Q3 2019 Earnings Call

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Now I'll turn the call over two broad Jacobs Mr. Jacobs. Please go ahead.

Thank you operator, and good morning, everybody.

Thanks for joining our.

Third quarter pretty school I'm here in Greenwich today, with Matt Fassler, our Chief strategy Officer job you had the our senior director of Investor Relations.

We delivered beat this quarter on both adjusted EBITDA and adjusted bps.

We also generated strong free cash flow.

We achieved these results despite a soft macro which is reflected in our updated revenue guidance.

Our main lines of business produced important gains in the quarter and logistics, we increased adjusted EBITDA by 11%.

We continue to buy truckload capacity it better than market rates.

We grew revenue in managed transportation by 22% for the tailwind from Exzeo connect we outperformed the market in Europe .

And our LTL adjusted operating ratio was our best third quarter, all our ever.

We remain firmly on track for LTL business to generate at least a billion dollars EBITDA in 2021.

Our proprietary technology is continuing to drive benefits for our customers and our shareholders.

Our entire management team, it's highly focused on executing on 10 major levers to significantly improve our profit over the next several years.

The majority of these 10 initiatives relate directly to our technology.

Companywide, we using our check to optimize the 5 billion dollar variable cost opportunity in our six and a half billion dollar annual labor spent.

For example in LTL, we rolled out game changing tools that use machine learning to reduce our $1.3 billion annual line haul spend or $650 million spend for pickup and delivery and also reduce the $365 million. We spent annually in dock operations.

In the warehouses, where we've introduced advanced automation like collaborative robots in autonomous goods to person systems. Our teams are working two to four times more productively.

And other revenue side, we're playing data science to capture pricing opportunities across our transportation modes.

In total the 10 levers represent a pool of approximately 700 million to a billion dollars its potential profit growth by 2022.

These are self driven company specific initiatives that are largely independent of the macro.

We're excited about the size of the price and the meaningful potential uplift to our profitability.

Now I'll turn the call over to match to discuss the quarter in more detail Matt. Thanks, Brett.

As I review that numbers, you'll see that we're moving full speed ahead with our tech driven initiatives across our company with many milestones marking progress in Q3, we're confident that these initiatives will deliver significant benefits for our shareholders both today and overtime.

Start by walking you through the third quarter numbers and our strategic focus by business unit, beginning with our transportation segment and North American LTL, we drove strong profit growth despite sluggish demand.

<unk> rose, 2.9%, excluding fuel price increases on contract renewals grew by 4%.

Both of these are a continuation of the trends we saw in the first half of the year, reflecting rational market pricing tonnage declined by 3.1% year over year. This was driven by lower weight per shipment from many of our industrial customers consistent with the macro backdrop for the you.

Industrial sector by contrast weight per shipment for customers and the consumer sector remain steady.

Our adjusted operating ratio improved by 460 basis points to 80.8% excluding gains on sales of real estate. Both this year at last our adjusted or improved by 210 basis points to 83.5% as Brad said, it's our best third quarter adjusted.

Or the.

The improvement in this ratio reflects our continued improvement in yield as well as tight cost control Tec, driven optimizations up pricing and labor are beginning to contribute to these results within freight brokerage we drove volume while remaining disciplined on March.

Our freight brokerage top line declined by 14% year over year, which mirrors Q2, excluding the reduction in our brokerage business with our largest customer our underlying freight brokerage revenue declined by just 3% our net revenue margin if the cross freight brokerage by 60 basis points to 18 per se.

And as contractual rates declined and the spot market stabilize in truck brokerage specifically the decline in our load count moderated to 4%, which is an improvement from Q2 importantly, excluding our brokerage business with our largest customer our growth and no count was more than twice.

<unk> percentage points bad in the high teens. This is an acceleration from Q2 and reflects a significant gain share.

We're continuing to source truckload capacity at price is better than the market in the third quarter, we procured capacity at about 3% better than the D.A.T. benchmark.

September was the strongest month in the quarter for truck brokerage both in terms of the year over year revenue and net revenue trends, our digital freight marketplace is enhancing our ability to source competitively deliver compelling value and create an appealing user experience for our customers and carriers.

Turning to our last mile operation revenue overall declined 19% year over year.

This reflects the impact of winding down our post injection business in Q1, we grew our core heavy goods business and excluding postal injection last mile revenue growth accelerated to 4% as we onboarded new business in recent quarters.

Net revenue margin in last mile increased sharply year over year, primarily due to mix as we discontinued our post injection business earlier in the year and as we increased margin for our core have you guys. Yes, given our recent new business wins, we expect last mile organic revenue growth to continue.

Into the fourth quarter as we mentioned earlier managed transportation posted strong sales growth in Q3 and remains one of the fastest growing lines of business at our company.

Our European Transportation business had a revenue decline of 1.8% in the quarter FX was responsible for about five percentage points of the decline.

Transportation revenue trends in Europe measured in local currency were relatively consistent quarter to quarter, which is a solid accomplishment in a tough backdrop, we continued to generate the most growth in the UK and Spain.

Looking across our transportation segment overall revenue was down 5.8%, but adjusted EBITDA was up 2.1% and adjusted EBITDA margin rose by 100 basis points to 12.4% driven by improved profitability in North American LTL managed transportation.

And last mile FX constrain this number by about $2 million or a little less than one percentage point turning to the logistics segment in North America, our 4% revenue growth reflected strong food and beverage peak as well as ongoing strength in consumer package goods and aerospace.

Yes, if we exclude our business with our largest customer our underlying logistics revenue growth in North America moves up to about 7% in Europe logistics revenue declined 3.5% FX had a negative impact of about five percentage points once again e-commerce .

It was our strongest vertical in European logistics.

We're continuing to build on our market leading position as the largest outsource provider of you fulfillment logistics in Europe .

Adjusted EBITDA for logistics as a whole rose 11% year over year in the quarter and adjusted EBITDA margin rose by 100 basis points to 9.4% the combined impact of that and the downsizing of our largest customer cost us approximately $11 million EBITDA, we believe that deal.

Illusion of these items more accurately frames the underlying growth in our logistics business. We remain excited about the growth we're seeing from our SPL direct shared distribution platform.

This offering brings together the best of our supply chain and transportation capabilities and both our current and prospective customers share our optimism for its growth outlook.

Is this win declined 2.7% year over year, improving from a 5.2% decline in the second quarter year to date, new business wins are up in the mid single digits in North America and down by similar rate in Europe .

Companywide, our sales pipeline remained above $4 billion for the third consecutive quarter, we have an important seat at the table for new business opportunities that we expect to pay off when the macro rebounds, moving down the income statement interest expense rose to $75 million from.

$51 million, a year ago, reflecting our debt issuance earlier in the year to fund our share buyback program, our effective tax rate improved to 20% from 26.2% a year ago due primarily to foreign currency losses recognized we now expect an effective tax.

That's right for full year 2019 between 23% in 25%, which is below our prior expectation of 25% to 28%.

Our weighted average diluted share count was 102 billion on September thirtyth, compared with 137 million shares a year ago.

The year over year decrease reflects our share buyback activity there was no meaningful change quarter to quarter as we Didnt, we purchased any shares in Q3.

Since we launched a program in December we bought back 35.2 million shares at an average price of $53.42 for a total cost of $1.9 billion, our diluted earnings per share. What's the dollar 14 up from 74 cents a year ago.

Our adjusted diluted EPS rose to $1.18 from 89 cents a year ago, our buyback activity was 15 cents accretive to adjusted EPS for Q3, and should continue to prove nicely accretive for the year.

Cash flow from operations in the quarter was $278 million compared with $288 million a year ago.

Gross capital expenditures increased to $177 million from $145 million a year ago net capital expenditures were $70 million compared with $115 million a year ago, all in free cash flow was $257 million.

A sizable increase from $173 million a year ago.

We had asset sales of $107 million, including $94 million from real estate and the remainder from equipment.

$71 million came from the sale of the office property in Portland, We discussed on our last earnings call, we sold up underutilized space and this back a more appropriate footprint at an attractive rent the sale important Portland resulted in a gain of $14 million Intel.

We book gain on sale of assets of $33 million in the quarter of which $29 million related to real estate 26 million of this was in our LTL business, including most of the Portland game.

We had a sequential benefit to free cash flow and trade receivables programs of $56 million in the quarter for the full year. We continue to expect these programs to deliver incremental benefit to free cash flow of $125 million to $150 million.

Now I want to bring you up to speed on some of the 10 key profit initiatives. We mentioned all of which are underway. They represent potential profit growth opportunity of 700 million to $1 billion by 2022, largely independent of the macro I'll start with some comp.

Thats about our technology organization, we've structured our tech organization to deliver a number of important advantages first as a global leader with about 17 million $70 billion and revenue we have the resources to invest in innovation on a large scale we make.

One of the largest tech commitments in our industry investing approximately $550 million a year in technology second while our technology strategy is centralized under our CIO. The team itself is embedded across our operations. This provides a constant feedback loops that engage our.

Operators and customers.

Third the way our business is structured we can deploy innovations globally across multiple operations in a relatively short time and fourth because our technology. Our organization is run as a single entity innovations developed for one business unit can have widespread benefits.

We have numerous instances of solutions created for one purpose and then applied with great success in other operations are xps smart optimization tools, our case in point.

Turning to the 10 keep profit improvement initiatives I want to focus on the progress we've made with the ones that are enabled by our proprietary technology. They are advanced automation and intelligent machines deployed for our contract logistics customers are Expo smart workforce productivity tools.

Which we're praying applying across our logistics and LTL operations LTL process improvements for the optimization of pickup and delivery and our line haul network pricing analytics and our Expo can that digital freight marketplace I'll give you a little more color on each.

Of these initiatives across our supply chain offering advanced automation delivers critical improvement in speed controlled safety accuracy and productivity productivity improvements are particularly valuable in tight labor markets, where wage inflation and labor shortages can you wrote.

Margins many of the U.S. is largest markets for warehousing and distribution such as laptop Columbus, Dallas, Eastern Pennsylvania, and Northern California have significant labor constraints in the third quarter, we increased cobots deployments and our warehouses in prep.

Creation for this year's retail holiday peak wants peak passes we can re purpose is cobots for new customers and started up in 2020 and down from that.

SPD smart, we've already increased work <unk> workforce productivity in our logistics warehouses and on our LTL Dot where its deployed this technology provides a bird's eye view of operations, our managers can optimize wherever levels through the day enhancing customer service in the process.

Before we launch SPD Smart, we had been managing warehouse labor spend through a combination of tribal knowledge and reactive analytics now we have deep visibility into performance and we're solving productivity gaps in real time.

The results to date are significant labor efficiency improvements and our warehouses of more than 5% on average increases in motor moves per hour on our LTL docs have more than 10% and employees, who are more energized and engaged in producing a winning performance to date.

We've rolled out xps smart and approximately 100 of our logistics warehouses in North America and expect to roll it to the remaining 200 sites over the next 12 to 15 months Europe has a five site pilot underway.

In LTL, we've deployed the technology on docs in approximately 20 locations and expect to have it all 290 of our North American LTL service centers by yearend.

We also have broader LTL tech initiatives focused on simplifying our processes with real time analytics, driving better productivity enhancing customer satisfaction and positioning X P out as the clear innovation leader in the LTL industry.

In line haul bypass optimization is letting us deployed trust deeper into the network. So that loads go directly to their destination. The freight is handled fewer times, which it would save time and costs and the third quarter, we saw solid improvement in our load factor due in part to these.

Line haul initiatives, our optimization to pick up and deliberate adjusts our routing to traffic in real time accommodate late breaking customer requests and generally managers surprises we've created a more intuitive interface for our dispatchers and we use machine learning to predict looking.

The windows based on customer service histories are dispatchers had visibility into the profit impact rabid adjustment, which enhances their visibility to manage exceptions. We're piloting this technology this quarter, but most of the benefit coming in 2020 and beyond.

On the pricing front, we're using elasticity models and LTL to adjust for customers Lane and current conditions.

Our algorithms incorporate data from past customer behavior, and real time market dynamics. The goal is to price as intelligently as possible and balanced and network for small to midsized LTL accounts, we've greatly improved the software that we used to price lanes are local account exact.

He lives can deliver prices in real time, which AIDS our ability to capture share currently we provide quotes on nearly 50% of the freight in the U.S. LTL market and convert less than a quarter of those quotes into revenue in the first half of 2019 without the benefit of.

Our optimization tools, we captured $1.9 billion of revenue on $9 billion of rate close out of an estimated 18.9 billion dollar total market size as the math suggests we have a large EBITDA opportunity here.

Moving on to SPL connect as many of you, though this is our proprietary digital freight marketplace with multi modal architecture.

It's best described as an umbrella operating system for transportation with a shipper interface a price engine a carrier interface and their mobile App called drive Thats PEO for truck drivers. We currently have over 37000 carriers registered on X P. M connect data.

Most of the App of the App doubled from quarter to quarter for the third period in a row.

In other transportation initiatives, we've introduced electronic carrier, scoring using K.P. eyes, which creates surface transparency and encourages ontime pickup and delivery and delivers better bounce rate and we've launched a carrier loyalty program, which is helping to strengthen our carrier relationships and improve.

<unk> overall performance and retention finally, we've rolled out a new app specifically for last mile drivers as we close I'm proud to share that Expo is the first global logistics company to join MIT is industrial liaison program, our collaboration with MIT.

Great as another note of connectivity with emerging tech, it's an opportunity for us to realize new levels of productivity for our customers, while providing input into the future of robotics and machine learning.

We're also proud of our partnership with the Susan G. Komen Foundation soon you'll see X PEO trucks on the road sporting a familiar pink ribbon, we're supporting column and the fight against breast cancer. Because this is the caused that resonates with our employees and is central to our corporate culture.

With that I'll turn it back to the operator, and we'll take your questions.

Thank you at this time will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question can you maybe press start to if you'd like to remove your question from the Q for participants you think speaker Whitney maybe necessary to pick up your handset.

Before parsing the Starkey.

Our first question comes from the line Bruce Chan with Stifel. Please proceed with your question.

Yes, gentlemen, thank you for your time, just a quick question here on the LTL yield.

When I look at some of the mix characteristics revenue per hundredweight was down length of haul was up fairly meaningfully and I think both of those tend to increase the revenue per hundred weight, which would imply the core yields or maybe closer to zero and I. Just wanted to get your take is that indicative of what's going on to the market and the competitive dynamic.

Or is that more of a function of some of your AI and machine learning enable pricing tools.

So Bruce.

We think that pricing in the LTL market remains healthy and rational our yield trends through the year have been consistent again, our price increases on contract renewals increased 4% again, we think an indicator of consistency in the pricing environment. We are the ERP.

Following our pricing analytics in LTL as we've mentioned Oh, our work in price elasticity has been essential for assessing a any individual customers history as well as current market dynamics for optimizing yield. So we think that pricing in the LTL environment remains consistent and healthy.

As it's been all year.

Okay, and then just switching gears a little bit to the M&A picture and you guys have done some nice work on the margin front in the cost management front. It looks like valuations are starting in a more moderate a little bit out there.

There are any more appetite to get back into the acquisition Fray and if so are there any changes to your previous strategy as far as where do you want to fill out some of that geographic endorsed surface white space.

We are in very early stages of conversations with potential sellers.

We are very disciplined in general and specifically with respect to M&A.

In M&A, we are very methodical process, we've begun that process, there's no timeframe.

M&A is something that we'd like to talk about.

Retroactively rather than Perspectively.

And in general to answer your question about the types of deals. We liked look at are ones that are a strategically compelling. There's a reason to do it as a strong rationale for doing it.

Be from a financial perspective highly accretive.

And.

Something that has synergy so that eight one we do like the customer but to also is a clear path to improve both EBITDA and free cash flow that we're acquiring but there's nothing to talk about of substance at this stage.

Okay and then just one final question here before I hand, it over on the contract logistics side.

Can you maybe give us some flavor on how that business would respond if we were to see maybe a modest recession I mean, obviously business volumes would be a little bit lighter, but I would imagine that there would be more of an appetite to outsource from firms that are seeking some cost savings.

Yeah, I think to some extent you're already seeing how these businesses.

And in a downturn, we've been a downturn we've been in a downturn in general for quite a while bought a year and industrial consumers still strong.

But the rest the economies not been so hot for quite a while maybe the terrorist started in March 2018.

Nothing really happens and people weren't paying close attention to him for good two three quarters and it started people started seeing the effects. So that's been building up and now you've seen the business in our case be able to generate positive year over year comps.

Even before in a slow economy in supply chain specifically.

There is a interesting of phenomenon of what happened in the great financial crisis in the largest up the for contract <unk> logistics companies that we bought new breed, where their EBITDA actually went up and up substantially in 2008 in 2009, So we'll see what type of recession we.

Having when we habit.

But so far so good.

Alright, great well appreciate the time and congrats on a nice result in a tough market.

Thank you Sir.

Thank you. Our next question comes from line as a meat, Russia with Deutsche Bank. Please proceed with your question.

Hi, Thanks. Good morning, Thanks for taking the question I wanted to first question I just wanted to ask about the cadence of earnings with respect to the fourth quarter. So the full year guidance, even just the low end implies a sequential uptick in the EBITDA from where you did in the third quarter, which I don't think it's ever happened and you know I would argue the bid.

This is probably less seasonally for Q focus now given the loss of postal injection. So I understand there's a lot of cost opportunity. So if you can just walk us through maybe the puts and takes on the sequential walk that gets you there and just how confident you aren't achieving the for your EBITDA guidance. Thanks.

I think you're absolutely right.

Actually postal injection that was a big bad Guy in the fourth quarter of last year, and we don't have that that this year. So just walking into the quarter. We've got that went to our back with not having both postal injection in France, France, the whole yellow yeah, but it was talking about the sequential Brad the sequential walkers, what I'm talking about.

Mhm and sequentially last year, we had the hit proposal injection and the hit from France, and this year, we're not going to have that.

All quarter benefit of the cost out that we did so well in the third quarter Didnt hit the whole third quarter that layered in throughout the quarter, we will get the full benefit for all three months in the fourth quarter and the biggest contributors will be LTL, where we've got positive yield got good cost control and we've got smart.

Labour tools already showing good results and they'll be rolled out to all the LTL facilities like Christmas.

Secondly, European supply chain, we've had growth in new business and we've been very disciplined on labor costs and last mile were so we're cycling the post injection, we've had new wins and the consumer is still healthy here in the fourth quarter and then the final thing that I would mention is the 10 levers the 10 lever six of which are cost control.

And primary <unk> made one that's most exciting and particularly for the fourth quarter is tackling that 6.5 billion dollar labor span that were very zeroed in on making sure that we're spending that six now billion dollars very wisely.

Okay.

So so so just a bow tie that you basically years are comfortable you have a line of sight to the earnings power of the enterprise being higher in the fourth quarter than it was in the third quarter is that correct.

That's correct.

Okay. Thank you for that reflected.

And that's reflected in the guidance that we gave out last night, we brought down revenue and we kept EBITDA.

And we kept free cash flow that's it that's what we're saying.

Got it Okay I appreciate it and then just maybe one longer term question you know looking beyond this year into 2020, I'm not asking for specific guidance and no. One is really given 2020 guidance outside in the trucking industry. So.

I'm not asking you to do that but you know just conceptually.

Given the.

Success, you're you're making in the new business wins in the pipeline business is up I don't know, 20% year over year or something like that you're lapping the large customer loss at the beginning of this year is it fair to assume browder amount that EBITDA growth you know accelerates next year or how should we think about it because you know there are some decent gains on sales this year.

Impact and the outlook for 2020, and so I just wanted to think as we look prospectively to 2020, given all the progress you're making on the cost and the revenue side is it is it conceptually right to assume EBITDAR growth year over year accelerates and 2020 versus between 19.

We like to set up of how we're going to enter into 2020, we've got a lot of momentum from so many different projects that the team is laser focused on.

We're not going to give guidance now we're gonna give guidance. Once we finished the budget process and I went on the next quarterly conference call. We like the way, we're set up going into next year.

Okay I'll leave it there guys. Thanks for taking my questions appreciate it.

Thank you.

Thank you. Our next question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.

Hey, Thanks, and good morning, guys.

On the LTL side can you give us a an indication of what you guys are seeing so far here in the fourth quarter I know, it's early but just want to get a sense of what October trends kind of are looking like.

Pricing standpoint.

Similar as to what it was in the third quarter yields a little bit better tonnage is a little bit worse and all those two things obviously, we prefer yields to be the better of the too because there's no cost associated with it goes right to pre tax in the third quarter, where the best or ever at best third quarter.

Oh are in the history of not us, but also Conway <unk> with or without real estate with real estate was 460 basis points improvement without real estate. It was 210 basis points improvement, we expect to continue to see a similar type of or improvement for the for the balance of the year.

Yield was up 2.9% in the third quarter, we expected to be more towards the higher end to the zone that we've had all year long that 3% to 4% leased that's how October starting out.

Price increases on renewals have been about 4% again at the zone, it's been all your 4% to 5%.

And.

I would say the star of the third quarter that we would expect to continue for the fourth quarter given what we've seen in October is really load factor from an operational perspective load factor was up 6.1% the third quarter and we've been getting better productivity from our new line haul modeling tools.

So I think for the fourth quarter, you should see operating usually or improvement about more than 300 basis points with real estate more than 100 basis points without real estate and then Matt was mentioning before on the workforce planning, we've now piloted smart in 20, LTL service centers and.

The result of an amazing had been very very similar to what we saw in the warehouses, where we've had over 5% labor productivity fairly consistently which is why we've accelerated the rollout will be an all 290 LTL service centers in the next 60 days and we've got very exciting tech projects in.

The line haul $1.3 billion of costs, there in PNG $650 million of costs were reducing there in the DOCSIS $365 million of costs. There tech enabled projects on all of those those items, we've seen benefits from that in the in the first month the quarter, we expected to increase over the over the whole quarter.

Okay. That's very helpful. Appreciate it and then you made a comment about buying it better than the do you see benchmark on the brokerage side. I think you said loads were up there. There's clearly some share gains going on can you talk a little bit more about kind of the strategy on the brokerage side. What do you think you might be able to kind of accomplish from a from market share perspective.

As we continue through this week market into that strategy shifted off we do see sort of these early signs affirming in the truckload market, maybe continued to a better more for market in 2020.

Uh-huh well in brokerage, we both lost market share and gain market share in the sense that if you take into consideration the largest customer that downsized their business with us and truck brokerage, where we were their largest truck brokerage.

Truck broker and they were our largest truck brokerage customer now there are small truck brokerage customer bars, then we've lost market share. If you take that out if you just pro forma out the the largest customer downsizing. This is up this is up very nicely and productivity was up so while include.

Being the largest customer downsizing loads were down 4% year over year, our headcount in brokerage was down 13%. So we're seeing nice.

Activity improvement there.

And in terms of procuring a capacity that's correct, we had been procuring capacity in the third quarter at 3% better than D.A.T. and that's because of our XP exco connect tools ex fuel connect is is.

He is a cliche, but it's on fire.

We had 37000 downloads in the third quarter, which was doubled what it was over the second quarter and we're on track to be 100000 downloads by the ended the year. So there's good things going on in freight brokerage at the same time, we're not immune to what's going on in general with the truckload market.

Okay. Okay. No. That's helpful. One quick detail and before I. Let you go would be just gains on sales. How do you think about the fourth quarter any projections you can give us for for the models.

Sure.

The thought process is likely somewhere in that $20 million to $25 million.

20 to $20 million to $25 million range I in total and that depends on how deals and up tracking for us in Q4.

Thank you very much appreciate it.

Thank you.

Thank you. Our next question comes online and Scott Schneeberger with Oppenheimer and company. Please proceed with your question I.

Thanks, very much a good morning e-commerce , it's been a big driver or last year expected to be a again this year, but a a bit of a different customer profile curious Brad and that could you address the approach this year and some of the trends you're seeing thus far.

Yes, Scott.

E Com is still our largest and our fastest growing vertical globally.

It's a sticky business because we do it really well and these are customers that value service and speed and accuracy, a lot very high renewal rates and that business.

Are the largest E fulfillment provider in Europe , and we capitalize on that position our reverse logistics business. The returns management business is the fastest growing subset of that fastest growing e-commerce vertical, but we're also seeing nice gains and omni channel.

And all the tech investments that we've done to support a ecommerce.

Give us the ability to manage peak better for our ecommerce customers and periods like Black Friday for example, and the smart labor tools have been very much appreciated by our customers because we're taking cost out we're not just only the scale leader in E. Commerce. We're also the cost leader in E. Commerce. So we're going to continue.

A pressing our advantage in E. Commerce is working very well for us and we will keep doing it.

Thanks, very much for that the logistics margin expanded nicely.

Sequentially could you discuss some of the drivers there in and out yeah. We've covered a nice job on this call discussing a efficiency initiatives I'm just curious what kind of trend we may see going forward in that segment. Thanks.

Well, you're right on EBITDA was up 10.9% in the third quarter and logistics. The margin was up 100 basis points. The revenue was down though is down a half percent year over year.

A big chunk of that was the downsizing of our largest customer which is not all over with so we're going to see some more pressure that going forward I think we can see more downward pressure on revenue there, but still a strong ability to grow the bottom line strongly healthily, despite adverse or revenue.

Trends.

Passive he's been growing we have 195 million square feet today, So it's up 5% year over year, but it's down sequentially because of the downsizing of our largest customer the smart to no smart labor management tools actually originated in our logistics business before we saw working and as the hey, let's let's try that in LTL as well so we've got about.

In eight of our 800 or so contract logistics facilities using smart labor tools right. Now we are seeing five plus percent labor productivity in those hundreds so sites, we're going to roll out smart labor management tools to all of our North American sites by the end of next year.

I remember that of our six and a half billion dollar labor spend that we're working to improve three and a half a billion dollars or that is in a supply chain is in logistics.

And to answer your question about what's growing the most there its reverse logistics, that's the fastest growing part of our company as a subset of of ecommerce which is the fastest one.

Beneath that.

In Exzeo direct X PEO direct continues to be on track. We see that is a billion dollar revenue run rate by the end of 22 customers love It they love it because it lowers their cost and it brings their inventory closer to their customers and customers weren't faster shipping in a cost effective way and that's it that's PEO direct us so lot of pay.

Positive wins, there on the bottom line topline I expect to be challenging.

Great. Thanks for that I don't know.

Thank you.

Thank you. Our next question comes from the line of Kevin Sterling with Seaport Global Securities. Please proceed with your question.

Thank you good morning, gentlemen.

Good morning.

Right can I dig deeper into but little bit of your longer term plans you talk about 1 billion in EBITDA in LTL bought 2021, and it sounds like to me you can get there through technology improvements the reduction and outside power you know lane density.

Obviously pricing in yield seem to be pretty good, but as you know tonnage it's falling.

I guess barring an all a recession or you know kind of a big thinker, you're pretty comfortable you can still get to that 1 billion in EBITDA outside of just some industrial kind of slowing if you will.

Am I thinking about that right.

You're thinking about exactly correct every sentence you just said I agree with and approved in the putting we have been in an industrial recession for last year and I say that just based on the objective fact that not only us with the entire LTL industry has seen negative tonnage growth in each last.

Four quarters, so in a contracting market, we've still been able to post excellent numbers in LTL and I attribute that partly to the things you mentioned that are intrinsic to us that we're doing in order to improve the business every day, we've got a great management team in LTL, that's very focused on efficiencies and productivity.

Cost out customer service, but also to the nature of the LTL business, which is very different than the truckload business. We have a in truckload you have so many many tens of thousands of carriers spreading out and sharing the capacity in LTL, there's a handful of carriers less than 10 that control, 89% like a path.

This is more disciplined more pricing power secondly in the truckload business. It's so much when rates start going up it's so easy for capacity to come in for supply to come in you just need to CDL and few trucks and bingo your business and they'll tell you. The network you need pickup and delivery vehicles, you need service center.

As you need the line haul trucks you the whole back office you all technology to plan the whole network a lot of moving parts and that modes prevents new capacity from easily coming in so the LTL business from our point of view the pretty good business. It's a business that can perform well even in tough times provide.

Did that the industry and managements of the leading companies are our disciplined and I think.

10 years ago, maybe weren't so disciplined and maybe weren't so knowledgeable about.

How all the different levers affected the P. now I think today every single management of the top 10 LTL companies is very sophisticated understand levers very well, particularly price I expect them to be disciplined in any future downturn. It just the way they've been disciplined in last 12 months.

Gotcha. Thank you very much.

It sounds like we're driving or you're driving toward a sub 80 you are in LTL is that your ultimate goal.

[noise] it'd be nice.

We're moving in that direction, it's not our main report card or May report card is growth in in operating income year over year growth in EBITDA return on capital and profit margin is one way to do that.

Hi, I, we do have a major effort on utilizing our backhaul better and to reduce are empty miles. So for there you have little pressure on yields that does pressure the alarm, but not apologize for all our we had the best operating ratio for third quarter ever in the third quarter.

Even without including any even giving zero percent credit for the real estate profits, we had our improved 210 basis points year over year and you're right is almost sub 80, but not quite 80 point it.

Yeah, Okay, and lastly, any update.

On a CFO search, whereas that stay in anything you can share might be new their incremental.

CFO search is like M&A, it's either binary we have you done it we haven't done it and we prefer to speak about it retrospectively rather than looking in the future, but the searches active we're seeing candidates right Mike in general in life, we're disciplined about it and we're looking for that superstar CFO and when we find that person will hire them.

And we'll announce it probably.

Got you, Okay, we'll bread.

Tabby. Thanks, so much for your time this morning I appreciate it take care.

Thank you.

Thank you. Our next question comes from the line of Ari Rosa with Bank of America. Please proceed with your question.

Hey, good morning, guys. Congrats on some of these results here so.

I just start maybe this is going back to amir's question, but.

You know looking at 2025.

Yeah, you're lapping a loss of your largest customer you know for this year. The low end of your guidance. So just kind of 7% EBITDA EBITDA growth given that you have some of these tailwinds and you know as you said, we've been industrial recession for the past 12 months and you no longer have that loss of of the largest customer.

Is there any reason to think that 7%, it's kind of a baseline in terms of what we can see in terms of EBITDA growth is there any reason to think that kind of where the macro is that that that level of growth that we've seen this year given all the headwinds that you faced.

It could be kind of a baseline as we look forward to to next year or to 2021.

Nice try and nice try on it but we're not going to be guessing that sure guidance on this call just like all of our competitors aren't giving guidance either but I like to set up going into next year I liked the very large number of internal initiatives that we've got that are idiosyncratic to us their company specific that are self help.

That are largely independent of the macro and the deep focus we've got on the management team Senior management team in the Middle management team on executing with a high level of accountability and each one of those levers I like where the organization is functioning, but we're not going to give specific guidance at this point in time for next year.

Alright fair enough well, let's say <unk>, let me ask a different question moving on to.

The billion dollar EBITDA target for 2021.

Coupled with the I think you said 700 million to a billion dollars of a savings from these 10 10 pet driven initiatives.

How do we think about those two things you know in interlocking with each other is the billion dollars additive or the billion dollars from EBITDA is an additive to the 700 million to a billion from from tech initiatives or do they kind of overlap.

They do overlap looking at like this we have in the normal plight of things we have headwinds we have tailwinds.

The main headwinds are inflation cost inflation in particular, we have pricing pressures with art with our $6 billion a labor costs.

And be a positive wins or things like price volume and everything that goes to margin expansion and good management teams know how to function in good markets in bad markets. So that you achieve all those in the good guys outweigh the bad guys you grow your profits like we've done every year for many years now.

In terms of additional pockets besides the normal to in for all of what I. Just described we as a team has spent a considerable amount of time to say what can we do above and beyond the normal way, we run a business to improve it what other besides normal operational excellence, what kind of strategic less.

Others can we push that will move the needle quite a bit and we device 10 major levers that is a pool of 700 million $2 billion of potential profit improvement by 2020 to.

That we feel confident we're gonna had a good chunk of that we're not going to get a billion dollars what I'm going to achieve 100% of every single lever, but we will achieve hundreds of millions of dollars from that you can take that to the bank. These are things that have been well thought through that are very very well grounded now a lot of those levers are tech enabled more than half of the more.

And what are we trying to achieve with those tech enabled initiative, we're trying to do things that make the customer very very happy with us and that improve our bottom line. So we're trying to shorten distributions cycles will speed up fulfillment time and increase the accuracy of orders and inventory, we're trying to reduce the stuff.

Packing costs for customers were tried increased labor productivity and all these things accomplishing customer delight and bottom line improvement. So if you look at those those actually those endeavors, you can slice and dice them in different ways I would put them into four categories automation.

PEO smart.

Ex fuel connect.

And a bunch of categories that all fall into LTL. So let me briefly explain each one of those if you look at automation intelligent machines advanced automation, the main needle movers or goods the person systems, where we improved productivity by four point Fivex and we're in a hurry to roll them out more and the Cobots, where weve increased product.

Revenue by two X and the robotic arms.

And we have compressed order fulfillment times in many cases from five days down to one. So these are big hits with customers and definitely is a big hit with them around Pete.

Expo Smart Expo smart is using dynamic data science and machine learning. So that we can use the information that we get from customers use our internal big data information not only about that customer because sometimes we keep better records in the customer keeps about themselves, but also use records.

Data from similarly, situated customers and all the customers, we haven't or managed transportation business. So that we can predict what the stat, what the right what that likely volumes are going to be the next day. The next week and we can get the right staffing levels, we get the right like the length of the shifts we can manage overtime correctly.

Yes, the right ratio temporary to permanent work if you get the right ratio in LTL drivers to dock workers, and then and logistics, where we've got as there was talking about before three and a half billion dollar global Labors, then we want to roll out to the other 70. So the sites all by all over the next couple of years.

In LTL in general we're looking at three big pools of spend we're looking at the $1.3 billion you stand in line haul. So here, we are using new line haul mindedly technology to build more intelligent route for the 2.6 million miles, we drive everyday and we're already seeing benefits that image.

Got it leave with you saw that in the in the load factor that this quarter up 6%.

We're attacking the pickup and delivery $650 million spend there what we're doing is we're designing intuitive tools for the dispatcher. So they can use dynamic route optimization to do three things.

Improve route density reduce miles per stop and reduce the cost per stop and then pricing, which is the most impactful of all the levers not just an LTL, but in general because there's no cost with it goes right to the right to EBITDA in pricing, we using AI based pricing algorithms that incorporates.

These past customer behavior and real time in the moment market conditions. So that we can find just the right price for our RFP is so that we're not pressing ourselves too high and losing business not pricing ourselves too low and leaving money on the table.

And then the fourth bucket is connect the digital freight marketplace, where we're using machine learning to match the right carrier to the right shipment at the right price and our competitive edge in the digital freight marketplace is the fact that we use a multi modal solution. We're not just offering brokerage just offering one thing that we're showing the customer.

Truckload intermodal LTL minutes trends last mile reporting expedite most of which are on the platform in the rest of which will be on the ex fuel connect platform over the next year or so so ex fuel connects been growing an explosive rate and these already see the fruits of that you saw us buying transportation and.

<unk>, 3% below de 80, you saw strong managed trans transportation in the quarter by 22%. So in short I would say that nobody had that big of a sandbox to plan as we do to drive digital transformation and that's going to benefit ourselves and it's going to benefit our customers is going to benefit our.

Our shareholders.

Okay terrific, that's really great color. Thanks for the time Brad.

You're welcome.

Thank you. Our next question comes from the line of Brandon Oglenski with Barclays. Please proceed with your question.

Hey, good morning, everyone and thanks for taking my question I guess Brad.

One off that answer.

The way you guys calculate organic growth was negative in the quarter, but I think you said the pipeline has increased rate. So can you just remind us the way you look at the pipeline and if that's netted against business that you think is not going to renew or that you've lost and.

I'm not looking for guidance in 2020, but I guess when do we see resumption and growth in the business or is this just more macro issue.

The pipeline definition is the precise pipeline definition that we use in our CRM, which is salesforce dot com.

And the pipeline.

Stood at $4.3 billion at the end of Q3, it was up 19% year over year was up both here. It was up in Europe . We a third time, it's been over $4 billion and three quarters and the ROE, but I wouldn't bring out the champagne, yet because new business. The clothes business was down was down about 2.7%. It was just shy of 900 million dollar.

<unk>.

So two things I would take away from that is on the one hand customers are taking more time to to transfer to convert secondly.

On the on the other side on the good piece of news, even though it was down was down 2.7%, we down less than the 5.2%. It was down in the second quarter. So it is I would look at it as the proverbial mongoose going through the snake. It's just it's going as digest the snake is digesting the mine, whose little slower in the slower macro.

So environment with respect to your question about when is organic growth going to resume to be positive.

That's a function of two things that is a function of the macro we can't we're not completely immune to the macro but also how effective we already selling our services to our customers and I think on that score. We've got a very superior superior service offering a crossover modes and you have leading positions in these fastest growing parts of transportation logistics brick house.

From an optimistic about that.

Okay appreciate that answer and I guess, what a lot of people are struggling with is reconciliation reconciling growth in EBITDA and obviously you guys are point to improved margins as well in the fourth quarter, but you know the lack of growth and free cash flow and I guess I want to look at it through the wins of gross Capex.

'cause it looks like to hit your net capex relative to your sale gain so far that's going to be spending maybe north of 600 million this year. So.

Longer term question you know what is the right gross level of Capex and what do you think the level of sales to offset that can be going forward.

Consistently.

But you're right off through the year, we've expected gross capex to track in excess of $600 million and that is likely to be the case.

In a in 2019 as well that's certainly the number that's embedded in our forecast from that we expect to hit for the year as you know our maintenance capex is dramatically lower than.

The gross Capex that were expanding this year, we're going to each year in our budget process, considering a growth initiatives considering the environment considering.

Our various uses of capital planning cut backs from a bottom up.

In that way so it's a bit similar to the other questions that we've gotten on 2020, Oh, we'll consider the environment consider how compelling projects are versus other uses of capital and come up with the number at that point in time.

As we've gone through this year and tighten our belts on costs and increased our disciplined on capital allocation, particularly with regards with regards to Capex. One thing. We're very happy about is that we've continued to invest in the tech initiatives initiatives that we've discussed through the call if anything.

Our focus on those initiatives our commitment in our investment in them has increased and we found opportunities away from those strategic efforts to the extent that we need a terrain in spending an increase discipline on both capital and that's creating.

Thanks, Matt.

Thank you.

Thank you ladies and gentlemen, this concludes our question and answer session I'll turn this back to Mr. Jacobs for any final comments.

Thank you operator, thank everyone for spending the hour with us I would sum up the quarter in two ways.

Tough external environment, which shows up in the revenue, but great bottom line performance by our team and I'd like to thank and congratulate our operators around the world for living a good bottom line performance. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.