XPO: Customers recovering faster than expected

XPO Logistics CEO Brad Jacobs says he expects a strong recovery to continue this year and next year for the freight company and its customers, with most recovering faster than expected. 

In a letter to stockholders this week, Jacobs said that “after a painful 12 months for pretty much everyone, 2021 and 2022 are shaping up to be big comeback years for the vast majority of our customers”, with the only question now being whether the recovery may overheat.

He said: “Many companies, especially those in consumer markets, are now in an accelerated V-shaped recovery. The 6% GDP growth some US economists are forecasting for this year could be conservative. Based on what our customers are telling us, I don’t think 10% growth is out of the question. 

“Freight transportation is a leading economic indicator, and our customers, for the most part, think they’ll be in a much stronger position a year from now than they were before the pandemic.”

Jacobs said in his letter last year to stockholders he had described himself as “a pragmatic bear in the short-term, a bull in the mid-term and a mega-bull in the long-term”, whereas now “the bear has left the building and the bull has arrived ahead of schedule”. 

But one big question troubling him was “whether burgeoning government spending will ultimately stimulate or stagnate the economy. Here, my mega-bullishness is cooling down a bit. When governments expand their role in allocating capital instead of letting free markets do their thing, historically that’s led to higher inflation, higher interest rates and higher taxes – and, eventually, to low or no growth. That’s not a certainty, but it’s certainly a question mark.”

Tailwinds: Automation, outsourcing, e-commerce 

For XPO, he said “the rebound for our business began midway through 2020, driven by three massive tailwinds: e-commerce, outsourcing and customer demand for supply chain automation. By year-end, we had met or exceeded our pre-pandemic performance in all major areas of our business: logistics, less-than-truckload and truck brokerage.”

He described e-commerce as “a broad-based tailwind, with demand coming from pure-play e-tailers, omnichannel retailers and direct-to-consumer manufacturers. “We provide these customers with inventory management, fulfilment and also returns management, where we have extensive expertise. The strong upward trends we saw in the back half of 2020 – notably, in consumer packaged goods, technology products, food and beverage, DIY products and other consumer sectors – have remained robust in 2021. Soon, we expect to see the return of brick-and-mortar retail demand as stores reopen.”

Another highlight of late-2020 was the long-awaited start of the recovery in the industrial economy. “This has an outsized benefit to our less-than-truckload business, where our freight primarily moves within industrial markets,” Jacobs noted. “Our LTL customers tell us that demand is speeding up as manufacturers move back to full production in the upcycle.”

Outsourcing, which he said has been a steady tailwind for some time now, “is becoming a sink-or-swim strategy for an increasing number of companies that currently manage their own logistics. Supply chains are becoming more complex, making it difficult for companies to meet customer expectations in-house. The pandemic showed that outsourcing logistics operations to specialists like XPO means greater flexibility, lower risk, more innovation and better visibility into the movement of goods.”

He said the third big tailwind – customer demand for advanced automation – “is being driven by a mix of e-commerce, outsourcing and the pronounced efficiencies that automation brings to logistics”. 

Early adopter of AI 

He highlighted that XPO was an early adopter of machine learning and artificial intelligence in its operations, and developed a proprietary warehouse platform that integrates cutting-edge solutions in-house. 

“Today, our employees work side-by-side with intelligent technologies that make their jobs easier: autonomous goods-to-person systems, collaborative robots, robotic arms and other advanced automation we tailor to each customer’s requirements. We’ve also introduced wearable technologies to improve efficiency and employee comfort,” he noted.

Meanewhile, he said the company’s core truck brokerage business “came roaring back in 2020, surpassing 2019 performance by the third quarter”. And its digital freight marketplace XPO Connect “is accounting for a growing number of high-margin, ‘touch-free’ transactions between customers and carriers, with one of the fastest adoption rates of its kind in the industry.”

No pause

Although a year ago, Jacobs said COVID-19 “looked like a huge, insurmountable ‘pause button’ that would stop the world in its tracks”, he claimed XPO “never paused”.

Among its initiatives he highlighted how in January the company “completed the synergistic acquisition of 106 Kuehne + Nagel logistics operations in the UK and Ireland. Five of the blue-chip customers who came to us in the acquisition are projected to be in our top 25 European logistics customers by revenue in 2021.”

Looking ahead at this year’s financial performance, Jacobs noted: “Given the strong momentum we see in 2021, we have a high degree of confidence that we’ll make or beat our full-year guidance for adjusted EBITDA of $1.725 billion to $1.8 billion, which is a year-over-year increase of 24% to 29% companywide. Importantly, we expect to achieve this level of adjusted EBITDA growth in both segments of our business: logistics and transportation.”

In December, the company announced its plan to spin off our logistics business, “and laid out a compelling rationale for separating the company into XPO and GXO”. 

Spin-off progressing

He said the company was “making excellent progress on the spin-off plan. We filed our confidential Form 10 with the SEC in March, and we’ve announced five world-class GXO executive appointees to date, with more to follow”. Malcolm Wilson, the CEO of XPO’s European business, will lead GXO as global chief executive when the separation is complete. 

“Malcolm has three decades of impeccable industry credentials,” highlighted Jacobs. “When we acquired Norbert Dentressangle in 2015, Malcolm had already grown the logistics division to global scale in 15 countries, and he has continued to lead it to unprecedented growth for XPO.”

He said each public company will have a simplified business model and its own equity currency when the separation is complete, “with pure-play leadership, strategic priorities, capital structure, technology, organic growth initiatives and M&A opportunities. In addition, we’re pursuing investment-grade ratings for both companies: GXO from day one, followed by XPO.”

He concluded: “Our goal this decade is to beat what we did in the last decade, when we were the seventh best-performing stock of the Fortune 500.”