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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the XPO Logistics First Quarter 2019 Earnings Conference Call and webcast. My name is Rob, and I'll 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. [Operator Instructions] Please note that 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 may be making certain forward-looking statements within the meaning of applicable 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 in the forward-looking statements.
A discussion of factors that could cause actual results to differ materially is contained in the Company's SEC filings. The forward-looking statements in 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.
During 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 contained in the Company's earnings release and the related financial tables.
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 in the Investors section of the Company's website.
I will now turn the call over to Brad Jacobs, Mr. Jacobs, you may begin.
Thank you, operator, and good morning, everyone. Thanks for joining our call. With me in Greenwich are Matt Fassler, our Chief Strategy Officer and Tavio Headley, our Senior Director of Investor Relations.
As you saw yesterday, we outperformed on our two key metrics. We delivered a solid beat on adjusted EBITDA in the quarter and even more so on free cash flow. Adjusted EBITDA at $343 million was a first quarter record for us. It was up 3.9% year-over-year on organic revenue growth of 2.3%. Notably this growth was after we absorbed a significant loss of business from our largest customer.
In freight brokerage, we grew net revenue by 9.5% and increased net revenue margin by 420 basis points. We're leveraging XPO Connect, our digital freight marketplace, to source capacity at lower rates and due to automation we're producing greater results with fewer people.
The number of U.S. carriers on XPO Connect has shot up to more than 18,000, up from zero a year ago. We had as many downloads on our XPO Connect platform in the first quarter as we did in all of 2018. And we're in the process of rolling out XPO Connect in Europe and in North America Last Mile.
In LTL, we accelerated yield improvement. In the first quarter, year-over-year yield growth was 3%. That's almost triple the 1.1% yield growth we reported in the fourth quarter of 2018. We also generated our best quarter adjusted operating ratio in LTL in 20 years. We've nearly doubled EBITDA in LTL since we bought the operation in 2015.
This year we're investing in a whole raft of technology tools to further enhance network profitability and the customer experience in LTL. We delivered a strong quarter in our logistics segment as well, generating year-over-year growth of 3.2% or organic revenue growth of 8.1%, excluding the impact of FX.
We benefited from the record number of contracts we started up throughout 2018. Companywide, we closed a record $1.1 billion of new business in the quarter that was up 15% year-over-year and this is an acceleration from the 6% year-over-year growth we reported in the fourth quarter.
And our global sales pipeline crossed the $4 billion mark for the first time. Last week, we issued our first sustainability report. It contains a slew of insights into our commitment to corporate responsibility. The report can be found on our website and I strongly recommend reading it.
As you saw in the release, we reaffirmed our 2019 outlook. We're off to a solid start and as I said in my annual shareholder letter, we believe we're more capable of creating significant shareholder value today than at any time in our history. With that, I'll ask Matt to review the numbers in more detail.
Thanks Brad. I'd like to walk you through the numbers, the backdrop and our strategic focus by business unit. I'll start with our transportation segment where we delivered solid profit margin improvement on 4% lower revenue, a declining revenue from our largest customer weighed on this number by about 300 basis points, especially in freight brokerage and FX had a 230 basis points impact.
Adjusted EBITDA from transportation was flattish. However, our adjusted EBITDA margin rose by about 30 basis points to 9.9% from 9.6%, reflecting higher profitability in brokerage, intermodal and managed transportation and cost discipline across the organization.
In freight brokerage as Brad mentioned, our net revenue increased 9.5% and our net revenue margin rose sharply. Our top line revenue declined 13% as we cycled our toughest comparison of the year, a 30% increase in Q1 of 2018, but the latest advancements in our out algorithmic platform helped us to produce optimal beds and price intelligently. Intermodal showed the strongest revenue growth of all of our North American transportation businesses and sharp margin improvement as well.
Moving on to North American LTL. Revenue per hundredweight, excluding fuel rose 3%, reflecting the success of our pricing initiatives, including good traction from our GRI increase. We also achieved a 3.7% rate increase with contract renewals. Our LTL tonnage declined 2% for the quarter but improved from that trend in March, despite a delayed start to the ag season.
Moving on to our last mile business, revenue declined 6% year-over-year as we wound down our postal injection business as the quarter progressed. Last mile revenue outside of postal injection rose slightly. We improved our net revenue margin in this business to the highest levels we've delivered since entering last mile in 2013. And we've made excellent progress driving forward momentum. We had our highest ever quarterly new business wins in last mile, double the prior peak.
Also, we rolled out XPO Connect to last mile. We now provide carriers automatic route planning and consumers can request personalized alerts, schedule or reschedule delivery times electronically, use augmented reality tools to visualize how they will place items inside their homes and track their orders in real-time using our web tools or Google Home, Amazon Echo or Google Search.
Our European transportation business generated revenue growth of 0.6%, organic growth was 6.3%, with the difference driven by FX. In France, our largest market in Europe, GDP growth has been modest. The operating environment there is still volatile, including strife to the periodically disrupted commercial activity. On the plus side, our UK operations posted solid growth and significant market share gains.
Turning to logistics, we reported a quarter of strong organic growth, segment revenue rose 3% globally with organic growth up 8%. Adjusted EBITDA rose 1% to $113 million. In North America, our 11% revenue growth logistics reflects ongoing strength in consumer packaged goods, food and beverage and aerospace, margins in North America held steady year-on-year.
We expect a scaled rollout of robotics for both new launches and existing relationships to expand our contract logistics margins over time. We're implementing these for select customers in new startups and existing operations. In Europe, logistics revenue declined 1%, with organic growth of 6.6%. We're continuing to see strong consumer-oriented demand for e-fulfillment in Europe, punctuated by stellar performance from our e-commerce franchise.
Addressing a few corporate items, we have raised or refinanced over $3 billion in debt from public and private investors since December 2018 to improve interest rates and other terms, while extending the company's maturity profile. Interest expense rose to $71 million from $59 million, reflecting our recent debt issuances. Our GAAP effective tax rate was 27% versus 0% a year ago.
Our tax rate and our adjusted net income calculation was 28%, consistent with our annual guidance range versus 6% a year ago. In the first quarter of 2018, our tax rate was lower based on equity compensation that did not repeat this year. Our weighted average diluted share count declined to $117 million from $137 million in the fourth quarter.
This primarily reflects our share repurchase activity. In the first quarter, we completed the $1 billion buyback authorized in December of 2018 and commenced the $1.5 billion buyback authorized this past February. All-in, we have bought back 35.2 million shares at an average price of $53.42 for a total expenditure of $1.9 billion. Our buyback should prove nicely accretive for the year.
Cash flow from operations in the quarter was the use of $96 million and free cash flow was also a use of $96 million better than expected. Our net CapEx was $71 million, down from $132 million in the prior year. This included gross CapEx of $118 million versus $142 million a year ago and sales of property and equipment of $47 million versus $10 million.
Looking at working capital, favorable trends and collections also helped our free cash flow. On a year-over-year basis, the pro forma contribution to cash flow from receivables sold during the quarter was $55 million. While on a sequential basis, the contribution was $111 million less than Q4 2018.
Moving on to our full year outlook, we're pleased to reaffirm guidance of adjusted EBITDA of $1.65 billion to $1.725 billion, which represents 6% to 10% growth over 2018. For the full year, we expect free cash flow in the range of $525 million to $625 million, with higher net CapEx and higher cash taxes in Q2. We expect free cash flow for the first half to look much like the first half of 2018.
We are optimistic about our record new business wins and pipeline. We're energized by our innovation and we should see benefits from our internal growth initiatives in the back half of the year.
With that, I'll turn it back to the operator and we'll take your questions.
Thank you. We’ll now be conducting the question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Hey, thanks. Good morning, guys.
Good morning.
Let’s start on the LTL side, just kind of curious if you could run through, if there's a gain in the quarter, I want to understand sort of where that falls, is that in the LTL business. And I know you had some weather impacts there, but it does seem like there may be the core profit of that business was down on a year-over-year. I was hoping you could help walk us through sort of what was going on in the first quarter and what do you think happens from here?
Good morning, Chris. It's Matt. We did experience a gain – we did book a gain from sales of real estate, a substantial part of that emanated from LTL. As you look at LTL, we're very happy with our yield growth of 3%, that's versus 1% in the prior quarter. We are investing as we roll out the newest generation of our tech tools, we expect those to enhance labor productivity, to enhance P&D efficiency to help our line-haul. And we'd expect to drive gains from this innovation over the course of the year.
The weather hit us as well, it impacts top line and people still come to work. So we delever there on the expense line too. Our business improved in March, sales wise and profit wise. That continued into April, when our real trends were similar, perhaps slightly better than what we saw in Q1. We expect – we're running LTL for EBITDA not just OR, but we do think we can generate improvement in OR year-on-year in the second quarter.
Okay. And trends in April would suggest that that is on track?
Yes.
Okay. Okay. That's helpful. And then, Brad, wanted to get a sense from you from a big picture standpoint about capital allocation, obviously, you guys had been aggressive with the buyback. We're seeing that impact on the share count. I don't know if anything's really changed since the last time we talked in this forum about how you see value in the market and what you may be have capacity to do with the balance sheet where it stands today? What sort of – what's the take focusing on XPO buying the stock, thinking outside of the company, other opportunities out there. What are your thoughts now?
We think about this all the time, Chris. It's a good problem to have that we're throwing off oodles of cash flow. And we have a question of how are we going to apply that cash flow. And we have several buckets and we're constantly comparing one bucket to the other. One would be M&A and other would be paying down debt and other would be CapEx and other would be stock buyback. And we'll just keep monitoring all of those four choices as we go along and do whatever makes the most sense from a return on capital point of view.
But no clear message this morning about what you see more value in, there's still no more value in the stock right now?
I didn't say that. I say that we're going to continue to monitor the return on capital that we would get from M&A versus the stock versus CapEx and versus just paying down debt. And we will continually look at that and we'll make decisions that make sense at that time.
Okay, all right. Thank you for the time.
You're welcome.
The question is from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Thanks operator. Hi Brad, Matt. Appreciate the question. So I guess I just want to push back a little bit on the LTL performance, because last year, you guys invested a lot in kind of high intensity salespeople or account managers, strategic account managers, I think you call them. And here we are kind of 12 months later or less than that. And there was a 200 basis point year-on-year degradation in the LTL margins. When all the other non-unionized comps had the same weather issues and are showing year-on-year improvement.
So you've had kind of this long-term framework of 100 to 200 basis points of LTL margin improvement. Is that still intact for this year? Do you expect every quarter for the next three quarters to actually be better than that to catch up from the underlying performance in the first quarter?
Several good points in there, I'll address each of them. One is, in LTL, you can look at LTL or any business for that matter, including real estate sales or not including real estate sales or including equipment sales or not including equipment sales. We look at it as that's an ongoing part of our business, sometimes as a good guy, sometimes as a bad guy, sometimes as favorable to us and a gain, sometimes we sell stuff and it's a loss. And it is what it is and just all comes out in the wash in the end.
So we don't look at it internally the way you described the margin. We look at it that our margin improved and our OR was a record in – the best first quarter OR in 20 years, 87.6% and we feel really good about that. In terms of LTL as a whole big picture, we really like what we've done with LTL, we've nearly doubled the EBITDA since we bought it from Con-way in 2015. It was doing, if you take out the warehouse part of the business, the Menlo business, the Con-way multimodal and just look at the LTL business itself, it was doing 300 something million dollars in EBITDA and today it is doing 700 something million dollars in EBITDA.
So it's a very, very, very big improvement and big success story. You are right. However, the first quarter had challenges to it, the biggest one of which was weather, and that didn’t just hit us, it hit other people as well. Nevertheless, I like the progress we're making on yield a lot. I like the fact that we had 3% yield improvement in the first quarter and only 1.1% improvement in the fourth quarter, it’s a nice acceleration on yield. And I liked the fact that the GRI that we put out in January of 5.9% has stuck and over 90% has impacted revenues. That's a really healthy pricing environment from our perspective.
I'm a little disappointed that our price increases on contract renewals were 3.7%, even though 3.7% is nice. It's down. It's down from 4.9% in the fourth quarter so there's some deceleration on the contract renewals and we're going to have to watch that. But overall, rates are up and we actually have some catch-up to do. Our competitors have been raising rates faster than what we have and we've been a little behind on that one. So a little catch up to do on that.
Now another thing I mentioned about LTL, Amit and talking about the big picture is LTL is an amazing portal into XPO for our large accounts. If you look at our top 25 LTL accounts or 25 biggest LTL customers, they use on average six different XPO services, so five lines of business in addition to LTL. So they're very big collateral benefit from our being in LTL business and having a broad range of customers.
The final point that you mentioned was about, we hired a bunch of sales people last year and where's the results from that? I liked the results. I think the results are, the fact that we've got a better OR, the fact that we've been able to get yield improvement at a higher rate than we had in the fourth quarter. These are real positive things. When you hire hundreds of people and put them into sales force, they need training, they need time and we're in the right direction on that. We’re not where we want to be yet, but we are in the right direction there.
And then I think you also mentioned something about OR improvement. I want to make this clear, we don't myopically run the business, any business, including LTL, just for operating ratio, just for margin. We run it for improvement year-over-year on EBITDA. That's our main metric that we're looking at. And we're looking at return on capital. More often than not, improving margin by taking out cost, by growing revenue more than costs helps with that, it gives us better return on capital, it gives us more EBITDA going forward, but not always.
Sometimes, for instance in LTL, you can see a little margin degradation by taking on business that matches your network perfectly but doesn't have as good OR but adds to the overall fluidity of the network and increases the actual amount of the profit. So I can't promise you that every single quarter we're going to see improvement in OR because we're not managing the business specifically to that target. We very well may, but that's not the main target that internally we look at. Does that answer all your questions, Amit?
Okay. That answers all the parts of my first question. I guess my follow-up, if I could.
Don’t get greedy, Amit but go ahead. What's your next question?
I'm not. I'm not getting greedy. I think I just wanted you to talk about your ability to, I guess, backfill some of the loss business earlier this year. I mean, obviously the new business wins were very strong, over $1 billion. I was wondering if you could parse that out between transportation and logistics so we can just get a sense of how much is maybe transactional that's going to replace the lost business and maybe how much is stickier kind of contract logistics business. Any kind of color there on your ability to kind of reallocate or refocus resources that were dedicated to that account to other parts of the business?
Okay. Well, I'm certainly not happy that we lost $600 million a business. It's never a good thing. I am happy that our sales force has refocused, it has been reinvigorated from that and they delivered, we had a record new business pipeline. We had – we crossed the $4 billion threshold for the very first time ever in the company, $4.1 billion in fact, crossed it healthily, so a big improvement. Our pipeline is up 13% year-over-year. It was a nice sign. And the actual closing of business in the first quarter was rock solid at $1.1 billion, up 15% year-over-year.
Now the fact that it's up 15% year-over-year in and of itself is a good point. But what's even more interesting point is the acceleration from the fourth quarter. So the fourth quarter we had good new business wins and it was up 6% year-over-year. So the rate of growth in the first quarter is 2.5 times what it was in the fourth quarter. So I feel very proud of what the sales force supported by great operations has been able to immediately generate in terms of replacing the lost revenue. But we have lost hundreds of millions of revenue. We still have wood to chop to get all that back.
With respect to the part of your question about where is all this new business coming from? It's all over the place. It's in Europe, it's the United States, it's in every business line. It's spread throughout. The biggest parts of those would be LTL, managed trans and brokerage for that matter too. Last mile as Matt mentioned in his opening, last mile also has got a rebound too. So what you're seeing is places where we're challenged, you're seeing the resiliency of XPO, you’re seeing the strength of XPO rising to the occasion when we have an incoming missile to diffuse it and move on.
Okay. I appreciate the question and thank you very much.
Thank you.
The next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your question.
Thanks. Good morning. I'm going to have to ask another couple of questions on LTL. Just in terms of your earlier pricing comments, have you seen any pricing competition on the margin? I think one of your peers had talked about that last week. And then in terms of the weight per shipment, it looks like it declined for the first time in a number of quarters. So curious if that was weather driven or a function of looser truckload or is it reflective of a shift in strategy in terms of the freight that you guys are targeting?
Thanks for the questions, Allison. On the weight per shipment, it's a bit lighter in Q2. It was down like 1-ish percentage, 1.2%. That's strictly due to mix moving away from the heavier freight like industrial or chem or ag or manufacturing and auto and getting a higher mix of lighter freight like retail, e-com, CPG, food and beverage. I wouldn't read a whole lot into it. That could go the other way in the next quarter. It could continue in that way. I don't think that's a big factor in what we're doing there. It's a little bit random. In terms of the yield and what we're seeing out in the marketplace, we did hear about those comments and because it came from a very good competitor who's very plugged in, we take them very seriously. At the same time, we're not seeing that internally in our business and that's shown by the numbers.
Our yield was up 3% in the quarter and that's about 3x as much improved as it was in the fourth quarter. And in the second quarter our yield improvement is trending actually a little bit more than 3%. So we would characterize the pricing environment in our market that we're dealing with as a healthy one. And the only one thing that I'm slightly concerned about is that, that price increases on the renewals are only “3.7%”. But still 3.7% is good enough.
Okay. And then in terms of the cash flow, should we be anticipating any further deferred purchase price receivables throughout the balance of the year? And Matt, maybe this is one for you, but could you help us think through the timing of the receivables factoring, how that will flow-through for the remaining three quarters? Thank you, guys.
Sure, Allison. So year-on-year, factoring contributed to cash flow by about $55 million. And consistent with the color that we gave as we entered the year by the time we finished the year, we would expect that contribution to be somewhere between $125 million and $150 million. The DPP accounting convention is just another way we ultimately bring the cash onto the balance sheet from the sale of receivables. That can move around a little bit. We don't have a forecast for it, but something like the level that you saw this quarter is most likely what you'll see for the next quarter or two on the cash flow statement.
Okay. So we should see another roughly $70 million in the next – each of the next two quarters. Is that what you're saying?
It's a number that's tough to forecast inter-quarter but directionally, that's a decent sense of where it will be.
Okay. All right. Thank you.
The next question is from the line of Brandon Oglenski with Barclays. Please proceed with your question.
Hey good morning, everyone and thanks for letting me in the call. Brad or Matt, can you talk about the pipeline? I think you said it's over $1 billion of new business in this quarter. But if I'm not mistaken, I think that's like a gross number. So for sure, there's going to be contracts that don't renew. So how do we put that in context of business that you're not getting back?
That's a gross number and that $1.1 billion of new business in Q1, we do expect that to translate for the most part into revenue. You're right. Customers plans change. Sometimes they get lower, sometimes they get higher, but that's a good approximation of what it will capitalize into.
And I guess Brad, over a what period of time, I mean, are these multiyear contracts? Or is that like a four or 12 month view that we've just signed up $1 billion of new revenue?
It's a whole range. So in truck brokerage, sometimes you sign up a contact and the next day you're up and running. In supply chain, we may negotiate a contract – a logistics contract and it may be 18 months before we see $1 coming in. So it's a big range in terms of immediately or later, depending on which business unit it is. But that all plays itself out because over the years, every quarter we're always signing up new business and getting a layering in effect that accordions over the quarters and over the years.
Okay. Thank you for that. And then on logistics, can you talk to the FX impact on the quarter? I'm assuming the revenue impact would be a similar impact on reported earnings? And then in North America, if I'm not mistaken, I think Boeing could be a customer for you guys. So can you talk about the aerospace? And is there any near-term risk there with the 737 delays?
I'll take the Boeing question and Matt can take FX. That is correct. Boeing is a top-20 customer for us. It's a long, long-term customer for us. It's a great customer. They think we're a great vendor because they keep giving us awards, you can look it up on their website, and we're proud of those awards, and it's hard to get those awards at Boeing, there's a lot of competition. The issues they've got with their various products have not affected us for the time being.
We're going to watch it. We're going to see how it develops and it could potentially in the future, but it wouldn't be material to our overall results. It might affect that particular contract or that particular account, but in terms of our whole company, it's not enough money to move the needle.
And briefly on the FX part of your question. So we do have heavy – a sizable European contract logistics business. We do hedge FX. We hedge primarily for EBITDA, not for revenue. So typically we blunt most of the impact of EBITDA – most of the impact of FX on EBITDA. So there could have been a little bit of flow-through from FX pressure into EBITDA but not to the extent that you saw to revenue.
Brandon, I'd add also on Boeing. I think they've got a bum rap in the press. We do a lot of QBRs with lots of customers. I can't think of a single customer who spends more time on safety and quality and Lean Six Sigma than Boeing does in the quarterly reviews before we even start looking at the financial numbers. So I don't know the company that's got a higher emphasis on safety than Boeing.
Thank you.
Thank you. The next question is from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks, good morning, guys. If I can follow up on the backlog, on the pipeline question. I think hitting your new record in 1Q was pretty impressive just given the current macro environment, especially in Europe. Can you just give us a little more color on kind of what's some of the new pieces of business that you're pursuing that went into that backlog? Or are these a few large chunks of business that maybe you now have the ability to take on given the departure of a larger customer? And kind of how do we think of that pipeline building in the next couple of quarters? Is this big jump like a one-off? Or do you think there's like more opportunity that is out there?
There is more opportunity because we're operating in $1 trillion addressable market. We have less than 2% of that market. So regardless of what's going on externally, if we do our job right and we keep our service levels high and we have an invigorated sales force, we should be able to grow the business, we should be able to take the market share and take advantage of the fact that we're a leader in all the different business lines that we have and that we've got a great cross-selling going on too.
Look at the SAMs, our strategic account managers, look at the amazing job they've done here in the United States, where now we've got 90 of our top 100 customers using two or more of our services and 55 of our top 100 customers using five or more of our services. Both those numbers would be zero or one three years ago, not two and five.
If you look at the tenure for our SAMs. We've layered our SAMs, our strategic account managers, in over the last few years, and now they've built up great familiarity with all our service offerings and able to develop the customers. So I'm optimistic about that. That single point of contact model for the larger customers, particularly the global customers, very much resonates with those big customers.
I'd also talk to you about our customer concentration. Our customer concentration, it was too much. We made a mistake letting one customer get $900 million of business with us. It's just too much. It's too much concentration. Previously, if you looked at our top five customers, it was about 11% of revenue and then the biggest one was a little more than half of that. So it was just too much concentration. Going forward, we're going to be much more diversified. Our top five customers this year should be something around 7% of revenue and no customer will be more than 2% of revenue.
With respect to the part of your question about are we seeing more business with small and medium-sized companies or are we seeing it more with large customers, it depends which business line. So in our LTL, what we call our local account are booming, and we're seeing enormous growth in that, and that's something if you look over the last several years, you've seen a big shift in the percent that we have with those smaller customers going up to where it is right now.
So that will continue in LTL. We'll also get more national account business, but there's more growth in those smaller accounts. On the other end of the spectrum, if you look at our contract logistics business, I don't think we have any small customers, they're all large customers, mostly Fortune 200 and Global 500 customers. So there the business is going to be – going to continue with large blue-chip customers.
Got it. That's really helpful color. And just a follow up on the truck brokerage business. We have seen a lot of change in that business in the last few months. First, your largest customer pulling a bunch of revenue there. There's been reports recently of Amazon kind of going live with their operation, a bunch of other news items for the new digital brokers. I'm wondering if any of these changes have fundamentally transformed your view on that space?
In the past you've been pretty open about the need to again transform and keep up with Silicon Valley when it came to their capabilities and tech spend. Again, just given some of the – maybe a little bit of an arms race going on there, do you feel like you need to change your approach of truck brokerage at all?
We're always changing our approach in all of our businesses, not just freight brokerage. We're constantly reinventing ourselves. We're constantly thinking what's going to be next, what's this business going to look like in five years and 10 years and 20 years and getting ahead of the curve.
And the main way we get ahead of the curve is technology and applying technology and automation in every single part of our business, including freight brokerage, which your question was about. And apart from Freight Optimizer, which is our basic TMS, the introduction of XPO Connect has been revolutionary for us in freight brokerage. A year ago, we had almost no business being done electronically. We didn't have that app rolled out yet. We had zero XPO Connect downloads a year ago. We had 18,000 downloads now. We had more downloads in this first quarter of this year than we had in all of last year.
So all the new technology we're putting in to source capacity better, to buy below the market, to buy very competitively, to pass along a lot of those savings to our customers, to use advanced algorithms to assess the market-clearing levels, to get our pricing just Goldilocks right so it's not so high that we're losing business, but it's not so low that we're losing money on the table, just a fair price.
I think we've made great, great strides in that and the progress going forward is just going to continue, it mushrooming. If you look at that digital platform we've got, we have a user retention rate of about 80%, which is significantly high for that kind of a product. So the market has spoken. XPO Connect is winning, and that's why we rolled it, not just in freight brokerage, but rolled it into last mile, now we're rolling it out and in all of European transportation.
Now you also mentioned about new entrants into freight brokerage. We don't have any proprietary inside look at that. We don't know anything other than what's been in the media.
Very good. Thank you.
Thank you.
The next question is from the line of Ari Rosa with Bank of America. Please go ahead.
Hey good morning. So Brad, I wanted to circle back on this LTL question. I think at one point you'd put out a target of that business reaching $1 billion in EBITDA over, I think, you had said maybe a three to five year time horizon. Just wanted to get a sense of to what extent you think that's still achievable.
And then within that, maybe you could address this question, which is when you look at a lot of these LTL carriers who have other lines of business and talk about cross-selling between those other lines of business, a lot of the time you'll see some margin degradation as a result of that because maybe they use their LTL business to subsidize those other areas.
Maybe you could address the extent to which that may or may not be a concern at LTL? And if that presents any kind of barrier to moving towards a low 80s type of operating ratio or getting to that $1 billion EBITDA target?
Okay, great questions. Yes, we are fully on track to achieve $1 billion of EBITDA in LTL in the next few years. EBITDA is going to go up every year in LTL and it's going to throw off a boatload of cash as well. It's a winning model. It's got a great service metrics, got a great installed customer base. It's functioning. It's functioning and it's going to keep growing and expanding, and we will hit that $1 billion EBITDA sooner than you may think.
In terms of pricing, we do not do loss leading. We do not do bundling where we're losing money on something and making it back in something else. That's a strategy. That's not our strategy though. Our strategy is we look at each service line and we want to make a fair profit as is customary normal in that.
And if we can bundle things together with fair market prices on all aspects and we do that, but generally speaking, that's not the direction we go in. We go more in the pure cross sell without discounting on price. Now where we are bundling, so to speak, LTL is with Last Mile and with supply chain in our XPO Direct concept.
So in XPO Direct that is something that is sharing space or sharing our distribution network space with our customers, serving omni-channels, serving e-com retail manufacturing. And we really didn't start full national network operations until January of this year.
And that's another part of the business where you see big growth, big top line growth, very significant increases in the weekly shipment volumes. And we continue to rapidly onboard a backlog of great blue-chip customers, some of whom are LTL customers into that XPO Direct concept.
And that's a place that you'll see LTL integrated with the rest of the organization through XPO Direct more than bundling at a loss.
Great. That's helpful color. And then on my second question, just wanted to touch on the capital structure a bit and return, I think we talked about it earlier, but by my calculation, you guys are now at roughly three times net debt-to-EBITDA. And I think you had previously talked about the target range being somewhere in the three to four times area.
So just wanted to see, do you think there's capacity to further lever-up, and maybe M&A comes back on the table or do you see kind of buybacks is continuing to be an attractive opportunity? I think you have roughly $600 million remaining on your authorization. Is that something we should look maybe to continue and maybe the means to continue that is through a little bit further leverage?
Well, we could lever up. We certainly could lever up from the point of view of being able service the debt very, very easily and comfortably, even in a downturn. Because as you know, in our business model, during a downturn, we cut back growth CapEx, working capital becomes a source instead of a use. We'll even trim back maintenance CapEx a little bit, age of fleet a little bit, and we're going to throw off significantly more free cash flow during a downturn than we do ordinarily, while we're expanding and growing during this part of the cycle.
But even in this part of the cycle we are seeing nice growth, a 3% GDP growth here, little more than 3% GDP growth there. You have 1% to 2% GDP growth over in Western Europe. So, even while we're seeing growth and we are investing in CapEx and we're growing the business and we're using working capital to grow the business and bridge the gap between when we get paid and when we pay our vendors, we're still going to throw off in the neighborhood of $575 million of cash flow this year.
So, that cash flow can be used for all the things that I talked about earlier in the call, one of which is a stock buyback. We'll look at that and we'll compare that to do we want to bring our debt levels down, in which case we'd apply it to just debt repayments. So, we'll keep looking at that. We don't want to commit right now because we're not committed.
What we are committed to is looking at the different options every quarter and then making a rational decision based on the numbers what makes the best return for our capital.
Great. Brad I could throw just one other quick one in there. I noticed that Sarah isn't on the call. Just wanted to get your thoughts on progress in terms of finding a CFO or a permanent CFO.
We are making progress. We are, the search is going well. We've seen a handful of candidates that we've been intrigued with. We haven't gotten to the finish line with any CFO candidate. We will, I can't tell you the timeline on that because we don't know it. I will say that there's no urgency to immediately fill that with someone unless we really love them because Sarah's hands are a very steady pair of hands and the finance organization is working very smoothly.
And I'm not saying that just because she's sitting 15 feet away from me, it's the truth. So that, closing the books on time, with clean numbers and SOX compliance and treasury and internal audit and tax and procurement, all the things that are in the COO function is going along very well. And we'll get a permanent CFO when we have the right person in front of us, but I can't give you timing on it.
Okay, fair enough. Thanks for the time Brad.
Thank you.
Okay. Thank you. The next question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thanks very much. Good morning. Logistics, really impressive organic revenue growth there. EBITDA not as strong in the quarter, could you just address, what were some of the headwinds there and perhaps by geography and then what you would expect as far as trend going forward, specifically in EBITDA and in logistics? Thanks.
Hey Scott, it’s Matt. Supply chain growth, as I said, supply chain profit growth, as I said, in North America looked a lot like revenue growth. We had 11% organic revenue growth and steady operating margins year-on-year.
In Europe we had, as I said, 6.6% organic revenue growth. We experienced a bit of operating margin decline that reflected a couple of factors. The most prominent of which was some elevated levels of SG&A, due to recent startups, some implementation, some field expenses from centralized business development, essentially the startup, to support new startup activity.
Also, we've spoken about the regional macro climate in our different markets and France is our toughest market of our largest markets and that did have some impact on profitability in European supply chain.
Great. Thanks for that. The free cash flow or cash flow usage in the first quarter was a good bit better than we had anticipated. And I think it was, it was Allison's question earlier on factoring. It was covered pretty well, but could you give us a feel for what other unique items may have occurred in the first quarter that may impact second quarter. I know you maintained full year guidance, but just a little bit of feel for how that might show up in the upcoming quarter thanks.
Sure. There's two things to think about that relate to timing. The first related to net CapEx and the second related to cash taxes. Both net CapEx and cash taxes were a bit lower in Q1 than we thought they'd be entering the year. We'd expect those to reverse to some degree in Q2.
I think I made the comment during my earlier remarks that we thought the first half would look a lot like the first half of last year, which would suggest to somewhat lower free cash flow number year-on-year in Q2 than we had a year ago. So, the first half would be consistent year-on-year and our free cash flow outlook for the overall $525 million to $625 million is unchanged.
Okay. Thanks
The next question is form the Todd Fowler with KeyBanc Capital Markets. Please proceed with your questions.
Great. Thanks. Good morning. I'm not sure how granular you want to get with guidance on a quarterly basis, but I know you've got the comments for low-to-mid single digit EBITDA growth in the first half, the second quarter EBITDA comp is pretty difficult. Should we expect EBITDA growth to be in the same range as what it was in 1Q or is going to step down a little bit. And then do you also have any more gains factored into the guidance for the full year.
On the EBITDA growth in Q2, to your point, we indicated low-to-mid single digits for year-over-year for the first half. Q1 was up 4%. So low-to-mid singles means low-to-mid singles means low to mid-singles. I don't want to put too fine a point on it but we have that color in there to give you some general indication. You're right about the second quarter compare. Those compares get easier later in the year. So, we'd expect something in the low-to-mid single digit range, in the second quarter.
And what was the second part of your question?
Matt, I was asking if he had any more gains factored into your guidance on a full year basis.
I mean we do have assets sales as part of our free cash flow guidance and we'll see where the market is for those and if there's anything meaningful we'll share that with you as we report.
Okay, great. And then just a follow-up, Brad in the sustainability report, you talk about the wage increases for the U.S. warehouse workers and as high-single digit increases, which is pretty notable. I guess, can you talk about the ability or how the contracts are structured to recapture some of those increases? Is that all contractually set where you're going to recover those costs or if you do have more wage inflation, how that impacts profitability for some of those agreements.
So, thank you for giving a plug for our sustainability report. It is an amazing report, I strongly endorse everyone to download that from our website. It has a slew of statistics; I learned something new about our Company. The fact that we drive 1.4 billion accident free miles around the world last year. The fact that we reduced distracted driving by 37%. The fact that 80% of our material handling devices like forklifts are powered by batteries.
The fact that we reduced water consumption by 18% and, to your point, the fact that our U.S. warehouse employees received an average wage increase of 8% in 2018 and over 30% received an increase of over 10% or more. And that we're investing in our employees development by giving them 1.7 million hours of training courses last year.
Now specifically, to your question about wage inflation, we are definitely seeing wage inflation globally. No question about that. Wages have been up and have been up significantly. Here in the United States, we've seen wage growth of over 4% coast to coast throughout business lines. Of course that compares to real inflation of less than half of that but still a significant wage growth.
In Europe, gradually not as much as the United States, but you're seeing wage growth in France of 0.5%, 1% and that kind of range. UK you're seeing 3%, 4%. Spain you see 1% or 2%. So, there is greater wage pressure here. And in the UK. And that's just specifically because you have unemployment at less than 4% in both of those places.
Having said that, we're a very attractive employer and I can say a statement like that very authoritatively because the numbers support it. We get about 80,000 job applications a month. We approach a million job applications a year. People wanting to work at XPO Logistics. We have a good brand in the marketplace. We have a strong recruiting organization and that whole talent recruitment machine is very, very well oiled and working very well.
In terms of specifically, in the amounts of money that we pay our employees, it's usually not multi-year contracts with increases for future years. It's usually a year-by-year basis.
Okay. So basically your ability to sustain the margins or recover the cost, I mean you feel comfortable with that given the wage inflation and the benefit programs that you've put in place?
I think so. I think if wage inflation stays at these levels, we can pass along prices to our customers. They understand it. They're seeing the same wage inflation for the most part. They'll accept that. And then we always got to work on productivity. I mean, our job is to help our customers reduce their costs of transportation and logistics. So, we're constantly looking at ways that we can take inefficiencies and waste out of the organization and pass along much of those savings to our customers.
One way that we're doing that is investing in technology, specifically in our Smart Program, our Smart Program is our labor management tools and they worked so well in our contract logistics business that now we're rolling them out in LTL. And in LTL, we have about $1.7 billion in labor costs. Really, we have a vision to be able to run the set of business we have right now at $100 million to $300 million less labor costs over time.
How are we going to do that by using these smart labor tools? The smart labor tools allow us in an objective way, in a mathematical way, by using predictive analytics, by using AI to say what's the right amount of headcount we want? Not too much, not too little, but just the ideal headcount for the project.
And we have to use predictive analytics in order to understand what the tonnage is likely to be the next day. And then that we use the smart technology to know what's the right ratio between full time workers and part time workers. What's the right ratio between dock workers and drivers, what's the right amount of overtime? So these, these questions that I just mentioned that Smart helps us solve has very big ramifications in terms of our wage costs and we think that we can more than offset wage inflation as we rollout these tools in LTL.
Got It. In fairness, I only read the cliff notes of the report, but, but maybe at one point I'll get to the whole thing.
Don't burst my bubble. I thought you read it from beginning to end.
Thanks for the time guys.
Thank you Todd.
The next question is from the line of Brian Ossenbeck with JPMorgan. Please proceed with your question.
Hey guys, good morning. Brad, a quick one on an SG&A, I know you had some severance in there and it looks like it will continue throughout this year, but it looked like it did step up as a percentage of revenue, even taking that out year-over-year and sequentially. So, maybe get a little bit more color what are the major components, excluding the severance and other one-times in that line? And where do you except that to be trending through the rest of this year?
You're asking about the restructuring charge?
Yes the SG&A excluding the restructuring. I think you had about $10 million or so in there. So just looking at the overall SG&A of the business and if you're going to go by segment and corporate, maybe that will be helpful, but just trying to get a sense of excluding restructuring where that line will be and what are some of the components that are driving that. I know you've got depreciation, salaries and other things in there. So just a sense of where that's going because it did step up a bit even including – excluding rather the restructuring.
I'll let Matt talk about SG&A. In terms of restructuring part of your question, you recall it in Q4. We had a restructuring charge of $19 million. That was the best $19 million we spent or amongst the best $19 million we ever spent because that should generate annual savings about – of about $50 million. So very good ROI on that.
In the first quarter, we did do some rationalization of the workforce based on various volumes and different parts of our business, and we incurred a restructuring charge of $13 million and that was mostly due to the decreased business with our large customer. But there were a few other things in it as well.
Controlling costs to confront cost inflation is a high priority for us. And as I was just saying, we're going to offset in inflation productivity. It's not just right sizing in the workforce. Matt, you want to take the question about SG&A please?
Sure, there's a bunch of small things that are in there. Some of it is salary, some of it is bonus accrual, some of its investment in sales force, a little bit of it is stock comp and then we have a number of investments in IT and in infrastructure that we think will drive productivity over time. And happy if we talk offline to talk about modeling that number, over the course of the year.
Okay. Thanks Matt. That makes sense. We'll take you up on that. Just one quick follow-up on the backlog and on the new awards. Does FX have any impact on that? Are there other things like labor, fuel perhaps that makes that number move around, or should we see any volatility on that? Or is it a pretty good core number when you just look at that as an indication of what the new business wins are doing and what the potential looks like, across your various end markets and end-verticals.
If you're talking about the pipeline and the new business won numbers FX has no appreciable impact on that number. You should view that as a clean number. That's a good underlying indication of the new business won, which we expect to have converted at pretty high rate. And then the pipeline of the business that we have visibility from a bidding perspective, which we view as our opportunity set of going forward. So, those are clean apples to apples-to-apples numbers.
Okay, thanks for the details appreciate it.
Thank you.
The next question is from the line of Kevin Sterling with Seaport Global. Please proceed with your questions.
Thank you. Good morning everyone. Brad, let me dig I know you addressed somewhat about the truck brokerage industry, but if I can dig a little bit deeper, if you don't mind. Now we've got some players in here just in the space that are willing to lose money essentially and for market share gains. Where do you see this industry in three to five years? Is it going to be an industry where there's just a few larger players that are left or and - or could it create some M&A opportunities as some of the smaller players look to exit the business for you?
Just love to get your thoughts, how this industry may change next three to five years. Is it just going to, or we're just going to be left with just a handful of larger brokerage players?
Kevin, your question is specifically about brokerage.
Yes.
Okay, great. I see brokerage going, pretty much along the ways that we thought it was going to go years ago. It's becoming more automated, a bigger impact of technology, more and more digital interactions like electronic interactions rather than human interactions. I think long term margins come down. I don't necessarily think short term margins come down, but long term I think as costs come out of the way brokers do business, a good chunk of that cost savings is going to get passed along to customers and that's going to degrade margins.
Now having said that, lower margins on a much larger amount of business with lower SG&A can still be a beautiful thing and you can still create a lot of value from that. And I think there will be a shrinking of the number of players, it’s not going to be 10,000 or 20,000 brokers five, 10 years from now. I think it'll be a smaller number of larger brokers who have very significant investments in technology and are tightly integrated electronically with both customers and carriers.
And the other part of your question is, do we plan to buy truck brokers, in terms of our long-term growth plans? I don't know. We always wanted to buy truck brokers. We bought a few small ones. We never – the reason we mainly didn't buy many more truck brokers was because the valuations are really high. In the private market, the larger truck brokers don't come on the market very often.
And when they do, they go for very, very, very big multiples. And we're very conscious about the price we pay in M&A. For us M&A is the purchase price is critical because that's the I in ROI in M&A. So it's the same reason we haven't, gone big in M&A in Asia.
You have scarcity value and then when properties come out in the market, the multiples get very, very rich. So I don't know, I don't see brokerage multiples coming down anytime soon. So, I don't know. And I don't see us returning to the M&A market immediately either. So, I don't see, I don't want to telegraph to you that we got a truck brokerage M&A in sight because we don't.
Okay. Gotcha. Thank you. That's very helpful. And just kind of sticking along that theme and I know there's been a lot of talk about the LTL industry and pricing. Can you just share with us, give us your thoughts on what you're seeing in truckload pricing. We all know the spot mark has just been under significant pressure, but some of the asset-based carrier seem to be holding in there with our contract renewals. How are you thinking about the truckload market and maybe share with us some trends you've seen through April?
Well, the biggest trend we've seen over the last year is seeing the spot market come down a lot in terms of pricing and in terms of volume. And you've seen the contract market, you have seen those volumes shift over to contract. So ironically, a weaker spot market is good for us and the other large brokers who have most of their business on contract because we're getting paid based on a rate that we firm up at a point in time. And then we're covering that in the spot market every month for the next 12 months at lower prices. So it helps to expand margins and take more money to the bottom line.
Look, look at our numbers in freight brokerage, bring it down to numbers, forget words. Look at the numbers. Net revenue margin, net revenue itself up 9.5% year-over-year, net revenue margin up 420 basis points year-over-year. So we've got lower purchase transportation costs. We've got new technology to source capacity.
We’ve got XPO Connect and freight brokerage. I'm bullish on what we're doing in freight brokerage. I do think ultimately that's going to become more efficiently done business and the margins will be lower.
Yes. Okay. That's all I had. Thanks for squeezing me in this morning. Have a good day.
Thank you. At this time we've reached the end of our question-and-answer session and I'll turn the floor back to management for closing remarks.
Well, thank you for joining the call. I would say this, I don't think we're 100% out of the woods yet from the curveballs we had at the end of last year, but we're making excellent progress, faster progress than I would've expected three months ago. Brexit is not going away. France is not going away.
Our biggest customer, two thirds of their business has gone away. So, these are three significant challenges. But look at what we did this quarter. A solid beat on EBITDA and even bigger beat on free cash flow, a record Q1 EBITDA. EBITDA up 3.9% year-over-year, even after losing the bulk of our largest customer’s business. A record new business win of $1.1 billion, up 15% year-over-year, accelerating from 6% up in the fourth quarter.
A global sales pipeline that's hit a new high watermark of over $4 billion, growing freight brokerage in terms of margins, in terms of actual revenues. XPO Connect our digital freight marketplace on fire, having gone from zero to 18,000 in a year, more downloads in the first quarter than all of 2018. Expanding XPO Connect to Last Mile in Europe will pay nice dividends over the time. Yield up in LTL 3% almost triple what it was up in the fourth quarter.
Our best OR in LTL for a first quarter in 20 years, having nearly doubled EBITDA in LTL since we bought that business. Rolling out tons of new tech tools in LTL to improve the business even more, chief of which is our smart labor management tools, our dynamic pricing as well.
Look at the organic revenue growth in logistics after you take out FX, 8.1%, it's still a nice healthy growth in what is a segment that's about 40% of our business. And bottom line, given all the rebound that we've done over the last few months, we’re very comfortable reaffirming the guidance that we've given for 2019.
With that, I'd like to thank you for your attention and look forward to seeing you at some of the upcoming investor conferences. Have a great day.
Thank you. This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.