Q2 2022 XPO Logistics Inc Earnings Call
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Welcome to the S. P. L logistics second quarter 2022 earnings conference call and webcast. My name is Paul and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question. Please press star one on your telephone keypad.
Please limit yourself to one question when you come up in the queue. If you have additional questions you're welcome to get back in the queue and we'll take as many as we can please note that this conference is being recorded before the call begins let me read a brief statement on behalf of the company regarding forward looking statements and the use of non-GAAP financial measures during the call the company will be made.
Certain forward looking statements within the meaning of applicable securities laws, which by their nature involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those projected in the forward looking statements.
<unk> of factors that could cause actual results to differ materially is contained in the companys SEC filings as well as in the earnings release. The forward looking statements in the company's earnings release or 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 to the extent required by law.
During this call. The company May also refer to certain non-GAAP financial measures as defined under applicable SEC rules reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and related financial tables or on its web site.
Can find a copy of the company's earnings release, which contains additional important information regarding forward looking statements and non-GAAP financial measures in the investors section of the company's website.
I will now turn the call over to Brad Jacobs, Mr. Jacobs you may begin.
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.
Mario Hart President of LCL, and Youre Wilkerson President of North American transportation.
Before we get into earnings I want to comment on the succession plan, we announced yesterday.
Once we complete the spin off Mario will succeed me as CEO of X P O and I'll remain with the company as executive Chairman.
It'll be the nonexecutive chairman of the spin off our XL.
Appointing Mario as my successor was an easy decision for the board and me.
<unk> has a deep understanding of the nuts and bolts of our L. T. L operations, he's been hands on with L. T L. As CIO for seven years, because as soon as we acquired the network we started developing technology for it.
He also worked closely with the <unk> sales team in his role as Chief customer officer, and he has been running the entire LCL business since last year.
Mario It's mission critical to X P L.
He was the third person I hired back in 2011, and we've worked side by side on every major initiatives since then.
He's been instrumental in the successful integration of 18 acquisitions and he spearheaded countless innovations that have given us a tremendous commercial advantage.
Now Mario and his management team will take the reins of our growth strategy for L. T L and lead <unk> into its next chapter as a pure play LCL carrier.
I'm proud to report a very strong second quarter all of our reported metrics were ahead of guidance and consensus.
We had our ninth straight beat on adjusted EBITDA.
And in fact, we generated more adjusted EBITDA in the second quarter than in any quarter in our history.
Like adjusted EBITDA or adjusted diluted EPS was a new record for any quarter.
Yeah.
In our North American <unk> business, we're continuing to build tremendous momentum.
What a difference nine months make.
Kudos to Mario and the team for delivering LTM revenue and adjusted EBITDA that were records for any quarter.
Our adjusted operating ratio ex real estate inflected positive in the quarter by 70 basis points to 84%.
That's another company record for any quarter.
And it puts us right on track for an improvement of more than 100 basis points this year compared with 2021.
Also in the second quarter, we maintained our highest level of LCL network fluidity since 2020.
So it's not surprising that we've seen a significant increase in our customer satisfaction scores as measured both internally and by third parties.
The <unk> team has increased its focused on customer service over the last nine months now and it's gratifying to see US continue to build high satisfaction levels. After a V shaped recovery in our service metrics.
In North American truck brokerage, we continue to sharply outperformed the industry.
Our gross profit was a record for any quarter at 28%.
Year over year by 610 basis points.
And it's not just a price play we grew volume year over year in the quarter by 16% and truck brokerage.
This is a best in class business that is both highly profitable and taking share quarter after quarter.
In Europe , our operations continue to perform well despite the war in Ukraine.
Our organic revenue growth in Europe was 7% year over year, which was a sequential improvement from the 5% we reported in the first quarter.
And in constant currency, we grew adjusted EBITDA year over year by a robust 14%.
Company wide our key part of our success has been to pay rigorous attention to return on invested capital and free cash flow.
And I'm pleased to report that as of the end of the second quarter, our trailing 12 month companywide ROIC was 38% and significantly higher in our North American <unk> and truck brokerage businesses.
It's worth noting that since we bought the <unk> business in October 2015, the businesses generated net cash of over $3.8 billion.
And lastly over the first six months of the year, we brought our net leverage ratio down from two seven times to one eight times.
It's gratifying to see X P outperformed so well across the board and our strategic actions on track.
This includes the planned spin off of our tech enabled brokered transportation platform <unk> in the fourth quarter.
Finally, I'd like to profoundly. Thank all of our 43000 X P O employees for delivering a phenomenal quarter and moved to a record year.
Now I'll pass the call over to Ravi to go through the financials.
Thank you Brad and good morning, everyone.
Today, I will discuss our second quarter results.
Our balance sheet and liquidity and our outlook for the balance of 'twenty, you're going to do.
I'll start with our results.
We delivered strong year over year growth with the record second quarter revenue.
And the highest adjusted EBITDAR and adjusted diluted EPS of any quarter in history.
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Revenue in the quarter was $2 $2 billion.
Adjusting for the sale of our intermodal business.
Year over year revenue increased 11%.
We grew adjusted EBITDA year over year by 23% to four and $5 million.
9%, excluding intermodal and gain somebody has a good chance.
This reflects strong earnings growth across all our businesses.
Effects negatively impacted EBITDA by $6 million in the quarter.
Our adjusted EBITDA margin was a record one 5% and this was a year over year improvement of 210 basis points.
Operating conditions in the quarter, we had favorable and the firm pricing environment more than offset inflationary pressures for labor and purchased transportation.
Our corporate costs in the quarter, excluding one time expenses related to strategic initiatives was down year over year by 29%.
This reflects continued rationalization of our corporate cost structure.
Our interest expense for the second quarter was $31 million compared to $58 million in the year ago period.
This reflects the paydown of approximately $3 billion of debt loved here and over $600 million of debt during the second quarter.
The effective tax rate for adjusted EPS for the quarter was 24%.
Our adjusted earnings per diluted share was $1.81, which was up from $1.22 a year ago, an increase of 48%.
The increase was primarily driven by higher adjusted EBITDA and lower interest expense.
We generated $199 million of cash flow from continuing operations.
Spent $130 million on gross Capex and received $4 million of proceeds from asset sales.
Gross capex was up $69 million year over year, primarily allocated to growing our LTE network.
Our free cash flow was $73 million.
This includes $28 million of cash outflows related to transaction cost that were not contemplated in our free cash flow guidance.
Excluding these transaction costs.
Free cash flow was $101 million for the quarter.
Looking at the balance sheet, we ended the quarter with $436 million of cash.
This cash combined with available debt capacity under our committed borrowing facilities gave us $1 $4 billion of liquidity at quarter end.
We had no borrowings outstanding under our ABL facility.
Our net leverage at quarter end was one eight times adjusted EBITDA.
We are ahead of schedule on our deleveraging plan and are well within our target leverage range of one to two bank adjusted EBITDA.
In light of our strong research in the past have and our expectations for the second half we updated our guidance after market close yesterday.
Our new full year guidance for adjusted EBITDA is $1 4 billion to $1 $40 billion.
This increase primarily reflects our second quarter outperformance and does not include the impact of our planned spin off.
The divestment of our European operations.
We still expect to have up to $50 million of gains from real estate sales and we currently expect all of these gains to be realized in the fourth quarter.
We also issued guidance for the third quarter adjusted EBITDAR up three and then $3 million, but higher than $45 million.
Pharma for the intermodal sales the midpoint of this range implies that third quarter adjusted EBITDA growth rate of 18% over the prior year.
Our outlook for full year 2022 like gifted EPS anticipates, a range of $5 and 55 <unk> to $5.90.
This reflects our higher EBITDA outlook and slightly lower interest expense.
The midpoint of our new full year guidance for adjusted EPS implies year over year growth of 33%.
On the cash flow front.
Outlook for full year cash flow is now 425 million to $475 million up $25 million versus our previous outlook.
As a reminder, this excludes all transaction related cash outflows.
We expect interest expense of 145 million to $150 million would you down from our prior target of 150 million to $160 million.
There's no change to our previous guidance for depreciation and amortization expense capex and the tax rate.
In conclusion, we had a very strong first half of 2022 and.
And we are entering the second half with good momentum.
The execution of our strategic plan remains on track and we are excited about creating two pure play transportation powerhouses I.
I will now turn things over to Matt.
Thanks Ravi.
I'll review, our second quarter operating results by segment, starting with North American L. T O.
We grew L. T O revenue, 15% year over year to $1 $2 billion, the highest revenue of any quarter in our history.
L T L. Adjusted EBITDA grew by 14% year over year or 16% ex real estate.
We had a five 5% decline in tonnage per day from the second quarter of 2021.
Demand from our major verticals was mix.
The year over year trend in agricultural verticals, which are seasonally significant in Q2 decelerated, while automotive accelerated.
Industrial by far our largest vertical track the overall trend as did our second largest vertical retail and ecommerce.
Year over year growth in tonnage per day improved through the quarter.
Yield excluding fuel accelerated to an 11% improvement year over year from 9% in Q1, reflecting a solid pricing backdrop to the industry and the benefit of our proprietary pricing tools pricing is a major focus of our technology development and L. T O and we've added.
Top talent to our pricing team.
We increased pricing on contract renewals year over year by 12%.
Our LTM adjusted operating ratio of 84% was 70 basis points better than the second quarter a year ago.
It's also a 530 basis point improvement sequentially from Q1 on our last earnings call. We said, we expected to achieve at least 400 basis points of sequential improvement. So we outperformed that expectation.
I'll note that these adjusted operating ratios exclude gains from real estate sales.
Our success in improving network fluidity is driving improvement in our cost trends.
As we have procured third party line haul capacity more effectively the year over year headwind from purchase transportation measured as a percent of revenue moderated from 250 basis points in Q1 to just 10 basis points in Q2.
Those are the financial highlights of our solid second quarter performance in North American L. T O.
Our other segment as brokerage and other services and I'll remind you that intermodal was reported in this segment until we sold the business late in Q1 of this year.
Segment revenue as reported declined in Q2 by 4% year over year, but excluding intermodal revenue increased by 9% to $2 $1 billion. In addition, FX weighed on revenue growth by three percentage points.
Adjusted EBITDA increased 17% or 29% ex intermodal to $152 million.
Adjusted EBITDA margin for this segment expanded by 140 basis points to seven 4% from 6% a year ago.
The largest revenue and profit driver in this segment as our North American truck brokerage business, which had another outstanding quarter. This will be the core business of our planned spin off of <unk>. So in the fourth quarter of this year, we increased our brokerage loads per day by 16% versus a year ago.
And by 61% from two years ago second.
Second quarter truck brokerage revenue rose, 24% year over year, our truck brokerage growth reflects our strong execution in a dynamic market.
Lou will speak more about the specific drivers in a minute.
As Brad mentioned organic revenue in Europe grew 7% accelerating by two percentage points from the first quarter. We saw an acceleration in organic revenue growth in all three of our major regions, France, U K and Iberia and the platform continues to deliver results both top line and profits.
Despite the geopolitical backdrop.
And lastly, we're grateful for some external recognition we've received during the quarter.
X P. O was named a top 103 PL by inbound logistics magazine for the ninth year Forbes named X P. O a best place to work in Spain for the fourth consecutive year.
We were named a best place to work for disability inclusion on the disability equality index for the second consecutive year.
And we served as the official transport partner for the toured the France for the 42nd year and expanded our partnership as the official transport partner for the women's edition of Detour.
Now I'll turn it over to Mario for his comments on North American L. T O.
Thanks, Matt and good morning, everyone before I begin I want to thank Brad and the board what they think their trust in me.
It was an enormous opportunity ahead and it'll be a privilege to lead the company and continue working with Brad as executive Chairman.
It's also humbling to be entrusted with continuing the transformation, we're executing an L. T O.
I run the business for almost a year now and I'm constantly inspired by our best in class team and we're going to accomplish a lot more together.
As Brett said, we continue to see tremendous momentum in our LTC business.
This has accelerated over the last quarter with the actions, we're taking to drive improvements in network or whether it be in service and grow our network capacity.
In the second quarter, we gained significant traction in all these areas with measurable results.
We achieved the highest level of network fluidity since before the pandemic.
We also reached a new high for customer satisfaction. According Damasio third party industry consultant that tracks, our net promoter score on a quarterly basis.
In addition, our investments in capacity are on track to five third minerals. We added since October are fully operational now.
Now, we're evaluating sites in Salt Lake City, Houston, Atlanta, Kansas City, Dallas and Philadelphia.
We're being very disciplined about the network expansion.
The analysis, and with adding new terminals or new doors existing terminals in markets with growing demand for MTO service.
We expect these markets to continue to grow over the long term.
The 345 net new doors, we've added to date I think that's over a third of the way our goal of adding 900 net new doors by the end of next year.
Looking beyond our footprint, we're investing in capacity what do we have a competitive advantage.
For example, last quarter, we announced that we added a second production line and our trailer manufacturing facility in Arkansas.
This investment has an immediate impact and then the second quarter, we produced a record number of trailers for our fleet.
Our target so manufactured more than 4700 trailers. This year. This will expand our in house line haul trailer capacity by over 10% to an all time high.
We've reaffirmed our planned for LCL capex at 8% to 9% of revenue this year.
On the driver side, we've been ramping up our hiring with targeted recruitment efforts and training more drivers in house and I was 130 training locations.
These two channels are working well as solutions to the ongoing driver shortage.
June was a particularly strong month for recruitment.
The Hyatt and vitamins overall is still tight but it was it significantly in the second quarter.
We added 44% average increase in the number of applications for each job we posted in the quarter.
Now I want to switch gears for a minute and talk about our record Q2, adjusted operating ratio of 84%.
The year over year improvement of 70 basis points ex real estate.
We had promised a second quarter inflection so year over year improvement and we deliver that.
I'm also pleased because we over achieved on sequential improvement, which as Matt noted was 530 basis points from Q1 to Q2.
We are on track with our target of more than 100 basis points of year over year improvement this year.
Looking at the underlying drivers, we expect yields to remain strong throughout the balance of the year.
Our pricing technology is mission critical in getting us fair value for our services.
In the second quarter, we saw the early impact of our pricing tools with strong yields on contract renewals.
From a sales standpoint, we want a record amount of new business in Q2.
And I would say is sustained the positive trajectory each month in the quarter.
Last week I met with a large ship it out in U S land that terminal.
They just signed on with a steel that our newest top 10 customer. They are very happy with the onboarding experience and they've already committed to incremental volume with us.
In addition, we're in discussions with two more brands. This quarter. Both of these would be top 10 S. T. L customers what X P. O. This would set us up well for 2023.
As we onboard more revenue will also focus on cost management. This is another area with our technology excels.
In the second quarter, we introduced proprietary cost models to enhance the team's visibility into cost management levers.
You also have a new piece double tracking capability that has the potential to significantly improve customer service and visibility.
One of our largest cost and a large opportunity, especially transportation.
We'll continue to moderate purchase transportation costs as we move through the back half of the year driven by more efficient operations and newly negotiated carrier rates.
There are times when third party line haul is the optimal solution.
But as we continue to add drivers and equipment, we expect to overtime in sorts more third party line haul miles.
This should drive material cost savings.
We had been auto finishes is underway and to sum it up I would go to is pretty simple we want to be the best.
Creating a world class LTE L carrier by maintaining an intense focus on every part of the business.
The highly engaged team that is determined to delight our customers.
This year, we expect to generate at least 1 billion of LTM, adjusted EBIDTA and more than 100 basis points of year over year improvement in adjusted operating ratio exiting the safe.
Going forward, we have company specific levers that can expand our margin and improve our operating ratio well into the seventies.
We'll speak more volume shares private investments in feet doors and people and captured a high return on those investments over time.
Over the last nine months, we've made major advances and positioning <unk> to become a world class MTL carrier from every perspective.
And we know exactly where we're going from here.
We'll provide more details on our growth plan and I would MTL investor day, as we get closer to the spin off.
We also announced our long term outlook for <unk> as a Standalone company.
Now I'll hand, it over to drew to cover truck brokerage through.
Thanks, Mario North American truck brokerage had another strong quarter as we continued to sharply outpaced the industry also.
I'll start by giving you four metrics from the quarter that highlight the stellar performance. The team delivered then I'll talk about what's driving these results first as volume we grew loads by 16% in the quarter and it was the seventh consecutive quarter of double digit load growth for our business.
We delivered a gross profit margin of 28% up year over year by 610 basis points. This is a record performance for us in any quarter.
Third is gross profit dollars, which we grew year over year by 76%, we have a long track record of growing gross profit through economic cycles, and we're confident we'll continue to do that.
And the fourth metric is our adjusted EBITDA margin of 10.6%, thus 420 basis points higher than Q2 last year and that's our first double digit adjusted EBITDA margin.
We achieved these four metrics through a powerful combination we built over many years scale cutting edge technology and deep customer relationships.
Scale refresh our access to massive capacity of.
98000 independent carriers in North America that allow us to serve more than 5500 customers.
Nearly half of the Fortune 100 companies.
These are carriers, who have registered to do business with us on our X P. O connect digital platform and come back week after week because of the Mets volume that flows through our network.
For a carrier these are income opportunities.
Truck brokerage is a highly fragmented industry and theres a lot of competition for carriers, especially with the driver shortage.
Make it more efficient for carriers to do business with us our digital platform is easy to use and we have a national carrier rewards program lets save them money on things like fuel tire and roadside assistance.
And the shippers are scale means reliable capacity on demand.
The automation and machine learning, we built into the platform allow our people to focus on being more productive for our customers. We're known as dependable problem solvers, who have a strong understanding of market dynamics.
We work with our customers to make sure we have the appropriate amount of spot versus contract business based on the current market conditions.
For instance, we made a deliberate shift in the second quarter to operate at a favorable revenue mix of 73% contract and 27% spot.
A year earlier that mix was 66% contract and 34% spot our technology gives us the agility to manage that change.
In the early days of X P. O. In 2011, we had the vision to develop a fully automated brokerage system and we've been building on our first mover advantage ever since <unk>.
I'm privileged to lead the team that made this vision a reality over the last 11 years and I'm, even more excited about the next decade because of the opportunity to leverage our platform to continue to serve more customers and outpaced the market.
Every dollar we put into our digital platform continues to pay off even now years. After we introduced X P. O connect is still growing at a rapid clip.
Our mobile App has been downloaded more than 800000 times.
The number of weekly average carrier users on the platform increased year over year by 74%.
And 80% of our truck brokerage loads were created recovered digitally up from 74% in the first quarter.
This is exciting to see the tremendous demand for our platform drive additional share gains for us.
Soon we expect the spin off is already so and once that happens all continue to work closely with Yo Armijo, who will be our chief information Officer, Joe off currently leaves the ongoing development of <unk> digital brokerage platform, which will be called Ora, So connect and will be the technology backbone of the <unk>.
New company.
For us the strategy of becoming a brokerage pure play it makes sense on every level.
We're a high growth platform with a long runway for value creation as a new public company with a sole focus on asset light transportation will continue to deliver best in class results for our employees customers carriers and investors I look forward to meeting many of you at our Investor.
Today. This fall, we will be sharing our long term outlook.
That concludes our prepared remarks, I'll turn it over to the operator, and we'll go to Q&A.
Thank you we will now be conducting our question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
Please limit yourself to one question when you come up in the queue. If you have additional questions you're welcome to get back in the queue and we'll take as many as we can one moment. Please while we poll for questions.
Yeah.
Okay.
Thank you. Our first question is from Scott Group with Wolfe Research. Please proceed with your question.
Hey, Thanks, Good morning, Brad first can you give an update on the process with Europe , and then Maryann I wanted to ask you about some of the L. T. L items, so nice sequential margin improvement, but if I look at the implied guidance for third quarter implies that.
A bigger sort of step back in margin than some of the other L. T cells, so any thoughts on the sequential.
Margin and into third quarter, and any way to quantify the savings you think you'll get from more in sourcing.
Hi, Scott good morning.
Sales process in Europe remains very lively very buoyant.
It's a great opportunity for a buyer to buy an asset Thats got scale and has pan European strategic value as a very attractive platform.
The base case scenario is we'd be signing.
A deal to sell it.
In the fourth quarter, and I, probably wouldn't close by the time of the spin could but probably not in that case, we'll just have it as discontinued operations and will show the numbers with and without it Martin and <unk>.
He's calling on the sequential margins and overall again as you said the second quarter, we delivered a great sequential improvement of 530 basis points 84 adjusted to our when we look at the third quarter, we expect an improvement of at least the humbled about 50 basis points on a year on year basis, which is the.
It is difficult in the neighborhood of our typical seasonality going from the second to the third quarter.
It is there is there something that you think you could do to sort of lessen that seasonality going forward to be more consistent with some of the other L. T cells in that and then I also had just asked about that the in sourcing in any way to quantify it.
And so that's helped with in sourcing. So so we do expect purchase transportation cost continue to moderate through the course of the year. When you look at the second quarter our line haul miles.
Our outsource, we're roughly 24, 7%, which was up 80 basis points from last year, which is what we said we would do but we're going to lean a bit more on purchase transportation. This year now we don't expect to in source purchase transportation as much in 2022 that's more I'll say longer term strategic initiative for us and how we <unk>.
To drive that however, we do expect the rate on a per mile basis as it continues to moderate through the course of the year as we improved network fluidity, we can be a much more predictive in how we purchase transportation and so just to give you a few stats the cost per mile put us in line haul was up on a year on year basis by 33% in the fourth.
Quarter and it was up 14% in the second quarter with newly negotiated rates with carriers just went into effect in the month of May So as we head into the back half of the year, we would expect that to continue to moderate and give us a portion of the cost tailwind we expect in the back half now going back to your question on if we can accelerate.
Further the order improvement obviously, you all it goes back to volume to price to and all the cost improvements that we are doing and there are multiple paths for us to get to all the guidance that used to video EBITA and at least 100 basis points of order improvement.
Okay. Thank you guys.
Thank you.
Thank you. Our next question comes from Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks for my guys Humira, maybe I can stick with you on the operating ratio.
Lives for particularly the third quarter.
Last year, you had a step up I think that's the neighborhood of 200 basis points from <unk> and that was when we had some challenges in the network I think the implied guidance maybe in the 200 ish type of range in terms of increasing the or sequentially like I think I'll make sure I understand sort of the moving parts around cost and some of the progress you've made in terms.
So efficiency in the business and it seemed like the second quarter was a big step forward and I'm. Just wondering if there are some you know some some dynamics that maybe changed from Q2 to <unk> and maybe there's some tonnage discussion that needs to be had within that comment, but I just wanted to maybe get a little bit more color on what's happening from Q3 Q from a cost perspective.
Yeah sure sure thing Chris So when we look at that if if we follow sequentially. So from an order perspective, obviously with good favorable in the second quarter was 70 basis points on a year on year basis, and when we go to a to the third quarter, starting first with pricing, we expect the pricing environment to remain steady at about our yield in the second quarter was up 11% versus $8.
7% in the first quarter and we expect to yield to continue to remain strong through the course of the year, although we'd have tougher comps as we head into the back half hour contract renewals went up 12% in the second quarter and we continue to be up double digit in the month of July .
From a volume perspective, we were down five 5% in the second quarter, and we expect the third quarter to be down in the low to mid single digits on the tonnage from but we are excited about the momentum we have in sales as I said in my prepared remarks, we saw a record new business wins in the second quarter and that trend and grew through the quarter we'd ended in U.
And I thought some of it in the second quarter, just recently, he and I met with them and they're sending board business I would weigh that we're very happy with that Onboarding experience within the top quartile in terms of quality that'd be offered them and theyre going to send more business, our way and we'll end with having great momentum here early in the third quarter with two potential pumped and call centers as well. So that's what leads to obviously.
<unk> improving through the course of the year and then finally on the cost side, you know I mentioned third party line haul costs and overall line haul costs. It would moderate through the course of the year and we also have a number of efficiency actions. We've had the best network. The way that you've had some speed and then making that that's going to lead to better results as well.
Okay, and just to clarify it is around 200 basis points, you think the right sort of seasonal transition from <unk> to <unk> in the business. There's been a lot of volatility so kind of just curious about what the right number is as we think about that going forward.
Yeah.
Seasonality is into a call.
Call it through the 250 range.
In terms of a change from the second quarter to the third quarter.
Okay. That's helpful. Thank you very much.
Thank you.
Thank you. Our next question is from Kenn Hoekstra with Bank of America. Please proceed with your question.
Great just to round that out Mario did you you mentioned three new top 10 customers potentially coming online. It that's a lot of new business.
You're leaving US maybe talk about the process the risk to your routing structure or service levels or how you prepare for that and then just to clarify that your EBITDA is up I think he raised your target about $50 million with with the $40 million to $41 million beat this quarter. So.
Or about 45 million overall, so are you just saying the back half is kind of no change to that despite the large beat in the second quarter just want to understand your your your vision on that that guidance raise and outlook.
Yeah first of all I'll be to take the customer question, and then turn it over to Matt for the guidance piece.
When you think about the way the way we look at I mentioned also earlier it got to be launched new costing technology here in the second quarter with its proprietary costing model. So we have a very deep understanding about how a customer as we onboard them how that would impact the network as a whole and we price according to where do we have excess capacity.
<unk> or an imbalance lanes, what do we need to get more volume in lanes that we want to be able to fill the backhaul for and better balance our network. So this is how we look at the use larger relationships in terms of one how we price them both to how we analyze that data put it fits with the network and we have a new technology that helps us make neither terminations easier.
And better and it can be accretive both in terms of volume and profits as well.
And then as it relates to the guidance can you write we beat the midpoint of our guidance by $40 million, we raised the midpoint of our new guidance for 2022 by an additional $5 million beyond that you can think about that is relating to a strong visibility in both L. T O and brokerage services, you've asked about El tail in particular in the first half.
Of the year in L. T L. A X real estate, we had an adjusted EBITDA increase of about 11% and we're more like mid to high teens in the second half of the year should be a very good visibility on first half to second half acceleration for LTE.
And then I think you mentioned earlier, 70% or moving forward is that is that your near term target was that just a throw out number and what levers do you need to get there.
When do you think overall about getting to the seventies from an order perspective that that's our goal. So if we think about our strategy that we started in Q4 of last year, and we expect to improve auto by hundreds of basis points. It gets put into the <unk> over the years to come and essentially that is focus on the customer wherever you want to delight, our customers by providing outstanding service and <unk>.
<unk> damage performance in all the aspects of service while it continues to grow volume by adding capacity. Historically, we are we spent that maintenance capex to expand margins now we're pivoting to a strategy, where we're investing in more doors or more people and more equipment that leveraging our paper manufacturing facility. There, obviously pricing will continue to be firm in our industry moving forward.
And then finally, if you went to leverage our proprietary technology to keep on optimizing our cost structure and an in source St line haul miles whether it makes sense over the years to come we expect to recoup I would've hundreds of basis points. It gets well into the seventies and we'll get more color on that in our Investor day later or early fall and how the model looks like.
Over the years to come.
Thanks, guys I appreciate it good luck on the spin.
<unk>.
Thank you. Our next question is from Allison Pollinium with Wells Fargo. Please proceed with your question.
Hi, Good morning, Mario in line with that and should we see that six celebrated industrial softening into next year, you know a lot of investment into that proprietary technology can you maybe walk through how we should think of the competitive advantage that propriety technology, but bringing it to better manage the down the cycle of a directory and market share gains or even.
You know the agility on the cost side and then secondly, just I guess this is more of them on the brokerage side expansion, although it's kind of a digitally.
That expansion, we didnt more towards new customers attractive tax people connect or existing customers moving more into digital capabilities, just any thoughts there. Thanks.
You got that its not to take the first one then I'll turn it over over to drew but first starting with the macro and the industrial so it's just the nature of our customers are all industrial companies and we hear mixed feedback from these customers, but when we look at many of these companies have had pent up demand from their customers, where they couldn't produce enough parts to fulfill open P OS that they had.
Their customers and as things are easing up in that supply chain that actually being able to move product faster, which is leading to stronger demand others that I'll tee that others that are actually seeing softness in demand that is impacting overall, how much they're shipping, but generally we see the industrial economy as soon as Eddie mentioned recovery and Thats kind of become a tailwind as we get through the App.
Throw it things are at today in terms of technology, and how we use technology and put US technology has a number of components somebody wanted to focus on pricing when we launched proprietary pricing technology and as I mentioned earlier, we just launched a new proprietary costing models that allow us to better understand the cost structure I think given shipment and how we can price the.
Great for the customer so we can get the highest possible, but and also pitching that heals gap, we have with some of our competition as well. It also helps with automation technology like dynamic pricing using manual processing as well and then we have a slew of picked all the cheese at all cost efficiency and overall operational X.
Evidence and these talks with line haul and this is we're doing things like that better balancing the network and all the algorithms of alternate line haul to optimize how much head also be built into the network with improved more than $1 $1 billion of spend we spent our line haul over time and then similarly with pickup and deliveries increased route density.
And on the dogs to optimize our labor day, but efficiency and finally from a customer facing perspective, we believe in technology to help with our service to the customer and keep some points. We just launched a new technology called called Pizza double tracking when we can give customers visibility to the pallet level of what every need pallet is moving through the network and then giving them.
Visibility on in terms of what went better than I do see their shipments.
Good morning, Allison. This is drew on the second part of your question. It was both new and existing customers, but there was also both new and existing carriers that we're working with when you look at the carrier side.
Last quarter, we talked about having 88000 carriers in our network. This quarter, we have 98000 carriers, but all of our stats on both the carriers and the customers that are up into the right our year over year registered carriers on ex fuel connect are up 47%. The registered customers are up 29% and the carrier usages.
74%. So when you look at the outperformance that we've had for the past several quarters technology as the main reason that we've been able to do that and that's because we began investing in in 2011.
Great. Thank you.
Thank you.
Thank you. Our next question is from Tom Waterworks with.
UBS. Please proceed with your question.
Yeah, Good morning, and Mario Congratulations on a on the.
The future I guess I'm, leading L. P L in and being a future CEO of X P O.
The and congratulations on the transition as well Brad.
Wanted to ask about the volume side on L. T L.
The five 5% decline into Q.
Is a bit greater than I expected or a bigger decline than I would've expected I don't know if that's a time lag between an improvement in the network performance and.
And the volumes are or what's happening within that but it just seems like you've had a pretty pretty quick bounce back in the network you're talking about customer satisfaction scores that are improving so do you think that that the weakness in volume in <unk> was just a time lag or how should we think about that and then I guess, how does that affect second half like could you.
You you know could you get to volume growth in <unk>, just trying to understand the kind of positive commentary versus the weak volume into Q and L. P. L. Thank you.
Yeah, you got it. Thank you. Thank you for the for the well wishes, but as you said, Alex tonnage was down five 5%, which was within our guidance, but when you think about the sequential tonnage trends from Q1 to Q2. These were favorable relative to peers now when we think about the what drove that I mean, so some of it was.
You mentioned earlier on the mixed feedback from customers. When you look at the existing customer base and it was a slight softness compared to if you compare that to last here is an example of Indian vitamin It was leading to that now what we are excited about though is the momentum we have from a sales perspective with the significant improvement we've seen into how we're performing at the network fluidity that it's back.
Pre pandemic levels with great sales momentum from our sales force, where we've had a record of business wins in the second quarter and that accelerated through the quarter as well. So when we think about it that's going to be new customers and new volumes will get onboard it in the back half as we head into 2023 and add more volumes on our network.
Well I guess, one one other element within the the discussion you you talk a lot about technology as a way to improve the customer experience what about culture of the employee base at L. T. L. I think you know if you've looked at like in an old Dominion. They have this remarkable culture on service and <unk>.
On them.
Getting employees focus on service is that something that that there's opportunity to improve or need to improve as well as the you know really having a strong technology.
Yeah, you are spot on this is very much ingrained in our culture, the culture of continuous improvement, but the focus onto customer and keep on improving service and just to give you. An example, we have a number of ongoing initiatives that actually helped drive that Saudi first our sales team is working with our customers on freight packaging best.
Mrs and for customers, who knows that old theaters, we actually had feedback loops, where are we now give them feedback on how well. That's all workers are loading. These traders, but also we launched a number of changes in the incentive plan for our people in the field. They actually have so quality as a whole as part of that incentive plan and we.
Our quality methods of loading offloading. These loads. So that's very much ingrained in what we're doing and there's a tremendous amount of momentum and focusing on the cost of it and the quality of your automotive customers.
Yeah.
Great. Thank you.
<unk>.
Thank you. Our next question is from Ravi Shanker with Morgan Stanley . Please proceed with your question.
Thanks morning, everyone, then Oh, my congrats to you Mario a very well deserved.
Hmm.
So the first question is on brokerage either for Brad or for drew Brian I think you've mentioned in your on your opening comments that brokerage is taking a lot of share are in the market place can you give us a little more detail on that like who is that taking share from is that during the pie is it coming from asset based carriers are coming from other incumbent brokers going from digital guys kind of where's that check.
Hum.
Ravi This is drew just coming from both you know when you look at the trend that's been going on for years in the brokerage industry brokerage as a whole is taking share from asset based carriers.
No I've said this before but whenever I started in the brokerage industry brokers had about 10% share of the for hire trucking markets. Today is 22 of us continuing to grow and I'm confident that it will continue to grow for the next several years going forward. So we're just coming from asset based carriers with some of the other brokerage and it's because of the service that.
We provide to customers the technology that create solutions for customers and and the team that they've got strong relationships with our top 20 customers have been with US for 13 years on average we've got a long history of service and continuing to create solutions for the customers.
But it's always dangerous to ask an incoming CEO , where he thinks its share might Max out because I don't think you think there is a limit but I'm going to ask it anyway of kind of what is is there a natural kind of shared limited when you compare to some of the larger incumbents, who they compete with US what is the long fragmented tail like what is a kind of steady state a chair.
<unk> target do you think.
Ravi I'm going to keep it simple right now we've only got 4% share in the brokerage market and we've got a long way to go.
Got it Brad are you.
I'm sure we're going to stay extremely busy with X P O our XO and any other ventures, but if I can ask you kind of what your plans are as executive Chairman of X P O and Nonexempt chairman of Barack so the waters on a good priority is going to be.
I couldn't hear the very last part of your question Ravi just the very end.
What are some of your priority is going to be as executive chairman.
And non executive chairman of Barack So all parties, yes. So.
Obviously with executive chair at SPL I'll be spending much more time, but I'll still be involved I would perform the customary duties that you expected out of a nonexecutive chairman at RSO and I'll be spending the normal customary duty should we expect it to an executive chairman and spo, So there'll be more time invested in <unk> and <unk>.
So I'll still be involved in hartsville.
Great. Thank you.
Thank you.
Thank you. Our next question is from Jon Chappell with Evercore ISI. Please proceed with your question.
Thank you and good morning I'm.
Drew as we think about that 16% volume growth in the second quarter is there any way to give a breakdown on a month by month basis, and where do you ended up in July just trying to think about if the falloff in the trucking market throughout the second quarter was a benefit to you or a bit of a headwind and then also as we think about that breaking the 20% threshold.
On the gross profit margin if volume does become a bit of a headwind does that enable the margin to kind of improve as you scale more the technology to the network et cetera, or does it kind of go hand, if there's a gross profit margin kind of go hand in hand with any potential volume headwinds.
Yeah. So when you look at it the volume growth you know it started off strong in April came down just a little bit in May and then pick back up again in June so it was pretty consistent throughout overall for Q2.
When you talk about you know the central volume falling off.
And in the future, yes, there is but there is the opportunity to expand net revenue margins and you saw us do that I'll put them up 41% in the second quarter and July was operating around that same.
The same gross profit percentage.
Yeah.
Okay. So just to frame it I mean, it's 16% starts to decelerate as 28% gross profit margin kind of the new Florida as we think about the back half of the year and into 'twenty three.
I wouldn't call it the Florida Theres a lot of unknowns for the back half of the year. So what I am confident in is that they will outperform the market because of the investments that we've made in technology that will have best in class gross profit percentages going forward.
Okay. Thank you drew.
Thank you. Thank you.
Thank you. Our next question comes from Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thanks, very much good morning, congratulation, Mario and Brad to you as well drew I'm going to I'm going to keep it on you I'm curious and in our in the back half.
For truck brokerage.
What are you anticipating for.
The dynamic the industry dynamic in spot rates and and how do you intend to manage our contract versus spot it looks like you've improved that and towards the contract side year over year and any color you can share about what time of year you may.
Renew contract rates more more so than than than other things.
Yeah. So the spot rates have come down on a year over year basis theyre below contract rates.
I don't think that they can fall too much further from where they are right now overall when you look at the back half of the year.
Still some unknowns in the macro but I'm confident that we'll outperform the market tightens or loosens, we built a model that can perform well in the.
Market and so the second part of your question I forgot when you pick up.
Yeah, just the management of contract versus spot and it.
Is there a good time of year, where you renew contract more than other things.
So typically our annual contracts come up in the fourth quarter and in the first quarter, but rates with customers is always an ongoing discussion and that's something that we manage through the second quarter and that's why you saw our contract volume go up to 73%, which was perfect for the for the market that we're in.
Great. Thanks.
Thank you.
Thank you. Our next question is from Jason Seidl with Cowen and company. Please proceed with your question no. Thanks, operator first of all congratulations on the CEO role going forward wanted to stick with you here on the L. T. L side, you know you talked a little bit about the cost savings from in housing a lot of our line haul.
Paul can you can you talk about the differential between the in house line haul.
And out how an outsourced line haul.
In terms of operational performance as in House line haul more reliable and will and should we expect in the house more that your raw performance numbers will go up.
Yeah sure thing, Jason I'd first say, thank you and if so when.
We think about first starting with cost there is iraqi differential of 30% to 40% cost per mile differential between outsourced line haul and in source line haul and now in terms of service. If you go back in the back half of last year, our on time service for carriers, where we're generally.
And a much tougher place so the differential on time service between internal and external was fairly wide, but since then that gap has narrowed quite a bit so carriers now outperforming at a much much better level of on time service. However, internally, it's always better because internal you. Obviously, it's your drivers your employees your equipment.
So you effectively have full control over it and it's usually a 100% of the time there. So it's a it's still slightly better put in sort of about that gap has closed a significantly since last the back half of last year.
And how should we look longer term at your terminals footprint. How comfortable are you that right. Now. This is the right footprint to have and what changes might you think about making if you want to make any.
Yeah, I'll do I'll do a terminal openings. So obviously, we have a plan to add 900 net new doors that we initiated in October of last year and so far we've added in that 345 doors and these are all in markets that we are where we are either seeing demand from our customers, where we don't have enough capacity to handle that.
Men or improving the operation of our line haul network. So when you think about the freight moving through our network. If we have certain docs would we're seeing already tapped out of capacity or running close to capacity. This is where we're looking to expand those to give you. An example, the Atlanta market is a market, where we were seeing both demand in the local market.
As well as demand for the market to flow in the south of the country for example down to Florida, So by adding the new terminal there that gives us effectively more capacity to handle that local volume as well as move more freight through the line haul network and this is what's driving our strategy.
Well. Thank you very much for the color and I appreciate the time as always.
Thank you thanks, so much.
Thank you. Our next question is from Ari Rosa with Credit Suisse. Please proceed with your question.
Great Good morning, and I'll Echo others' comments in terms of extending congrats tomorrow.
On the promotion or the anticipated publishing to C. L.
Mario I I wanted to stick on that topic of kind of negative tonnage growth versus adding door capacity. It seems like those two things are in conflict. So.
I guess my question is you know as we think about 2023 is the expectation that tonnage can be up year over year as you start to bring on onboard some of these new customers and maybe you can talk about that that logic is it really just filling out the network and improving service capacity in and do you anticipate.
Maybe idle capacity.
Maybe a little bit more elevated than what it has been relative to history.
Thanks for thanks, Thanks area.
Wishes because when we think about capacity, we think of it as being a long term investment for us to be able to drive grabbing market share and growing volumes and historically since we first acquired Con way, we our Capex investment strategy and LPL was to actually keep volume steady, but expand margins and pointing it gets some.
We generated $3 $8 billion of cash since we acquired Con way and the goal was not to expand volume that said moving forward. What do we think about these investments are the short term you know again, we're seeing that mixed feedback from customer and softer demand than what we saw last year, but generally over the years to come that demand is going to pick up and we're gonna have the investments in <unk>.
<unk> to be able to capture that demand both from a network perspective from a real estate doors perspective, as well as adding more fleet to be able to handle that as well for 2023 guidance, we'll obviously give more and more of that later in the year and I definitely encourage you to attend our Investor day, we're going to be we're going to be holding.
The default.
Okay, great and if I can sneak in a quick quick follow up I just wanted to ask Brad because we're probably not going to get to many more opportunities to have read on these calls I would imagine.
Just you know given your experience with X P O and spending a decade building this business any reflections on kind of what what went well what went less well and our thoughts on the future.
The broader industry in terms of both L. T L in brokerage.
Hum.
I look back over the last 11 years and I feel very proud very proud of the team I feel proud of what the team has accomplished.
We started off buying a relatively small company back in 2011 Express one it had about $170 million of revenue and less than $10 million EBITDA I'm looking we've grown the business to right now and we've done it with being very careful with how we spend the money that our shareholders have given us and our lenders have LINTA.
And we've had an intense focus on return on capital and generating free cash flow and this is what creates value over time, so I I like where the company is positioned I like the fact that we've culture management and people who have grown so much over the last decade to the point, where I feel comfortable to buying the company up in three weeks.
We divided up the warehousing business with an excellent CEO running that.
We're spinning off brokerage and we got an excellent CEO to run that and remain co will be run by an excellent CEO Mario Hurricane <unk> business will be very strong in the second part of your question is what do I think about the future of the alcohol business in truck brokerage I think they're both good businesses I think particularly the way we're approaching those businesses.
In truck brokerage, we Mario and I right from the very beginning in 2011.
Said you know we have a vision here, let's automate this business and let's make things that are done by humans done by the computer and that's what we did and we spent so much money investing in developing what was originally freight optimizer, we're going to call. It Super Mario but that name was taken and then and it developed into <unk> connect and <unk> connect.
Adoption rates are off the charts and then there's a lot of elements that have gone into making our brokerage business very strong but the technology is is the main one in my opinion. So I think brokerage has got a bright future because its tech enabled and we provide a service that shippers need and we provide a service that carriers need so.
I'm I'm I'm good with the business in terms of L. T L different business plan. There there that's something completely levered not completely but predominantly levered to the industrial economy. So we have to go up and down with the industrial economy.
And we've had an approach there too.
When phase one of L. T. All up until now to run the business for cash to run the business for not growing the topline not growing tonnage not growing head count not growing the fleet, but to run the business more intelligently run the business more efficiently run the business more productively and as a result of that we've taken a business.
That was doing 300 something million dollars of EBITDA. When we bought it and now we are on track to do $1 billion of EBITDA and we've taken the margins up by 1290 basis points and all the while generating $3 $8 billion of cash I can't emphasize that enough because anybody can.
Lots of Capex into our business and Youre going to see volume growth of course, you will but to take our business and not put money into it in a big way, but instead generate cash from it and grow profit growth from that that's really something I'm very proud of what the team has done now in phase two of LCL, we're going to continue our disciplined.
Growing the margin right, eliminating waste, reducing inefficiencies running the business in a way that customers love us and at the same time, we're going to invest in the fleet and we're gonna grow the top line as well, but the big inflection point in terms of phase one of LCL, which we were sweating the assets and say.
Just two of LCL, where we're going to continue to focus on the optimization of the assets, but also invest in the business and grow the top line. So I think the future's very very bright there and I think Mario is inheriting a very good platform and I'm confident he's going to bring it to a whole new level over the next few years.
Great. Thanks for all the color and congrats on the strong results.
Thank you and congrats on your position or your fixed shoes to fill.
Thank you so much I appreciate that.
Thank you.
Well Howard.
Record results to talk about on this call, including our highest adjusted EBITDA of any quarter.
And LCL, we reported our best adjusted operating ratio ever.
Truck brokerage is continuing its phenomenal run with another quarter of double digit volume growth.
The process with Europe is going well and a sale there should help us to continue to Delever and the spin remains on track for the fourth quarter.
After the spin each company will have a rock solid CEO Mario for LCL drew for brokerage and will have a long runway for earnings growth in both of them. So thank you everyone. It's been a pleasure and we'll talk again soon.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Okay.