News / XPO plans to reduce supplier numbers by 90% to cut costs, despite soaring earnings and $1bn new business pipeline

XPO Logistics has announced plans for a significant cost-cutting exercise, as it reported a third-quarter net profit of $13.8m on the back of a year-on-year 57.2% increase in revenues to $3.7bn, while adjusted EBITDA more than doubled to $352.7m.

As result of soaring earnings, the company has raised its free cash flow target for the full-year 2016 to $175m from $150m three months ago, while its full-year adjusted EBITDA has been reduced slightly from the previous target of $1.265bn to $1.245bn, following last week’s sale of its truckload division to Canada’s TransForce, which will hit full-year earnings slightly.

EBITDA targets for 2017 and 2018 now stand at $1.35bn and $1.575bn respectively, the latter reduced from the previous target of $1.7bn, again due to the truckload disposal.

Chief executive Brad Jacobs maintained yesterday that the truckload divestment was primarily due to strategic reasons, although of the $558m cash price, some $550m has been used to reduce its debt – which it is now attacking on a variety of fronts.

“The increased free cash flow can also be used to pay down debt, and in conjunction with our recent opportunistic refinancing of $2.6bn debt in August we have now lowered our annual interest expenses by $63m.

“The free cash flow could also be used for dividend payments or share buybacks,” he added. He told The Loadstar that total debt was now under four times EBITDA, “which we are very comfortable with”.

Mr Jacobs also sketched the outline of XPO’s long-term cost reduction plan.

“The biggest opportunity for us is in procurement – we have a world-class procurement team and annual spend of $4.3bn across 80,000 suppliers.

“Our plan is to reduce that number to 10,000 suppliers over the next three years, with ultimately 2,000 suppliers accounting for 80% of the spend, and this will be across all sorts of areas – labour, offices, trucks, trailers, facilities, real estate and IT.”

Its IT investment budget for next year remains large, however, and currently stands at $425m for the year.

“We’re happy to make that investment. Technology is a huge differentiator for us. We’ve built a highly scalable and integrated system using cloud-based technology that gives us agility and facilitates enhancements. This enables rapid technology development, testing and deployment. We see the ongoing enhancement of our technology as being critical to continually improving customer service and leveraging our scale.

“In our last mile business, we hold the patents on industry-leading software for real-time workflow visibility and customer experience management. This gives us a competitive advantage in the last mile space, because it documents our ability to deliver superior end-customer satisfaction ratings. We can move quickly to address any sub-par carrier performance,” he told investors and analysts at the company’s results presentation yesterday.

Meanwhile, Mr Jacobs yesterday said that despite the truckload sale, the company forecasts rising EBITDA levels over the next couple of years due to its long-term sales pipeline, particularly in the contract logistics, e-commerce and last mile segments.

“North America logistics has closed $300m of new business this year, and $175m of that was in the third quarter alone, while in Europe over €330m of new contract logistics business has been closed in the first nine months. Globally, our new business pipeline is worth over $1bn,” he said.

Yet the enormous double-digit increases seen in recent quarters – and again on display this week, with logistics revenues up $35.6% and transportation revenues up 72.5% – were largely to due to the effects of its acquisitions, and are unlikely to continue at such a steep pace as this is the final quarter where the numbers are affected by the Con-way purchase.

“Starting next quarter, the numbers will include Con-way directly so you won’t see these type of growth numbers – but we will still see growth resulting from increased sales and reduced costs.”

Following its August debt refinancing, ratings agency Standard & Poors upgraded XPO’s credit rating to B+ and classified its outlook as positive.

S&P global ratings analyst Tatiana Kleiman said: “The upgrade of XPO reflects the strengthening of the company’s credit metrics, resulting from acquisition–related earnings growth and cost synergies, and our expectation that credit ratios will continue to improve over the next year as earnings climb and cash flow generation strengthens.”