectations—adjusted EBITDA in Europe was up over 26 percent year-over-year for transport and 17 percent for logistics.”
  
For the third quarter, it reported a net loss of $35.4 million, compared with a net loss of $11.6 million for the same period in 2014. The net loss attributable to common shareholders was $93.1 million, compared with a net loss attributable to common shareholders of $12.3 million for the same period in 2014.
  
The third quarter 2015 net loss includes $52 million of non-cash accounting charges related to the beneficial conversion features of the previously announced June 2015 $1.26 billion equity private placement; a $31.6 million non-cash after-tax amortization charge; and $25.3 million of one-time after-tax transaction and integration costs net of noncontrolling interests, the company said.

Adjusted earnings before interest, taxes, depreciation and amortization (“adjusted EBITDA”) improved to $166.1 million for the quarter, compared with $24.2 million for the same period in 2014. Adjusted EBITDA in the third quarter of 2015 excludes $36.4 million of one-time transaction and integration costs; and a $400,000 benefit related to the gain on sale of intermodal equipment assets. Adjusted EBITDA in the quarter includes $2.7 million of non-cash share-based compensation.

As of November 3, the company said it had approximately $530 million of cash, and an undrawn $1 billion asset-backed revolver credit line.
 
Prior to the acquisition of Con-way Inc., XPO’s target EBITDA run rate was $625 million at year-end. The company said it significantly exceeded that three months early with its generation of $166 million of adjusted EBITDA in the third quarter.
 
The company has annual revenue of $15 billion and adjusted EBITDA of $1.1 billion. The company has issued the following new financial targets:

For 2016, full year adjusted EBITDA of at least $1.25 billion based on existing operations. And for 2018, full year adjusted EBITDA of approximately $1.7 billion based on existing operations, an increase from the $1.5 billion previously targeted for 2019.
  
The appointment of Tony Brooks as president of its LTL business in North America was most newsworthy.  Brooks is a 30-year industry veteran with significant executive experience in LTL operations, transportation and distribution networks and fleet management. He has held senior positions in transportation and logistics with Sysco Corporation, Dean Foods, Sears Holdings Corporation, PepsiCo/Frito-Lay and Roadway Express.
  
Brooks succeeds Joseph M. Dagnese, who took over Con-way Freight in mid-June after running Con-way Truckload, the nation’s 20th-largest TL operation that Con-way purchased for $750 million in 2007 XPO has placed Con-way Truckload on the market. Analysts estimate the TL unit could fetch approximately $400 million.
  
“I’m very pleased to welcome Tony Brooks,” XPO CEO Jacobs said. “We have an outstanding team of employees in LTL, and Tony is a veteran supply chain leader who has run three of the largest transportation fleets in North America. He has deep roots in LTL and a strong record of transforming large transportation networks. We’re excited that Tony will be leading our LTL platform to its full potential as part of our larger service offering.
  
Jacobs said XPO is in its “strongest position yet to create value through the optimization of our operations.”
  
He said since the Con-way closed Oct. 30, XPO “already taken out over $30 million of excess costs on an annualized basis” through dismissals and eliminating redundancies. “We’re targeting full year adjusted EBITDA of at least $1.25 billion next year. And looking forward to 2018, we’re targeting EBITDA of at least $1.7 billion - $200 million higher and a year earlier than originally planned,” Jacobs said in a statement.
 
XPO’s third quarter 2015 results by segment are:
-Transportation:  it generated total gross revenue of $1.4 billion for the quarter, a 128.1 percent increase from the same period in 2014. The year-over-year increase in segment revenue was primarily due to the acquisitions of Norbert Dentressangle, Bridge Terminal Transport, Atlantic Central Logistics and UX Specialized Logistics. Organic revenue decreased 2.7 percent for the quarter, but increased an estimated 3.4 percent excluding the impact of lower fuel prices.
 
Transportation’s net revenue margin for the third quarter improved to 22.6 percent, compared with 20.4 percent in 2014. The increase in net revenue margin was primarily due to price optimization, lower purchased transportation costs, and the shedding of unprofitable business, XPO said.
  
The company said it improved its margin percentages in all of its transportation businesses from a year ago, including truck brokerage and intermodal, last mile, expedited and global forwarding.
  
-Logistics: The company’s logistics segment generated gross revenue of $993.3 million, compared with $50.1 million from the same period in 2014. Net revenue was $810 million, up from $50.1 million a year ago. Adjusted EBITDA was $88.1 million, up from $8.0 million a year ago. Operating income was $36 million, versus $4.5 million a year ago. EBITDA and operating income in the segment exceeded expectations, primarily due to new contracts, the shedding of unprofitable business, and operational improvements.

Revenue and profitability for the logistics segment for the third quarter of 2014 reflect a partial contribution from XPO’s acquisition of New Breed on September 2, 2014, and do not include XPO’s European operations, which were acquired on June 8, 2015.
  
For the nine months ended September 30, XPO’s company-wide revenue was $4.3 billion, a 180.6 percent increase from the same period in 2014. It reported a net loss of $128.7 million for the first nine months, compared with a net loss of $53.7 million for the same period last year.

The net loss attributable to common shareholders was $183.5 million, or a loss of $2.10 per diluted share, compared with a net loss of $55.9 million, or a loss of $1.13 per diluted share, for the same period in 2014.
 
Adjusted EBITDA for the first nine months of 2015 improved to $274.7 million, compared with $39.8 million for the same period in 2014. Adjusted EBITDA for the first nine months of 2015 excludes $115.5 million of one-time transaction and integration costs; and a $6 million benefit related to the gain on sale of intermodal equipment assets, the company said.