To Our Stockholders

2018 was a year of record growth and profitability for XPO that became characterized, in many ways, by its final four months.

In September, a longtime European customer went bankrupt. Then, macro conditions in France and the UK deteriorated. We were hit by a short-and-distort scheme in December – the same month our largest customer accelerated its plan to insource. To top it off, we didn’t execute up to our usual standards.

As a result, we missed our 2018 target for adjusted EBITDA and our stock fell 47% between October and January.

In light of our pay-for-performance culture, our president, Troy Cooper, and I voluntarily waived an aggregate $4.3 million in bonuses and deferred compensation awards.

I’m proud that our team delivered 12.3% year-over-year revenue growth in 2018, including 9.3% organic revenue1 growth, despite the temporary turbulence. We generated net income attributable to common shareholders of $390 million. And we grew adjusted EBITDA1 to $1.56 billion – up 14.3% year-over-year. Moreover, we generated cash flow from operations of $1.1 billion, and free cash flow1 of $694 million. Our free cash flow handily surpassed our target of $626 million, due in part to improved working capital management.

We ended 2018 with a strong balance sheet and modest leverage of net debt2 to adjusted EBITDA of 2.4x. Our earliest significant debt maturity isn’t until 2022, and some of our debt doesn’t mature until 2034.

Our liquidity gives us considerable flexibility in making the best capital allocations on behalf of our stockholders. When our share price dropped, we paused M&A in favor of buying back our own stock – a rare opportunity to create compelling shareholder value. In December, our board authorized $1 billion of share repurchases, followed by an additional $1.5 billion authorization in February. We’re very good at M&A, and we’ll return to acquisitions when the time is right.

Customer-Focused Innovation

Looking at our operations in 2018, our logistics segment generated double-digit organic revenue growth that outpaced the company as a whole. Tailwinds in 2019 include ongoing demand for e-fulfilment and reverse logistics, traction from the 118 project start-ups we layered in throughout the year, a robust pipeline of active bids, and XPO Direct, our shared-space network.

XPO Direct is a new way for omnichannel and manufacturing customers to think about distribution. National customers essentially rent our capacity for contract logistics, last mile, less-than-truckload (LTL), labor, technology, transportation and storage. They can position inventories fluidly across markets without taking on large fixed costs. In 2018, we grew the network to over 90 facilities, giving XPO Direct critical mass.

Within our transportation segment, we’re automating many of our interactions with shippers and carriers in truck brokerage. Our XPO Connect digital platform is creating a sea change in efficiency by sourcing, transacting and tracking on the cloud. Our brokerage business already benefits from having a variable cost model; now we’re applying technology to further improve margins and labor productivity. We’re also deploying labor more efficiently in our logistics sites by utilizing our XPO Smart labor productivity tools.

In North American LTL, we again increased profitability year-over-year. We’ve nearly doubled EBITDA in LTL since we acquired it in 2015, and operationally, we’ve brought LTL a long way forward in three years. In 2018, we continued to optimize our freight mix, improve asset utilization and serve customers with more consistency through the implementation of engineered standards and expanded training. We’re also diversifying our LTL customer base by selling this service across more verticals, with a focus on local accounts.

On the technology front, our LTL network is benefiting from advanced pricing algorithms, AI-based load-building and augmented reality tools that improve dimensional accuracy in our linehaul models. We’re rolling out dynamic routing optimization for pickup and delivery to enhance visibility for our customers – this technology also reduces our carbon footprint by decreasing empty miles. Our LTL technology blueprint for 2019 includes the launch of XPO Smart labor productivity tools, expanded use of machine learning in linehaul, and new price elasticity models that identify optimal pricing and balance our network volumes. Over the next 12 to 24 months, we intend to launch a new LTL technology platform for comprehensive network optimization. This should generate a significant increase in EBITDA once implemented.

In last mile, our core service for heavy goods performed well in 2018. We have a cohesive last mile network that we launched in 2013, when we bought the leading last mile company in North America; we then integrated three more highly regarded last mile providers over 18 months. In 2018, we expanded our network to 85 last mile hubs in North America. Our last mile customers benefit from the tens of millions of dollars we’ve invested in innovating the home delivery and installation of heavy goods. We believe we have the best service metrics in our sector – in part because our sophisticated technology gives retailers and contractors more control over the all-important consumer experience.

One of our company’s most compelling competitive advantages is our combination of technology, density and scale. It allows our people to cross-sell our services and solve complex supply chain problems for customers.

Recently, we launched a single tracking number that our customers can Google to follow their goods through our warehouses and across our modes of transportation. It gives our large accounts an additional incentive to use XPO for multiple supply chain solutions. At year-end 2018, 90 of our top 100 customers were using at least two XPO service lines, and 55 of the 100 were using five or more of our services. Four years ago, these numbers were close to zero.

This year, in total, we expect to spend approximately $550 million on technology, up from $498 million in 2018. In addition to our LTL initiatives, we have ongoing deployments of predictive analytics, autonomous devices, collaborative robotics and virtual operations, facilitated by artificial intelligence and the Internet of Things. Other initiatives include the global implementation of XPO Smart tools for labor productivity, intelligent warehouse management and demand forecasting, self-learning digital tools for last mile on XPO Connect, and the customization of goods-to-person systems in our warehouses.

A Culture with Purpose

In conveying our strengths, we believe that equal weight should be given to the human face of XPO. Our company employs more than 100,000 extraordinary individuals who support over 50,000 XPO customers in 32 countries. Our employees have great insights – in 2018, management reviewed more than 32,000 employee survey responses and acted on countless suggestions, including the establishment of a permanent, US-based relief fund for colleagues in disaster areas. This reflects an important component of our culture: to engage our employees, customers, investors and the global community in a shared sense of ‘‘doing good.’’

Our culture is also about being safe, respectful, entrepreneurial, innovative and inclusive – it’s about having compassion, being honest and respecting diverse points of view, while operating as a team. We reinforce our culture through open-door management, the XPO University training curriculum, our Workplace virtual community and equal opportunity hiring policies. In addition, we have robust ethical guidelines that foster physical and emotional safety at work and clearly define prohibited behavior, such as harassment, dishonesty, discrimination, workplace violence, bullying, conflicts of interest, insider trading and human trafficking.

XPO takes an active role in advancing its workplace culture. Our company’s expanded policies for Pregnancy Care and paid family bonding leave are significant benefits we developed over the past year. We also partnered with a leading healthcare network for women and families to offer supplemental health services from over 1,400 practitioners in 20 specialties via a virtual clinic. In total, we’ve made more than 30 quality benefits available to XPO women and families in the US. These include fertility services, prenatal and postpartum care, paid family bonding and a return-to-work program. All of our program and policy enhancements are provided at no additional cost to our employees.

I’m proud that our Pregnancy Care Policy is a gold standard – and that our benefits package for pregnant women and new parents is progressive not just for our industry, but for any industry. Any employee of XPO who becomes a new parent through birth or adoption can qualify for six weeks of 100% paid leave as the infant’s primary caregiver, or two weeks paid leave as the secondary caregiver. In addition, a woman receives up to 20 days of 100% paid prenatal leave for health and wellness and other preparations for her child’s arrival.

Our female employees can request pregnancy accommodations without fear of discrimination. A woman receives ‘‘automatic yes’’ accommodations, such as changes to her schedule and the timing or frequency of breaks, or assistance with certain tasks. More extensive pregnancy accommodations are easily determined with input from her doctor. Furthermore, we guarantee that a woman will continue to be paid her regular base wage rate while her pregnancy accommodations are in effect, even if her duties need to be adjusted, and she will remain eligible for wage increases while receiving alternate work arrangements. While we fully support the passage of the Pregnant Workers Fairness Act or similar legislation, our Pregnancy Care Policy goes beyond any likely expansion of federal protections.

Women at XPO have strong role models to look to on our board. Of our seven independent directors, three are highly accomplished women: Gena Ashe, Marlene Colucci and AnnaMaria DeSalva, who serves as the board’s vice chairman. We’ll continue to evolve the composition of our board to reflect the diversity of our company.

The development of our culture will continue to be a steady march forward, as it has since our founding in 2011. We recently published our inaugural Sustainability Report, a global document that covers 2018 data. We also publish a Corporate Social Responsibility Report for our European operations. Both documents can be downloaded from our new website at

This year, Fortune magazine once again named us one of the World’s Most Admired Companies, and ranked us first in our category of trucking, transportation and logistics. We receive over 80,000 job applications in a typical month despite a tight labor market – talented people of all experience levels who want to be part of XPO. I credit our employees for furthering our reputation as a leader and a great place to work.

For 2019, we expect to grow adjusted EBITDA faster than revenue, while growing revenue faster than the market. Our key financial targets are adjusted EBITDA in the range of $1.650 billion to $1.725 billion, and free cash flow in the range of $525 million to $625 million. We expect to deliver the majority of these gains in the back half of the year.

The 6% to 10% growth in adjusted EBITDA implied by our outlook also assumes continued growth in both North America and Europe, although at a slower pace than in 2018. If a recession comes, we can significantly reduce our capex spend. We’re likely to produce substantially more free cash flow in a downturn, with working capital turning from a use into a source of cash.

We’ll always have growth opportunities across our service range, regardless of macro conditions. We hold less than a 2% share of a trillion-dollar addressable market – that’s more than 50 times the size of XPO’s present revenue base. In 2018, we continued to gain ground by winning a record $3.8 billion of business. In 2019, we estimate that our top five customers will account for about 7% of our revenue, with our largest customer representing only about 2%.

I’d sum it up this way: XPO is more capable of creating significant shareholder value today, as a world-class industry innovator, than at any time in our history. We believe that there’s a disconnect between our current stock price and our earning power. In our opinion, this represents an opportunity – though not without risk – for investors who seek outsized long-term returns.

XPO should continue to outperform its peers and the macro in any operating environment. We have a strong competitive moat: a combination of leading positions in fast-growing areas of transportation and logistics, a broad range of integrated solutions for complex supply chains, important advantages of scale, and differentiation through cutting-edge technology in every line of business.

I want to personally thank our investors, customers and employees for believing in us. When I look at our company, what strikes me is not our path to prominence in less than eight years, or the $4.8 billion of adjusted EBITDA we’ve generated since 2014. It’s that I’m 100% certain our greatest opportunities to serve your interests are still ahead.

April 22, 2019

Brad Jacobs

Bradley S. Jacobs
Chairman and Chief Executive Officer

1 Organic revenue, adjusted EBITDA and free cash flow are non-GAAP measures. Reconciliations to GAAP measures are provided in the tables in Annex A to our company’s Proxy Statement.

2 Net debt is defined as total debt less cash and cash equivalents.

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