XPO Earningcall Transcript Of Q2 of 2024


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chief financial officer; and Ali Faghri, our chief strategy officer. This morning, we reported a strong

second  quarter  for  both  revenue  and  earnings  in  a  soft  market  for  freight  transportation.

Companywide, we grew revenue year-over-year by 9% to $2.1 billion.

And  we  increased  our  adjusted  EBITDA  by  41%  to  $343  million.  Adjusted  diluted  EPS  was  58%

higher  year-over-year  at  $1.12.  I'll  start  with  the  strategy  that's  driving  our  above-market  earnings

growth and margin expansion. There are 4 pillars for LTL 2.0.

First  is  to  provide  world-class  service.  This  revolves  around  the  service  metrics  that  are  most

important to our customers. In the second quarter, we improved one of the most important metrics,

damage claims ratio, to a company record of 0.2%. This compares with 0.3% in the first quarter and

0.7% last year.

Since  late  2021,  when  we  started  LTL  2.0,  we've  driven  more  than  a  75%  reduction  in  damage

frequency.  We  also  improved  our  on-time  performance  on  a  year-over-year  basis  for  the  ninth

consecutive quarter. We already have one of the industry's fastest networks of 1- and 2-day lanes

and,  when  coupled  with  our  strong  on-time  performance,  this  is  a  key  differentiator  for  our

customers. We achieved these improvements while handling higher volume across our network by

prioritizing both operational excellence and network investment.

Specifically, we have two major levers with long runways to improve our service: one is the opening

of 28 new service centers, and the other is our insourcing of purchased transportation. In addition,

we're constantly implementing a number of shorter-term initiatives. For example, we now have the

freight airbag system installed in over 95% of our service centers. We're seeing a strong return on

this  investment  through  a  reduction  in  damage  claims.  The  second  pillar  is  to  invest  in  network

capacity.

Over the past 3 years, we've added nearly 14,000 trailers and more than 4,000 tractors to our fleet.

This  is  a  high  return  use  of  capital  that  allows  us  to  in-source  linehaul  transportation,  drive

operational  efficiencies  and  improve  customer  service  levels.  So  far  this  year,  we've  added  over

1,900  new  tractors,  bringing  down  the  average  age  to  4  years  from  5  years  at  the  end  of  2023.

These  new  tractors  are  more  efficient  to  operate,  resulting  in  a  double-digit  decline  in  our  fleet

maintenance costs in the second quarter.

We've  also  manufactured  over  2,600  trailers  year-to-date  at  our  in-house  production  facility  in

Arkansas. As the only U.S. freight transportation company to produce its own trailers, we can create

capacity when our customers need it and at a lower cost. In addition, we're continuing to roll out the

28 service centers we acquired in December.

We've opened 14 so far and expect to open another 10 in the back half of the year. The last four will

be operational by early 2025, on track with our plan. These sites are in fast-growing freight markets.

Each new center will help us operate more efficiently in the near term while giving us more capacity

when the cycle recovers.

Our larger footprint also reduces freight rehandling and brings us closer to our customers. And as

our network continues to expand, the benefits of service will grow. Our third area of focus is yield,

which  is  our  single-biggest  opportunity  for  margin  improvement.  We've  been  reporting  strong  yield

growth, and we're still in the early innings.

In the second quarter, we grew yield, excluding fuel, by 9% year-over-year, which helped us deliver

440  basis  points  of  adjusted  operating  ratio  improvement.  We  have  3  distinct  levers  for  yield

improvement:  we're  aligning  our  price  with  the  value  we  deliver,  we're  growing  our  accessorials

business and we're expanding our local customer base. In the second quarter, our contract renewal

pricing  increased  year-over-year  by  high  single  digits  for  the  fourth  consecutive  quarter,  driven  by

the service improvements we're making. And accessorials generated double-digit revenue growth in

the quarter. We're rolling out premium services that our customers are asking for, like our expanded

trade show service.

We recently opened a new service center in Las Vegas, and we're already seeing strong customer

demand for this offering. For our industrial base, we launched and expanded cross-border service

called Mexico+ that adds more capacity and order crossing points to support our customers who are

shifting  production  to  North  America  from  overseas.  We're  also  continuing  to  earn  more  market

share from our local customer base, which is a higher-margin business. In the second quarter, we

increased shipments from local customers by over 9% compared with a year ago. The final pillar of

our strategy is cost efficiency.

The opportunities here are in purchased transportation, variable costs and overhead. In the second

quarter,  we  reduced  our  purchased  transportation  cost  by  22%  year-over-year  through  a

combination of insourcing linehaul and paying lower contract rates to third-party carriers. We ended

the  quarter  with  15.9%  of  linehaul  miles  outsourced  to  third  parties,  which  was  a  reduction  of  490

basis  points  year-over-year.  This  is  the  lowest  level  outsourced  in  our  company's  history,  and  we

expect to accelerate the pace as we move forward.

When  we  transport  the  freight  ourselves,  we  have  more  quality  control  and  more  flexibility.  Our

drivers  and  service  centers  can  move  freight  faster  with  less  rehandling,  which  reduces  damages.

We  also  get  better  utilization  of  our  trailers  by  redeploying  them  at  their  destination.  We  expect  to

have a few hundred driver teams and sleeper cab trucks on the road by year-end to support more

insourcing.

Lastly, we're continuing to manage labor cost effectively in our operations. This is a direct result of

the  team's  execution  as  well  as  our  proprietary  technology  for  labor  planning.  The  second  quarter

was our sixth straight quarterly improvement in labor productivity. Turning to Europe, our business

continued to outperform the industry in a soft macro.

On  a  year-over-year  basis,  we  increased  segment  revenue  by  4%.  We  also  delivered  the  highest

quarterly EBITDA since 2019 with year-over-year growth of 7%, driven by a combination of top line

growth and disciplined cost control. Our strongest EBITDA growth was in the U.K. and France.

In  the  U.K.,  the  increase  was  in  the  high  teens.  And  in  France,  it  was  in  the  high  single  digits.  In

summary, our strong results in the first half of the year demonstrate the disciplined progress we're

making  with  the  many  initiatives  we've  put  in  place.  Importantly,  we're  delivering  record  service

levels with a direct connection between service and profitability.

This dynamic is at the core of our strategy. It enables us to outpace the market with yield growth and

profitable market share gains while operating more costs efficiently at scale. We're also continuing

to invest capital where it can sustain high returns over time. These are all inherent strengths of our

company that we'll use to improve the business in any environment.

Together  with  our  operating  momentum,  they  create  a  powerful  foundation  for  future  growth.  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

Thank  you,  Mario,  and  good  morning,  everyone.  I'll  take  you  through  our  key  financial  results,

balance sheet and liquidity. We reported a strong second quarter across the company with revenue

up 9% year-over-year to $2.1 billion. This includes top line growth of 12% in our LTL segment and

4% growth in Europe.

Excluding fuel, our LTL revenue was up 13% year-over-year. As we took on more business in LTL,

we also improved our labor productivity. From the first to second quarter, we reduced our headcount

sequentially,  while  our  shipments  per  day  increased  by  4%.  This  helped  to  mitigate  the  cost  of

salary, wages, and benefits, which in total were 11.5% higher in the quarter than a year ago.

This primarily reflects wage and benefit inflation as well as incentive compensation aligned with the

segment's  strong  second-quarter  performance.  We  were  also  more  cost  efficient  with  purchased

transportation,  primarily  due  to  our  insourcing  initiatives.  Our  expense  for  third-party  carriers  was

down year-over-year by 22%, which equates to a $19 million savings in the quarter. Additionally, we

continue to improve our maintenance costs with our cost per mile down 12% year-over-year.

Depreciation expense increased by 24% year-over-year or $15 million, reflecting investments we're

making  in  the  business.  This  continues  to  be  our  top  priority  for  capital  allocation  in  LTL.  Our

second-quarter capex was primarily allocated to purchase tractors from the OEMs and manufacture

more trailers in-house. Next, I'll add some details to adjusted EBITDA, starting with the company as

a whole.

We  generated  adjusted  EBITDA  of  $343  million  in  the  quarter,  up  41%  from  a  year  ago.  Our

adjusted EBITDA margin was 16.5%, which was a year-over-year improvement of 380 basis points.

This  was  supported  by  margin  improvement  in  both  segments  and  the  continued  rationalization  of

our corporate cost structure. In the second quarter, our corporate net expense was $3 million for a

year-over-year savings of 7%.

Looking  at  just  the  LTL  segment,  we  grew  adjusted  operating  income  by  51%  year-over-year  to

$214 million and grew adjusted EBITDA by 43% to $297 million. This reflects the combined impacts

of  our  pricing  gains,  cost  efficiencies  and  the  increase  in  volume.  In  our  European  Transportation

segment, adjusted operating income was $19 million, which was a 6% increase from the prior year.

And we grew adjusted EBITDA by 7% to $49 million.

Returning to the company as a whole, we reported operating income of $197 million for the quarter,

up  84%  year-over-year.  And  we  grew  net  income  from  continuing  operations  by  384%  to  $150

million, representing diluted earnings per share of $1.25. The increase in net income from continuing

operations  includes  a  onetime  tax  benefit  of  $41  million  related  to  the  reorganization  of  our  legal

entities in Europe. We expect to receive a net cash refund of approximately $45 million in 2025.

Note that we excluded the tax benefit from adjusted net income in our second-quarter reporting. On

an adjusted basis, EPS increased by 58% year-over-year to $1.12. And lastly, we generated $210

million of cash flow from operating activities in the quarter and deployed $184 million of net capex.

Moving to the balance sheet, we ended the quarter with $250 million of cash on hand.

Combined with available capacity under our committed borrowing facility, this gave us $836 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 2.7 times trailing 12-months adjusted EBITDA. This was

an improvement from 2.9 times at the end of the first quarter, and we expect to further reduce our

leverage in the second half of the 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-Ahmad Faghri -- Chief Strategy Officer

Thank you, Kyle. I'll start with our LTL segment, which reported another quarter of profitable growth,

reflecting strong execution by our operational teams. On a year-over-year basis, we increased our

shipments per day by 4.5% in the quarter, led by more than 9% growth in our local sales channel.

Notably, we grew tonnage per day by 3.4%, which is an acceleration from 2.6% in the first quarter.

Our weight per shipment was down 1.1%, with the year-over-year decline moderating from the prior

quarter.  This  was  our  fourth  consecutive  quarter  of  year-over-year  improvement  in  weight  per

shipment. On a monthly basis, year-over-year, our April tonnage per day was up 3.1%, May was up

2.4%  and  June  was  up  4.6%.  Looking  just  at  shipments  per  day,  April  was  up  4.7%,  May  was  up

3.8% and June was up 4.9%.

For  July,  we  estimate  tonnage  and  shipments  per  day  to  be  about  flat  year-over-year  with  both

trends outperforming seasonality. On a 2-year stack basis, July shipments per day and tonnage per

day  meaningfully  accelerated  versus  June.  Our  pricing  trends  remained  strong  as  we  continue  to

align our pricing with our service quality and premium offerings. For the second quarter, our contract

renewal pricing was up year-over-year by 8%.

We also delivered another quarter of above-market yield growth. We grew yields, excluding fuel, by

9%  compared  with  the  prior  year.  While  our  improving  weight  per  shipment  was  a  modest  mix

headwind  to  yield,  our  revenue  per  shipment,  ex  fuel,  increased  sequentially  for  the  sixth

consecutive quarter and was up 7.4% year-over-year. We expect to continue increasing both yield

and  revenue  per  shipment  quarter-over-quarter  in  the  back  half  of  this  year,  reflecting  ongoing

momentum with our pricing initiative.

Turning to margin, we improved our second-quarter adjusted operating ratio by 440 basis points to

83.2%. We've now delivered year-over-year margin expansion of around 400 basis points for three

consecutive quarters. Sequentially, our adjusted OR improved by 250 basis points, coming in at the

high  end  of  our  guided  range.  Our  robust  margin  performance  was  primarily  driven  by  yield  and

volume growth, bolstered by our cost initiatives and productivity gains.

Moving to the European business, we improved volumes throughout the quarter with strong pricing

that  outpaced  inflation.  Our  organic  revenue  growth  in  June  was  the  highest  year-to-date  for  the

segment  overall.  And  in  the  U.K.,  an  important  market  for  us,  organic  revenue  in  June  increased

year-over-year by double digits. Our sales pipeline has grown to a record $1.3 billion, and the team

continues  to  earn  new  business  from  blue-chip  customers,  strengthening  our  position  in  key

European geographies.

Before  we  go  to  Q&A,  I  want  to  summarize  the  considerable  progress  we're  making  toward

becoming  the  LTL  service  leader  in  North  America.  Our  service  metrics  are  at  record  levels,  and

there  is  ample  runway  for  further  improvement.  This  is  earning  us  profitable  market  share  and

above-market  yield  growth.  We're  also  optimizing  our  network  with  meaningful  cost  efficiencies,

primarily through linehaul insourcing and labor productivity.

And we just reported another strong quarter of revenue and earnings growth in a soft macro. We're

confident that our strategy will drive significant margin expansion over the years to come. Now we'll

take your questions. Operator, please open the line for Q&A.

Operator

Questions & Answers:



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