XPO blows away second-quarter estimates; LTL operating ratio at lowest point in decade

In what is likely the high-water mark of its brief history, XPO Logistics Inc. shattered analyst estimates for second-quarter results, reporting quarterly net income for the first time and posting the best operating ratio in its North American less-than-truckload (LTL) business in 10 years.

The Greenwich, Conn.-based carrier and logistics provider reported late yesterday that second-quarter earnings per-share, adjusted for non-recurring items, came in at 42 cents, more than doubling analysts' consensus estimates of 19 cents. XPO posted net income of $42.6 million, the first time in its five-year history it posted a quarterly net profit. Its domestic LTL operation, which was known as Con-way Freight before XPO bought its parent last fall and re-branded the unit as XPO LTL, posted an 85.5-percent operating ratio, meaning it cost the unit 85 cents out of every revenue dollar to run the business.

In last year's second quarter, the former Con-way Freight posted an operating ratio of more than 92 percent. Not since 2006 had the unit reported such a low operating ratio as it did in the second quarter. The former Con-way unit accounted for about 60 percent of its former parent's overall annual revenue of $5.8 billion.

XPO said total second-quarter gross revenue—revenue before the cost of transportation expenses—increased 202.9 percent year over year to $3.7 billion. Much of that gain was due to the impact of a string of 2015 acquisitions, including Con-way and French trucking and logistics giant Norbert Dentressangle S.A., which XPO bought in April 2015 for US3.5 billion.

XPO posted adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, of $354.9 million in the quarter, compared with $79.7 million during the same period in 2015. It generated $260.7 million of cash flow from operations, and $169.5 million of free cash flow in the quarter. The adjusted EBITDA and cash flow figures are a more accurate reflection of the financial health of XPO's business than its net income, mainly because the adjusted figures exclude one-time gains and charges related to XPO's acquisition spree.

XPO's growth in the quarter was propelled by e-commerce related gains in its "last-mile" delivery services, and by big wins in contract logistics business in the U.S. and Europe. They were enough to offset the persistent weakness in the industrial freight market, where XPO is a significant player. Bradley S. Jacobs, XPO's chairman and CEO, said U.S. industrial production, which has been depressed for about 18 months, is improving but only very slightly. The macro demand outlook, outside of e-commerce, is stable but sluggish, Jacobs said in a phone interview yesterday.

LTL revenue was impacted somewhat by the company's decision to cull unprofitable or unacceptably profitable freight from its portfolio, Jacobs said.

Second-quarter operating income for the LTL segment rose 66 percent, to $115.5 million, XPO said. The increase was due to improvement in yields and cost reductions. At the time the acquisition was announced last September, XPO announced the Con-way deal would boost Con-way's annualized profits by between $170 million and $210 million over a two-year period through synergies and operational improvements. Since then, however, it has uncovered about $90 million dollars in additional savings, partly through more efficient procurement activities, yield improvement, and more cost reductions.

"Clearly the company is making progress in integrating its various operations and eliminating duplicate overhead expenses, while squeezing efficiencies out of its overall purchasing program," said John G. Larkin, transport analyst for Stifel, an investment firm.

"We're at an inflection point in the evolution of our business," Jacobs said in the statement announcing the results.