Q1 2021 XPO Logistics Inc Earnings Call
Welcome to the X P O logistics first quarter 2021 earnings conference call and webcast. My name is Melissa and I will be your operator for today's call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question. Please press star one on your telephone keypad. Please note. This conference is being recorded.
Before the call begins let me read a brief statement on behalf of the company regarding forward looking statements and the use of non-GAAP financial measures.
During this call the company will be making certain forward looking statements within the meaning of the optical securities laws, which by their nature involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those projected and the forward looking statements for instance, there can be no assurance that the company's planned spin off of vigilant.
Ex business will occur as currently contemplated or at all.
A discussion of factors that could cause actual results to differ materially is contained and the companys SEC filings.
Forward looking statements and the company's earnings release or made on this call are made only as of today and the company has no obligation to update any of these forward looking statements except to the extent required by law.
This call. The company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are complete and contained in the company's earnings release and and the related financial tables are on its website.
Yeah.
You can find a copy of the company's earnings release, which contains additional important information regarding forward looking statements and non-GAAP financial measures and the investors section of the company's website.
I'll now turn the call over to Brad Jacobs, Mr. Jacobs you may begin.
Thank you operator, and good morning, everybody. Thanks for joining our conference call with me today, and Greenwich are David <unk>, Our CFO, Matt Fassler, our Chief strategy Officer, and from London, Malcolm Wilson, our current CEO of ex fuel Europe and future CEO of the planned spin G X.
And as you saw we had a tremendous first quarter that beat expectations and gave us a very strong start to 2021 on.
On a year over year basis, our first quarter revenue was up 24% to $4 $8 billion, which is an all time high not just from a first quarter, but for any quarter.
Our revenue includes 22% growth from our transportation segment, where the truck brokerage market is white hot.
And the channel environment, just coming back strong.
And the logistics and our revenue growth was a hefty 27%.
Our logistics segment also had a great first quarter for sales with a number of large contract wins.
Companywide, we set new first quarter records for both net income and adjusted EBITDA.
Both of our segments generated robust EBITDA and the first quarter, leading to our third consecutive quarterly record.
Our $443 million of adjusted EBITDA with a year over year increase of 33% and.
Our first quarter adjusted EBITDA margin of nine 3% was up from the prior year by 70 basis points.
Technology and operational excellence were the two big drivers here.
And even with the gains we've been reporting we're confident that we're in the early innings of margin improvement.
On the back of our first quarter beat and considering the optimism we're hearing from our customers. We significantly raised our full year 2021, adjusted EBITDA guidance to a range of 1.8 to five to $1 87 $5 billion.
Our LCL business North America is on a solid upward trend.
Tonnage per day, and LCL was up three 7% and the quarter compared with a year ago and yield ex fuel was up four 2%.
Our LTM adjusted operating ratio ex real estate improved to a first quarter record of 84, 3%, which was 220 basis points better than a year ago.
And truck brokerage and the story is growth growth and more growth three months ago, We reported a record fourth quarter for our brokerage business and now we've driven results higher to top it with another record quarter.
Our loads per day, and brokerage were substantially better than the market.
Up year over year by 25%.
Revenue and brokerage was up 83%.
And net revenue was up 132%.
Our net revenue margin and brokerage was up 389 basis points to 18, 6%.
The big driver behind our brokerage performance as our technology and the productivity, we're getting from ex PL connect our digital platform.
Over the last five years, our technology enabled us to handle 41% more volume with just a 3% increase and sales and procurement head count.
And logistics and our growth is being driven by the big three tailwind of ecommerce.
Outsourcing and customer demand from warehouse automation.
I'm delighted to report that we recently won the largest contract and the history of our North American logistics business. It's also the largest win for our company overall at $1.8 billion of projected revenue through 2032.
This includes both and extension and expansion with a long standing customer.
Mac and we'll talk about some other recent wins and a minute, including three major brands debt, a total will be using over $1 billion of our logistics services over the next five years.
We're also continuing to make excellent progress on G. Ex Oh, the planned spin off of our logistics business.
We remain on track to complete the spin and the second half of the year.
And our goal is to have <unk> be investment grade from day, one followed by X P O.
Our strategy and our spin and address the consistent themes, we've heard from shareholders over the last year to simplify the company and reduce leverage.
With that I'll ask Malcolm to share some recent developments and our logistics business Malcolm.
Thank you Brian.
Demand for our logistics services is very strong due to a combination of secular tailwind and a cool positioning within this environment.
Three big Mega trends.
<unk> e-commerce, and where household and patient.
And the double digit revenue and EBITDA growth and our logistics.
Sourcing and being a consistent trend for years.
Celebrated as a result of the pandemic.
Large companies have become more aware and both are both the critical importance of supply chain continue with each other.
And the potential vulnerability of handling logistics.
And house.
And we collaborate strategically with customers to help and redesign their supply chains, and we give them greater visibility and flexibility from our technology.
The sustained rise and E. Commerce, we're seeing is a secular shift in consumer buying behavior.
We can all relate to day right now all the one times.
Signs of being compressed most notably in the diary.
Okay.
And what used to be one day logistics real estate is now down to one day all that.
Advanced automation and intelligent machines, a cost effective way to meet these expectations and.
And consumer and markets, where supply chains are becoming increasingly complex.
Investments in robotics, and advanced automation and delivering faster smarter.
Small for logistics processes.
Other cost for our customers and our company.
Well utilizing more and more robotic technology to deliver crucial improvements in speed and.
Joel accuracy safety and <unk>.
And what's your of employment and consistent and say Oh, probably from.
<unk>.
This gives us strong positioning as a large scale operator and industry innovator.
Moving on.
Chip customers see the strategically and deeply integrated solutions, we provide as mission critical.
And she is evident in the growing number.
And those patients.
And the first cool, but we had a number of important ways with some significant value attached to each of them.
As Rod mentioned one of these wins.
And he's seen strength.
We also won several large customer contracts and Mike sorry.
And development is the contract we just signed with Apple who is a major new customer for us.
We look and a massive distribution center, Iowa, and Indiana with over a million square feet of state of the art space for E Commerce fulfillment.
It would be direct to consumer distribution that uses advanced automation and.
And robo to personalized products before we ship them to consumers.
Two other examples a large customer waiting list and Europe asos and Waitrose.
Asos as a global online fashion retail and we've been sitting here trying to penetrate a recent agreement with and it's a part of contract further cement our position as the U K E.
Leader.
And you saw signs of renewed ours.
And Spencer and I did the relationship with our second Til will open next month.
Waitrose is a problem and you take food retailer that volume.
Good morning, and expertise in temperature control and that'd be and food distribution, We Inc.
And our first contract with Waitrose and amidst the COVID-19 last year and this year, they're entrusting us to rone and incremental distribution center.
These contracts demonstrate how blue chip customers trust, our reliability and bye.
Our ability to deliver innovation the great examples of tremendous potential for profitable growth, we're seeing and the logistics landscape in Europe and North America.
Although new business signings overall, there's a good balance between established customers seeking longer term contracts.
And first time customers line Council.
Only know yesterday.
We're executing on customer agreements with a combined volume more than $4 billion over the contract line.
These agreements also give us great visibility into future revenue and margin puts all of them and see no logistics business, which is planned to be spano and G zone.
All of the work streams required with the Spain and in good shape I'm running to schedule.
Importantly, we've been building the G X O C suite over the last month with strong internal appointments and external hires.
I want to mention bearish around.
It will be G ex <unk>, Chief Financial Officer, Barry She's a hands on and see Oh, who also think strategically about value creation. During his tenure as CFO. The Sapanski group. He led the multinational finance operation of one of turkeys largest publicly traded companies.
I'm also pleased to welcome Marc Mendota, who will be our chief investment officer.
And that's because being the number one ranked transport analyst and Europe for eight years in a row with an impressive track record of Citigroup.
Yeah. So it will be a high growth company and I'm pleased that we're making great progress and bringing a world class team together and preparation to lead that girl who.
And there will be more announcements to come.
No David reported the quarter.
Thanks, and I'll come and good morning, everyone today I'd like to discuss our first quarter results, our balance sheet and liquidity and our updated outlook for 2020 one.
And the first quarter, we generated revenue of $4 $8 billion and adjusted EBITDA of $443 million.
The revenue number reflects a year over year increase of more than 20% and <unk>.
Adjusted EBITDA is up more than 30% and both figures are higher than we expected at the beginning of the quarter.
Our record Q1, adjusted EBITDA reflects commercial momentum and powerful execution across our business units and a strong ongoing economic recovery.
As Brad mentioned revenue grew 24% year over year and the first quarter.
Our U K logistics acquisition contributed three points of revenue growth and foreign exchange contributed three points.
As a result, our organic revenue growth in the quarter was 18%.
Our revenue growth translated into even stronger adjusted EBITDA growth of 33% and.
Our EBITDA margin increased 70 basis points year over year.
We had limited COVID-19 impact on first quarter EBITDA last year, so our year over year growth. This year largely reflects our strong operational execution and favorable market dynamics.
Both of our segments made a strong contribution to our adjusted EBITDA growth.
Logistics adjusted EBITDA increased by 28% and the first quarter and transportation adjusted EBITDA was up 36%.
We continue to see robust consumer demand and a more modest rebound in industrial activity.
And as revenue increased we benefited from the operating leverage inherent in our business and the cost reduction actions, we took last year.
Weather also affected us in February, but the negative impact and the quarter was minimal.
And that will review our segment detail and a few minutes.
Our adjusted earnings were a dollar and 46 cents per diluted share in the quarter, which is more than double what they were last year.
We generated $173 million and cash flow cash flow from operations and the first quarter spent $140 million and gross capex and received $36 million of proceeds from asset sales.
As a result, we generated free cash flow of $69 million and the quarter.
Q1 free cash flow exceeded our expectation despite stronger than expected revenue that gave rise to a use of working capital for receivables in the period.
Maintaining strong liquidity continues to be a top priority for us as an organization.
Our cash balance at March 31 was $629 million.
This cash combined with available debt capacity under committed borrowing facilities gives us nearly $2 billion of liquidity at quarter end.
We redeemed our 6.5% senior notes due 2022 in January this reduced both our debt balance and our cash by $1 $2 billion.
We also refinanced our $2 billion term loan in March and lowering the average interest rate by three eight of a point.
We had no borrowings outstanding under our ABL facility at quarter end, and we have no significant debt maturities until September 2020 three.
Our net leverage at March 31 was 3.1 times LTM adjusted EBITDA.
And two and a half times the midpoint of our projected 2021 adjusted EBITDA.
Our free cash flow and 'twenty, and 'twenty and our EBITDA growth in 2020, one are helping us delever fairly swiftly.
Our steady progress on this metric is important and the context of our commitment to move both ex P. O N G ex out toward investment grade ratings.
Over the last several weeks, we've spoken with the rating agencies about G ex out.
And those discussions we've highlighted her gx and whose business model is based on contractual commitments and long term relationships with a diversified group of Blue chip customers.
These are attractive attributes from a credit perspective.
Our plan is for <unk> to be investment grade from day one.
We expect to have more details soon about precisely how much debt G X O will carry and how the proceeds paid over to X P. O remain co will be deployed.
Turning.
And to our outlook, we've updated our full year guidance to reflect our strong first quarter results as well as our expectation that the effects of COVID-19 on our business will continue to moderate in 2020 one.
All of our projections exclude impacts from our planned spin off of G ex out.
As Reade highlighted we now expect to generate 1.8 to $5 billion to $1.875 billion of adjusted EBITDA. This year with growth of 28% to 32% and our logistics segment and 30% to 34% and transportation.
Our outlook assumes a modest amount of ongoing COVID-19 related costs in Q2, and Q3 and intentionally lower year over year gains from L. T L real estate sales.
We expect that consumer demand will continue to be solid.
E Commerce will continue to grow.
Industrial demand will continue to recover and new business opportunities will continue to emerge.
In fact that is precisely what we've seen so far this year.
In the second quarter, we expect that our adjusted EBITDA will be and the mid twenty's as a percentage of our full year adjusted EBITDA, which is typical seasonality for us.
We expect continued strong margin performance and our L. T L business and about $5 million of gains from L. T L real estate sales versus $10 million in last year's second quarter.
Our year over year growth metrics, and Q2 will be extremely strong due to the significant pandemic impacts we experienced and the second quarter of 2020.
On the cash flow front, we've upped our estimate of full year free cash flow to a range of $650 million to $725 million. We've also upped our full year Capex estimates by $25 million and are now targeting roughly $675 million of gross capital expenditures and 500.
$25 million of net Capex.
These estimates could vary based on new business opportunities and our logistics segment.
Yes.
We currently expect D&A, excluding the amortization of acquisition related intangibles to be $625 million to $645 million.
Due to our opportunistic term loan refinancing in March we're now forecasting $270 million to $280 million of interest expense in 2021.
Which represents a $50 million year over year reduction.
And we continue to estimate that our effective tax rate will be and the 24% to 26% range.
As a result, and with roughly 113 million diluted common shares outstanding. This year, we're now projecting adjusted earnings of $5 90 to $6.50 per diluted share at.
At the midpoint this is year over year EPS growth of 109%.
And some are business has been firing on all cylinders and Q1, we generated stellar topline growth and even stronger bottom line growth. We grew our margins and the process and we've now delivered three straight quarterly records for adjusted EBITDA.
Our results not only reflect strong execution throughout our operations there.
They also underscore how our businesses are strategically well positioned to meet customers' needs and capture profitable growth opportunities and logistics L T L and brokerage.
We remain enthusiastic about our prospects as a leader and the markets, we serve and we're proceeding decisively toward the play and spin off of our logistics business with the wind at our back.
I'll now turn things over to Matt.
Thanks, David I'll review, the first quarter operating results starting with our transportation segment, we had a very strong quarter in North America and L. T. All driven by the recovery and the U S economy, and healthy pricing backdrop, and our ongoing progress improving our pricing and operating disciplines.
Our LTM revenue growth accelerated to seven 1% and revenue ex fuel grew by six 7% and he is where our strongest year on year growth rates and L. T. L. Since we acquired the business and 2015.
We also grew tonnage per day by three 7% year over year, which was a pick up from the fourth quarter of two one percentage points shipments per day rose two 4% accelerating like three one percentage points from the fourth quarter.
Tonnage improved and five of our six largest verticals, which together comprise over 80% of our volume.
Retail and consumer verticals remained stronger than industrial but trends and industrial continued to improve most notably late in the quarter.
Tonnage and shipment count both outperformed typical seasonality our weight per day, it ticked down by 10 basis points from Q4 outperforming the typical Q1 decline of 90 basis points.
Excluding fuel rose four 2% year over year, which was a sharp acceleration from the one 5% increase we posted in the fourth quarter revenue per shipment and excluding fuel grew five 5% improving from the three 8% growth, we had and the fourth quarter growth and revenue per day excluding.
Fuel accelerated to eight 4% up four seven percentage points from Q4.
Our L T L. Adjusted operating ratio of 82, 6% compared favorably to 83, 4% a year ago, excluding real estate gains our adjusted or improved to 84, 3%, which was 220 basis points better than the first quarter a year ago.
Our adjusted or ex real estate gains also improved sequentially by 20 basis points and adjusted operating income ex real estate increased by 23% year over year importantly, we're seeing ongoing improvements and productivity and I'll tell our load factor increased by two 3%.
Over a year and we reduced empty miles by 6% and we were four 8% more efficient and pickup and delivery than we were in Q1 last year aided by our ex P O Smart labor management tools.
And we're firmly on track to deliver at least $1 billion of adjusted EBITDA and LCL next year, driven by both revenue growth and continued improvement and our operating ratio.
Turning to truck brokerage, our north American truck brokerage business delivered another spectacular quarter on a year over year basis, we generated and 83% increased revenue and more than doubled net revenue with an increase of 132% loads per day increased by 25% once again sharp.
And we outpaced the market and net revenue margin rate increased by nearly 400 basis points to 18, 6%, we controlled costs, well and earnings growth and truck brokerage substantially outpaced the increase and net revenue Chuck.
Truckload capacity was quite tightened Q1, with a high load to truck ratio, our technology team and carrier network working together allowed us to find capacity for our customers I wanted to take a step back for a minute to last year's third quarter and brokerage and when we made the decision to invest and head count at a time and our competitor.
And we're pulling back and this may have seemed counterintuitive at the time given the environment as it was but we had a plan to be first out of the gate and the recovery and now it's paying off our new hires are ramping productivity significantly faster than in the past aided by X P O connect and over time as you heard from Brad earlier.
Our productivity and brokerage has increased dramatically.
Carrier and customer adoption of ex P. O connect continues to search we approached 400000 downloads of the platforms mobile App, and Q1, representing 30% growth quarter over quarter and tripling the cumulative number of downloads year over year and.
And the first quarter, we topped 81000 registered carrier accounts and X P. M connect up nearly 50% year over year and the number of customer accounts on the platform grew sequentially from the fourth quarter to the first quarter of 2021 by 16% while also securing volumes through API technology at a profit.
And the book clip.
Looking at our transportation segment overall year over year, we increased first quarter revenue by 22% and increased adjusted EBITDA by 36%, our adjusted EBITDA margin and the segment was 11, 5% compared with 10, 3% a year ago, we project, 30% to 34% growth and <unk>.
Full year, adjusted EBITDA, and the transportation segment, which is above our prior outlook of 24% to 29%.
Turning to our logistics segment, we increased revenue by 27% and the first quarter year over year organic revenue growth accelerated to 13% from 9% and the fourth quarter.
Major of our revenue growth reflected our U K acquisition and favorable FX conversion.
We saw exceptionally strong growth from our customers and the omni channel retail CPG and technology verticals. The holiday peak was not only and early peak it wasn't extended peak as well and our warehouse operations were running at a high velocity for our customers and consumer facing businesses. These sectors.
Commerce reverse logistics and consumer Tac continued to represent enormous from new revenue opportunities for us and Europe, our logistics business generated 15% organic growth, which underpinned the 38% year over year increase and our revenue and North American logistics, we grew revenue by 9% over last.
At year Labor is still tight, but we're managing it well we continue to see 5% to 7% productivity improvement with Sps smart our proprietary suite of intelligent analytics and labor management tools. This technology is rolled out and most of our north American warehouses and more than half of our European sites.
Globally, and logistics are adjusted EBITDA and the quarter was 28% higher than in Q1 last year and our adjusted EBITDA margin increased 10 basis points to eight 5% as David mentioned, we expect annual adjusted EBITDA growth and this segment, we expect it to grow 28% to 32% which is above our pre.
And our forecast of 24% to 29%.
We're pleased that the strong momentum we achieved and the first quarter continued through April the industrial rebound is helping our <unk> business with a lot more runway to the recovery the pricing environment remains helpful and it's showing up and our yield which is outperforming typical seasonality and brokerage capacity is still tight.
And the volume backdrop remains fantastic and logistics new contracts around the rise now from gave you a sense of just how exciting our growth prospects are and logistics. The operations, we acquired and the UK and Ireland are ramping up volumes as COVID-19 restrictions are lifted we're also seeing a resumption of more normal activity and Italy.
We're continuing to bring operations on line from new business wins, and the U S as well and the global tailwind from E. Commerce is creating demand for ex P. O direct our shared space distribution network in North America.
While we're happy that we've delivered a strong quarter. We're also focused on delivering sustainable results for the long term and increasingly we're collaborating with customers on ESG strategies. This smells with our own pursuit of environmental sustainability, social responsibility and good governance and our commitment to diversity.
Equity and inclusion we prioritize these parts of our culture because it is good for our employees and communities and because it helps make X P. O a great place to work when we use our expertise to further our ESG goals. It resonates with like minded customers who share these values within our company, we're tracking about 40 E S.
<unk> initiatives with the new scorecard that documents our progress the metrics are largely operational at 25% of the long term incentive comp for our senior exactly is tied to this scorecard and we have a number of initiatives underway to help our customers achieve greener supply chains for instance, we've had a massive rollout.
L a day lighting and our warehouses and we're constantly focused on reducing empty miles and our transportation businesses.
Our leader and alternative fuel vehicles and key European markets, where we have over 250 natural gas powered trucks, and our fleet across France, and UK and Spain, We've also invested and improving the sustainability of our packaging waste management and recycling.
Close with a few of the accolades we've received and the quarter.
Recently named a Forbes best company to work for it and Spain for the third straight year.
Intel recognized us with their supplier Achievement award for our COVID-19 response, and three ex P. O executives Archrock Chowdhry drew Wilkerson and Eric Caldwell were recognized by supply and demand chain Executive magazine for their accomplishments in the industry, so altogether and outstanding quarter for our transportation.
<unk> business, our logistics business and our progress on the spin with much more to come.
With that we'll take your questions and operator over to you.
Thank you if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question. Kim you May press star two if you'd like to remove your question from the Kim from participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line.
I have Tom <unk> with UBS. Please proceed with your question.
Yeah, good morning, and congratulations on the strong results.
Wanted to ask you a bit about pricing and kind of how you think about the the contour of that this year.
And I guess two components, one would be on L. T. L. Pricing, obviously, you saw a nice acceleration and first quarter. How do we think about where that can go to if it's 4% and first quarter can it be 67.
Percentage when you get to the second half of the year or is that is.
Is that asking for too much and I guess, the second question would well actually let me let me just leave that and then I'll come back on the second one.
Taught me on TL pricing environment is strong you commented on the acceleration that we noted in our yield and the first quarter versus the fourth quarter. Obviously, the market is tight and there's lots of demand for our capacity our price increases on contract renewals continue to move and the right direction was quarter over quarter month over month.
And into the second quarter. So that's a very helpful. Harbinger of the yield outlook for the rest of the year, which is a good one.
So then the second question would be on logistics I think it's quite it's quite evident on transport that theres a very.
Favorable dynamic supply demand is very tight and that's that's benefiting pricing. How does is there any impact and logistics pricing I know, it's a very different market are you seeing stronger pricing would.
Would you expect stronger margin performance and logistics contracts, you're signing now or are those markets.
And you know kind of just disconnected in terms of you know some of the tightness and pricing and transport and how that could affect you know, whether theres tightness or more pricing and logistics.
Thank you.
Tom one other things, we love about the logistics business is its consistency, that's evident and pricing and it's evident and the kind of financial results that were able to generate and a variety of backdrops and so we're able to manage our price movements very well and that business and you shouldn't expect to see any impact and logistics results.
Based on the movement that we're seeing and transportation markets today, obviously to the extent that they are indicators of a strong demand backdrop. That's good for the for the logistics business as it is for transportation the generally a constructive backdrop there as well.
Yes.
Okay, great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Hamzah Mazar with Jefferies. Please proceed with your question.
Hey, Good morning. My my question is on the logistics Jack So sorry, you know you've talked about.
Getting into double digit EBITDA margin could you just remind us what the big levers there are to get to to get there and your confidence level in and their timeframe.
Sure.
First of all labor productivity, we have our smart work force management platform and to drive 5% to 7% labor productivity and proud of them as we roll it out that rollout is still maturing and the U S and is really in the middle innings at most as you think about Europe. So there's lots of headway for us to make progress in terms of labor productivity.
And there's organic growth at existing sites, particularly when you think about our sites with exposure to E Commerce, which is our fastest growing area right now that will help us drive operating leverage there's of course, the acceleration of the rollout of automation and robotics, a huge part of our value proposition to our.
<unk>, there's tremendous new business opportunities, obviously, we seek out a lucrative business opportunity is and the incremental revenue helps us drive operating leverage as well finally ex P. O direct continues to season and continues to contribute to our profit outlook. So really I think those five drivers are going and going to be the key for our.
Operating leverage and logistics going forward.
Got it and just my follow up question I'll turn it over again just on logistics could you remind us how you think about the reoccurring revenue base in the logistics segment and I know customer retention is high but when you do lose a customer do they take that and the house do they go to a competitor.
And just give us a sense of the reoccurring revenue base and in that business.
And the renewal and retention rates and contract logistics are very strong.
Many of our largest customers have been with us for many many years, we've had multiples and renewal multiple renewals with them and we expect that to remain the general cadence of the business. There are some instances, where we part ways and.
And typically that that typically come to an arrangement and and then we move on but generally the retention and renewal dynamics are very powerful and our logistics franchise.
Great. Thank you so much.
Thank you. Our next question comes from the line of Brandon <unk> with Barclays. Please proceed with your question.
Hey, good morning, everyone and thanks for taking my question. So I know, we've talked about this a little bit and pass them from past calls, but it sounds like the split is coming along.
[noise] closer now and so can we just revisit the priorities for each business post split I think we're getting some more information from you guys here it sounds like investment grade balance sheets might be and the future as well. So can you talk to maybe the priorities from the capital side as well as you know maybe a resumption of the M&A.
Okay.
Sure Brandon and good morning.
So in terms of capital allocation, we're always looking for the best ROI from the cash that we generate from the business and our current focus to your earlier point, except you're waiting to spend which is going to create lots of value and.
And then paying down debt to become investment grade and then and obviously in parallel to that at all times is investing in Capex goes our priorities for capital.
Yeah.
Okay, and does M&A become a bigger piece and the store even ones separate.
You know accretive M&A and stock buybacks and each of those is really always and option. We're always aware of what's happening and the market will.
We will announce any moves after the fact and we're we're very highly disciplined obviously as we think about those opportunities.
Okay, and then a quick follow up on the margin question and logistics I think you guys brought on a pretty large portfolio of U K contracts. This quarter, we thought it was going to be potentially dilutive to margins, but it looks like you guys had pretty good performance. There. So can you speak to how that business has been integrated.
Yeah.
Yeah. Please allow me to just given up day talking about smelter and payer.
So are you trying to new business coming in has been a combination of and new customers. So we've had some really exciting new customers chrome and good.
Rail type of size contracts.
The established customers and brand new customers and also we brought state and in the quarter the acquisition and the tactical acquisition of the U K and and business and that has come with some real blue chip customers and just to remind you know not came with new vertical so intact.
Colm and food services and beverages, and we've seen very strong synergies coming from that project. We've also seen a lot of synergies coming from customers. The most of being a pent up demand in those verticals because we've seen a very large sales flow of new opportunities come and get it.
There was and lastly, really we've renewed and reviewed for you some of the existing agreements. So total suppose be margin accretive and I think that's really giving you back from that Youre describing.
I appreciate the feedback milk.
Thank you.
Thank you. Our next question comes from the line of Amit.
And <unk> with Deutsche Bank. Please proceed with your question.
Thanks, Good morning, everybody.
And I wanted to go back to the comment around the <unk> leverage.
And just how this will work.
I think the way I think the way these things have worked in the past.
Like spin co draws down new debt the proceeds from that debt or dividend and back to remain co, which then uses of proceeds to offset dilution.
Is that the right pathway and do you expect the dilution.
And remain core to largely be offset pro forma for the spin and <unk>.
Yeah.
Good morning, it's David the way Youre thinking about it is the the right way to think about it where we're confident that <unk> will be investment grade on day, one we haven't announced and precise capitalization plan, yet and we're still talking to the rating agencies.
And as you as you say the remainder of the debt will stay with ex P. O remain co and we wanted to drive a remain co to being investment grade.
Soon and from a process standpoint to the extent that we issue debt for Jack So.
Some or most of that cash would be dividend did up to X P. O to pay down remain co debt and so that will allow us to reduce the leverage in addition to that we generate a lot of cash and we're prioritizing the allocation of that cash to pay down debt and to me. What's really exciting is that if you look at the.
Q1 balance sheet for the combined company net leverage is at two and a half times, our current EBIT guidance for this year and that means that the aggregate amount of debt that needs to be allocated between the two companies is manageable and really positions us well for <unk> to be.
Investment grade on day, one and for ex P. A remain co to move rapidly to being investment grade.
Got it so it's not really and offsetting a dilution, but really a transfer.
The debt load from Gx from Mexico to Jack So and forgive me because of the recurring revenue stream and the asset intensity of Gx. So.
Pardon me, if I'm wrong enough and I'll move on to my follow up.
Okay.
Matt I think I think the operating leverage and the business will pick up and the second quarter, just given more growth coming from L. T. O. I think that's kind of a consolidated dynamic, but if I just look at logistics and I think this is this is kind of important as it relates to <unk>. So you know this is an asset light business I assume.
Most of the DNA is amortization of intangibles as opposed to you know.
Depreciation of the asset base, but if I look at if I look at the logistics business given that asset light and nature I guess rois and he is the best way to look at that business and so.
Is there any way you were malcolm or if somebody could talk to us about what these new contracts that they're bringing on their mungus, our underwriting from an ROIC perspective, and I guess you look at it on a project basis because of the contract nature of the business, but any help there in terms of what the ROIC C is being underwritten and in terms of what these new contracts.
Uh huh.
Sure you're absolutely right. We look at every project at the project level, we solved for pre tax and after tax ROIC and we look at the IRR. We look for a return on capital at the project level of at least 20% and approaching 30% over the life of the first call.
Track, we get paid back and more on the first contract assuming no renewals. Obviously, we have a very strong track record of generating renewals and we're extremely disciplined about the kind of new business, we take in and financial profile of the business that we bring and that's that's that's.
And critical to our success and contract logistics.
So one and on an allocated basis, you're saying the ROIC.
Logistics is 20% to 30% I don't know a fully allocated basis, it's 10% to 15%.
And well share more of those numbers with you as the form 10, it comes out but at the project level. That's what you tend to see it and obviously, there's some G&A et cetera that you layer on the we obviously think about all of the associated overhead and.
Anything that any incremental overhead as we consider bringing on a customer or a new project.
Okay. Thank you very much guys I appreciate it.
Yeah.
Thank you. Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, Good morning, I wanted to touch on the EBITDA guidance, and and maybe a little bit about seasonality.
I think <unk> is expected to kind of move back into the mid twenties range. Do you think is typical from a seasonal perspective, obviously, a strong outperformance and the first quarter. So I guess I just wanted to make sure I understood. Some of the moving parts in terms of cost maybe revenue growth. Obviously, the comps are currently challenging and sort of lead to go and from the significant outperformance from EBITDA.
Seasonality standpoint, and want you to maybe something that's a little bit more normal and and do you think that kind of last from the rest of the years and just some helpful color around the seasonality and the profit from the business.
Chris We had a really really good first quarter and a.
Terrific environment, we're going to have a very strong second quarter, we framed the seasonality for you. David did you talked about a mid twenty's as a as a share of the year, obviously, we expected and very good year as well, we talked about the EBITDA guidance for Europe for the company overall and for each of the businesses and we see obviously a very strong performer.
And the second quarter.
Good trends, both in transportation and logistics.
So nothing specific that's changing materially from <unk> about the business environment, or otherwise and maybe sort of changes the dynamic of seasonality.
Oh, no no particular changes obviously the year over year comps are strange this year because of the pandemic last year, but when we look at the year overall.
We delivered 33% EBITDA growth in the first quarter and that's right at the midpoint of what we're expecting for the year as a whole. So so that our I think there's a consistency there between our first quarter results and what we're expecting for the full year on a year over year base.
This is the comps will be easier and the second quarter because of the pandemic effects last year and will be tougher in the second in the second half.
Okay. Okay. That's helpful. I appreciate it and then you know if you guys could help maybe share you mentioned some of the leverage numbers on the EBITDA guidance as it stands right now and you've I think you've talked and the rating agencies recently.
So what does Inc.
That's been great look like for Jack So in terms of leverage and and maybe how do we think about that.
And that for both companies like gastric and any sort of guidance that you've gotten or helpful color would be interesting.
We're really still working through the details of that and we expect to have more details around that soon what I would emphasize is that we were confident at that Jack so.
It can be investment grade on day one.
And that would allow us to give us the flexibility to issue some debt and the gx oak and can support and still be investment grade and and dividend those funds across to X P O to reduce the amount of net leverage remaining at ex Po following the spin.
Okay, great. Thanks for the time I appreciate it.
Thank you.
Thank you. Our next question comes from the line of Todd Fowler with Keybanc capital markets. Please proceed with your question.
Great, Thanks, and good morning and.
The logistics pipeline sounds you know very healthy obviously I'm very strong right now and should we look out to the rest of the year also and we understand that there's some benefit on the comps from the acquired Kuehne and Nagel business, but how are you thinking about logistics revenue growth with where the pipeline is that basically when does the pipeline start to translate into revenue.
And maybe for the remainder of 'twenty, one and then some thoughts and kind of what you'd expect from a normalized top line growth rate and logistics beyond 'twenty one.
Sure. So the business that we spoke about today some of that comes online later this year more of a comes online in 2022 that said Theres, new business that we underwrote and and signed previous to today's which we've discussed and signed prior which is going to flow and obviously to revenue and the <unk>.
Second quarter third quarter, and et cetera. So there's a very nice consistent flow of revenue from new business, making its way into the into the into our logistics operations.
In terms of other long term cadence of logistics revenue, it's certainly at least the high single digit growth rate and as the algorithm that we've spoken about over time and I think that's a pretty good way to think about the long term revenue I'll go for contract logistics.
Okay, Great, Matt and then as a follow up obviously some advantage on the decisions you made on the brokerage side to add head count you're into the market you know the the volume growth. There is just exceptionally strong right now how do you think about the stickiness of some of that business I mean, once you're handling some of that volume is that more transactional debt.
If we start to see the market become more balanced at some point and the future that reverts back to a contracted you know are and asset based carrier.
How should we think about you know some and the success that you're having in the strong brokerage top line and volume growth that you've seen recently thanks.
Have a terrific customer base, we have terrific people and we have terrific technology and we deliver for those customers. During this very tight market.
We expect the strength of the franchise to continue to resonate through the cycle and really across the vagaries of any truck brokerage cycles, we feel exceptionally good.
About the durability of the franchise and the sustainability of strong results relative to the market and brokerage.
Thanks for the time.
Thank you.
Thank you. Our next question comes from the line and Scott Schneeberger with Oppenheimer and company. Please proceed with your question.
Thanks, very much I'm and ask you about last mile. It's a I know, it's small and it doesn't get into a lot of airtime anymore, but looks like a really strong quarter would love. If you could elaborate on that book and North America and didn't know Europe ex.
It was it was a terrific quarter for last mile and focusing on North America for a moment demand for heavy goods is still very very strong our revenue growth was 22% year over year and importantly, we're continuing to drive volume through our network of 85 last mile hubs, we're leveraging those facilities.
And their proximity to population centers around the U S recall that we're the leading outsource provider of last mile and a last mile logistics for heavy goods and the largest provider of from many of the leading retailers and E. Tailers.
In Europe. This business is at an earlier stage of its development, but the results there were outstanding stronger growth and general and last mile and Europe than we have and the U S. So very strong quarter for last mile and both reach and Scott.
Great. Thanks on that and then on X P O direct and contract logistics and I'm curious and congratulations on a really strong first quarter with these are with these wins how is ex P. O direct affected and how are you progressing towards your long term objectives there.
Ex fuel direct is doing really well and obviously outgrew the north American business nicely and it's a critical service for emerging and E. Commerce players direct to consumer players, who don't have their own distribution capacity and are seeking to build their connectivity with consumers, it's a very differentiated offering and the mall.
And it's a real nice element of the growth story that we have and contract logistics.
Thanks very much.
Thank you.
Thank you. Our next question comes from the line of Allison <unk> with Wells Fargo. Please proceed with your question.
Hi, Good morning. This is Michael D Matea on Bath Nelson.
Strong quarter and L. T. L. A just had a question on a stripe strategic priorities for the business.
And with remain co and post spin and all.
And as we look out over the next three to five years, what are realistic or for this business can be as it gets more attention cannot sustainably be 75 to 80 or business.
Yes.
And the strategic priority for a L T O.
Obviously, we could drive more EBITDA and and that's our that's our number one priority to simplify for you Oh, we have and initial goal for 2022 other.
At least $1 billion of adjusted or as I said in my earlier remarks, and Thats going to result from a combination of revenue and operating and operating leverage remember that and L. T. L. A we have a number of very high potential technology efforts underway, we're working at our dock labor optimization through xps.
Smart obviously, our route optimization impacting both line haul and PSD and you saw some of the impact of that manifest itself and the first quarter and then obviously the work we're doing on LCL pricing elasticity, optimizing our pricing as we get better and better data on the market and and use our own data more effectively and each.
These technology initiatives has lots of runway and it's going to help us drive our profitability going forward.
If it's higher IRR was good and where I'd say the sky's the limit, but I think you get my point, we have lots of opportunity to improve our operating ratio further from here and I'll tale.
It sounds great. Thank you.
Okay.
Thank you. Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.
Thank you operator, gentlemen, good morning, two quick questions one on the L. T. L front that seems to be a little bit more weighted towards the industrial manufacturing side of the economy. That's that's coming back, but it's still slower than the consumer how should we think about tonnage growth as we move into the back half of the year and and early 'twenty two.
Obviously, Jason tonnage growth in the second quarter, and it's Gonna look amazing.
And I think about our prepared but the good a good story here. We obviously just finished April side, a fresh look at the numbers.
The March the April weight per day compared to March weight per day relative to typical seasonality was slightly better. So it's not just easier comps and theres also intrinsic underlying acceleration.
And that <unk> business, so a very very strong tonnage growth and the second quarter and healthy tonnage growth, we think and the second half of the year as well, obviously, the comparisons and normalize with debt, but we have a very good outlook from tonnage okay.
That's good color I Wonder also switch onto logistics side, and how we should think about ex P. O sort of returns as they open up more and more of sort of these modern facilities that are that feature more and more robotics.
How does the margin profile on a new facility like that compared to a more legacy facility that doesn't use that type of technology.
Every project is different and as I said and the answer to an earlier question. We underwrite every project considering the capital that we deploy.
The duration of the contract and all of those considerations and whatever the automation is whatever the robotic component and we still have the same financial framework for evaluating the projects. So we underwrite a project if it's promising for our customer and financial and promising for us and for our.
Elders and and and we work with every proposal to ensure that it will deliver on that potential regardless of the amount of automation and technology. Just so happens we have lots of very compelling opportunities to introduce advanced automation and robotics. It's one of the things that our customers are looking to us for its one of the big dry.
Rivers of outsourcing and contract logistics and ties and very well, obviously, the ecommerce and omni channel retail. So all of those things are really converging and and obviously, where we're considering that and as we underwrite our financial proposition and keep in mind and automation becomes more and more cost effective over time and the lead we have and implement.
And this automation and helps differentiate us from the rest of the marketplace growth and delivering for customers and and delivering the associated financials for shareholders. So so I guess the best way to think about it is you know the contracts are done on a on a contract by contract basis, and and you pretty much put and good returns to make sure that Oh.
And you're covering your investments, but that the technology that you're employing in the marketplace is going to help you win more and more awards as we go forward.
You nailed it.
Alright, perfect. Thanks, guys appreciate it.
Thank you.
Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to Mr. Jacobs for any final comments and thank.
Thank you operator, so let me conclude by highlighting and LPL, we improve the operating ratio by 220 basis points and.
Brokerage, we grew loans by 25% and net revenue by 132%.
And logistics, we signed a bunch of whales massive contracts with premier customers, both here and the United States and in Europe, each worth hundreds of millions of dollars over the life of the contract one worth significantly more than that.
And and logistics, we're benefiting from three powerful growth drivers outsourcing warehouse automation and ecommerce and finally based on the Q1 beat and the strength. We're seeing in April we raised guidance significantly for the full year, we raised the new low and above the prior high and so I'd like to thank the team none of these and.
Complishments were done by any one specific person as always the team so ex the Oh good job. Thank you.
And even 90 days.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.