Success with the small and medium sized business LTL market helped US and European trucking giant XPO to a 9.4% y-o-y increase in operating income of $151m on revenues that fell 3.2% to $1,952m.
Small business interest saved North American LTL
Though operating income fell 4.2% y-o-y to $158m and revenue fell 4.0% to $1,172m in the North American LTL division. CEO Mario Harik said, “We reported a sequential improvement in operating ratio to 85.9% that outpaced seasonality. We accelerated our Q1 yield growth, excluding fuel, to 6.9% and improved revenue per shipment sequentially for the ninth consecutive quarter.”
The company attributed deviation from market trends as being in a large part due to success in the small and medium business market. SMBs offer higher margins than corporate clients and as certain XPO competitors have found in the quarter, can be a tough nut to crack. Harik explained, “To grow in that segment, you need excellent service because these are smaller businesses. They might be shipping 5 shipments a week, 10 shipments a week. The shipments represents their brand. They want it to be picked up on time, delivered on time, deliver damage-free every single time. And with the improvement in service we’ve had, we’ve had a tremendous amount of success in that channel.”
Harik continued, “The second component as well is that we’ve added 25% more local sellers to our team over the last few years, and it takes after you hire a local seller, it takes you another full year to get them fully ranked to productivity as well. So this has been obviously in the woods for us for a number of years. And our local sales force is truly doing tremendous job out there. Just to give you an example, in the first quarter, we grew that channel in the mid to high single digits from a tonnage perspective, and we accelerated that to double digit here in the month of April.”
In addition, the division also reduced its purchased transportation costs by 53% or $43m in the quarter. This, the leadership believes will hold it in good stead for the future.
European Transportation moves into profit
From a loss of $4m in Q1, 2024, the European Transportation division achieved a profit of $1m in this quarter on revenues that fell 1.9% y-o-y to $782m. XPO’s chief strategy officer Ali-Ahmad Faghri said, “We delivered solid progress despite a challenging macro environment. We increased revenue by 2% year-over-year on a constant currency basis for the fifth consecutive quarter of growth. We also grew adjusted EBITDA by 19% sequentially from the fourth quarter, outpacing seasonality, and in some key geographies like the UK, we increased adjusted EBITDA by double digits versus the prior year, showing continued strength.”
Threats and opportunities
In the quarter, UPS and Amazon have announced an interest in the small consignment LTL industry. Asked about this, Harik said that he doesn’t feel this such a threat as neither are making moves on XPO’s LTL territory. In regards UPS he said, “We don’t see them as being material threats. And for a few reasons with UPS, they are targeting very lightweight shipments with the service, typically a few hundred pounds, compared that to our average weight per shipment is about 1,350 pounds. They also are much more parcel-like – it’s going into residences and inside deliveries, which are typically things we don’t do a lot of in traditional LTL.” Referring to the sale of UPS Freight LTL division to XPO’s rivals TFI International in 2021, he continued, “It’s not a new offering for them. I mean they used to offer that for a long time. And usually, when you start getting into this heavy parcel type shipping, it’s a non-conveyable product, so it doesn’t operate well in a parcel sortation facility. So it’s much harder for them to execute on it.”
Amazon doesn’t ruffle XPO’s feathers either. Harik continued, “They have a lower exposure to LTL than other modes of transportation. They move much more parcel, they move much more truckload and that could be if they were in-sourcing that could be a threat to these industries. But in LTL, they are approximately 2% of the overall LTL industry spend. For us specifically, they’re less than 0.5 points of our overall volume and shipments.”
There is more worry regarding the tariffs situation but this is uncertainty as opposed to a threat at the moment in the eyes of XPO’s leadership. Harik said: “ Some customers are in wait-and-see type pattern. Some customers are still importing goods as they always have. Some customers that pull-forward.”
Harik said that in one case XPO had benefitted from the changing global supply chains, “I recently met with a large customer, an industrial company, that produces product in the U.S. and Mexico and Canada. And now they are moving more of the manufacturing here to Texas in the U.S. And we used to only handle the outbound freight out of that distribution facility, now we’re handling both inbound and outbound freight where the inbounds are for parts and raw materials and then the outbound for the finished product all the way to the customer.” This comment may reflect the intended trajectory of the current trade policies of the US Presidency, and how logistics companies can turn threats into opportunities. Such major supply chain changes aren’t happening quickly but might yet start to appear more within the next four years and would then be opportunities that replace the uncertainties of today.
Author: Richard Shrubb
Source: Ti Insight
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