XPO Logistics, Inc. (NYSE:XPO) Q1 2024 Earnings Call Transcript

XPO Logistics, Inc. (NYSE:XPO) Q1 2024 Earnings Call Transcript May 4, 2024

XPO Logistics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

“(Transcript provided to Seeking Alpha by the company.)”:

Mario Harik: 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 financial results that were well above expectations for revenue and earnings, in a soft market for freight transportation. It was a strong first quarter for us company-wide, reflecting the momentum we carried into 2024. We grew revenue year-over-year by 6% to $2 billion, and we improved our adjusted EBITDA by 37% to $288 million. Adjusted diluted EPS was 45% higher year-over-year at $0.81. As you saw in our results, our LTL 2.0 plan is firing on all cylinders. I want to frame my comments this morning around the four pillars of our plan and the tremendous progress we’re making.

I’ll start with the pillar that is most important to our growth and profitability is to provide world class service to our customers. Our first quarter damage claims ratio continued to be among the best in the industry, at a company record of 0.3%. This was an improvement from 0.7% last year and from 1.2% when we launched LTL 2.0 just over two years ago. The underlying driver of this improvement has been a reduction of more than 70% in damage frequency. Another key service metric is on-time performance, which has now improved on a year-over-year basis for eight consecutive quarters. In short, we’re delivering meaningful service improvements, while moving more volume through our network, with a multi-year plan that balances operational excellence and investments in the network.

This includes the freight airbag systems we introduced in the second half of last year. That equipment is now installed in 75% of our service centers and we expect to complete the rollout by mid-year. The sites that have the airbag are seeing an improvement in damage frequency of greater than 20%. We’ve also recently updated our trailer loading procedures, which will continue to enhance our service quality over time. And as we in-source more miles from third-party carriers, we expect this to further reduce damages and improve on-time performance. We’ve made it clear to our customers and employees that service quality is our North Star, and we’re well on our way to becoming the best-in-class LTL service provider. The second pillar of LTL 2.0 is to invest in our network.

Our business has historically generated a high return on invested capital. Since the launch of LTL 2.0, we’ve added over 12,000 trailers and 4,000 tractors to our fleet. This has allowed us to operate more efficiently and maintain strong network fluidity while in-sourcing more linehaul transportation. Over two-thirds of our 2024 CapEx is allocated for fleet. We added nearly 1,600 tractors in the first quarter, which brought down our average tractor age to 4.2 years from five years at the end of 2023. The new tractors are more efficient to operate, resulting in an improvement in our fleet maintenance cost. We also manufactured nearly 1,300 trailers in the quarter and we recently celebrated the 30th anniversary of our production facility in Arkansas.

We are the only U.S. freight transportation company to manufacture its own trailers, which puts us in a unique position to create capacity when our customers need it and we can do it with less capital. In terms of the 28 new service centers we acquired in December, we’ve now opened the first six on schedule in April, with another six planned for the second quarter. This is expanding our presence in growing freight markets like Nashville, Las Vegas and Houston. We plan to bring another dozen sites online by the end of this year and expect all 28 to be operational by early 2025. The third pillar of our plan is to drive above market yield growth. Yield is our single biggest opportunity for margin improvement and it’s the highlight of our results this morning.

We grew yield excluding fuel by 9.8% year-over-year, which helped us deliver nearly 400 basis points of adjusted operating ratio improvement. Even with the gains we’ve made, we still have significant pricing opportunity that we can capture over time through three distinct levers by improving our service, growing our accessorial business, and expanding our local customer base. As we continue to improve our service, we’re able to align our price with the value we deliver. This was reflected in our contract renewal pricing, where we achieved year-over-year growth in the high-single-digits for the third consecutive quarter. We also captured a double-digit increase in accessorial revenue as customers took advantage of our premium services. The fourth quarter rollout of our retail store offering went well, and we’re developing a pipeline of customers specifically for this premium service.

In the first quarter, we introduced another new service called must-arrive-by-date, which is already gaining strong customer traction, and we’re expanding our trade show and cross border services with the support of our newest service centers in Las Vegas and Nogales, Arizona. Lastly, we’re continuing to have success in growing our local customer base. From a strategic perspective, local accounts are a higher margin business for us and we’ve expanded our local sales force to double down on this opportunity. In the first quarter, we earned 10% more shipments from local customers compared to the year ago. The final pillar of LTL 2.0 is cost efficiency, specifically with purchased transportation, variable costs, and overhead. In the first quarter, we reduced our purchased transportation cost by 21% year-over-year by covering more linehaul miles in-house while also paying lower contract rates for the miles we outsourced.

We ended the quarter with 18% of linehaul miles outsourced to third parties, which was a reduction of 370 basis points year-over-year. That puts us at the higher end of our target range for a 200 — 400 basis points improvement this year. We expect to accelerate the number of miles we bring in-house in 2024, which will give us greater efficiency, flexibility and quality control. This will be supported by our initiatives to add driver teams in sleeper cab trucks for long distance hauls. We’ve onboarded over 100 of these teams and we’re targeting a few hundred sleeper trucks to be in operation by the end of this year. Lastly, as our volume growth continues to outpace our headcount growth, our variable labor cost creates an ongoing margin opportunity.

We managed this effectively in the first quarter through the strong execution of our operational teams and our proprietary technology. Turning to Europe, our business continued to perform well in a soft macro environment. We increased both revenue and adjusted EBITDA versus the prior year, supported by a strong pricing environment and a robust sales pipeline. Our strongest year-over-year growth rates and adjusted EBITDA were in France and the UK, which are two key geographies for us. In France, the increase was in the mid-teens and in the UK, it was in the high-single-digits. Across the European business as a whole, our first quarter EBITDA was the highest it’s been since the pandemic. In summary, we made significant progress in executing our strategy in the first quarter, while continuing to make investments in long-term growth.

Our service quality is at record levels, we’re growing yield faster than the market, and we’re driving cost efficiencies in areas that have the greatest impact on earnings. The initiatives we put in place are contributing to our strong operating momentum and cementing our foundation for future growth. We’ve come a long way under LTL 2.0 and we’re still in the early stages of unlocking our full potential. Now, I’m going to hand the call over to Kyle to discuss the first quarter results. Kyle, over to you.

Kyle Wismans: Thank you, Mario. Good morning, everyone. I’ll take you through our key financial results, balance sheet, and liquidity. It was a strong first quarter across the board. Revenue for the total company was $2 billion, up 6% year-over-year. This includes top-line growth of 9% in our LTL segment and 1% in Europe. Our LTL revenue, excluding fuel, was up a robust 12% year-over-year. On the cost side in LTL, salaries, wages and benefits were 10.5% higher in the quarter than a year ago. The increase primarily reflects wage and benefit inflation as well as incentive compensation aligned with the segment’s strong first quarter performance. We mitigated these impacts by delivering our fifth straight quarterly increase in labor productivity on a year-over-year basis.

Our labor hours per day increased by 3.5% in the quarter, while our shipments per day increased by 4.7%. We were also more cost efficient with purchased transportation through a combination of in-sourcing and rate negotiation. Our expense for third-party carriers was down year-over-year by 21%, which equates to a $21 million savings in the quarter. Depreciation expense increased by 22% year-over-year, or $13 million, reflecting the investments we’re making in the business. This continues to be our top priority for capital allocation in LTL. Our first quarter CapEx was primarily allocated to purchasing new tractors from the OEMs and manufacturing more trailers in-house. Next, I’ll add some detail to adjusted EBITDA starting with the company as a whole.

We generated adjusted EBITDA of $288 million in the quarter, which was up 37% from a year ago. Both our North American and European segments contributed to the increase. Our adjusted EBITDA margin was 14.2%, representing a year-over-year improvement of 320 basis points company-wide. We also continued to rationalize our corporate cost structure. Our first quarter corporate net expense was $5 million for a year-over-year savings of 44%. Looking at just the LTL segment, we grew our adjusted operating income by 50% year-over-year to $175 million and we grew adjusted EBITDA by 40% to $255 million. This reflects the combined impact of pricing gains, cost efficiencies, and increase in volume. In our European Transportation segment, adjusted EBITDA was $38 million for the quarter, up 3% over the prior year.

Company-wide, we reported operating income of $138 million for the quarter, up 138% year-over-year, and we grew net income from continuing operations by 294% to $67 million, representing diluted earnings per share of $0.56. On an adjusted basis, EPS increased by 45% year-over-year to $0.81. Lastly, we generated $145 million of cash flow from operating activities in the quarter and deployed $299 million of net CapEx. Moving to the balance sheet, we ended the quarter with $229 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $793 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 2.9x trailing 12 months adjusted EBITDA.

This was an improvement from 3x at year-end 2023 and we expect to further reduce our leverage this year. The ongoing investments we’re making are enhancing our earnings growth trajectory and will support our long-term goal of achieving an investment grade profile. Now, I’ll turn it over to Ali who will cover our operating results.

Ali Faghri: Thank you, Kyle. I’ll start with our LTL segment, which reported another quarter of profitable growth with strong underlying trends. On a year-over-year basis, we increased our shipments per day by 4.7% in the quarter, led by 10% growth in our local sales channel. This resulted in growth in tonnage per day of 2.6% and our weight per shipment was down 1.9%, which was less of a decline than the prior quarter. On a year-over-year basis, this was our third consecutive quarter of improvement in weight per shipment. On a monthly basis, the trends across our operating metrics were broadly positive. Our January tonnage per day was down 1.1% year-over-year. February was up 3.5% and March was up 5.9%. Looking just at shipments per day, January was up 1.4% year-over-year.

February was up 5.8% and March was up 7.2%. In April, our preliminary tonnage per day was up 3.1% year-over-year, while our shipment count was up 4.8%. On a two-year stack basis, April shipments per day and tonnage per day accelerated versus the month of March. We also delivered another strong quarter of yield growth. We grew yield, excluding fuel, by a robust 9.8% compared with the prior year. While our improving weight per shipment was a modest mix headwind to yield, our revenue per shipment ex-fuel accelerated for the third consecutive quarter to a year-over-year increase of 7.9%. Importantly, our underlying pricing trends are strong as we continue to align our pricing with the better service and value-added offerings we provide. Our contract renewal pricing was up 8% in the quarter, compared with a year ago.

Turning to margin, our first quarter adjusted operating ratio was 85.7%, which was an improvement of 390 basis points year-over-year. We’ve now reported nearly 400 basis points of year-over-year margin expansion in each of two consecutive quarters and the current quarter is tracking for an improvement at the same level or better. Our strong margin performance was primarily driven by yield growth and bolstered by our cost initiatives and productivity gains. Sequentially, our adjusted OR improved by 80 basis points, which outperformed our expectations. Moving to our European business, we delivered year-over-year revenue growth despite ongoing softness in the macro environment. As with the prior quarter, our strong pricing outpaced inflation, volume improved month by month and turned positive on a year-over-year basis in March.

We also grew adjusted EBITDA versus the prior year even with fewer working days, reflecting disciplined cost control. The team continues to execute well and earn new business from high-caliber customers. This momentum is reflected in our sales pipeline, which has expanded to nearly $1.2 billion. This should continue to strengthen our position in key European geographies. I’ll close with a summary of our strong start to the year, which lays the foundation for the significant margin improvement we expect in 2024. As you heard from us this morning, we’re continuing to deliver record service levels, providing more value to our customers and earning higher returns. Our service improvements, combined with the momentum of our accessorial offering, drove another quarter of strong yield growth.

And we realized meaningful cost efficiencies through our linehaul in-sourcing initiative and labor productivity gains. In summary, our strategy is working. We’re delivering strong revenue and earnings growth, and we’re still in the early stages of realizing our margin expansion opportunity. Now, we’ll take your questions. Operator, please open the line for Q&A.

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Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. [Operator Instructions]. Our first question is coming from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.

Ravi Shanker: Thanks. Good morning, everyone. So Mario, you said that you are seeing some pretty good pricing momentum and there’s a lot more to come. How much of your order book is repriced already and kind of what’s the potential opportunity there as you kind of go through the year?

Mario Harik: Hey, Ravi, it’s Mario. When we look at the overall contract renewal, so we were up in the high-single-digits in the first quarter, and usually on average we renew roughly around a quarter of our contracts. And that performance for us was driven by all the service improvements that we are delivering for our customers that obviously we earn a higher price because they don’t want to see disruptions in their supply chain. And they also understand we’re investing in our network to be able to provide that, that great service. Again for us, it’s been the third quarter of high-single-digits and we have, since the bankruptcy of Yellow that would be, we have another quarter of the book effectively to renegotiate here in the upcoming quarter as well.

Ravi Shanker: Got it. It’s helpful. And maybe as a follow-up, I think you said 2Q OR year-over-year improvement similar. Can you just unpack that a little bit more kind of how do we think about the evolution through the months of 2Q and kind of how much OR would improve vs seasonality? Thank you.

Mario Harik: Yes, you got it, Ravi. I’ll actually give the color on the tonnage, yield and OR — ultimately OR outlook like we usually do. But on the tonnage side for us, April was up 3% on a year-on-year basis and shipment counts were up in the same ballpark as the first quarter as well. Now, we do expect the second quarter to be up in a similar level. For us, April was actually better than seasonality compared to March. And we’ll give another update here on the May tonnage early June mid quarter. And on the yield side, as I said earlier, we do expect yield to be up on a year-on-year basis in a similar range as we had in the first quarter. April for us was also in a similar range. From a revenue per shipment perspective, we saw that accelerate from Q4 to Q1, and we expect on a quarter-over-quarter, on an absolute dollar basis, for that to further accelerate in the second quarter.

And ultimately from an OR perspective, we expect a strong quarter for margin improvement. Sequentially, we expect to be an improvement from Q1 to Q2 of 200 to 250 basis points going into the second quarter. That could put us, call it in the low to mid-83 range for Q2, which implies more than 400 basis points of margin improvement on a year-on-year basis, which we believe would be very, very good performance in this freight market.

Operator: Thank you. Our next question is coming from the line of Ken Hoexter with Bank of America. Please proceed with your question.

Ken Hoexter: Great. That’s great detail, Mario, congrats, and way to go up. Just talk about the growth of local sales and what that’s meant, it seems like that had outsized growth compared to your national sales in the quarter and it seems to be accelerating. Maybe talk about the pace that you expect that to continue because that’s been important driver for the pricing that you’re talking about. Thanks.

Mario Harik: Thanks, Ken. It is a big part of our strategy to grow local account business because, Ken, these are more sticky relationships we have with those customers, and they are supported with a local relationship with one of our sellers in a local market. So over the last 12 months, we increased the headcount in our local sales force by roughly around 25% over that period of time. And we’re seeing great performance here. In the first quarter shipment count was up 10% on a year-on-year basis. Just to give you a stat there, we’ve added more than 3,000 new buying accounts in that channel so far year-to-date. So this is a segment of growth for us. We’re investing more in it. And when customers see our focus on service and taking care of them and taking care of their freight, we’re seeing very good growth associated with that.

Ken Hoexter: Great. On the future growth, we’ve seen some volatility in some customers kind of taking on freight and losing it. Maybe talk about the demand environment in the backdrop here. We’ve had mixed signals. Our indicator seems to be improving in the backdrop. Any signs that you’re seeing demand improve in the backdrop?

Mario Harik: We are seeing the freight markets continuing to be soft, Ken; the underlying demand from customer is soft. However, it’s stable. It seems to be bouncing along the bottom from that perspective. However, again, for us, April was better than seasonality. But a lot of that is based on our sales efforts, on our quality improvements, our service improvements, are enabling us to drive those gains. Now, if you break it down between industrial and retail, we saw the ISM peak over 50 for the first time in March, but then it dropped back down to 49 here in April. So we’re seeing the industrials be a bit more muted. And when we talk to our industrial customers, and we usually survey them on a quarterly basis, they do expect growth in the back half, but it seems to be muted growth.

On the retail side, inventories are largely normalized at this point. And what our customers are telling us, they do expect, again, growth in the back end, given in the back half, given the easier comps, but it’s still softer consumer demand as well. So again, the market seems to be on the softer side in terms of the underlying demand. But again, for us, it’s about gaining more momentum in that local account segment. And as we deliver great service numbers, our customers are rewarding us with more freight.

Operator: Thank you. Our next question is coming from Daniel Imbro with Stephens. Please proceed with your question.

Daniel Imbro: Yes. Good morning, guys. Thanks for taking our questions. I wanted to dig in to the cost side in a little bit more detail, obviously, better performance on the OR here in the first quarter. And you mentioned bringing linehaul in-house, 200 basis points to 400 basis points this year. Where could that go in 2025 and beyond? And then Mario, on the variable cost side, what are the other levers that you and the team are targeting? So as we kind of execute on this initiative, what’s the next leg of the cost takeout you see in the model?

Ali Faghri : Sure, Daniel. So when you think about linehaul in-sourcing, obviously, an important strategic initiative for us here in the first quarter, we were at about 18.1% miles that were outsourced to third parties. We improved that by 370 basis points on a year-over-year basis, also improved 150 basis points quarter-over-quarter. And that was at the higher end of our full year target range of improving by 200 basis points to 400 basis points annually. In terms of our target, we’ve talked about cutting third-party linehaul miles in half by 2027 relative to where we were at year-end 2021. So that would get us to somewhere in that low-teens percent range as a percentage of total miles. That’s not only going to be a cost benefit for us, but it’s also going to help us with service as well.

As we’ve talked about more recently, we’ve been rolling out initiatives to accelerate the pace of in-sourcing, specifically team drivers and sleeper cab trucks. We already have 100 of those teams onboarded. And we expect to have a few hundred of those teams in the fleet by the end of 2024, and that’s going to allow us to drive efficiencies in our linehaul network but also accelerate that pace of in-sourcing.

Mario Harik: And in terms of — Mario — in terms of variable cost levers, so Ali mentioned the in-sourcing of third-party linehaul, which that comes — obviously, you saw here in the first quarter, our PT costs were down over 20%. Now, when you look at the other levers around variable labor costs, and the team has done a great job operationally managing labor. Here in the first quarter, we had the fifth consecutive quarter of productivity improvement. If you look at the quarter, we — our shipment count went up more than our headcount effectively in the first quarter. And that led to benefits, obviously, to the bottom line. Now, a lot of that is driven again by operational execution in the field, and it’s also driven by our proprietary technology that enables us to manage labor very effectively.

So if you think through the quarters and years to come, these are two big levers for us. One is the continued reduction of PT costs. And then the second one is labor productivity.

Daniel Imbro: Great. I’ll leave it there. One question. Best of luck guys.

Mario Harik: Thank you.

Operator: Thank you. Our next question is coming from the line of Fadi Chamoun with BMO Capital Markets. Please proceed with your question.

Fadi Chamoun: Yes. Good morning. Thanks for taking my question, and congrats on strong results. Were there any costs associated with the new terminals that you opened in Q1? Are there any dragging costs that you expect kind of as we go into the second quarter and the second half of the year as you reopen these terminals? And just a follow-up kind of on the pricing side of things. This — I mean, you mentioned renewals are tracking in the 8% range. Is that kind of complete kind of the book of business that we have seen started to get renewed at service level improved last year? I’m just trying to figure like from a comp perspective, do we start to get into easier, I mean, harder comps in the second half of this year? Or is that momentum potentially sustainable? Thanks.

Mario Harik: Hey, thanks, Fadi. I’ll start with the Yellow site openings or the acquired sites opening. I’ll turn it over to Kyle to discuss contract renewals. But when you look at the new service centers we’re bringing online, we don’t see them as having a meaningful cost headwind for us. We do expect them to be OR neutral in this year, and they will become accretive in 2025 and beyond. Now, here in the near-term in the second quarter, I mean, that’s a small impact of cost, probably in the 10 basis points to 20 basis points range on OR associated with those sites, as we first turn them on and then we start getting the efficiency benefits. The reason why for us, that’s the case, because if you look at the service centers, we already cover 99% of all ZIP codes and they fall in three categories.

In some markets, we are moving from a smaller location to a larger location. And as soon as we do that, we gain all the benefits of having more space on the dock that enables us to run more productively and more efficiently for a better service. But your variable cost is the same because we just relocated the team and the rolling stock from site A to site B. The second scenario is where we are adding a site to an existing market where we already have a service center. A good example of that is Nashville; I was in our new Goodlettsville site, which is north of Nashville a few weeks ago. But that’s the case where you look at that site, we split the existing team in that market between two sites or more than two sites. So in the case of Nashville, we already have 30, 35 city drivers in Goodlettsville, but these were relocated from our Nashville terminal into Goodlettsville.

So there as well, you see a small impact from the cost per door, the more space that we have, but you don’t see a meaningful impact on cost. And we have two smaller markets in Eau Claire, Wisconsin and Nogales, Arizona that are net new markets, but they are smaller terminals, and they already, in Nogales right across the border from Mexico and it’s already running ahead of expectations in terms of the demand we’re seeing on that side. So on a net-net basis, Fadi, we look at these as being OR neutral and then accretive for 2025 and beyond.

Kyle Wismans: Hey Fadi, when you think about renewals, so we renegotiated about 25% of the contractual book each quarter. So from the disruption last year, we’ve gone about — through about 75% of the book. And then if you think about the outlook for contract renewals, we expect to be somewhere probably in the high-single-digit range for the remainder of the year.

Operator: Thank you. The next question is coming from Jon Chappell with Evercore ISI. Please proceed with your question.

Jon Chappell: Thank you. Good morning. Kyle, kind of a simple one for you maybe. So in February, you gave some annual guide: low-single-digit tonnage yield ex-fuel mid-single-digit, OR 100 basis points to 200 basis points — 150 basis points to 200 basis points improvement, and it feels like with the 1Q upside and the commentary that Ali or Mario has given about April so far and how 2Q is tracking that you’re off to a much better start. Is there any way to frame what the full year guide may look like based off the first four months of the year vis-à-vis the February guide?

Kyle Wismans: Sure. So I think what’s important to think about is if you take the Q2 guide we walked through today. So if you’re in the low to mid-83s, if you think about that and you roll through typical seasonality for both Q3 and Q4, that would imply our full year OR to be at the high end of the outlook range. Now there’s still a path, Jon, we can do better than that, given the momentum we have now and potential for a macro recovery, but it’s still early in the year. We’ll give you an update as the year progresses.

Jon Chappell: Okay. And no change to the others, tonnage or yield as well?

Kyle Wismans: No change right now to the assumptions.

Operator: Thank you. Our next question is coming from Stephanie Moore with Jefferies. Please proceed with your question.

Stephanie Moore: Hi, good morning. Thank you. I wanted to actually follow-up on the prior question or two questions ago on just the ramp of terminals. Any change in the timeline of the ramp of service — the ramp of these service centers, just given what is a weaker macro?