XPO Logistics (NYSE:XPO) Executive Talks Stock, BREXIT, and Profits

- June 27, 2016



With XPO Logistics (NYSE:XPO) falling 15% in the two sessions following BREXIT, I decided to reach out to Scott Malat and Brad Jacobs to find out what’s going on, and to ask how exposed XPO is to what’s going on in Europe. Immediately afterwards, Scott called.

I was not prepared for an hour conversation. I did not have good questions prepared. I did not have a recorder, nor did I have my laptop. Therefore, we just had a normal conversation that covered a range of topics. So, here is a layout of what we talked about along with quotes that probably are not 100% correct.

Keep in mind that the headings reflect the topics that we discussed while the content that follows are Scott’s thoughts on those topics.

XPO stock reaction to BREXIT

This is completely overdone right now. It’s really weird.

We are down so much more than our European counterparts who are much more exposed to the euro and pound than we are. I think U.S. investors are finding U.S. companies that they think are most exposed to Europe and then punishing them. It does not make sense. We are down 3-4x more than our European competitors, many of which are fully exposed to the U.K.

How exposed is XPO to pound?

First off, we are hedged. So the currency swings will have no impact on our results. Our hedges are done on a monthly basis to eliminate our currency risk.

But let’s pretend these hedges were not in place. We have 9% of our EBITDA in pounds. A 10% move would be a 1% impact to EBITDA (without the hedge).

What are the macro risks from BREXIT?

The macro issues affect how companies do business in many ways. Mostly, we are not making any significant changes because we don’t yet know what to expect. When there is more uncertainty, people don’t make big decisions, or big moves.

For us that means less potential of getting new, big contracts. We did a $600 million deal last year. Our biggest ever.

That deal would not have happened in this economy, because uncertainty like this slows down processes and is generally negative for the economy.

I believe there is significant risk to European GDP. The uncertainty and overall outcome from BREXIT could decrease trade, create higher barriers, tariffs, potentially breaking up the EU. I don’t know that any of that will happen, but the uncertainty creates risk.

If European economy suffers, how does it affect XPO?

In our European business, 55% is supply chain and 45% is transportation.

The supply chain business is less cyclical. In the last recession our (Norbert Dentressangle)  supply chain revenue actually went up. The reason is because we have sticky long-term contracts for this business.

In the U.K., 70% of contracts are cost plus, or open book, which means you take all your costs and show to the customer then charge a margin on top. It is a very low risk contract.

In economic downturns, people try to cut their costs and businesses outsource their logistics. These low risk, cost plus contracts are a good way to do so.

The 45% of our European business that is transport is more cyclical. You could be down as much as 20% in a bad recession. However, it is a quick turnaround. In 2010 Norbert did more revenue than in 2007.

Europe and U.K. is 26% of the overall business, and 45% of that 26% is the transport business that you are worried about. So, you worry about 11%-12% of the entire business in the event of a major recession.

What about profits in a European recession?

Norbert actually increased free cash flow in 2008 and 2009. In 2010, they had to reinvest capital and free cash flow went down.

Norbert has changed a lot since the last recession. The transport has gone to 50% asset light and 50% asset heavy. They were 70% asset heavy in the last recession.

BREXIT, one-time costs, and profits for XPO Logistics

We have so many cost saving initiatives in place. We have control over our own destiny.

We will do $1.25 billion in EBITDA, $75-$100 million in one times for the year. We already had $27 million in one-times in the first quarter. So we will have $20 million a quarter in one-times but our EBITDA is going way up from the first quarter. Also, all of those expensive rebranding costs will be mostly finished by the end of this year.

For Q2, we are looking at $325 million in EBITDA, which includes $20 million in one times.

(I asked specifically about positive EBITDA, net income, and EPS. His response was as followed)

We are going to do that in the second, third, and fourth quarter. People don’t see the earning power at XPO.

The first quarter is always going to be bad. It will be bad next year too. The first quarter is when we pay all of our bonuses. We are a low salary, high incentive based business. All of those incentives get paid in the first quarter, which happens to be our weakest of the year.

The second quarter will look much different. We will be profitable.



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One Comment

  1. Ed W
    Posted August 6, 2016 at 5:43 pm | Permalink

    As July has come and gone and we are headed into August at XPO, Nothing has slowed down and we are at capacity, hardly any empty trailers to go to, I believe barring some drop in entire stock Market, we will make even more money than we did in Q2, Edw

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