Q1 2020 Earnings Call

Welcome to the F.C.L. adjusted first quarter 2020 earnings conference call and webcast.

My name is Michelle and I'll be your operator for today's call.

Time, all participants are they listen only mode, where we will conduct a question and answer session.

If you had a question please dial star one on your telephone keypad. Please note that this conference is being recorded.

Well again, let me read a brief statement on behalf of the company regarding forward looking statements and the use of non-GAAP financial measures.

This call the company will be making forward looking statements.

The meaning of applicable security laws, which by their nature involve a number of risks and uncertainties and other factors that could cause actual results to differ materially from those projected and the forward looking statements.

A discussion of doctors that could cause.

Actual results to differ materially is contained in the Companys Sep filings.

These forward looking statements in the Companys earnings release are made on this call are made only as of today and the company has no obligation to update any of these forward looking statements, except leaks that required by law.

During this call. The company also may refer to certain non-GAAP financial measures as defined under applicable FCC rules reconciliations of such non-GAAP financial measure.

Comparable GAAP measures are contained in the company's running really and the related financial tables, you can find a company of the company's earnings release, which contains additional important information regarding forward looking statements and non-GAAP financial measures and the Investor section on the company's website.

Now I'll turn the call over to project Mr. Take up you may begin.

Thank you operator, good morning, everybody.

George virtually this morning by David why sure our Chief Financial Officer.

Megan Henson, our chief Human Resources Officer, and Matt Fassler, our Chief strategy Officer.

Also for the Q1 eight portion of the cool you have top Yardley, our senior director of Investor Relations Robbie tools in our treasurer.

With me as SVP of financial planning analysis, and our newest addition, Kevin Sterling Who's joined as VP of strategy welcome to the team Kevin.

I want to start by expressing my profound appreciation to all the frontline workers at our company in our industry and across the other professions crept up society functioning during the pandemic.

I'm, particularly grateful to our warehouse workers dock workers in drivers, who provide an essential service to our customers.

You will hear directly from Megan.

Actions, we've taken to keep our people save.

Then Matt will cover the quarter in some improvements we drove in the business and provide color around April.

David will wrap up the prepared remarks, and then onto queuing it.

Turning to the quarter, we had a strong January and a strong February.

Then the pandemic sharply disrupted our end markets.

It started with our European operations in early March and began to affect parts of our North American business later in the month.

We quickly terminated our strategic review process and turned 100% of our focus to keep their employees save our customers operational and our balance sheet rock solid.

We had $1.3 billion or liquidity as of quarter end and we added a nother $1.2 billion in April for total liquidity of $2.5 billion.

We delivered $333 million of adjusted EBITDA in the quarter and expanded our EBITDA margin by 30 basis points.

And I'm proud that even in an economy on pause, we delivered $95 million of positive free cash flow in a quarter that's typically negative.

We expect to generate hundreds of millions of dollars or free cash flow this year.

Like all crises. This pandemic has the beginning a middle and an end.

We're in the middle of it now and it will end.

It's still logistics will emerge far stronger than we were pre hope it.

Many of our core strength position us for growth on the other side of the pandemic.

Including our proficiency is an E commerce advanced automation and data scientist and are focused compassionate culture.

Our billions of dollars of investment in these areas give us a head start on growth in the recovery.

That's why wasn't there in the short term I'm, a bowl and the medium term megacable for Expo in 2021 and beyond.

With that I'll turn the presentation over to Megan.

Thanks, Brad.

I'll start by emphasizing two key aspects of X fields response to cope with 19 prevention and appreciation.

The safety protocols, we implemented a comprehensive and designed to prevent exposure to the virus. In addition to dealing with it after the fact.

We've secured enough P.P., either safeguard our employees that work around the globe, including Globs hand, sanitizer white thermometers and masks.

Inside our facilities social distant thing, it's our strongest event.

This includes holding shift meetings outdoors, where employees can remain six feet apart.

Redesigning traffic flows and changing shipped schedule.

Installing barriers between workstations.

Having only one share per table break room.

Our sites have regular proactive cleaning schedules.

To encourage our employees to stay home when they're stuck we've added an additional two weeks of pandemic paid sick leave to our current paid time off in the U.S. in Canada.

We've added free cobot 19 testing to our U.S. insurance policy and free access to Tele medicine.

And we've expanded mental health programs for all employees globally in their dependence.

As soon as we know the confirmed or presumptive case, we follow what tracing protocol and notified those who may have been exposed.

Employees, who are exposed are required to self quarantine for 14 days.

And when one up our people test positive we closed the facility for deep cleaning using a team of certified specialists.

Overseen by industrial high Janice.

When we shut down a site for deep cleaning, we send all of the employees home with full pay.

We filed the guidelines of the World Health organization, the CDC government policies, and our own health and safety protocols to determine when we can safely with you work.

In recognition of the contribution of our colleagues who are providing critical supply chain services, we've announced front line appreciation pay for nearly 40000 employees in the U.S. and Canada.

Hourly employees in our warehouses receive an extra $2 per hour on top of the regular pay rate.

Later this month full time employees working on our LTL service centers will receive a onetime bonus of $500.

And part time employees will receive a 250 dollar bonus.

I'm proud of the work our people are doing around the world will continue to put their safety and well being first.

With that I'll turn the call over to Matt.

Thanks Mega.

I'll review Q1, and how we're using our internal initiatives to optimize performance in this challenging backdrop and then discuss current trends.

Starting with our transportation segments.

Our North American LTL business had another improvement in profitability despite softer demand.

Per day declined by 6.4% year over year, primarily due to subdued activity from our industrial customers. This has been the case for quite awhile.

Yield excluding the impact of fuel.

Proved 2.6% year over year.

Price increases on contract renewals remained healthy at 3.7%.

Our proprietary krysten tools within LTL are helping us gauge elasticity for prospective bids eating our yield profile. In addition, 66% of all local accounts RF piece and the corridor, where automated up from about 50% in Q4.

Technology is driving faster turnaround times, and helping us win more new business in fact, our new business one in LTL posted double digit increase as it hasn't each and every quarter over the past two years.

Adjusted operating ratio improved by 420 basis points to a Q1 record of 83.4%.

Excluding gains on sale of real estate, our adjusted our improved by 320 basis points to 86.5%. This strong performance was the result of steady yield improvement and solid cost control.

Written by our profit improvement initiatives.

Our X P outsmart workforce planning tools drove dock productivity up 7% year over year to the best level, we've seen since 2012.

Also in Q1, we launched new capabilities for our line haul optimization model. This helped us improve load factor by 5% and reduce our empty miles by 23%.

So a win for both asset utilization and the N. Gardner.

Moving on to freight brokerage gross revenue declined by 5% year over year, which was a sharp improvement from Q4.

Our net revenue margin increased across Brett use that as across freight brokerage by just 40 basis points sequentially to 17.5%.

But it fell 300 basis points year over year against the tough comparison as contractual rates decline and the stock and the spot market stabilize.

We didn't freight brokerage our truck brokerage loads per day increased by 9% accelerating significantly from 1% growth in Q4.

Like others in the industry, we experienced a surge in volume late in the quarter from customers and the consumer staples sector. Both producers and retailers. This was related to meeting increased demand for food and dry goods as people stayed at home.

Our Expo connect digital freight marketplace continues to gain traction.

We saw our carrier rep productivity improved by 16% in Q1.

Driven by an increase in automated transactions.

Weekly active users hit a new weekly high in March and we launched new capabilities and our pricing algorithms that allowed us to improve our forecast the accuracy for truck brokerage by 16%.

And our last mile operation.

We had a standout quarter and last mile meeting increased customer demand for electronics and fitness equipment. We also benefited from the trend towards buying it big and bulky goods on line.

We implemented new safety protocols for last mile deliveries and March, including Curbside drop off and P.P.N.E.S.P.P.E.N. social distancing during in home installations.

Turning to Europe in our transportation business Q1 revenue declined by 8.8% versus 2019.

Oh wait on revenue by about two percentage points, we were tracking to plan into March when code that began to impact, France and Spain.

We continue to hold numerous leadership positions across our transportation verticals geography is and service lines in Europe. For example, we reinforced star status as the number one L.T.L. provider in France, and Spain, and a cop three LTL provider in the U.K.

Across our transportation segment, adjusted either Dot fell by 4%, while adjusted either died margin rose by 40 best points to 10.3%.

Moving onto our logistics segment, our revenue declined 4.3% in North America reflect into downsizing of business with our largest customer and our decision to exit some lower margin business consumer package goods was our strongest vertical.

Are proprietary X.P.O. smart tools are driving productivity and cost efficiency in staffing in our warehouses and I'm pleased to report that X.P.L. direct operated solidly in the black as it passed its first anniversary our shared distribution model as resonating with <unk>.

Who wants to optimize their direct to consumer efforts.

Shippers looking to augment their e. commerce and on the channel capabilities customers value supply chain flexibility now more than ever rebuilt X.P.L. draft to address that neat.

In Europe logistics revenue declined by 3.5% your every year.

Facts had a negative impact of about 2.5 percentage points.

Commerce, and food retail, where our strongest verticals and European logistics.

Our effort to drive margin improvement in European Logistics, which was one of our 10 core profit and proven initiatives continues to resonate we reduced las makers and drove deficiencies throughout the business.

Across our logistics segment as a whole wheat doubled our new business went to the highest level we've seen since the third quarter of 2018.

Since the pandemic, we're seeing intense customer interest in surge management, we're meeting that need and in some cases converting these opportunities into longer term deals.

Just to be able to die for our logistics segment rose, 7% year over year, and adjusted EBITDA margin rose to 8.4% from 7.6% a year ago.

Moving down your income statement interest expense was $72 million versus $71 million a year ago.

Our data effective tax rate rose to 30% from 27% a year ago.

Are weighted average deluded share account was 103 million about the same his queue for a compared with 117 million shares a year ago and down 25% from our peak in the fourth quarter of 2018.

Are diluted earnings per share. It was 20 cents versus 37 cents last year and are adjusted do D.D.P.S. was 47 cents versus 51 sense and the prior year corridor.

We we may end up and operating across our lines of business in all of our major markets. The pressure on demand is influenced by regional stay at home mandates and varies by customer verticals. For example, we've seen pockets of strengthened E. commerce, food and beverage and personal care.

Our overall revenue in April declined in the low to mid twenties on a percentage basis, which we believe is in line with industry levels for our lines of business.

We saw smaller declines in logistics L.T.L. track in line with our full company revenue performance and softer performance from the rest of our transportation segments.

North American L.T.L. yield was flattened April similar to March.

Truck brokerage volumes ease sequentially from the surge the market experience in late March, but notably margin dollars per load and net revenue margin have improved from Q1.

This has not been a conventional slowed down in any sense for many customers. It's been a shutdown well we've been up in up then up and operating across our lines of business. Some customers have temporarily closed their stores and factories.

I mentioned, France, and Spain earlier or activity in those countries kit its lowest levels in early April and our transportation volumes are recovering modestly as these markets prepare to emerge from lockdown.

Volumes have been bouncing along the bottom in the U.K. and the U.S. since mid April as industries and geography is reopened we expect to see improvement.

Against this backdrop consider three important factors first 77% of our costs are variable and 23% are fixed we've been aggressively addressing our costs. Some of our expense reductions are likely to endure posts pandemic eating our earnings power when the and.

<unk> eventually normalizes.

R.X.P.O. Smart planning tools are helping us managed through the volatility on a real time basis, and our investments in L.T.L. right optimization and supply chain automation are driving structural cost improvements second as Meghan discussed where prioritizing the well being of our people.

We expect expenses related directly to these efforts of up to $50 million or more in the second quarter and it's hard to imagine a better investments are people are the bedrock of X.P.O.

Third we doubt cutbacks way back.

Remain committed to a number of important growth investments for instance, where in the final stages of protecting our warehouse of the future with Nestle, which will launch bitter this month and we're continuing to optimize our routing and L.T.L. pick up and delivery and line hope to have the highest or why opportunities across the.

Company.

X.P.O. is built to withstand disruption and when we emerged from the pandemic will be even better position for success for example, where a leader Indy Commerce logistics.

Commerce growth has accelerated globally and we expect that to continue after the pandemic, we expect to benefit as the number one outsourced you fulfillment platform in Europe, the leading reverse logistics platform and the number one last mile platform in the U.S. for big and bulky goods.

Envision more demand for logistics automation were leader in providing advanced solution to scale and we've been applying this expertise straight through the depth of this downturn.

We'll see more value placed on data visibility that customers with all types, who want more transparency and their supply chains or value here lies and our digital freight marketplace are intelligent analytics machine learning and our ongoing routing in pricing enhancements our costs structure will be leaner.

We will remain focused on disciplined capital allocation as we have been since day, one seeking out the strongest risk adjusted returns were a resilient organization, we've been there for our customers and our relationships with them will be stronger on the other side of the code curves.

Now I'd like to turn the call over to David Weisner R.C.F., though.

Thinks that in good morning, everyone.

I'd like to discuss our first quarter cash flow or balance sheet and or liquidity and then shared some closing remarks.

Degenerate into $180 million of cash flow from operations in Q1 spent $139 million on tax and received $54 million and proceeds from asset sales, including are ongoing program of selling appreciated.

Appreciate it real estate.

As a result, we generated positive free cash flow of $95 million in the quarter.

Since of free cash flow use of $96 million in Q1 last year.

As the scale the <unk> pandemic became clear in March <unk>.

Aggressively managed working capital and focused on turning or receivables into cash.

We became even more disciplined about collections and derived in incremental 72 million dollar you're over your benefit from our trade receivables programs in the corridor.

As a revenues flowed in March it naturally brought down receivables balance below the March 2019 level.

We repurchased 1.7 million shares of our stock at a cost of $114 million in late February in early March.

Trading play and that was put in place earlier in the corridor in which triggered when our share price decline fairly dramatically.

We stopped buying duct stock in mid March.

We also throttle backward capital expenditures significantly and currently estimate that gross cap x. will be roughly $400 million. This year, which is down more than a third from or 2020 plan before the pandemic.

It's mortgage became increasingly volatile in March maintaining strung liquidity became a top priority for us as an organization.

In addition to the action say just mentioned, we drew $600 million on R.A.B.L. facility in March and ended the first quarter with a cash balance of $1.1 billion.

That cash plus another $200 million available A.B.L. borrowing capacity Frodo total liquidity at quarter and to $1.3 billion.

In early April we added to 350 million dollar credit facility to further strengthen our liquidity.

And in late April we issued $850 million of 6.25% five years senior nodes.

These financings give us pro forma liquidity of $2.5 billion, including $2 billion of cash as of March 31.

We have no significant debt maturities until mid 2022, so we feel great about how we've fortified are already strong liquidity position.

Or net leverage at quarter and was 2.95 times, which is just below the lower end of our targeted range of three to four times adjusted EBITDA.

So well X.P.O. like all companies and industries is facing a highly unusual operating environment. We had the benefit of continuing to operate as an essential business and that gives a speed on the ground and momentum when the uncertainty subsides.

We have an exceptionally strong balance sheet.

In our industry is a leading indicator, meaning that will be at the forefront of the recovery when it comes.

As you May know I joined X.P.O. in early March.

I'm happy to be part of a management team that is focused without flinching on keeping our employees say and providing essential services.

Our customers in an unprecedented environment.

I'm happy to be part of a business that is resilient, both operationally and in its ability to generate cash.

And I'm happy to be part of a global team that provides transportation and logistics solutions that are reliable in demand and important with that we look forward to taking your questions.

Thank you will now be conducting a question and answer session. If you think off the question. Please press start one on your telephone keypad. It confirmation telling one decay airliners into question Q. you May press start to.

<unk>.

Since you think speaker equipment may be necessary to pick up your hands that before.

Our kids one moment they easily fall for your question.

Our first question comes in the line, Chris Leatherby with the city. Please proceed with your question.

Hey, great somewhere I guess.

Maybe starting on the transfer <unk> transportation side X.L.P.L.. If you think about sort of that segment. It appears on E.E. bit basis, but no I'm not sure that's necessarily how you guys look at it but on even basis. It looks like it was either break even or maybe slightly lossmaking, you talk a little bit about sort of what was going on in the business. There was that for V. earlier in.

Packs of covert related to the European piece of the transportation business was that related to sort of free brokerage, having a tougher march because of the spiking teal rates can just give us some color on sort of that piece of the business and maybe how that could be trending as an earlier indicator of recovery into cue.

<unk>, it's Matt three points to talk about their first of all the only place we really felt the impact of codes in early and Q. why in the U.S. wasn't intermodal and that business is impacted was impacted by the flow.

In China, which has you know slowed down with the moderation in the past the Chinese manufacturing as that country South the early impact of coding. So we had a slower corridor in intermodal throughout again, the only place from U.S. really saw prior to early March so that had an impact on that.

On that line the second item to think about is within freight brokerage obviously the entire industry has been <unk> was experiencing a lower net revenue margins you're over a year that was a function primarily the contractual rates continue to come down and the spot market.

Stabilized says we indicated that margin dynamic get improve any pro but that's the reality that we saw in Q1 and third as we discussed we did see slowing in your early to mid March kind of country back country, Spain, and France, the most significant.

For transportation business among the countries that shows flowing earlier in the month and that also with on results for that line item. We look at this on any but that they assessment and the numbers on any of the debate <unk>. We're solidly positive in each of those business units for that a segment of transportation as a whole, but those are the three items that would have moved.

Transportation X.L.T.M. Cuba.

Okay. Okay. That's helpful. I appreciate that and then if maybe sort of a bigger picture question about you know free cash flow and leverage shows or bread I know you've talked about several hundreds of millions of dollars of free cash flow generation. This year. When you think about sort of the impacts of the business in terms of it you build up perspective relative to the free.

Cash generation can you give us some parameters, maybe a little bit more specificity around free cash flow and do you think you can deal ever through 2020 would that be in an initiative for you guys.

Well free cash flow will generate hundreds of millions of dollars you're free cash flow.

Can't be more specific than that because we don't know you don't know how the pandemic is going to play out.

We don't know if you're up even though it's coming back really fast really really sharply whether that will continue Annette trajectory. We don't know if the United States, which is bottom from our perspective, we see volume is bottoms, we see a lot of things stabilize we don't see a getting better yet so we don't know how fast.

It's going to get better and how much is gonna get better. So there's still a lot of imponderables here that we really don't know.

In our models in all scenarios, we should be generating hundreds of millions dollars or free cash flow, though.

In terms of leverage.

We have the same parameters, we've always felt that three to four times leverage is the right amount of leverage to not for the company at risk, but to improve the return for the common shareholders. In this environment. There are some of our shareholders you would like us to shoot for a lower leverage to target maybe we will we visit that at the board.

In terms of the ability to d. leverage.

I think we will generate substantial free cash flow, but we don't have a from handle on exactly what the database. So we don't know what the multiple will be on that.

Okay. Okay. That's helpful.

Just one quick one of your bread. We only have you you don't obviously stop the strategic alternative exploration made quarter, which is understandable given the circumstances that were in here can you talk just a little bit sort of how you think about the relative value of the business is is that still something that is.

Well once we get past and just want to get a sense of sort of conceptually how you think about the businesses right now evaluation standpoint.

Well the strategic review process is completely off the table. It's yesterday's news, we're not spinning emitted on it today in terms of the question about what do we think of the value. The company. We look at the value the company for a long term perspective, not from what its multiple of this particular quarter, even as particularly year.

And we look at the cash flow generation ability over the next 510 years, and we discount that and we think by it all parameters. The stock is trading at significant discount twin it's intrinsic value.

But well we can do is.

Focus on everything we can improve the quality of the company keep our people say.

Maximize the revenue <unk> cash flow and we think the multiple we'll take care of itself in due course.

Got it thanks for the time appreciate it.

Thank you.

Thank you and next question comes from the line of I met in the Hot shot with what you think pleased to see this your question.

Thanks, Operator, hi, everybody high Brad.

Brad There's there's really no history in terms of you know how X.P.O.'s earnings profile trends in a recession you had a recession kind of industrial starts in 15 and 16, but of course you were still building the company at that point. So in that context, I mean, I know you said, 23% of the costs are fixed, which obviously implies that type of operating leverage in the.

In the business of course, it doesn't really work that way in the real world. It's not linear so I was hoping maybe you or <unk>, Matt or anybody could just hopeless really think about you know a hypothetical scenario, maybe that's kind of the better way to think about it you know if we saw 10% decline in the revenues of the company.

<unk> $2.

Declines given the variability in the cost structure as well as kind of the non volume cost number through your color. There I think would be really helpful.

<unk>, so two points to make on that number one as we have built or detailed models based on our current experience revenue trends in what we're seeing in the business that 77% variable, 23% fixed cost mix is the right way to think about the business and we're like.

Likely take you to the proper outcomes <unk> earnings will look like under different revenue scenarios of course, we're working on our costs structure, we're attacking our cost structure. We're looking to take out obviously variable cost and that is happening. We're also looking to take fixed costs out of the business, but that formula that we've used.

Historically is with stand in the test of reality and is the appropriate prison to think about as you build your model out for the current quarter on top of that obviously, considering the the pains that we're taking to care for people and the cost of says the cost associated with that obviously, we hope and expect that.

That is a trans yet cost and that that does not repeat that would be a function of the progress of the pandemic and we're hoping that that passes quickly consider to other things. One. This is a shutdown. This was not a slowdown spoken in the past about what recessions would look like they're customers and segments.

Industries.

That have shuttered their facilities for periods of time, that's unusual and as the economy catch up and running again, we expect our business slightly lead that and certainly in and slightly and certainly move in concert with that and this is just a moment in time and doesn't move past two two.

We'd expect that 70, 723 formula really to work in our favor.

Yeah, and I just I appreciate that that's very clear answer, but I just wanted to follow up on the first quarter. You know revenues were down over 250 million and profits won't be down <unk> 10 million. So complex you 4%.

Seem like that number is really the good what do you think about annual performance this year and I'm only yours and maybe there's gonna be can bold toured around the quarters dumped the way we're to think about it.

Right now the comments I made a specific too cute too. We obviously have different scenarios that were modeling for the year, but we have the greatest visibility to Q2, obviously, we have good visibility in April and we share our revenues to date with you from that perspective thinking about how cute too is going to play out we're thinking about that sticks variable cost me.

As the appropriate basis for modeling, we did a good job managing the business through the volatility that we saw at the end of Q1 and and yes, we generated operating leverage despite a modest revenue decline, but with the revenue declines that we're seeing in April and it's a different order of magnitude because the world isn't it.

Different place you can see the map work out the way I discussed rather than a reflective of the performance that we haven't q. on which against your point, we're very proud.

Okay. The last question very quickly for me did you talk about the automotive and airspace exposure in North American logistics I think you've got specific exposure on the 787 program for Boeing, which obviously productions getting cut in half over time, but just talked about the exposure to those two and markets and the impact on the North American logistics market.

Auto.

Mid single digits of our revenue tied to auto auto has been way down.

Many of our auto customers that is zero.

The good news is if you talk to forward or Toyota or and they're all opening up in the next few weeks. So they're going to go from nothing for something and we'll see how fast they ramp up and where they get up to on the people, but it's gonna be a lot better than nothing in terms of Boing Boing is a valued customer.

Bars.

And we do two things for them, we do military and we do commercial or military part of the business is strong and stable and the outlook is really positive on the commercial side you know they could be some lightness there could be some decrease it certainly won't go down to nothing it'll go down somewhat.

But not way way way down will go down a little bit.

Yeah, I think that's pretty strict time.

Thank you.

Thank you and next question concerning airline Gosh me Burger with Oppenheimer Company. Please proceed with your question.

Oh, thanks, very much good morning, <unk> in recent years X. feels really built up a a big focus on E. commerce, which seems to be accelerating in the current environment. All these years, a lotta and market pressure or just to dress, but could you. Please speak to the end markets its strength, how they're performing in April.

And kind of add add a total company level what percentage of the company is seeing some good relative to the to the to the bad in this environment text.

Well, Scott E. Commerce saved us in April frankly, it was our strongest performing vertical across the board. It was actually going up and most of everything else is going down food and beverage was we also strong but you take out each time and take out food and beverage except for a few little specifics and all of the parts of transportation logistics.

Perform well two from the middle of March till till the end April.

It's a great business to being right now because it's not.

<unk> phenomenon in our opinion as much as a secular phenomenon. We expect some of these behavioral changes that have taken place during the pandemic to continue post pandemic, we had nine per cent organic revenue growth in our last mile business in the first quarter and.

That's a stand out Amis. The reason is people were inside and people were ordering exercise shit, but equipment online people were ordering D.I.Y. and lawn and garden in home improvement from from their whole super ornate ordering appliances in a whole electronics online so that.

That growth of on line is a big we're big beneficiary of that.

Course in Europe, where the largest provider of evil filming services for E. Commerce and that's also been really positive recently and then if you look at reversed logistics and we do so many different diversified things in reverse returns management around the globe.

That's also a a winner that's going against the trend here <unk>, Ami channel and and so forth and so on so I I think it calm is.

I used to be right now Unfortunately, we have a good exposure to it it's not the majority of our business though.

Okay. Thanks, and then with regard to the the 700 million to a billion dollar a long term profit growth pointing initiative could you just provide an update obviously, there's a lot of focus on a on cost deficiencies in this environment.

What what the work of that is right now in in how meaningful that could be in 2020 text.

The 10 lovers are still very much.

Obviously, we are prioritizing health and safety over employees.

<unk>, but the 10 leverage is still important for the financial health of arc employees and some of initiatives are on kind of pause, but others are full speed ahead, so that the major projects and the biggest ones that are still full speed ahead or pricing algorithms.

Because.

Every time, we get pricing right. It optimize is our bottom line because.

We don't lose business that we we shouldn't lose and we get business that we should get and we'd only money on the table unnecessarily.

And it's and pricing the pricing initiatives affect all of our business over business evolved pricing.

The other lever that is growing and <unk>. It's growing in important is automation, particularly warehouse automation one of the things that we had to focus on and deal with in in in a way that no. One focused on the force how do you rent a warehouse with keeping six feet distancing between everybody.

How do you run cross talk facility with six feet distancing round everybody.

Yeah.

In the warehouse, we're farther along on automation than we are in L.T.L., but even in L.T.L. Some of the equipment overtime can be automated for safety's sake for efficiency sake in the warehouse, we're either the leader or one of the top two leaders in warehouse automation and all of.

<unk> robotics, and our A.I.N. or machine learning. It's all it's all were doubling down on that that's something that we're still spending money on and we feel good about spending money on that because forget about the long term even in a medium term, it's gonna be a big return on that customers like it our workers like it frankly.

Of the other levers the smart workforce planning to his labor management tools to enhance productivity. Those are those also full speed of has full speed ahead I'm. So happy that we had smart.

Ruled out to the majority of our locations, where we have workers prior to this pandemic because we would have never been able to manage the head count so accurately as we as we did I would've been much more random so getting the right size of the staffing getting the right blend between fulltime in part time getting the right shift.

Interest shift endings, smart smart save the day on that one so that's still full speed ahead.

L.T.L., we're still working on the P.D. optimization, that's something that's very important we'd I haven't stopped on that we're still working on the line Hall optimization.

And and of course, the pricing opportunities there when you look at the 10 lepers.

Most of them are are driven by technology. So our our tech team is is all working from home.

And of course, one of the lowest work from home, that's a check kind of thing and they've been highly productive and highly focused at keeping keeping progress made on these very very important lovers.

Great thing to appreciate it they want.

Thank you.

Thank you are next question comes from the line of our emails that with Bank of America athletes proceeded to your question.

Hey, good morning, guys. So maybe you could talk about where you see opportunities to cut costs in this environment. Obviously, if rubbing user contracting you know <unk> and you guys are looking to preserve some <unk>. Some margin there, but you know <unk> are there are opportunities to to cut meaningfully in.

Two whether B.S.G.N.A. costs or or costs of the individual segment level.

Yes, 77%.

And rising of our costs are variable the two biggest categories within that 77 per cent Ari or labor and purchased transportation those that too big things that we spend lots of money on billions and billions of dollars.

On the labor.

That that we have a system that has labor go up when we have more volume and has labor go down when we don't have volume for them to do so that is a self regulating cost control process. That's been in place for a while we just keep improving the technology that powers that every every month.

On the purchase transportation Similarly, it's fairly self regulating because if we don't in our transportation business.

<unk>, we don't have shipments coming in well, we don't go out and we don't go out and.

Purchase third party capacity, we don't add drivers you don't add trucks. So the model self corrects quite a bit because of the way what we spend the money on.

Great <unk> and then just for my second question, you know, maybe a little bit of silly question, but I'm curious to hear your take you know if you guys still are targeting hundreds of millions millions of dollars and free cash flow generation, even in a downside scenario why do you guys have so much cash on hand, and what are your.

Pensions for for that cash.

Well when the pandemic hit.

It was quite a shock to everyone, including us and.

The first thought that went to where mine was well how do we project or people you have 100000 people how we protect our people from from this terrible virus and that took up a large percentage of our efforts to learn a lot of stuff you had to learn all about.

Hygiene had to learn about social distance even had a lot about training we had a litter about P.P.E.. There's a lot to learn immediately quickly. So R.H. organization led that multi discipline effort and and that became a top priority after that.

In terms of <unk>.

Where where we can allocate capital going forward.

We would think about creating shareholder value by one up for things.

Down debt.

And refunding. The 2022 maturity is for example, or cap X., where we see growth we're still investing in cap. There we have a a wonderful joint venture with Nestle, a 15 year joint venture in the warehouse for the future that's going to open up the next few months, we still investing in that we still have contract with.

<unk> businesses that are coming our way either because it was came in from China, and there's no demand for so people need the storage and we're helping many many cousins were that or customers, who are reopening they conduct coming back into a business and they need contract logistics help so we're investing campuses in.

Because we see a very defined and measurable and and hi return on those those projects. The third category. We look at in terms of capital allocation would be and today well if not top of mind right now.

Under difficult to buy a company over so it is something we think about something we're we're talking about something we're watching and then afford category of capital allocation would be share repurchases. So we want to always be looking at our stock and seeing if it makes more sense to buy back or a stock or to do one or the other three things I just mentioned.

All these things require capital.

And the survival of the company was this was the thing that we thought about in the same graph as the survival of our employees from a financial perspective, we wanted to load up on cash it's hard to be it's hard to go broke when you have two and a half billion dollars liquidity, let's put it like that.

So we we had over $1 billion liquidity, then a quarter and when we went out and we raise a high yield bond offering and we did a couple of transactions with some banks and now we've got $2 billion of cash in the bank and we have $500 million of availability on various line. So we have two and a half a billion dollars.

Acquity anywhere cash flow positive so I feel that we've from a financial perspective done our duty to protect the company from <unk>, No surprise, which could happen. We don't know if the virus is going to come back. We don't know if there's going to be a w. <unk>. We don't know that so I feel were protected by having two and a half billion dollar.

Liquidity and and it gives a flexibility in options and also gives us protection.

Sure that so that makes a lot of sense in just a quick follow on you know.

In this environment would you consider share repurchases or <unk> and if not what would you have to see that that would get uncomfortable with buying <unk> with going back to a resume and share repurchase.

Well, we've got about $500 million left on the repurchase program authorization.

But it's not the only application of of capital and we'll have to be more disciplined even more discipline. Then we always have been on stock buybacks, because there's more risk and uncertainty in the future.

So it's not the highest priority for us to go buy back shares, but I don't rule it out and we would we would announce that retroactively not prospectively. So we would announce any sure purchases. We did at the end of the quarter not ahead of time.

Sure It makes more sense, thanks for the time.

Thank you already.

Thank you aren't next question comes from <unk>.

Please proceed with your mind.

Yeah bread, you said, you're a Mega Bowl on X.P.O. in 2021 and beyond I was hoping we can flick <unk> flip somebody earlier questions about downside operating leverage to to think about what the recovery might look like for you guys. Now how do you expect them our performance global fruit and global economy.

Recover.

And you know if if organic revenue growth returns to reasonable longer term trend of you know G.D.P.L.S.D.D.B. plus modestly you know what kind of operating leverage should we expect to see on me, but out of that and you should we see further leverage dropping from either daughter free cash flow or if some of the working capital come back in.

Cat that's come back in there may be that growth versus you that thank you.

Fast am I think the answer all those questions are we think the same thing we thought.

Prior to the <unk> to the pandemic and we look at 2020 is kind of a last year for earnings growth. This is a year to stay strong stay solid stay say be well protect our employees protect the balance sheet protect our relationship with customers and live to find another day.

And our base case scenario is.

This old works itself out over the course of this year and 2021, we look back at 2020 and go Poof, what a crazy here that was what we're glad it's over with and 2021 in that scenario that we think is the base case scenario should look pretty much like we thought.

2020 was going to look like for for the.

Demick happened. So we will see operating leverage from revenue growth transferring to <unk> transferring to free cash flow, we will see all the cross selling opportunities, we will see all the opportunities to get more market share because of our outside.

Exposure to bask going places in the industry like E. Commerce, we will see the fruit as we have been seeing of the billions and billions of dollars of investment main technology. The warehouse automation into our digital Fray marketplace next joke and then all the projects I mentioned, a few minutes ago and L.T.L. on pick up until.

<unk> in line Hall, and so forth.

It will come out of the crisis with a lower cost structure.

That's partly because we've been rolling out are smart labor tools, and and they've just been working very very very well.

And I think it's because.

Learn as many companies had not just in our industry as many companies I don't work differently, how to work more leanly, how to reduce travel entertainment cause heart how to reduce the time costs of all this traveling the big costing time older older fatigue, and getting sick and the out of the office and so so.

I think we're going to have a greater work from home population and I think we'll figure out ways to cracked and not on making sure that everyone. Working from home is justice focus justice productive as they wouldn't be if they were in the office now won't be able to work from home. If you work in a warehouse or if you're driving a truck.

So those that parts of the business will look fairly the same except there'll be a little bit more automation.

Well. Thank you for that comprehensive answer if I could if I could add one more related to that if anything expected to shift.

The cash taxes front, as we think about cash flow going forward or or maybe any other casual items beyond the more obvious ones that we tend to look at thank you.

<unk>, if our even income are lower our cash taxes will be lower as well. So as you think about cash flow more broadly we've spoken about our cat that's coming down from the original plan.

Cash taxes are likely to be lower than our original plan a working capital was very favorable and Q1.

Working capital can be a source for the year, how it turns out from the year has a lot to do with where revenue as in the fourth quarter revenue strong it could be useful cash or revenue softer it would more likely to be a source of cash those are the biggest moving pieces to think about for us we cash flow.

Thank you.

Yeah.

Thank you are next question comes from the line out and Landry with credit. Please proceed with your question.

Good morning thing.

To touch on L.T. out.

Performance.

<unk>.

Yeah me too hopefully about maybe there's some at least some knowledge agreed to back out.

Here is have billion dollars that.

P.L. segments still attainable by 2020 wide or shall we talk about your comment body just had a couple of minutes ago that you have plenty plenty.

Here for for growth and yeah.

To get pushed out here.

The answer is al too I don't know we have to see the timing out how all this plays out we have a very clear path.

Action points in L.T.L.

Which will steadily improve it's more jewel in steadily improve even die generation will steadily improving your cash flow generation is returns.

Timing of it like with all our businesses. We it's it's really hard to nail it down I mean, l. until a great quarter by the way in the first for rental record all our and improve 420 basis points.

<unk> with.

With <unk> with real estate it it without real estate in 320 basis points, excluding real estate.

The operating income was up.

32% on your your basis I call that a good order.

There were many bright spots, we had lots of new business, one load factor was up 5.2% adopt productivity was up 8%.

So we're firing on all cylinders in L.T.L. The problem is the industrial economy is not open for business yet so we've seen tonnage dramatically decreased as the whole industry has.

<unk> tonnage has gone down as much as 20 per cent, even a little bit more than 20 per cent. That's the bad news. The good news is is stabilized it hit bottom and found a bottom there were weeks over the last couple of months, where we were seeing we have about 60 metrics that we watch every morning and their color code.

And almost all of them were read [laughter] week. After week. It was you know not very pleasant to watch those metrics. They started turning yellow and they start turning green so they're they're stabilizing towards forecasts we used to do.

Wheatley forecast removed a weekly forecast for doing daily forecasting now and and L.T.L. is tracking to the forecast. So I'm very confident in the management, we have in L.T.L. I like our position L.T.L. I love the projects that we're working on that really cutting edge I have great confidence in them I.

I believe will get $2 billion of either die in L.C.L., whether it's next year or the following year.

It's a confidently predict.

Okay.

Oh really now contact with it that that I would imagine that there weren't any specific protection for later <unk> that next that did you have the scroll through that Fox structures and end up till 10 protection are deep enough to mitigate touched.

<unk> <unk> <unk> <unk> <unk>.

Yeah.

Oh, so it's not we have lots of different <unk> contract structures ranging from costs plus two six variable, which means there's a p. step six than another portion of by independent to purely transactional.

<unk> <unk>.

<unk>.

<unk> Detrimentals that we expect to see in contract with just sticks in Q2 are on the bed around to what we expect to see from the broader company, which is consistent with the kinds of protections that we built into our contracts, which were not to your point designed explicitly for global pandemic, but were designed with the intent.

Protecting us from the slowed at the slow down in some protocols and for some customers in some regions, it's more significant and what we would previously of compensated because we did not contemplate dispensation business activities in in regions are sectors. So that will have an impact but the way the models built very big picture.

Is working one other point our expectations are having spoken with the head of our European business yesterday I is that our European contract with just six volumes are going to get back pretty close to par not quite there, but getting closer to that by the end of Q. too and we have good visibility on a recovery.

Almost a benchmark levels well before the end of the year, so that isn't very resilient business. So long as economies and customers are up and running in some form or fashion. So that that that's an inkling of good news from European contract from Justice.

Okay perfect. Thank you guys.

Thank you I'll soon.

Thank you we have reached the I never question unanswered question I'd like to trying to call back over <unk> closing remarks.

Thank operator effects at one for tuning into our call.

And I will be seeing many of you in the upcoming conference season over over video conference. We're looking forward to the time when we when it's safe for us to all see each other in person and who were appropriate shake hands or even given a hug and you back to normal felt thank you for your support.

And talked in due course have a great day be safe.

Thank you. This is listed a conference you may disconnects realize at this time. Thank you for your participation have a wonderful that.

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