Q3 2021 XPO Logistics Inc Earnings Call
Hello, and welcome to the X P O logistics third quarter 2021 earnings call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. Please press star zero on your telephone keypad as a reminder, this conference is being record.
It is now my pleasure to turn the call over to Brad Jacobs. Please go ahead.
Good morning, everybody and thanks for joining our call.
With me today in Greenwich are Ravi <unk>, our CFO, Matt Fassler, our Chief strategy Officer, and Mario <unk>, our CIO and acting president of belts yeah.
We also have drew Wilkerson, who leads our north American transportation group, joining us for Q&A.
Yeah.
As you saw from our press release the company overall had an excellent third quarter.
We beat expectations for revenue adjusted EBITDA, adjusted EPS and free cash flow and raised our full year guidance by more than the beat.
We now have two reporting segments following the spin off of <unk>. So.
The largest service offering in our brokerage and other services segment is north American truck brokerage, which had another remarkable quarter.
Our North American L. T. L segment had mixed results and we're actively course correcting.
Highlights of the quarter company wide include a year over year increase in revenue of 22%.
We also grew adjusted EBITDA, excluding real estate by 25%.
Our revenue was the highest of any quarter in our history and our adjusted EBITDAR was the third quarter record, marking the fifth consecutive quarter. We've raised the bar on this metric.
In North American truck brokerage, we continued to significantly outperform the market and growth of gross revenue net revenue and volume.
Year over year, we grew volume with our top 20 customers in total by 45%.
Yes.
We also significantly increased productivity growing loads at nearly twice the rate of head count.
The largest driver of this productivity is our technology.
Specifically, our X P O connect digital brokerage platform, which continues to have very high levels of industry adoption.
Matt will give you the growth numbers behind X P O connect including the number of carriers, we have on the platform and the carrier usage customer count and cumulative downloads.
And L. T L. We delivered record third quarter revenue and adjusted EBITDA ex real estate gains and our strongest yield growth yet up 6% X fuel.
But our adjusted operating ratio ex real estate eroded by 190 basis points year over year.
Mario will cover this in detail later on the call.
Many of you know Mario from his 10 years with X T O.
Is one of the most talented executives I've ever worked with and one of the first leaders I hired in the company.
Mario and I have worked shoulder to shoulder on every major projects since.
Today he'll talk about the five point action plan, we've taken to return to our trajectory and L. T. L. A significant multi year operating ratio improvements.
This includes how we're addressing shortages of equipment and labor using X P O specific capabilities like trailer manufacturing and in House River schools.
We're also moving to the next phase of our strategy and L. T L for shareholder value creation.
Over the next 12 to 24 months, we plan to add approximately 900 doors towards L. T L networks, which.
Which equates to about 6% more doors than we have now.
We believe these targeted investments will enhance network wide operating efficiency and support future revenue growth.
And notably our L. T. L segment has superlative return on invested capital, making it an ideal use of shareholder resources.
We continue to target at least $1 billion of adjusted EBITDA in L. T L. In 2022.
In conclusion, we delivered a number of key financial achievements in the quarter companywide and in each of our segments and once again, we raised our guidance for full year 2021.
Finally, we were delighted to pay down $1.5 billion of debt in the quarter moving us closer to our goal of an investment grade rating.
I'll now hand over to Ravi to discuss our results and our balance sheet.
Thank you Brad and good morning, everyone. Today, I will discuss our third quarter results, our balance sheet and liquidity and our updated outlook for when you go into one.
In the third quarter, we delivered strong year over year growth in both revenue and adjusted EBITDA with both results coming in higher than expectations.
We generated revenue of $3.27 billion.
The year over year increase of more than 22%.
Fuel prices contributed three points of growth, resulting in organic growth of 19%.
The impact of FX was not material in the quarter.
We grew adjusted EBITDA by almost 15% to $307 million.
But if I'm off a spin off before the third quarter record for us and it reflects strong growth and execution in our brokerage and other services segment.
Excluding real estate gains.
Your adjusted EBITDA growth was 25%.
For the quarter, our adjusted EBITDA margin, excluding gains from real estate sales was nine 2% an improvement of 20 basis points year over year.
What about segments brokerage and other services.
And not to make a contributor to our growth.
In our brokerage segment.
Adjusted EBITDA increased by 46% in the third quarter and you know as you guys segment adjusted EBITDA, excluding gains from real estate was up year over year by 2%.
Operating conditions in the quarter were favorable with robust consumer activity and then ongoing demand in the industrial sector as well as the firm pricing environment.
This was partially offset by cost pressures, especially on the purchase transportation line and by the impact of labor and equipment shortages.
Matt will provide additional color on our segment performance in a few minutes.
Our adjusted earnings were 94 cents per diluted share.
It was up from 42 cents per diluted share from a year ago, an increase of 124%.
This year over year increase was primarily driven by higher EBITDA lower interest expense and lower tax rate.
We ended at $250 million of cash flow from continuing operations.
Spent $77 million on growth Capex, and the ship $12 million of proceeds from asset sales.
As a result, our free cash flow was a very robust under the $85 million.
This exceeded our expectations for the quarter.
Given by strong earnings as well as Capex and working capital timing that work in our favor.
We are executing our strategy of driving shareholder value as a pure play a transportation company.
On a trailing 12 month basis.
Harmony return on invested capital was 33% with the North America segment of that.
Given this return profile, we are increasing our capex in SDL.
Gradually with plans to add additional doors and purchase equipment to support the expanded door capacity.
Our cash balance at September 30, it was $254 million after paying down one $5 billion of debt in the quarter.
This cash combined with available debt capacity under our committed borrowing facilities gave us over one $2 billion of liquidity at quarter end.
We had no borrowing outstanding under our ABL facility.
Gaining strong liquidity will continue to be a top priority for us.
Our net leverage at September 30, It was two eight times adjusted EBITDA for the last 12 months.
Following the spin off of <unk>, we use the $794 million dividend from <unk> <unk>.
$284 million in net proceeds from our equity offering along with cash on hand to repay all our outstanding senior notes due in 2023 and 2020 for a total redemption of over $1 $5 billion.
For the full year, we have reduced our gross debt by approximately $3 billion.
We have begun to benefit from lower interest expense this year and our interest expense will decline by another $60 million on a year over year basis for 2022.
We now have no significant debt maturities until 2025.
We'll continue to Delever, our balance sheet through free cash flow generation and adjusted EBITDA growth.
Deleveraging is important in the context of our target, but give net leverage in the range of one to two times adjusted EBITDA by the first half of 2023 now commitment to achieve an investment grade rating.
Turning to the outlook, we issued yesterday after market close we updated our full year guidance in light of our strong third quarter results.
And the favorable economic trends, we see today.
Our outlook assumes this trend will continue and the market impact of labor and equipment shortages don't get worse.
The raising our full year adjusted EBITDA includes a fourth quarter adjusted EBITDA target of 300 million $305 million.
On the cash flow front.
Our new outlook for full year free cash flow of 425 million to $475 million.
We expect gross capex to be <unk>, 5 million to $400 million and net capex to be $250 million to $275 million for the year.
The updated full year pro forma depreciation and amortization guidance is $390 million with $295 million and there is no change to pro forma interest expense of approximately $200 million.
We expect our reported interest expense for the year to be approximately $230 million.
Our full year tax rate is now expected to be 24%, 26%, which is an increase of 1% versus our previous guidance.
And by discrete items and non deductible expenses.
Our average share count forecast for the year remains unchanged at approximately 114 million diluted common shares and we expect to end the year at approximately 116 million diluted common shares.
The full year adjusted EPS guidance on a pro forma basis is now $4 15 to $4 25.
The change in our adjusted EPS range reflects higher EBITDA and an increase in tax rate.
In conclusion, we had a transformative third quarter with the spin off of our logistics segment and we are enthusiastic about our prospects and the transportation leader in the markets we serve.
I'll now turn things over to Matt.
Thanks Ravi.
I'll review, our third quarter operating results, starting with North American <unk>.
Grew revenue by 15% year over year, excluding fuel, we grew revenue by 10% year over year.
<unk> tonnage per day by 3% year over year, our tonnage trends track typical seasonality in July and August but trailed in September our weight per shipment increased 4% year over year with the increased broad based across verticals shipments fell slightly by <unk>, 6% year over year.
Our retail and e-commerce vertical was strong reflecting strong consumer economy, and our expanding footprint in the consumer space. Our one to two days service offering is attractive to consumer facing verticals, we see substantial room for further recovery in industrial and especially in automotive.
Tonnage did rise nominally and both of these verticals.
The pricing environment remained firm yield excluding fuel rose 6% year over year. This was our biggest year over year yield improvement since we acquired Conway in 2015.
Price increases on contract renewals were at 8% consistent with Q2 revenue per shipment. Excluding fuel grew 10%. This reflected the increases that we saw in both yield and weight per shipment.
Our <unk> adjusted operating ratio was 83, 9%, excluding real estate gains our adjusted <unk> was 84, 4%, which was 190 basis points higher than the third quarter a year ago, the erosion in adjusted or mirrored the impact of the higher cost of purchased transportation.
Which when measured as a percent of revenue increased to about 200 basis points year over year. This increase was driven largely by higher truckload rates. In fact, we reduced our use of third party transportation year over year as we have for some time.
In sourcing this volume in an environment constrained by shortages of labor and equipment impacted our efficiency, we've already taken steps to address this dynamic going forward also through a number of pricing actions our yield growth in October accelerated meaningfully Mara.
Mario will offer additional details on our strategic plans for <unk>, we have enormous opportunity for outsized growth in the years ahead.
With the spin we've allocated our lines of business other than North American <unk> into a new segment brokerage and other services.
North American truck brokerage is our largest revenue and profit driver among our lines of business in this segment.
Our third quarter truck brokerage results were outstanding as we gained share and delivered outsized profit improvement.
Our loads per day increased by 37% versus a year ago, holding steady with our growth in the second quarter and once again, we sharply outpaced the market.
On a year over year basis, we generated a 62% increase in both revenue and net revenue net revenue per load increased 18% year on year.
The truckload market remains exceptionally tight as shippers seat capacity and visibility to their freight movements are digital brokerage platform Spo connect is helping us drive tremendous volume at excellent margins.
Carrier and customer adoption of <unk> connect continues to surge.
We exceeded 550000 cumulative downloads of our drive <unk> mobile app as of the third quarter nearly tripling the cumulative number of downloads year over year.
We topped 90000 registered carrier accounts on the platform up 37% year over year.
Average weekly usage by carriers more than doubled and the number of customer accounts on the platform more than tripled.
Our North American truck brokerage profitability was very strong and re leverage our 62% net revenue growth into stronger adjusted EBITDA growth in brokerage.
Looking at overall segment results from brokerage and other services revenue rose, 27%, while adjusted EBITDA Rose, 46%. The adjusted EBITDA margin for this segment rose to five 8% from five 1% a year ago.
I want to mention a couple of recognitions that are particularly gratifying.
We were recently named a top company for women to work for by the women in Trucking Association and.
And we received both the Ford Excellence award for treating customers like family and an award from Ulta beauty for commitment to continuous improvement.
Now I'll turn it over to Mario for a further discussion of North America and elsewhere.
Thanks, Matt I'm going to focus my comments on two areas of LTM, where we're bringing a lot of fresh initiatives to the table.
One is the action plan, we began executing in October and the other is our strategy to accelerate growth going forward by making targeted investments in the business.
As you know we had some year over year erosion in our operating ratio despite.
Despite reporting our highest third quarter revenue and adjusted EBITA Excreta state.
I want to be clear that's exactly why we fell short on our operating ratio and we're taking a number of specific actions to get it back on track.
I'll walk you through it as.
As you know we've had an ongoing strategy of in sourcing third party line haul transportation to use our own capacity.
This strategy has worked well for us for years.
The third quarter was a tough time to be in sourcing, particularly given the ongoing labor and equipment shortages.
This impacted our network efficiency and reduce the amount of available capacity.
Short term will be taking a more balanced approached our line haul needs.
Understand the problem and we own the solution.
I took over as acting President in October and we immediately began executing on our five point action plan all of our initiatives are underway.
First with improving network flow with selective embargoes, but we limit the freight we accept a certain terminals for short periods of time.
We are working one on one with those terminal teams to cleared the way for more volume.
The short term cost is embedded in our guidance.
Second we're driving multiple pricing initiatives to improve yield capitalizing on the firm industry pricing environment.
For example, we pulled forward the general rate increase from January to November.
Five 9% increase that went into effect at the beginning of this week.
And we're instituting accessorial to enforce appropriate charges for trailers that gets retained at the drop off points.
The same holds true for loads that require special handling like oversights freight or a regular dimensions of that.
<unk> of the freight means we can't fully optimize our trailer, we'll get paid more for that.
Our pricing actions are already paying dividends and we saw strong yield performance in October.
Third we're ramping up the attendance at our ex fuel driver training schools to help mitigate the driver shortage. This year will have 800 graduates in the U S and we're targeting more than double that number next year.
And fourth on the equipment side, we have an ex vivo specific solutions, our most immediate needs, which is trailers, we have a major edge here and it's going to get bigger starting in 2022 with.
With investing to significantly increase our production capacity at our company owned trailer manufacturing facility in Arkansas, We expect to nearly double the number of units produced in 2022.
And fifth as Brad mentioned, while all of these initiatives are underway, but also embarking on a two year plan to expand our U S network by about 900 doors or approximately 6%.
Over the next 12 to 24 months will make strategic investments in the business and our top 10 Metro markets will add doors across the network, where they can improve our operating efficiency and grow our revenue and yield while benefiting as many customers as possible.
But in the middle of the planning process. So we'd have more color on this when we give you our outlook next quarter, we expect to add at least half of the 900 doors in 2022.
That covers the plan, we launched in October and our strategic investments in the business and we will continue to focus on rolling out new technology to drive value and LTM.
LPL pricing is front and center in our Tech agenda, it's our biggest opportunity to accelerate healed in the long term.
We're building out our data driven tools to optimize rates for small accounts and we use elasticity models identified the best pricing.
Another big opportunity is network optimization and line haul, but our annual spend is about $1 1 billion ex fuel.
Our goal is to reduce the number of miles required to process, a given amount of volume in our network.
And we're also meeting the load building process that gets higher trailer utilization.
The next area is pickup and delivery, but we launched new planning tools earlier, this year and have upcoming launches of new dispatch tools and dynamic routing enhancements.
Our goal is to increase the number of stops per route and the average volume per route.
Our other big focus is dock productivity.
I'd like steel smart productivity tools are in place across our network and they have had an immediate positive impact that should gain traction when the labor market settles down.
Another area, where we can enhance dock productivity is through those planning, which is how we positioned trailers on the doc to minimize worker movements.
Additional developments underway for LTM on the technology front, including in <unk> portal and new API features for our customers.
And finally, you may have seen the recent press coverage of our new hub in Chicago Heights.
Terminal has significantly increased our capacity any key metro area and it will drive efficiencies across our network.
It's a state of the art facility with 264 doors, and 150000 square feet and its employees around 250 people.
All of our drivers our help to strict safety standards, but I've mentioned that 25 of the drivers based in Chicago Heights have an amazing safety track record of driving either $1 million or 2 million miles accident free.
More doors mean, more topline growth more efficiencies and more yield flowing to the bottom line for our shareholders. This is the same strategy that is driving our capital investment plan moving forward.
Our North American LCL business delivers a high return on invested capital and we're extremely bullish about this opportunity to unlock more potential.
I'll close with a personal comment.
A lot of time in the field over the last month, and it's very exciting to work in the trenches with our first class LTR organization and.
I am impressed by how deeply to steam cares about serving our customers and how quickly they've embraced our action plan.
These are the folks with their ear to the ground and Theres a lot of positive energy driving the future of this business.
As we take actions to course, correct our network in the fourth quarter, we expect adjusted operating ratio detract typical seasonal trends.
This implies year over year erosion, similar to or slightly greater than what we saw in the third quarter.
We expect to inflect back towards year over year improvement in the first half of 2022.
We look forward to driving significant positive developments in <unk> in the coming year, we're continuing to target at least $1 billion of adjusted EBITDA in 2022.
And we have a strong conviction that we will generate hundreds of additional basis points of improvement in our operating ratio in the long term.
With that we're going to take your questions. Operator, Please open the line.
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Our first question today is coming from Hamzah <unk> Macquarie from Jefferies. Your line is now live.
Hey, good morning. Thank you My first question I'd, just like to address some of these to Mario.
I guess.
Or what exactly you werent wrong in Q3 and L. P. L. I know I know, it's all related and you gave some color, but just as part of that.
Do you think you underperformed your peers in the quarter and then you mentioned some of the strategic plan going forward.
Maybe just some more color on that in terms of the confidence level on that and the execution risk.
On that strategic plan going forward. Thank you.
Yeah. Thanks, Thanks, Hamzah. So when we look at the third quarter, despite having record EBITDA and revenue, we underperformed on or so we had erosion of 190 basis points versus a lot of our peers that had the improvements in that in that award now I mentioned in the opening remarks.
We as a carrier had higher dependency on purchase transportation. So these are we call them internally highway sub service smiles.
Last year in Q3, we had roughly 26% of our miles with highway subsurface and we continued a long term strategy to in source Highway sub service, which have played well for us in the past.
It's a tough time to do this in a quarter, where you have obviously labor shortages and equipment shortages, which puts pressure on our line haul network and therefore, our networks to become less efficient and the network flow was not as efficient as we would have liked it to be which effectively increases increases the cost of being able to fulfill the service we expect and it also reduced the amount of capacity we have.
The network. So when you combine these things.
This is kind of what we saw that the erosion that we have an action plan as I mentioned the opening of an opening remark is at five point action plan to address this issue we.
We are number one.
The strategic embargoes, but for the selected <unk> of number of sites. We meet the demand of freights that we are getting from our customers in those sites to improve the network flow and we've seen great results. So far are great feedback from the field I've been spending a lot of time at our terminals over the last months and good to see the impact that we did this is having in our operation.
The second area I don't yield, although we had record yields in the quarter, which is a 6% year over year improvement in its accelerated from a four 5% in Q2, it's still there needed to be higher we didn't move as quickly as we should have on raising prices on our customers and we are taking action on this have you already are seeing a very nice improvement.
October of our yield performance and the actions. We took there was one on contract renewals, we've seen a higher percentage on yield improvement there we.
We are charging our customers excess <unk> when they contained our trailers. So we can get more of that equipment back into our fleet and we are also tracking them wherever they are shipping something that is irregular or long or it doesn't fit our network and doesn't allow us to optimize our theaters as well.
And then we hold our general rate increase from early next year is unusually muted within Q1 two through this Monday to also capitalize on the local accounts getting more and more yield improvement there now.
Now the third area is really three components to it which is adding capacity to our network. So when we think about capacity. It's about drivers, it's about equipment and its about physical terminals, so doors and actual physical space, where we move when we move to go on the driver side. So we had the competitive edge with our drivers school and we're investing more into these drivers.
Schools, where this year, we're going to graduate profit doubled the number of drivers we have done in 2019.
And we are looking to double that number going into 2022, so let's kind of be a solution for us to add more drivers, while driving saliva ranks and help counter some of driver shortages, we're seeing in the industry.
From Deutsche Bank. Your line is my life.
Thanks, Operator, hi, everybody you know Brad on the L. T L business I'm not so focused on where we've been I think the results are pretty clear, but I'm really focused on you know, where we're going and and so what I'm trying to understand is the level of urgency in the organization the level of urgency and.
Your mind to get the L. T L business back on a better trajectory and and is it fair to say that you know three Q results is a bit of a kind of watershed movement moment for the company to kind of change course on the L. T. L business. So that's kind of the first question and just separately the M&A market.
Is very very hot right now as you know better than anybody there's obviously several deals in the space in the recent weeks and months and quarters.
How do you and your mind balanced kind of the benefit of of retaining businesses outside of brokerage in L. T. L. A with the potential you know benefits to accelerate the deleveraging of the balance sheet, which is obviously like one of the key strategic priorities. Thank you.
On the second question the M&A, Oh, I don't Wanna get into specifics of what we may or may not be doing on non-core parts of the business to answer your question. The obvious advantage. If we chose to go that path is it would accelerate our get into our goal of becoming investment grade I was very.
Happy that we paid down $1.5 billion in debt. This order that was a real good move toward getting investment grades.
But we have more ways to go so if we chose to go down that path. We just accelerated with respect to your first question.
We listen to our shareholders and we listen to them very closely.
Times, we hear most of what they say and not all of US He said so.
So we have two things that investors told us over the last year, one was reduce your debt.
Making huge progress on that.
It was simplify the business model to spin accomplish that.
But I think we heard those two things loud and clear we acted out on the third point I don't know if we heard it so well, which was you need to grow your LDL business, not just sweat the assets and and grow the margin and and get.
Great returns on capital, but grow top line. So we have heard that now.
And that is something we are going to do now with respect to the third quarter.
I would say that even great company stumbled on that and we certainly did not stumble companywide. We beat then we raise so I rest my case there we.
We certainly did not stumble in Europe numbers were great.
It would be very difficult to make an argument that we settled in truck brokerage since we have industry leading results. There we stumbled in LCL, we were focused on other things and didn't keep our eye on the ball there.
We do have our arms around the issues there.
Do we have been intensely focusing on this and the last three or four weeks.
And we will continue to intensely focused on this with respect to your question about what's level of urgency we love solving problems, that's how we create alpha.
We have a tremendous track record of creating significant shareholder value over the long term for our investors and we will of course correct. This LCL with a great level of urgency and I'm confident we will.
Thank you.
Thank goodness question is coming from Todd Feller from Qbank capital market. Your line is in our lives.
Great. Thanks, and good morning bread to the last point and you're looking for growth within the <unk> business, how do we balance or how do we think about some of the near term actions and the impact on tonnage.
What that means for growth here in the near term.
And can you also speak to service metrics. During this time period, you know where you're able to maintain service or did service Supper eyes. You went through some of the actions too basically free up some of the network fluidity. Thanks.
Well.
I think service levels to the entire industry, not just auto industry, but globally transportation.
Wasn't functioning at peak efficiency.
In recent months due to the significant upsurge in volume yet the shortages of labor and equipment and we were not immune to that either.
With respect to what the short term impacts will be on tonnage.
The embargoes that we just selectively.
Slowdown tonnage diluted here and there the raising yields okay that some last to see on that but overall, you'll see in the coming quarters, a shift to growing the revenue line not immediately but you will see that shifts slowly and steadily growing the revenue line and you will see us investing more in capex and you'll see us.
Be more aggressive on raising rates, you'll see as being more aggressive on enforcing accessorial those a whole slew of initiatives. We've got in place and Mario summarize the top one that will allow us to regain our position and LCL.
So bread you are saying that any deterioration in service metrics would be consistent maybe with the industry is kind of the comment that you're making.
Can't see the service metrics for for the competition. So it's hard to compete that to compare them.
But I would say that the industry as a whole suffered as a result of.
The shortages of equipment shortages of labor and this big influx of volumes and in a network business in that part of the transportation supply chain that suffers a little bit more because it's a network, particularly adhere that last their penchant hearing the cries there.
I will say that we've got 25000 loyal customers and LCL and customers choose carriers that meet their service expectations.
Yeah understood. Okay. Thanks for the time.
Thank you.
Like our next question is coming from Chriss, whether it be from city. Your line is not alive.
Hey, Thanks, good morning, guys.
Maybe once you get a sense of what you think the capacity of the network is today, so I understand you're adding model.
About 60% of the capacity I'll look back a few years you guys are down in terms of tonnage about 6% from where you were.
2017, so I just wanted to get a sense, maybe when you think the capacity of today and then what the issue is simply the line all piece that will will constraints in the quarter, but you didn't see this sort of sequential uptick in September in terms of tonnage that your peers did so I just wanna make sure I understand the dynamics around capacity and what you think this will actually drive in.
Terms of the.
The next 24 months as you roll out these new doors.
You got it right. This is Mario that's when we think about excess capacity.
About 15% excess capacity when it comes to total footprint. However, it is not evenly distributed.
That will finish point in certain markets and when we think of our plan going into next year's to opening up the additional 6% of doors. We are looking at Metro markets, where we are seeing higher demand from our customers and the already covered more than 99% of the ZIP codes in the country. So we have plenty of items and demanded as many of these market and in those markets, but we do have bench points us when we get off.
Either opening terminals with adding doors as we head into 2022 now the second physical capacity is one aspect, obviously, though the two other asphalt capacity of drivers and equipment and as we all know the driver shortage has been affected our industry significantly and this is where we are doubling down on both our recruiting efforts at our drivers' schools.
Wait more drivers to fill the gap there I'll do all the short term.
The second part of your question online Hall, so typically the way mine hauled worse when you're in source versus transportation you effectively break one small girl Hall that we're doing with a third party carrier into smaller hops in the network. So when you have a driver shortage in some parts of the segment effectively you add to either line-haul miles but yards.
Diverting tomato so another facility.
Add costs on re handling on the dock as well so that's the dynamic when you have an imbalance in the driver when you have to drive a shortage and you have an imbalance and while we kept on insourcing versus transportation that impacted our capacity in certain markets, where we didn't have enough capacity to meet our customer demand.
Okay.
Well I appreciate that Mary.
And then in terms of some of the actions you are doing you said that your metering volume coming in you said October there was a positive response generally speaking probably could network fluidity to the point that you are making you give us a sense if you can.
See 20 to grow to get in the short run as you're going through this process and picking specifically about <unk> I don't know if you want to give us an update on what's on the 12th of October but wanted to get a sense that you think you could still grow tonnage, while you're going through the short term fixes.
Fixed in the network.
Yeah give your color kind of what's about early in the port that looks like so what I'll do on the yield side. The pricing actions. We have we have taken as Sean gave every night Federation Appeals improvements you over a year in October however, tonnage with the embargo actions, we've taken demeter, coupled betrayed and as we take this corrective action, we would expect punished will be solved and the and the fourth quarter.
As well as the Eagles corrective action and when we look forward to next year as we cleared the way for more volume and add more of that capacity on the driver's side than on the failure side Ah we expect to have an inflection point in the first half of the year on both a lot improvements and volume equipment as well.
Okay. That's helpful. Thank you.
You got it.
Yeah. Your next question today is coming from Jordan Alger from Goldman Sachs reminded my life.
Hi, just a couple of questions. One can you talk about your strategy of using purchase transport going forward since that seems to be a bit of an issue in the quarter is that at least in the near term expected to increase and then in terms of the inflection an hour to get to that billion dollar EBITDA number.
What sort of improvement are you currently contemplating thanks next year.
Yeah, So let's talk with the with the first part of the question of virtuous transportation. So we on the short term and this goes from this quarter Q4, and I'm going into the queue. One we are taking a more balanced approach versus transportation. So we are analysing on is aimed by lane basis, we all know what's happening in the truckload market rates. So these rates have gone.
Can see up so we are going Ah lane by lane and analyzing what would be the cost to outsource to a third party.
Using our all drivers for it and try and get back to the demand we're seeing from our customers in those markets on the short term, we're going to take a more balanced approach on purchase transportation that leans towards adding more purchase transportation. If the rates are right and depending on which means we can get those right. So as an example, the typical outbound from southern California today the.
Rates are just completely out of.
Typical market norm given the tightness, we're seeing in that market. However, other parts of the country like in the Midwest or the northeast you would have much more desirable raped on the on the truckload of the truckload site I'll go onto our strategy and source versus transportation will continue so as we cleared the way for adding more drivers and what equipment we do.
Believe that if you want to handle more of the line home network on our own equipment with our own driver that's going to be back on the long term.
Now into going back to our.
Guidance on.
Or our August for next year.
Targeting at least a billion dollars of EBITA for the for the full year 2022.
Comes to all will get more color on that going into going into the next was on the next earnings call will give it more color to what we expect on the on the awed improvement for the year towards.
To have that number.
Thank you.
Okay. The next question is coming from Fresno Glinski from Barclays. Your line is in our lives.
Hey, good morning, everyone and thanks for taking my question I know, we've had a lot of focus on LPL, but can we talk about the brokerage business and from the efficiencies that you guys are seeing there I think a lot of it's being driven by your ex connect App and can you talk about the sustainability.
Brokerage earnings going into make sure just given that we have such elevated right from a truck inside like chemist, earning space be maintained or do we need to think that that could reset. Thank you.
Hey, Brian and this was dirt.
<unk> connect with sorted over 10 years ago, and we had three things among the first thing was our customers and so when we built this for our customers. We really wanted to be able to give them massive amounts of data to help them make the best transportation decisions possible. When you look at the vendors are the carriers, we won't be easy to do business with and that's something that shows but.
On a 30 day run 77% of our cares are likely to come back to us.
<unk> face was for the employees, we continue to see improvements with our employees and the productivity of them. If you look at the volume over the last five years has increased 60% and we have added less than half of about half of that on pet down. So our volume continues to outpace head count.
<unk> as far as the sustainability on the market I don't think anybody's got a crystal ball for where the market stolen I can tell you right. Now we are confident that we will continue to take share overall, we've proven that we can take share in a tight market or in a loose market and we've got a great group of proven operators, who on average our director level and above have been.
With extra year for over eight years and so that team has has had success in both a tight market annulled loosed Margaret and we're confident that we will continue to do both we have very strong relationships with our customers. Thus evidenced by growing volume on 37% on a year over year basis, and with our top 20 customers dependent on us.
Then the tightest capacity, we've seen in the grew volume, 45% on a year over year basis.
Thank you.
Thank your next question today is coming from Jason Sidel from calendar why does in our lives.
Hey, Thank you operator hate to go back to LDL here, but I'm going to give you go.
Just wanted to think about sort of <unk>, you sort of laid out some of your or targets I'm surprised we're not going to say I think a little bit more sequential improvement only because you are pulling up your <unk>, which is five 9% and then you have pretty strong rate increases there.
You had in the previous quarter of 8% what should we think about the puts and takes for the or for at least the near term I understand the long term plan.
Yeah, so severely.
Look at the auto going into Q4, so we expect a fourth quarter has typical seasonal calling from from Q3.
Which I will meet you over at Ocean, similar to or slightly greater with what we saw in Q3 now the dynamics of the quarter. As you said so so we're seeing whether you're very nice approval for the yield in October based on the actions that we have taken so far on all of the things I mentioned earlier on with access audios with the highest contract renewables with all with all the.
Different pieces, there however, with the embargoes, we implemented in October effectively.
It has put us in October when it comes to volume so the dynamic of the quarter will be you would see higher yields you would see softer the volume and that will contribute to what I would posit.
Pause it looks like for the quarter.
Okay. So it's going to grow more in the embargoes side and on your G. R. I.
You are really the first person I've seen to push <unk> into November a Fedex freight came out but there is there <unk> not some of the surcharges is not taking place until January.
Do you think that you could suffer some on the tonnage area with that or do you think that the market is just so hot it's not gonna matter.
When you look at the current market, it's a pretty firm pricing market. So there is more demand in the market and there is capacity in the market and then we believe and also the way that it works for US it's impact our local accounts and we also have a lot of time with our sales team escalate that feedback on where we need to be and we felt that that was the right action to take we haven't so far.
Any have you had any pushbacks or negative feedback from customers. They understand it in this market that has cost inflation in terms of fiber wages and getting equipment and all the things that they see investment by changed the thing that has been pretty easily whether you see so far.
Mario and if I could sing one more in here.
Maxine mandate wanted to get your thoughts on that I don't know if Bryan wants to chime in as well, that's a pretty hot topic in the trucking market obviously.
Pitch the administration that.
The industry should get an exemption I of course agree wholeheartedly with them, but I would love to hear your thoughts on that.
My personal opinion by everyone should get vaccinated.
I think the evidence is very clear that.
Who were vaccinated yet.
Infected less and when they do get infected less they get hospitalized less than non vaccinated people and for sure. The data shows that if you vaccinated you dial us very.
Very compelling reasons to get back to having said that.
There's a lot of resistance from a lot of people to get vaccinated and one the government needs to take into consideration the practical ramifications of policy and in the trucking industry in particular.
It's probably a little bit higher percentage of people, who were anti vax or so to speak and if that policy went in right away. It probably would not short term at least have a good effect you see a lot of.
Labour leave the market. So that's my overall view.
Well said I agree with you and I appreciate the time.
Thank you.
Okay. Next question today is coming from Ravi Shankar Morganstanley. Your line is in our lives.
Thanks morning, everyone Mario maybe if I can start with you congratulations.
Congratulations on the new role B when you look at the old hat you were wearing.
Maybe the guard had as.
CIO I think a lot of the opportunity on the tech side Warden LPL, but now that you have actually got under the Hood.
Of the LDL business and got your hands Dirty. If you will are you seeing any incremental opportunities on the tech site that make you excited about what you can do with the ideal business.
Yeah first first thanks, Thanks, Robbie and as you said I've been very involved in that out at 10 business and all the technology initiatives that we have been rolling out and if you go back over the last five years, we've improved by what operating ratio by 1000 basis points and nearly tripled the profitability of this business hesitate component to pay and that now we're moving forward I mean, obviously aimed at all.
Running the business I had much more impact in terms of accelerating some of these initiatives I'm getting them out in the field of the medium.
The long run and if I break it down the biggest opportunity continues to be in pricing. We have pricing is all about using price elasticity to better understand where customers are willing to pay any any heightened assistant the model with a total pricing environment and to give you. An example in our brokerage business, where we have we've had 10 years of <unk>.
Against using machine learning to optimize price and you can see that evident in how well we price on the margins are getting on that on that business as well. So we continue to believe that a lot of abortion again pricing and improving technology. There at the second area that online Hall, when we think about Blind Hall, that's roughly $1.1 billion worth of spend X fuel and it's an area that.
So 1% improvement, obviously is 11 million Bucks up E cow and we are we already have good technology data, we're going to we're going to continue to improve that a lot of it is optimizing the road building process and where we put the for example trace within a taylor to reduce the amount of the handles we're seeing we're seeing in the network as an example, there.
The third area that I will pick up and delivery relaunched new planning tools earlier. This year. These were towards it allows our plan was all web based just beautiful looking user interfaces easy to use it has our standards do a better job and Betty and year out and within the process now of launching our new dispatch tools and then going into next year launching additional out enhancements as with a lot.
It was to increase the amount of weight with putting in a certain triple seasonal the sauce on the on the subcontinent as well and then do the next areas that don't adopt productivity. So as I mentioned in my opening remarks, smart already deployed and all of our terminals and smart allows us to make sure. We have the right amount of dock workers for the amount of work that we need to.
Do and we'd also now launching a new technology that allows us to better position traders on the dogs. So we can minimize work could movements between the doors. So we can improve efficiency by minimising travel on the on the dock as well and then finally with customers I spend a lot of time with customers a lot of the feedback is that we were launching new API technology that is making our integrate.
<unk> with customers go easier new web portal with Corinthian pilot, we're very excited about and we're getting great feedback from customers on it. So we're definitely accelerating the tech agenda and similar to what we've done in brokerage of getting outside results driven by technology. We believe that the STL business will continue to use tech to that optimize the business.
Very helpful. Thanks, So much Maria and maybe a quick follow up to Brad.
Brian increasing resource allocation to MPL makes a lot of sense, given the fundamentals of that business, but what about the brokerage business. Obviously you guys are firing on all cylinders. There. What's your strategy resource allocation. There is it more of a motorcycle for it's worth or do you feel that there is real share gain and growth potential there in the bunker.
I think we will continue to take share I think the investments we've made an ex feels connect over the last decade.
Have been consistently paying off and we've been outperforming the market and outperforming the market and brokerage by a significant amount. If you look in this particular quarter are loads up 37% and if you look at the volume from our top 20 customers is up 45% year over year, you look at our net revenue was up 62% and you look at <unk>.
Specifically.
Year over year carriers up 37% carrier usage has doubled customer count is up three times a year over year you look at the API.
Driven transactions, they're up fivefold year over year. So it's still connect is working very very well and that is enabling us to meet customer demands to meet them, where they want it where they want to transact with us. So XDA connect is very very sticky and 77% of the carriers, who do business with assigned connect.
Come back within 30 days and do more business with us.
The virtuous cycle now with respect to your question about allocating resources in terms of Capex truck reference doesn't need much cabinet.
Really just the it.
And.
Some of the overhead which is really not even capex opex. So.
It just doesn't need a lot of capex, the real place, where we're going to put capex in is going to be on LDL. So that we can do what our shareholders have told us which is to grow grow in LTR for that we've got to invest in it. So that's what we'll do.
Great. Thanks, so much.
That your next question today is coming from time Warner Woods from UBS. Your line is not alive.
Good morning.
Wanted to ask I guess to start with I know you've had a lot on LCL, but.
What do you think changed sequentially.
Was it.
I understand that it'll be better was it the labor attrition picked up I guess in terms of the change online Hall, I mean, where you at.
<unk>, 26%.
Outsource line-haul in second quarter, and then you went to 24 kind of too quickly I mean, it seems like a number of things that are kind of intertwined and I think I'm just trying to understand partly what is.
Just the macro is a lot tougher, which obviously you work harder to improve but the macro the labor market may not improve so wanted to see if you could give some more perspective, I'd really what changed sequentially second quarter versus third in LDL.
You guys Asides I mentioned earlier as we we had the long term strategy to in source, our purchase transportation, but when we think through the summer, especially with the Cobra Darien, taking up and.
I ended by a shortage effectively that wasn't the right time. It was a tough time to be in sourcing versus transportation. So we when we in source that effectively moved drivers in our network between city and buying all operations, but there wasn't enough drivers given the shortage was too quick a move in a market where you have a driver a shortage.
So moving forward as we visit from that so one we're going to take a more balanced approach to look at depending on the rate for certain Hsr's lane versus transportation veins, and we're going to make the right decision for the business of the short term and also with accelerating our either hiring though I mentioned drivers' schools early it on if we look obviously when when we think about hiring drivers that includes.
Both hiring certainty as well as inherently and this is this is where we're doubling down on both of these I have ensured pumping the number of drivers with getting some outlines our schools. This year versus 19, obviously and something six times, what it was versus last year and Bubbling that going into next year and we're also building down on our efforts, we've been adding increasing the size of our <unk>.
Team when using social media with added benefit Fort Fort between the total's versus starting bonuses and some market for drivers to capture that.
That portion of it and I'll put up but going back to Q3 to separate really was the pivot point, where we've seen the the threshold of drivers how much we had in source on Bush's transportation hit a bottleneck that caused the network to become inefficient and when that happened. We effectively then and have enough capacity to pick up customers freight and then because.
The cost inefficiencies in that effort as well.
How much did the line-haul outsource.
Or excuse me in source increased <unk>.
So we're on a Q3 on a <unk> basis. It was 26 to $24. It was roughly around the same in terms of the year over year in Q2 as well.
Okay that makes sense can you offer any quick thoughts on just what your macro assumptions are for the 1 billion EBITDA in <unk> in 2022 is it like labor market Wise do you assume stability or do you assume some help that the labor market eases a bit to get to that <unk>.
Significant improvement in 2022.
And it's fat in the short run we expect the macro conditions that we see today, including all of the reality that we see in terms of labor and capacity, we do assume that over the course of 2022. There are some normalization on both of those fronts, but the clear the kudos get into those numbers.
We understand is achieving.
The goal that we set in the five point action plan, particularly this relationship to network efficiency in network flow in the short run and achieving the results that we expect on head count and equipment and the initiatives that we outlined earlier.
Great. Thanks for the time.
Thank you.
Thank you we region of our question and answer session I'd like to turn the floor back over to management for any further closing comments.
Thank you so I'd leave you with four points.
<unk> in the third quarter. It obviously was not our finest hour. However, we have our arms around the issue and we're dealing with it with great urgency and I'm confident that we will.
Achieve our goals there in terms of truck brokerage.
We're just continuing to kill and truck brokerage the tech investments over the last decade are clearly paying off.
The biggest the third point I point out is the pricing environment inflation is not a good thing for consumers, but it's not necessarily a bad thing for companies within the supply chain, assuming you could raise your pricing in excess of your price inflation, which we should be able to do so we should be benefiting from the.
Firm pricing environment, and we've seen ourselves be able to execute that in Europe, we see ourselves be able to execute that and brokerage and all the lines of business within brokerage and we are now going to push the pedal to the metal on on exerting pricing power in LCL.
And a four point I would end with is.
I'm, just very delighted that we paid off a billion dollars $5 that in the quarter and we've made great progress towards our goal of becoming investment grade so with that I. Thank everyone for participating in this call and we'll be talking to you all in due course, thank you.
Thank you. It does continue to teleconference and webcast disconnect. Your lineup. This time and have a wonderful day, we thank you for your participation today.
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