XPO : Third Quarter 2024 Earnings Transcript

Published: 2024-11-01 17:56:05 ET XPO

Corrected Transcript

30-Oct-2024

XPO, Inc. (XPO)

Q3 2024 Earnings Call

Total Pages: 23

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

CORPORATE PARTICIPANTS

Mario A. Harik

Ali Faghri

Chief Executive Officer & Director, XPO, Inc.

Chief Strategy Officer, XPO, Inc.

Kyle Wismans

Chief Financial Officer, XPO, Inc.

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OTHER PARTICIPANTS

Ken Hoexter

Scott Schneeberger

Analyst, BofA Securities, Inc.

Analyst, Oppenheimer & Co., Inc.

Scott H. Group

Jizong Bruce Chan

Analyst, Wolfe Research LLC

Analyst, Stifel, Nicolaus & Co., Inc.

Reed Seay

Ravi Shanker

Analyst, Stephens, Inc.

Analyst, Morgan Stanley & Co. LLC

Fadi Chamoun

Jason H. Seidl

Analyst, BMO Capital Markets Corp. (Canada)

Analyst, TD Cowen

Christian Wetherbee

Stephanie Moore

Analyst, Wells Fargo

Analyst, Jefferies LLC

Jonathan Chappell

Ariel Rosa

Analyst, Evercore ISI

Analyst, Citigroup Global Markets, Inc.

Thomas Wadewitz

Jordan Alliger

Analyst, UBS Securities LLC

Analyst, Goldman Sachs & Co. LLC

Brian P. Ossenbeck

Analyst, JPMorgan Securities LLC

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the XPO Third Quarter 2024 Earnings Conference Call and Webcast. My name is Paul, 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. [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 will 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 as well as in its earnings release. 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 may also 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 in the related financial tables on its website. 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 XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. This morning, we reported strong third quarter results in a soft backdrop for freight transportation with above-market earnings growth and margin expansion.

Company-wide, we grew revenue year-over-year by 4% to $2.1 billion and we achieved significant operating leverage on that growth, delivering a 20% increase in adjusted EBITDA to $333 million. Our adjusted diluted EPS was $1.02, which is a 16% increase from a year ago. The standout result of the quarter was a strong margin expansion, with a year-over-year improvement and LTL adjusted operating ratio of 200 basis points. This improvement was at the high end of our target range.

What drives our results are the four levers of our strategy: service quality, yield growth, investments in the network and cost efficiency. These levers are closely aligned and each one has a distinct role in driving our performance.

I'll start with service quality. We delivered a damage claims ratio of 0.2%, which is an improvement from 0.4% last year. Importantly, damage frequency continued to improve each month in the quarter to record levels. We also improved our on-time performance year-over-year for the 10th consecutive quarter. The speed and reliability of our network are the primary reasons why our customers trust us with their freight, and they experience these benefits on a daily basis.

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

Our second lever is the targeted investments we're making in capacity ahead of the strong demand we anticipate in a freight market recovery. These ongoing investments are designed to deliver world-class service at every stage of the freight market cycle. Over the past three years, we've added nearly 15,000 trailers and more than 4,000 tractors to our fleet. We're using our rolling stock to accelerate our line-haul insourcing with a broad benefit to service across our network.

In addition, we've now opened up 21 of the 28 service centers we acquired last December, and we expect to open the last seven sites by early next year. This is on track with our plan. The majority of these sites are in markets where we want to build density and leverage our existing teams. Each new service center helps our network operate more efficiently. When they're all online, we'll have roughly 30% excess door capacity in the network. Strategically, this positions us to capitalize quickly in an upcycle, driving substantial operating leverage and profitable market share gains.

Yield is our third lever and the primary driver of our margin improvement. We've been reporting above-market yield growth throughout this year as we align our pricing with the value we deliver. In the third quarter, we grew yield excluding fuel by 6.7% year-over-year. This underpinned the 200 basis points of OR improvement we reported. We achieved this by executing on multiple initiatives that are yield and margin accretive.

With our customers under contract, we increased renewal pricing by high-single digits year-over-year for the fifth consecutive quarter, supported by the service improvements we're making. And we're earning more market share from local customers due to the investments we made in our sales force. In the third quarter, we increased shipments from local customers by over 10% compared with a year ago. Our new premium services are another benefit to yield. We've continued to increase our revenue mix from high margin accessorial services, and we expect this revenue stream to grow substantially over time.

The final lever of our strategy is cost efficiency, where we have three areas of focus: purchased transportation, variable costs and overhead. In the third quarter, we reduced our purchased transportation costs by 40% year- over-year, primarily driven by our line-haul insourcing initiative. We ended the quarter with 13.6% of line-haul miles outsourced to third-parties, which was a reduction of nearly 800 basis points year-over-year. This is the lowest level of outsourcing in our company's history, and we're on track to meet our 2027 target by year-end 2024, three years ahead of plan.

We now expect our outsourced miles to be below 10% next year. And to support this trajectory, we're deploying more driver teams and sleeper cab trucks for long distance line-haul runs. And we're continuing to manage labor costs effectively using our proprietary technology. We can realign labor hours quickly to address changes in volume and do that at the service center level.

Turning to Europe, where transportation remains soft in most countries, we continue to outperform the industry. On a year-over-year basis, we increased third quarter segment revenue by 7%. It was our strongest quarterly revenue growth since 2021, with volume accelerating for the fifth consecutive quarter. The strongest revenue performance was in the UK, where our year-over-year organic revenue growth was up mid-teens. Importantly, our sales pipeline in Europe is growing at near-record levels as we close new businesses and replenish new leads. This should support ongoing above-market growth across our key geographies.

In summary, the strong third quarter we delivered highlights the effectiveness of our strategy and our company- specific initiatives, regardless of the macro. The world-class service we provide is within our control. It creates value for our customers and enables us to outpace the industry with yield growth and margin expansion.

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

In addition, we've made significant progress in becoming more cost efficient with our operations. Even in the current environment, our strategy is driving robust financial and operational results, and our investments in capacity will accelerate those results when the freight market rebounds. We have a long runway for additional market share and earnings growth, and we're well positioned to capture that opportunity.

Now, I'm going to hand the call over to Kyle to discuss the financial results. Kyle, over to you.

Kyle Wismans

Chief Financial Officer, XPO, Inc.

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet and liquidity. We reported a strong third quarter across the company with revenue up 4% year-over-year to $2.1 billion. This includes top-line growth of 2% in our LTL segment. Excluding fuel, our LTL revenue was up 5% year- over-year.

On the cost side in LTL, we made another significant reduction in purchased transportation. Our expense for third- party carriers was down year-over-year by 40%, largely due to insourcing more of our line-haul runs. This equated to a savings of $39 million in the quarter, and we continued to manage labor effectively with hours per shipment improving by 1% sequentially. This helped to mitigate the year-over-year increase in total salary, wages and benefits of 4%, primarily due to inflation.

Additionally, we were more cost efficient with fleet maintenance, which brought down our cost per mile by 12% year-over-year. Depreciation expense increased by 21% or $14 million, reflecting the investments we're making in the business. This continues to be our top priority for capital allocation in LTL. Next, I'll cover adjusted EBITDA, starting with the company as a whole.

We generated adjusted EBITDA of $333 million in the quarter, up 20% from a year ago. Our adjusted EBITDA margin of 16.2% was a year-over-year improvement of 220 basis points. Looking at just the LTL segment, we grew adjusted EBITDA by 18% to $284 million, underpinned by an increase of approximately 17% in adjusted operating income. In our European Transportation segment, adjusted EBITDA was unchanged from a year ago at $44 million, and our corporate adjusted EBITDA was $5 million compared to a loss of $7 million a year ago. Excluding a $9 million gain from a past investment in a private company which was sold in the quarter, corporate adjusted EBITDA was a loss of approximately $4 million.

Returning to the company as a whole, we reported third quarter operating income of $176 million, up 14% year- over-year, and we grew net income from continuing operations by approximately 11% to $95 million, representing diluted earnings per share of $0.79. On an adjusted basis, diluted EPS increased by 16% year-over-year to $1.02. And lastly, we generated $264 million of cash flow from operating activities in the quarter and deployed $123 million of net CapEx.

Moving to the balance sheet, we ended the quarter with $378 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $934 million of liquidity. We had no borrowings outstanding under our ABL facility at quarter-end. Our net debt leverage ratio at the end of the quarter was 2.5 times trailing 12 months adjusted EBITDA. This was an improvement from 2.7 times at the end of the second quarter and 3 times at the end of last year. We'll continue to make investments that enhance our earnings growth trajectory and support our long-term goal of an investment-grade profile.

Now, before I wrap up, I want to highlight some updates to our full year 2024 planning assumptions. We now expect interest expense will be in the range of $225 million to $230 million. We're also narrowing our expected

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

adjusted effective tax rate to the range of 24% to 25% for the full year. And we expect diluted share count to be 120 million shares. Our other planning assumptions this year remain unchanged.

Now, I'll turn it over to Ali who will cover operating results.

Ali Faghri

Chief Strategy Officer, XPO, Inc.

Thank you, Kyle. I'll start with LTL where we executed well in a soft freight market to deliver another quarter of margin improvement and earnings growth. On a year-over-year basis, our third quarter shipments per day were down by 3.2% overall, but they were up in our local channel by double digits, accelerating from the second quarter. Local accounts are a key part of our strategy and an opportunity to earn market share at a favorable margin. Our weight per shipment continued to moderate this quarter and was down 0.7%.

Collectively, these dynamics resulted in a 3.9% decline in tonnage per day, which largely tracked the seasonality and outperformed the industry as a whole. On a monthly basis, our July tonnage per day was down 0.8%, August was down 4.7%, and September was down 6.1%. Looking just at shipments per day, July was up 0.1%, August was down 4.6%, and September was down 4.9%. For October, we estimate that tonnage will be down 8% from the prior year, tracking roughly in line with seasonality, excluding the impact of a cyber-attack at a peer last year.

Our pricing trends remain strong as customers continue to recognize the value of our service quality and premium offerings. This enabled us to deliver another quarter of above-market pricing growth. On a year-over-year basis, we grew yield ex-fuel by 6.7% and revenue per shipment by 6.6%. Importantly, both yield and revenue per shipment increased sequentially from the second quarter this year and also on a two-year stack basis. We expect these trends to continue for the fourth quarter, reflecting ongoing momentum with our pricing initiatives.

Turning to margin, we improved our third quarter adjusted operating ratio by 200 basis points year-over-year to 84.2%. Sequentially, our adjusted OR increased by 100 basis points, coming in at the top of our guided range. Our robust margin performance was primarily driven by yield growth and bolstered by our cost initiatives and productivity gains. We've now delivered significant year-over-year OR improvement for four consecutive quarters, all in a historically soft freight environment, and it's notable that we were the only public LTL carrier to expand margin in the third quarter. Our full year outlook is for an adjusted OR improvement of 150 to 250 basis points, and we expect to be at or above the high end of that range.

Moving to the European business, we executed well in the quarter to outperform the industry in a challenging market for freight transportation. Our pricing outpaced inflation and we managed costs to mitigate the impact on earnings. Third quarter adjusted EBITDA for the segment was flat compared with last year, and we generated double-digit growth in the UK, which is a key market for us. The improvements we've made in the business will accelerate results in Europe when the macro recovers.

I'll close with a summary of the major drivers behind the record margins we're reporting in the trough of the freight cycle. We're making significant progress with service quality, and we expect this to propel margin expansion for years to come. Our pricing is outpacing the market and continues to gain traction. We believe we're just beginning to capture the massive yield opportunity ahead of us. And we're operating far more productively by reducing third- party line-haul miles to historic lows and effectively managing our variable costs. These initiatives are all in the early innings with strong momentum, and their impact will accelerate when demand begins to recover.

Now, we'll take your questions. Operator, please open the line for Q&A.

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

QUESTION AND ANSWER SECTION

Operator: We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Ken Hoexter with Bank of America. Please proceed with your question.

Ken Hoexter

Analyst, BofA Securities, Inc.

Hey, great. Good morning, and nice job on the continued margin improvement. So, Mario, sticking on that, where is the pricing gap now versus the margin as you think about the path you started on with LTL 2.0, I guess ultimately the margin potential? And then thinking about the volumes down 8% in October, if you normalize for Estes, how is the underlying market progressing then?

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Thanks, Ken. First, if you look at the margin gap on the pricing side, so when we started our plan, that was roughly, call it, a mid-teens pricing gap between us and best-in-class on the pricing opportunity, and so far this year, we were able to claw a couple of points out of that given our outperformance in yield versus the market. That was a combination of, one, our service product continues to improve tremendously, and we get great accolades from our customers who understand that we are investing more in our network. We are investing in rolling stock, and that comes at a premium.

But we're also seeing a great contribution from premium services that we are onboarding. We launched about a half a dozen either expanded or new premium services, and these come at a higher yield and higher revenue. And we're also growing our local account segment here in the third quarter, we grew shipment count in that segment more than 10%, and that also comes at a higher yield and at a higher margin as well. And over the years to come, roughly half that gap is driven by premium price to service, and we expect to keep on bridging that gap. And then the other half comes from both accessorial revenue or premium services as well as local accounts.

In terms of volume trends, what we're seeing here in the quarters, first, if you look at the third quarter, August was the most sub-seasonal month. It was a few points below seasonality compared to where we were in July. September was roughly around - we were down about 6.1%, and that was roughly 1 point below seasonality versus August, but that started with - the beginning of the month was better than the end of the month that was impacted by the hurricane. And ultimately in October, we are down - there's still a couple of days here to go, but roughly around 8%, which is roughly in line with seasonality.

So, we're seeing the sub-seasonal demand normalize here in the month of October. And as you said, a portion of the year-on-year delta is the cyber-attack that happened at one of our peers, and we estimate the impact of that cyber-attack to have been 2 points on the year-on-year comp when you look at October of last year compared to October this year.

Ken Hoexter

Analyst, BofA Securities, Inc.

Great. Thank you.

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Thank you.

Operator: Our next question is from Scott Group with Wolfe Research. Please proceed with your question.

Scott H. Group

Analyst, Wolfe Research LLC

Hey. Thanks. Good morning. So, Mario, with tonnage down a lot, is it limiting the pricing upside in the near term? I don't know, maybe talk about pricing renewals. And then Ali, if I just take the implied fourth quarter guide, it doesn't imply a lot of year-over-year margin improvement. I know it's early, but any early thoughts on how to think about LTL margin improvement in 2025?

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Yeah, I'll start on the overall pricing environment, Scott, and I'll turn it over to Kyle to discuss contract renewal, and Ali can discuss OR outlook. But if you look at pricing overall, we continue to see a very constructive pricing environment out there. And if you take a step back, a year ago, a significant amount of capacity exited the market. And we continue to see that industry pricing backdrop be constructive. I mean, you heard our peers report here last week and this week, and all the commentary leans toward a strong pricing environment.

Now, typically in our industry, we typically price 100 to 200 basis points ahead of cost inflation, and we're seeing that play out here. And we are outperforming on the pricing side, given what I mentioned earlier on. So, from one perspective, we are being rewarded for the better service product from our customers, but we also have these avenues in terms of local accounts generating higher-yielding and higher margin freight and incremental accessorial revenue that is coming from the incremental services that we are launching that our customers are asking for.

So, it's the win-win where the customer gets a new service from us, they get to experience the great service, and obviously, we get the yield benefit from that as well. And if you look here in the third quarter, we were able to deliver a great yield outcome, accelerating on a quarter-over-quarter basis, accelerating on a two-year stack basis. The absolute number for revenue per shipment is up, the yield per hundredweight is up. So, all of these KPIs are moving in the right direction for us here as we go towards the back half of the year.

Kyle Wismans

Chief Financial Officer, XPO, Inc.

And Scott, when you think about renewals, so renewals were up high-single digit in Q3. So, again, another strong performance driven by a lot of our service improvements. It's important to note it's our fifth consecutive quarter to be in that range. The other thing I think important here is it's flowing through, so we're seeing revenue per shipment in the quarter up 6.6%. That's our seventh consecutive quarter of sequential growth. So, we're confident in our ability to deliver strong above-market renewals both in Q4 and next year.

Ali Faghri

Chief Strategy Officer, XPO, Inc.

And Scott, just on the OR side, we do expect a strong quarter here in the fourth quarter driven by continued strength in yield and cost management. Typically, Q4 is a more volatile quarter, which does give a wider range of

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

outcomes, and volume trends can be impacted by the holidays and weather. However, if you take a step back and you look at the five-year average for the sequential OR change from Q3 to Q4, it's been in that 250 basis points range, and we would expect to do better than that normal seasonal trend as we roll into the fourth quarter. And I think, more importantly, when you roll that into the full year for 2024, we expect to now be at or above the high end of our 150 to 250 basis points OR improvement range, which is very strong performance at the trough of the cycle.

Scott H. Group

Analyst, Wolfe Research LLC

Thank you, guys.

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Thank you.

Operator: Our next question is from Daniel Imbro with Stephens, Inc. Please proceed with your question.

Reed Seay

Analyst, Stephens, Inc.

Hey, guys. Thanks for taking the question. This is Reed Seay on for Daniel. Mario, service has remained pretty solid. And I think you held on the gains in the Mastio survey this year. Other than insourcing line-haul, can you talk about where you see some remaining opportunities for service that could potentially still be pain points for customers?

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Yeah. So, overall, we're on a great trajectory of service improvement. If you look at our damage claims ratio here in the third quarter, we were at a 0.2% damage claims, compared that when we started our strategy a few years ago, we were at 1.2%. So, a tremendous reduction of more than 80% of damages in our network, and our customers appreciate that tremendously. On the on-time side, this is the 10th consecutive quarter of improvement. We get a ton of accolades from customers on the speed and reliability of our network when it comes to picking up the freight and delivering the freight on time as well.

Now, a lot of the initiatives, Reed, that we have so far implemented were all around changing incentive comp plans, launching airbags, having more capacity, having technology that enables us to track damages down to the person level, to the shift level. And all of that has enabled us to completely change how we load the freight and the trailers here over the last few years, and we only see upside. I mentioned this in my opening remarks, in the quarter, we saw every month of the quarter reach a year record of better damage frequency than the prior month, and we continue that trend to continue here over the quarters and years to come. Our teams in the field operation, they are just doing a fantastic job executing on all of that.

Now, when you look forward, we have a number of initiatives that will continue to improve service. As you said, first starting with our insourcing of third-partyline-haul, typically when we move the freight on our equipment, we are more efficient at doing it. We get more space in the trailers. We have much better on-time performance. Here in the month of October, our Road Flex operation on-time performance was nearly 100% in terms of being on time. And as we continue to insource more third-partyline-haul, we are going to continue to see our on-time get higher and higher. And obviously, our goal is to be in the high 99% when all of these things are completed.

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XPO, Inc. (XPO)

Corrected Transcript

Q3 2024 Earnings Call

30-Oct-2024

Similarly, on the improving of damages, we are continuing to work as we expand the footprint of our network in some locations. We can build more pure trailers to destination, which reduces the re-handling in our network that will further take that damage performance even in a better place. And our goal is to get to a 0.1% damage claims ratio over the quarters and years to come here. So, overall, again, the trajectory is very strong. We have a great plan that we're executing on, and I'm very proud of the team, of the progress they're making.

Reed Seay

Analyst, Stephens, Inc.

Awesome. Thanks for the color.

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

Thank you.

Operator: Our next question is from Fadi Chamoun with BMO Capital Markets. Please proceed with your question.

Fadi Chamoun

Analyst, BMO Capital Markets Corp. (Canada)

Thank you. Good morning. I just wanted to see if you can give us some feedback on maybe 2025, just thinking about some of these levers that you have been able to use this year from the accessorial, the local channels, and ultimately what you're doing on the [ph] PT (00:27:48) side, which seems like has a little bit more to go as we go into 2025. Like, your tonnage per day or overall likely flat this year. Like if we don't see material kind of macro cyclical improvement over the next few quarters, what does 2025 look like? Is there more room for kind of OR improvement without the macro environment? If you can give us kind of any high-level way to think about 2025, would be great.

Mario A. Harik

Chief Executive Officer & Director, XPO, Inc.

When you look at 2025, we expect a strong year, both from an OR improvement perspective and an earnings growth perspective, and this is, Fadi, even in the current soft macro environment. And obviously, any improvements in the demand backdrop will only accelerate our results even further. You look at 2024, we're going to be at or above our guided range for OR improvement in a very soft freight market. We'll talk more about the specifics of 2025 next quarter once we close out the year.

But that said, if you look at the levers, we are heading into next year with another great year of service under our belt, and that leads to us having - being able to price the freight accordingly. We also have launched a, call it, half a dozen or so premium services or expanded premium services here in year in 2024, and our sales team and customers are incredibly excited about those services. We're building momentum. We're building the pipeline. We're converting more of that revenue on our trucks, and that comes at a higher margin and a higher yield. And it's a service that our customers are asking for.

When you look at our local customers, we have added so far year-to-date more than 8,000 new local customers. And here this last quarter, despite shipment count being down in the low- to mid-single-digits range, our local customer shipments were up more than 10%, and that's going to continue to accelerate as we head into next

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Disclaimer

XPO Logistics Inc. published this content on November 01, 2024, and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on November 01, 2024 at 21:55:40.693.