XPO Logistics needs growth to de-lever

XPO Logistics missed earnings estimates last week when it released its fourth-quarter and annual results even though its revenue grew at a much faster pace than the market had expected.

Nonetheless, its share price was hammered in early trading when management discussed its quarterly performance on 25 February – it had lost almost 18% of value at one point, but it bounced back with the broader market later in the day, and closed down 6% at $25.8.

XPO has plenty of financial flexibility this year and next, but its gross cash pile plunged to $289m in 2015 from $644m in 2014, while losses widened to $191m from $63m in the prior year.

According to the announcement, “As of December 31, 2015, the company had approximately $290 million of cash and cash equivalents, and a $1 billion asset-backed revolver. Approximately 72% of the company’s debt will mature in 2021 or later.”

XPO Logistics grew its asset base via acquisitions last year, and it looks like it has time to deliver but it must continue to grow cash flows to meet heavier debt repayments. Interest expenses alone rose to $216m in 2015 from $48m in 2014.

Its core transportation unit generated gross revenue of $2.1bn in the fourth quarter, for a 216.8% increase over the same period in 2014. Such a growth rate was primarily driven by the consolidation of Norbert Dentressangle, Con-way, Bridge Terminal Transport, and UX Specialized Logistics.

Meanwhile, EBITDA rose to $151m from $31.6m, but fourth quarter operating losses stood at $6.1m against $10.7m one year earlier. The drop in operating incomes was due to depreciation and amortisation costs as well as one-off transaction-related costs, XPO said. It’s easy to argue that it needs to do better than that in 2016 to entice new investors.

Elsewhere, its logistics division turned over $1.3bn quarterly against $166.5m in the fourth quarter of 2014. Adjusted EBITDA was $98.5m, up 276% from $26m in 2014 – the surge in core cash flows determined a rise in quarterly operating income to $34.8m, which compares with $13.1m in the prior year.

Its annual adjusted EBITDA rose from $81m in 2014 to $493m in 2015, but excludes $201m of one-time transaction-related costs and a $9.5m gain from the sale of intermodal equipment assets. By comparison, its gross debt rose at a much faster pace to $5.4bn from less than $600m in 2014. Given its cash balances, its trailing net leverage stands at about 10x but will drop below 4x on a pro-forma basis if the company hits its full-year target of at least $1.25bn of adjusted EBITDA in 2016.

“For 2018, the company reaffirmed its full-year target of approximately $1.7 billion of adjusted EBITDA,” it said.

Bradley Jacobs, XPO Chairman and chief executive, noted that in the fourth quarter XPO “delivered organic adjusted EBITDA growth of 33%, and organic revenue growth of 8.4% ex-fuel.”

“EBITDA growth in our transportation segment was led by our asset-light freight brokerage business, which continues to improve productivity through technology and the increasing tenure of our sales force,” he said – adding that for freight brokerage, last mile, expedited services and global forwarding all combined, XPO grew the organic net revenue margin by 280 basis points to 21.7%.

Finally, Jacobs said that in the logistics segment XPO realized “higher-than-expected EBITDA and operating income, led by our European logistics business,” which was boosted by new multi-year contracts with “world-class customers”, some of which use XPO’s new last mile network.


Source: Transport Intelligence, 29th February 2016

Author: Alessandro Pasetti


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