Q4 2022 XPO Inc Earnings Call
Welcome to the X P. S fourth quarter 2022 earnings conference call and webcast. My name is Melissa 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.
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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 this call the company will be making 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.
A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release.
Forward looking statements in the company's earnings released or made on this call I 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 the related financial tables or on its website.
You 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 on the company's website.
I'll now turn the call over to X P S Chief Executive Officer, Mario Harris, Mr. Harris, you may begin.
Good morning, everyone. Thanks for joining our call. We're excited to talk about our simplified business model following the spinoff of Rx. So.
And how it focuses our resources on growing the value of our LTE network.
You didn't Greenwich, what's called Anderson, our CFO , who will cover the fourth quarter and full year results and.
And we also have Ali if I agree with us for Q&A.
Ali as our new Chief strategy Officer, and he's a great addition to the executive team.
Yesterday, you saw US report a solid quarter of growth in a soft macro environment.
That statement is true for the company as a whole and also put our two reportable segments of North American and European Transportation.
Company wide, we generated revenue of $1 $8 billion, reflecting year over year growth of 3%.
And we grew adjusted EBITDA year over year by 38%.
Which far outpaced our revenue growth and beat consensus for the 11th straight quarter.
For the full year, we generated over $1 billion of adjusted EBITDA and <unk>.
Business.
This exceeded our major targets, we had set for 2022.
Looking at the business by segment I want to focus on MTO and some key results to tie directly to our growth plan.
In the fourth quarter LTM industry in North America saw a year over year decline in shipment volumes due to macro pressure.
But in X P O, we grew our shipment count and tonnage.
Our positive tonnage growth ties back to the plan would be called APL, two point O, which is to invest in capacity ahead of demand and unprofitable market share by providing best in class service.
We continue to have great success Onboarding new business.
<unk> volumes from Blue chip customers, well, either signing up with us for the first time, we're giving us more of their business.
This drove it said he just changing our mix in the quarter and our tonnage spend is up more than typical seasonality.
We also had the high margin local base and east customers give us more shipments per day, however, the weight per shipment decline in the softer macro.
As a result, our yield came in at the lower end of our outlook.
I would miss should become a tailwind for us to both volume and yield as the macro recovers.
The second reason without before maintenance service.
And I'll give you. An example in the fourth quarter, we improved our damage frequency by 66% year over year to the lowest damage frequency in six years.
There's no doubt that our intense focus on service is helping got secured more tonnage.
Especially as we are hearing from your customers that's being ranked as one of their top LPL carriers for quality of service.
Customer feedback like this has a ripple effect and our entire organization.
Employee satisfaction is up sharply which is an indication of the pride our team is seeking in our service standards.
And I would eat and survey employee satisfaction, including drivers and dock workers was the highest in more than a decade.
For the full year 2022 from an operating ratio perspective, there were a lot of puts and takes including the softer macro.
We improved our adjusted operating ratio, excluding real estate gains by 40 basis points for the year, which was short of our target range.
Strategically we made good progress in setting up the networks to capitalize when volumes rebound and we like our positioning.
With executing on the growth levers in our plan.
Hundred and 69 net new doors, we added with six new terminal openings.
In the next 90 days, we expect to open another 167, net new doors, and Salt Lake City, Atlanta and Dallas.
But also fully the unique levers we have within our company to help drive our expansion.
And 2022 we increased our line haul fleet by over 10% by manufacturing more than 4700 theatres in house there.
We also trained over 1700 truck drivers last year and our driver training schools.
These are tangible advantages we have the execution of our long term plan for LCL to point O and that are gaining ground.
Turning to Europe . This business continues to perform ahead of expectations with solid organic growth, particularly in the U K and Spain.
Constant currency fourth quarter revenue in Europe increased year over year by 9%.
Our pricing in Europe was up year over year in Q4, and we're continuing to win business with new and existing customers.
Despite the macro uncertainty there our sales pipeline continues to be very robust.
I want to wrap up by tomorrow by summarizing the exciting trajectory with creators going into 2023.
We successfully completed the spinoff of Rx So in November which simplified our business model.
I'll have to a highly focused business segments with strong value propositions and the customer markets. They know best.
In North America, we drove above industry tonnage growth in F. T. L. In Q4, and we ended the year with over $1 billion adjusted EBITA make.
Making good on the targets, we set five years earlier.
We're winning market share with our service quality and also through our investment in network capacity.
We're on track to open the remainder of the 900 net new doors, we projected in our growth plan.
And in Europe , our business is performing above expectations.
This is the momentum we're carrying into 2023, and we intend to continue to invest in growth.
We're confident that we'll deliver on the targets, we set for our LCL business.
Yeah revenue CAGR of 6% to 8%.
Adjusted EBITDA CAGR of 11% to 13% and an adjusted operating ratio improvement of at least 600 basis points each.
These targets covered the period from 2021 through 2027.
And as we move toward them with focus on being world class in every aspect of our business.
We know that this combination of financial and operational excellence is the most sustainable way to deliver outsized shareholder value.
Now I'm going to hand, it over to Carl to discuss our results and our balance sheet all over to you.
Thank you Mario and good morning, everyone.
Today, I'll discuss our fourth quarter and full year results balance sheet and liquidity.
I'll start with the fourth quarter, where we delivered strong year over year growth in adjusted EBITDA and adjusted diluted earnings per share.
Revenue in the quarter was $1 $8 billion up 3% year over year.
Organic revenue growth for the quarter was 2%.
And the net impact of fuel prices and FX contributed an additional point of growth.
We grew adjusted EBITDA by 38% year over year to $262 million.
This was primarily driven by our North American LCL business, which increased adjusted EBITDA by $42 million or 20% year over year.
This includes the real estate gain of $55 million, which was up $20 million from a year ago.
Additionally, we had a 30 million dollar reduction in corporate expense as we continue to rationalize our overhead after the spin off.
Our adjusted EBITDA margin was 14, 3%, representing a year over year improvement of 350 basis points.
In the L. T L segment, our fourth quarter operating ratio was 84, 2%.
Our adjusted operating ratio excluding gains on real estate sales was 87, 1%, which is a 16 basis point improvement from a year ago.
Our European business also continued its solid performance with revenue up year over year, 9% on a constant currency basis.
Please note that we won't be addressing a potential sale of our European business on this call.
We reported a net loss from continuing operations of $36 million in the fourth quarter.
Representing a diluted loss per share of 31 cents.
This compares to income of $47 million and earnings of <unk> 40 per share a year ago.
The fourth quarter 2022, net loss includes three impacts primarily incurred in connection with the Rx So spin off completed in November .
First we had a $64 million noncash goodwill impairment charge related to a change in our segment structure following the spin off.
Prior to that the European Transportation business was a single reporting unit and goodwill was evaluated for impairment at that level.
Following the spin the European Transportation business is comprised of four reporting units and impairment testing was required to be performed on a disaggregated basis for each of the new units, resulting in the charge this quarter.
The second impact related to the spin was the $42 million of transaction and integration costs.
And finally, we had $35 million of restructuring charges, mostly due to the planned step down in corporate costs.
On an adjusted basis, our adjusted earnings per diluted share for the quarter was 98, which was up 53% from a year ago.
This increase was primarily driven by higher adjusted EBITDA and a lower effective tax rate.
We generated $196 million of cash flow from continuing operations spent $167 million in gross capex.
And received $78 million of proceeds from asset sales.
Gross capex was up $77 million year over year, driven by our planned investments in expanding our L. T L network.
This resulted in strong free cash flow of $107 million.
Turning to the full year 2022, we delivered revenue of $7 $7 billion, reflecting a year over year increase of 7%.
Adjusted EBITDA was 997 million in 2022 up from 812 million a year ago.
This was primarily driven by a 12% increase in adjusted EBITDA and our L. T L business and a 75 million dollar reduction in corporate expense.
Adjusted diluted earnings per share from continuing operations increased by 82%.
Coming in at $3 53 per share this year.
We generated cash flow from operating activities of $824 million for 2022, and free cash flow of $391 million, which was up 11% from the prior year.
Our capex investments of $521 million almost doubled from a year ago as we accelerated our investments in the business to support our long term growth targets.
Our L T O adjusted operating ratio, excluding real estate improved by 40 basis points from the prior year to 83, 9%.
Moving to the balance sheet, we ended the quarter with $460 million of cash this cash combined with available borrowing capacity under committed borrowing facilities gave us $930 million of liquidity at year end.
We had no borrowings outstanding under our ABL facility and our net debt leverage at year end was two one times adjusted EBITDA down from two seven times a year ago on a previously reported basis prior to the Rx So spinoff.
This week, we extended our ABL maturity to 2026.
And we recently received a credit upgrade from S&P from double B double B plus.
Turning to the first quarter 2023 we expect the company to generate year over year growth in adjusted EBITDA in the low double digits.
This anticipates $5 million to $10 million of unallocated corporate costs in the quarter.
We expect to wind down these costs over the course of the year.
And finally, a reminder, that starting with the current quarter. Our adjusted operating ratio. It will include the allocation of incremental corporate costs.
And exclude pension income.
You'll find the historical reconciliation for this in our Investor presentation.
In addition, we're providing assumptions for the full year 2023 to help with your planning.
These are <unk>.
Gross capex of 500 to 600 million.
Interest expense of $185 million to $195 million.
Pension income of approximately $20 million.
An effective tax rate of 24% to 26%.
And a diluted share count of 117 million shares.
Overall, we're pleased with our results in 2022 and are excited about our growth prospects as we move forward.
Well now take your questions.
Operator, please open the line.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Mind, you, we ask you to please limit yourselves to one question each.
Our first question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.
Yeah.
Hi, good morning, Thank you.
They send it out I was something.
Thanks, Chris.
Can you provide a little bit more color in terms of how you're thinking about the first quarter for LPL and in particular, how youre thinking about right thing watched us out, which now appears to be kind of in that low single digit range, where a lot of your peers are at mid to high <unk> any color there would be helpful. Thank you.
Hey, Stephanie what do we expect companywide adjusted EBITA for the first quarter to be up low double digits as Scott mentioned earlier for the LTE else, specifically, we expect adjusted EBIDTA to either be slightly down or slightly up depending on what happens in the demand environment in the month of March which as you know it was a big driver.
For the first quarter put us in.
From an order perspective, we expect it to be better than typical seasonality in the first quarter is typically seasonality for US is a 50 basis point deterioration from the fourth quarter going into the first quarter now that said we're off to a great start here in the month of January our tonnage is up and better than typical seasonality and I would have yield.
Ex fuel is in line with the fourth quarter as well and we are cautiously optimistic about the demand in vitamins. So when we look at the back half of the quarter based on what we're seeing in our results today, we are seeing a pick up in more strength from a volume perspective, but obviously, we'll see what the what the rest of the quarter will do but hopefully this gives you a color on all those on the inside.
A quarter.
And maybe just on the pricing side of it as well if you can.
Yeah sure.
The first quarter, we expect <unk> to be in line with the fourth quarter here.
Here in the month of January that was the case, we did take a G arrived for our local accounts and the month of January .
So what we did last year into the fourth quarter.
But we will continue to be impacted by some of the mixed dynamics. We mentioned some of our prepared remarks in the first quarter, but we continue to see the pricing in vitamins are being are being rational.
Understood and then just kind of more of a modeling a modeling question could you provide a bit more color on corporate expenses in the fourth quarter and what it should look like again kind of in the first quarter and then moving forward throughout the year. Thank you.
Hey, Stephanie it's Carl Anderson, I can and I'll take that so if you look at the fourth quarter, our corporate expense was $29 million.
And as we begin 2023 $20 million of that will be allocated to L. T. L. Starting in the first quarter. So it really leaves about $9 million left as far as the pure corporate expense and it is as it said in the prepared remarks, we expect our corporate expense in the first quarter to range around $5 million to $10 million in line with.
We saw what do you make that adjustment and importantly, we expect that to wind down throughout the course of the year.
Yeah.
Great. Thank you so much.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Oh, Thanks, very much good morning could you talk to our tonnage trends in the quarter.
Just a kind of kind of puts and takes versus your internal expectations of what occurred and then I'll follow up on that thanks.
Sure Scott so into the fourth quarter tonnage came in on the lower end of our outlook, let's be obviously bucked industry trends in terms of our tonnage being up and I was shipment counts also being higher than I would punish our tonnage came in roughly at a plus 1% for the quarter now in terms of the trends within the quarter December .
It was the softest month of the quarter, which was impacted by weather in the back half of December So that was a more of a softer than what we saw for the remainder of the quarter now as I mentioned earlier, though January Ah is a up a better than the fourth quarter numbers and its better than typical seasonality as well and we're seeing we saw a strong.
Demand from our customers, especially a lot of the new customers, we onboard it through the course of 2022.
Thanks, and I appreciate that and then with with regard to our the operating ratio in the fourth quarter. It sounds like weather was an impact there could you kind of hit on the main items that were a were impactful in the fourth quarter versus your internal expectation and thanks for all for the guidance just provided appreciate that.
So just kind of focusing on fourth quarter, and and and and work her attacks.
Yeah, you got it so it was so predominantly for the for the fourth quarter. All came in short of our expectation driven by the tonnage outcome in the month of December . So if you take out the impact of weather in the back half of December that'd be would have exceeded our expectation on autumn hooting and four for the fourth quarter.
It takes time and it was purely the weather were there any other headwind impacts and in the quarter that were worth calling out. Thanks.
Yeah, it's not outside what we had discussed on the last call, which was more driven by elevated cost inflation. When you think about labor expenses and maintenance costs, but higher than expected, but we already had factored for that when we when we altogether on the last earnings call.
Got it that because it sounds fairly isolated to the fourth quarter, what was impacting that that those those other factors cause these cost inflation is that in a in an and.
In solid shape as you enter a the the the company in 2023 with a with your of your pricing strategies.
Yeah, so as we headed into as we head into 'twenty or 'twenty. Three obviously, we're seeing inflation starting to taper off in terms of all but all cost when you look at the fourth quarter for us the two big categories of costs are labor and purchased transportation and what I would wager were up 10% on a year on year basis.
The fourth quarter and roughly two thirds of that was based on wage inflation additional wages, we have given I would folks in the field and the other one third was to support the 1.5% shipment growth that we had into the fourth quarter on the purchase transportation cost that it was down 10% in the fourth quarter.
But you have to appreciate that fuel is part of that line for the third party providers. So effectively the rates were actually down more than that in the fourth quarter now as we head into 2023.
That's that's stronger cost inflation, we saw in 2022 is starting to subside, especially on the purchase transportation side, a that will become a tailwind through the course of the year and same thing on wages. We expect then obviously it would be up but not as up as they were in 2022.
Great. Thanks for that I'll turn it over.
Thank you.
Thank you. Our next question comes from the line of Chris Wetherbee with Citigroup. Please proceed with your question.
Yeah. Thanks, good morning, guys.
Maybe starting on the strategy around your local customers versus some of the National Council of the L. P outside so.
Maybe I just wanted to maybe better understand that and then.
I I guess over the course of the last several years post the Conway integration I think there was a strong effort to kind of go through the customer base and the right size and make sure you're dealing with the basketballs profitable customers and obviously the operating ratio improved over the course of that period of time. So I guess I'm kind of curious how much work is left to do with what does the strategy sort of really entail and maybe ultimately what do you think.
The potential benefit to your operating ratio profitability broadly speaking can be.
Thanks, Chris if you if you take a step back and you look at the channel mix dynamic in the fourth quarter and that's I'll walk you through that and there was talk about 2020 three and beyond but when do you think about the fourth quarter. We didn't have a channel mix impact on our yield but that was driven by onboarding a larger strategic national accounts in the back.
Half of 'twenty, 'twenty, two which we have discussed on prior calls as well and these were important to build density in lanes in our network now on the local channel side. These are typically smaller accounts that are higher yielding freight for that type of business and we have also taken market share in that particular segment, what I was.
Shipment count in the fourth quarter was up mid single digits, but tonnage was down and that's driven predominantly through the softness and the macro where east customers. We're shipping it can be gained more customers. However, they were shipping lower weight on a per shipment basis. So that's the macro D covers those local accounts would have higher weight per shipment.
This would drive tonnage up commensurate with the volume of shipments we're seeing in the network and that becomes both a tailwind for tonnage and 40 yield put us moving forward. So that's the dynamic between national and local.
And in terms of how you think that that might impact the out I mean in fact, the operating ratio and I guess, making sure I understand what sort of different now versus what you've been doing because I thought you were trying to optimize the customer mix over the course of the last several years.
Yeah. So overall, it's still a similar strategy, but as we switched to LPL 2.0, well. The strategy is also gaining market share and when again when you look at national accounts from a mix perspective, and an LTE network. They create density on a lane for land basis, which is very important.
And we use the metric internally called a lean balance factor and I would operation, which as you get closer to a stronger lean balance that's overall accretive for your margins. So when we onboard the national accounts, and we say that a good fit for the network there on improving that lean balance and using available capacity that we have in the network now over.
<unk> and Dakota market. We obviously, there is softer freight demand, but as debt that he covers and you see that pickup in depth local channels as well as the national as we onboard that this would be a tailwind for both volume and yield now in terms of the impact on or obviously, that's what it depends on many factors because all our will include a combination of both.
Yield and cost management as well so all of these need to award outcome, but obviously I would go with us by 2027, so that improved our operating ratio by at least 600 basis points and we're confident we're going to deliver on that.
Okay. That's helpful and then just real quick clarification.
First quarter adjusted EBITDA up double digits can you give us a.
Clean number of what you're comparing that to obviously given the breakup of the business I want to make sure I understand the basis for that and then.
Guidance around the LPL adjusted EBITDA as well that includes $5 million to $10 million of unallocated costs, when you're thinking about being flat or up or down a little bit.
Yeah, So Chris its a if you think about our comps.
Comparator until Corp, Q1 of a year ago that base is $184 million and then as far as that corporate cost as I referenced. Some you know in that range five to 10 that will still be in that corporate bucket. It will not be part of L. T. L. L. T. L will have the additional $20 million approximately that's all that we previewed as previously said we would.
Allocating it.
Thank you very much appreciate the time.
Thank you.
Thank you. Our next question comes from the line of Jordan Alger with Goldman Sachs. Please proceed with your question.
Yeah, Hi at your Analyst day, you talked about technology and implementation to help with dynamic pricing line haul reducing other costs like P. T. Can you maybe give an update on that and how it's shaping up versus your expectations. Thanks.
Thanks, Jordan, we're making great progress on the rollout of our proprietary technology as we have discussed and and I would investor day, there are a number of initiatives and and proprietary pieces of our techs that helps us drive that resolves starting with pricing. This year, we've made great progress in upgrading our and we discussed this on the last call our call.
<unk> modeling and how we allocate cost to shipments and how we price more efficiently. So in this environment. We are investing more in our sales force and we've had record numbers of audit fees that would be all done.
I think through the system and having a platform that makes it very easy for our pricing analyst to price that business and have the quick turnaround with the sales team is essential and our technology is enabling these things and similar thing as you mentioned all dynamic pricing and our platform is enabling costs on the spot business side to be able to on board.
Business, and and being able to react more quickly to the city and vitamin on the cost management side, we've made great progress in our line haul technology platform and how we optimize line haul runs a similarly on the pickup and delivery platform for both our planners and dispatchers and then finally for dock efficiency, our solutions with the smart labor.
Our platform enables us to improve how we operate our dock shifts and make them commensurate with our with the volume we are getting so great progress across the board with our with our tech.
Thank you.
Yeah.
Thank you. Our next question comes from the line from Brandon <unk> with Barclays. Please proceed with your question.
Hey, good morning, everyone.
Question.
That makes it maybe helpful weakness.
Here, because it's sort of in between.
In some cases tens of minutes pro forma adjusted EBITDA could.
Could you just almost like what what was a comparable margins and inventory.
'twenty, one and you'll see all of the network.
And just sit far apart.
I got a breadth of offerings.
Residue were coming in very choppy, we can't we couldn't we couldn't hear you well, but let me try to ask question, what you're asking about the baseline off.
2021 2022 and how corporate expenses are layering in moving forward as well.
Yeah, that's right.
Yeah, I think Brandon as you look out we did include in the Investor presentation, I'm, a pretty detailed historical reconciliation on page 27.
Specifically for the L. T L. A segment that kind of walks the differences, but on a year over year basis by quarter for all of 'twenty, two as well as full year 'twenty one.
Yeah.
But I guess, if I look at the.
Since this from <unk>, because I think you guys sat down and told appeal adjusted EBITA.
They're down slightly.
That's correct for LPL EBITA, we expect it to either be down slightly or up slightly depending on the demand and vitamins in the month of March.
I'm sorry, guys I know you have the numbers in the presentation, but what what is that EBIT and thought it working parent guarantee from <unk> 22.
Yeah. So for Q1 of 2022 now that we've allocated a $20 million. It it's going to be $186 million would be the L. T. L. EBITDA for Q1 of 'twenty two.
Okay. Okay. So we shouldn't be thinking maybe slightly down from that number for the quarter.
That's correct.
Okay.
I'll take the first part.
But it's just a lot to get through.
Thank you. Thank you.
Thank you. Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your question.
Hey, guys. Thanks, so relative to the that the newly adjusted one two or have a 89.
<unk> a year ago, how are you thinking about or in Q1, this year and any thoughts on full year operating ratio for LTE M.
Yeah, So what first I'll start on the on the full year. So when you look at because obviously, we had the old definition last year as it's called that was updated with as Scott mentioned earlier on with the corporate allocations and the removal of pension income. So last year's what are their number was 83, 9% and what do you account for the allocation of corporate.
And the exclusion of pension income that would have been an 86 and change or now for the full year of 2023, but obviously, you're not guiding for for the full year.
Given where things are this year, but there is a path to approval or this year, but it will depend on the macro and we feel cautiously optimistic about the demand outlook as I mentioned earlier and based on what we're seeing today and our results are again volume is up it was better than seasonality and we're seeing stronger demand from some customers and it was getting optimism from.
Customers as you head into the spring in the back half of the year, but obviously, we're watching the macro like everybody else is now specifically into demand in vitamins. The segments are different retail has been had sequential declines in the fourth quarter, but the feedback we hear now that the retailers have gone through that inventory and that was that gonna see more normal seasonal buying patterns in.
2023 and industrial we're seeing short term softness, but you are seeing some strength in some of the areas like auto machinery short cycled manufacturing, where they try to outline and get more robust 2023 so depending on what the that's in vitamin does for the rest of the year with dictate what what the order would do and obviously there are dynamics at all yield and that all.
A lot of company specific initiatives, we're driving on the cost side like in sourcing line haul and all of these variables would lead to the outcome for 2020 three on or what again, there is a path to improve <unk> and 2023 but all of these variables will dictate the outcome for the first quarter as I mentioned earlier, we expect a seasonally to be better than typical.
The analysis from the fourth quarter for the first quarter and typically that's a 50 basis points deterioration is what we see from Q4 to Q1, and we expect to do better than that.
And I think I think we're all just a little confused because we don't but there's no numbers now so we're not really sure what the the seasonality. So just to be clear. Your did you did on the new methodology, you did a 90.3 or in Q4.
<unk> nine in Q1 of 'twenty, two and you're saying it.
It should be.
Typically it's 50 basis points worse Q4 to Q1, but maybe it's gonna be something better than that.
Correct and or the high end of the range. So if you. If you think of anybody thought improvement for the first quarter are Scott that would be an or improvement for the quarter.
Or improvements sequentially or year over year.
No year over year on the low end of the range in terms of EBITA being slightly down, but it would be a year on year deterioration, but better than seasonality on the high end of the range what EBITDA improved slightly in the first quarter that would be in order improvement on a year on year basis.
Okay, and then just bigger picture right, if I take a step back in the model it looks like.
You're really outperforming everybody on tonnage you're really underperforming on yield so it seems like maybe sacrificing some price to get volume.
Is that what's happening here is that's.
That's what it looks like in the model, but just in them.
Is that what we're doing here.
So we're not sacrificing price to buy volume with price. So there were a few dynamics into fourth quarter that impacted us. The first ones to causes that we were lapping a early July we took in Q4 of last year. While this year. We said that we took that in the month of January which is usually our customary timeline and I mentioned the yield dynamic on the mixed channel early at all.
So we on boarded there was national accounts that are strategic for our network yet the higher yielding local accounts against their shipment count is up mid single digits. So we're taking market share. However, we've seen a weight per shipment decline in that channel. That's called so overall the way to be down so that dynamic is what effectively impacted yield and then.
Finally length of haul was down one 3% for the quarter, where are we on boarded more next day and two day lanes shipments of our network and we also saw less outbound, California afraid come in through lesser imports into the fourth quarter, which has a direct correlation to yields.
Now if you take a step back our contract renewals in the quarter were up roughly 7% that's for the existing business and we continue to we continue to see from us in the overall industry very rational pricing and in how we price the business.
Okay. Thank you guys.
You got it thanks a lot.
Thank you. Our next question comes from the line of Allison.
Wells Fargo. Please proceed with your question.
Hi, Good morning, I, just wanted to talk about the Capex for the year. If you can maybe break that down a little bit more and then in terms of the new door ads.
Maybe talk to him I haven't seen relative capacity available today with how you're thinking about the investment as we go through the year in terms of discipline around that thanks.
Thanks, Allison Yeah. If you look at 2022, our total Capex of the company was about $521 million about 85% of that relates to the L. T. L business and as you can see from our guide for our planning assumptions for 2023.
We do expect Capex at the midpoint to be up over what it was last year, So and again I think that same percentage mix between L. T. L and Europe is is how you should think about it.
And I'll do on the door side. So we you know obviously when we started the NPL 2.0 plan. Our goal was to open up 900, new doors and these were based on areas, where we have where we have line of sight on demand from customers. So a lot of the markets that we go after we already know that we need capacity.
And we're seeing that demand come from customers. So over the next 90 days, we're gonna be opening up additional doors 167, net new doors, and Salt Lake City, and Atlanta, and Dallas, Texas, as well and we have a plan through the remainder of the year. So open up more doors in those markets, where do we need that capacity for example, Houston is a great market for us.
Florida is a great market for us what do we need more capacity as we're gonna be looking to add but we're being very disciplined in how we open up those doors and all the terminals. We've opened up had been the operating better than expectations.
Got it and then just to follow up on the shipment cost inflation should we be assuming sort of up mid single digits for this year or is it lower or higher than that just any color. Thanks.
They said it would be in the ZIP code of up mid single digits, but it will depend on what the truck put us because we have roughly around a quarter of our line haul miles or to outsource it will depend what the truckload rates due for the balance of the year. We expect these to be a good tailwind for us here in the first half of the year, but it did.
On the demand and vitamins in the back half and how that translates on the waitress side, we expect it to be in the sub mid single digit but in depth in that territory.
Got it thank you.
You got it thank you.
Thank you. Our next question comes from the line of Tom <unk> with UBS. Please proceed with your question.
Oh, Yeah. Good morning, Marianne I know you've had some questions on price a bit I was wondering if you could tell us a bit more just in current in terms of.
The broader strategy, what type of freight or you're trying to bring on you know what are I guess, what's the.
You know if you push harder on price versus tonnage kind of what what's the the overall strategy for what were you trying to build it's gonna be Oh are accretive in terms of you know kind of price mix and how much tonnage matters relative to that thank you.
Sure. So first starting with the type of afraid that we look for we look for freight that can build density in our network. So effectively. These at 48 by 48 skids that are that fit well in an LTE network typically Goldman Sachs to dock in terms of B to B type shipments is the primary type of freight that we are that we're going after.
We also look to go after freight that creates density around our terminals. So we think about the pickups. That's odd in proximity to our terminals is another way, we think about the quality of the freight and to.
How it relates to our network as well now in terms of channel mix. We are looking to build density both international channel and the local channel as I mentioned earlier and the local channel, we're making great strides in Onboarding new customers. This year. This year. We ended the year with 27000 customers, which was up 2000 from our prior numbers.
25000 customers and a lot of these were new local accounts, we are onboarding and with having that success in sales. It's driven by two main areas of focus one hour service is up into the right and we're getting great feedback from customers on the quality of service and two is the investments we are making in capacity to be able to handle that business.
We want to grow in both of these channels with the with the type of freight in the type of profile I just mentioned.
So I guess is the primary driver of the you know more moderate growth in revenue per hundred weight versus peers is that really just the emphasis on or the greater growth with national accounts, and then I guess just from kind of a forward look would you think that you were you know.
Revenue per hundred weight weight would accelerate a bit as you look forward or would you think it remains kind of low single digit given that mix effect with a national account tonnage.
So it's a combination of all the things that I mentioned earlier on so the mix of channels is one component and obviously the local being down all the way, but shipments being up that's kind of become a tailwind, but it's also the other items that LG awry I don't think the hall as well and a lot of these things with any cover as the macro as afraid the vans and vitamin C covers for the course of <unk>.
2023 now.
Going back to the local channel. The fact that shipments are up as the macro recovers you would see the wafer shipment start to go up and then the overall punished we're getting into that channel would go up which would be a lift 40 yield and what our national accounts. We look at these as longer term strategic relationship just to give you. An example, the average tenure of our top 10 customer today is 16.
Years. So these are customers that we're gonna be fine tuning the business, we do with them over time. So again overall, we expect yields to remain positive and we expect our strategy to pay dividends as the macro recovery on the freight and vitamins that gets stronger and we like how we're positioned.
So it's probably cyclical in terms of seeing that acceleration in revenue per hundredweight.
Yes.
Right. Okay. Thanks for the time.
Thanks, Tom.
Thank you. Our next question comes from the line of Ken <unk> with Bank of America. Please proceed with your question.
Hey, good morning, Mario and team I'll, just throw it out there I think there's a lot of discussion here I think they've rebuilt this model four times this year alone and it sounds like with another reallocation on other ones coming next year. So looking forward to the consistency there going forward.
But just a base level understand that you're now at a 90% or in the fourth quarter at L. T. L. I think full year just about 87.
You were at what Ninety-three at Con way before you bought it and you're talking about another 600 basis points in a few years maybe talk about.
How you get there and and and you know it sounds like the strategy is shifting a little bit to know, we adding national accounts, which I know you've talked a little bit about but it sounded like that was a key move to get away from because that was a key driver of improving our wire. So maybe just start with that and then Karl just a clarification on EBITA.
I know you you've included the and the adjustments of $20 million and $15 million on or but did you leave that the $15 million out of EBITDA is that the way, we should think about that to get to that 185.
Yeah I know.
$20 million I kind of walk you through that Ken and the 15 million I guess I'm not understanding the question.
But I guess to get to the the adjusted operating income you you take out both the 20 million in Riyadh. The 20th 15 million of income pension income, but you don't do that on EBITDA right you just take out the $20 million of corporate cost.
Well no I mean as we go forward pension you know as we think about op income pension will be excluded.
Overall, EBITDA, though has a pension income so and as we said in the planning assumptions, we kind of showed you what the expectations were for 'twenty two 'twenty three as far as pension income being approximately $20 million for the full year.
Okay.
And Ken going back to your question on or definition. So we closed last here with an award of 83, 9%, which obviously called away had more than one line of business and they had a corporate structure as well. So they had the warehousing business, which was the former menlo business. They had the truckload business and they had the NPL business.
Now what do you think on a and we haven't changed that definition since we acquired the business back in 2015 and on Death's reporting basis. The war was 83.9 at year end 2022 now moving forward and we discussed the shooting out Investor day, as we become a Standalone company, we are taking back the corporate cost and putting them.
And at a T L effectively what's hard mentioned earlier on there at the five to 10 million of unallocated costs that would be in the third quarter wind down through the course of the year as we rationalize the corporate structure and this is where that new definition. It kicks into place now with the new definition 2022 with 86, 8% on your from at all.
[noise] perspective, and obviously as we move forward I would go to is to improve the athlete.
These 600 basis points by the time, we get through 2027.
Yeah, just to clarify I was talking about just the L. T. L section of Conway, which had all the allocations. So it was like to like I I believe I'm, having solid calmly for 15 years before that so so just maybe then can you follow up Mario on that strategic mix I, you know I know you've talked a little bit about going the national accounts, maybe I just want to understand.
And.
Now with your focus is on returning to more national accounts doesn't that serve as a detriment Oh Wow I believe Matt Fassler I used to talk a lot about moving more towards local accounts, because that's where you needed to get better pricing and thus better margins and and and not just chase density you know when we listen to other other.
L T cells it sounds like you know.
It's not a desire just to fill the network infill density but to do so.
With a profitable focus it sounds like I guess, maybe help us understand because I think a lot of the questions are coming at you because we're all really struggling to understand how I'm just chasing that density at a lower price optically maybe maybe it's just optics, but that typically historically has been at a detriment to the O arm. So maybe just fill us it because I think that's where some of the.
We're standing from the markets.
Sure thing kind of we'd actually doing both so what do you think about our sales efforts I mean again when do we think about about the investments we have made in capacity and the improvements in service and the investments in our sales force. The goal is to grow profitable national accounts and very profitable local account business as well. So when you look at the <unk>.
Fourth quarter as an example, with the local accounts shipment counts is up mid single digits. So we are actually going after the vote and for the national accounts, what he means very disciplined with the type of freight we are getting into the network I mentioned earlier it on one of the metrics, we look at and thirdly, it's a balanced Ah is a lean balance factor and we are onboarding.
That enables us to improve that factor and which would make the local accounts more profitable over time as well, but you need a combination of both to be able to drive higher margins overtime.
Yeah.
Thank you. Our next question comes from the line of Jeff Kauffman with vertical Research partners. Please proceed with your question.
Thank you very much good morning, everybody I wanted to go back and talk about the network maybe through different labs.
And I want to think back about 18 19 months ago. When <unk> was spun out and we had that quarter, where the L. T. L network struggled with service.
Because of that purchase trying to or than we were in sourcing transportation and a number of customers. As you mentioned your average customer tenure for 16 years.
Kind of steered trade away from the network for a couple of quarters you guys were in the penalty box until service was improved and you've got drivers staffing to appropriate levels. If I look at where the network is today versus.
Versus where we were in the aftermath are not a year ago, Let's say 18 months ago I'm, just kind of curious where has the network improve that no. Mario you were talking about the damage frequency was one of the best ever but kind of talk about where service levels are relative to maybe where you were.
Free that issue 18 months ago and in terms of the customer business that got steered away from you.
In the aftermath of that you know you didn't lose customers. So much. They just didnt give you as much freight have you gained all that back is there still some of that customer afraid that's out there that we're looking to bring back in the network now that the service metrics are better just kind of I want to look at it sort of slightly different lessons and understand you know, what's where it needs to be.
But he is not yet where it needs to be and how you've recovered relative to where you were.
Yes, Jeff So when you look at our service levels and I mentioned this in my opening remarks, our damage frequency Hasnt, who 66% you don't eat into fourth quarter and it's the best it's been in six years of any quarter in six years. So when you look at it from that perspective, obviously not only what he covered from the 18 month ago.
But now on a path to get back to the company records in terms of the quality that we offer our customers and similarly, our on time service was up 14 points on a year on year basis in the fourth quarter now we do surveys with our customers on a weekly basis and these are life shipping customers and the customer satisfaction is the fourth quarter exiting the month.
December was a company record is when we started doing this a couple of years ago in terms of taking that satisfaction. So the improvements have been dramatic and they prove it had been very effective and we hear it from our customers now going back to your question on the customers that we could have lost obviously when we onboard business. Some of it is existing customers wherever you are.
Expanding the amount of business that we do with to give you. An example, the recent the I mentioned last quarter. We on boarded in your top 10 customer that was a customer that was doing a small amount of revenue with us prior and now the amount of revenue is multiple I mean, we're talking more than 10 X amount of volume that they used to do with US three three those improvements so we see it there.
That correlation between the improvements, we're making in service and customers wanting us wanting to give us a bigger share of wallet and giving us more business as well.
If I could follow up on that just for a second.
About.
Early 2022 I mean, theres always been a gap between the year on year yield improvement X P O versus the peer group and it feels like that gap is closing a little bit the last few quarters and I remember early 'twenty. Two it was a we can't really push price with customer because the service is still feeling.
Or are you past that and are there games that you can still make it on a relative basis. They may be relative to the peer group now that the services at these levels is that something we should see in 'twenty three.
Yes, we are past that in terms of service and again when I when I talk to our large customers. We've on boarded I can sense can you get the feedback that would be at one of their top carriers in terms of service quality now obviously with some of the existing customers that are going to have less loss due to service issues in the past. These as they come back that takes time to be a.
To grow wallet share of wallet with them as well, but generally when we think about the impact of service currency, providing close to best in class service and we ought to Ani up into the right trajectory of continuous improvement and focus on it.
Okay. Thank you.
You got it thanks, Jeff.
Thank you. Our next question comes from the line of Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question. So maybe just for a follow up on the Capex you have a breakdown in terms of the 85 or so percent. That's L. T O. What's real estate, which was tractors and trailers are you can you give us a sense of what terminals or at lease versus own and you will see that in the 10-K before.
Two long and then can you just wrap it into maybe a range of expectations for free cash flow for the year.
Yeah sure. So if you look at kind of the breakdown you know about 70% of the Capex that we're planning for really is between tractors and trailers and it's weighted pretty much equally.
The remaining amount is kind of split between you know other things you know theres a little bit in there for real estate as well, which probably adds another 15% and if you think about you know the mix between purchase and leaves about 40% or excuse me between owned and leased 40% is owned.
And any thoughts on free cash flow and what that all shakes out to yeah. I mean, I think as we look at our conversion rate.
Yeah, It's a fair question as we look at.
The first quarter, we are planning to really accelerate our capex expenditures and it's really going to be based off of the availability of getting new trucks and so there's a chance we can have up to 50% of our capex spend CDR could occur in the first quarter, obviously subject to the availability of what we are.
Right now I think additionally, as far as cash flow.
Other points, we should kind of 0.1.
We're not planning for any real estate sales in the in 2023.
Two we do expect to have higher cash interest costs as well that will factor into your free cash flow numbers for us.
Got it and then a follow up on one of the other variables would be looking at this year the impact of fuel. So you can look at fuel surcharge up more of an expense I would see Marty mentioned, there's purchase transportation component on that but you know for fuel curve stays where it is how.
How does that affect L T O or an EBIT as we go throughout the year.
When you look at fuel, it's always been part of the economics of an MTM carrier so when customers pay.
Our services they have a price that is inclusive of fuel and is similar to all carriers that when you look at the price of diesel today, you know that last year.
On a full year basis, the price per gallon was roughly in the upwards of $5 per gallon, while cutting piece in that four six range. So.
It will stay at current levels, that's what we're most likely to be some pressure related to that and obviously the positive side, though our fuel being lower it's going to stimulate more economic activity and also with with have more yield ex fuel type strength associated with that as well, obviously, we'll see how the how the yours.
Does that we ought to focus from our perspective all of the levers that.
We can control, obviously and fuel and well see what the weather you it looks like as a as the year develops.
Okay. Thanks for the time.
Thank you. Thank you.
Thank you. Our next question comes from the line of Jason Seidl with Cowen and company. Please proceed with your question. Thanks.
Thanks, Operator, Hey, Mario and team.
I wanted to get back to the pricing and yield side, because I don't think I heard. This can you talk about what you were pricing new contracts out of the quarter.
For the fourth quarter, we were roughly at 7%.
Or so maybe you could help me out here about your comments about sequential yields from fortune one Q Mario I believe you said they were going to be about flat.
And I'm, assuming that was an ex fuel commentary.
That's correct.
Okay. So why is it going to be flat when you're repricing at 7% in the quarter. Your G. R. I also moved to January I would assume that would drive it up or is there just another massive mixed shift.
Going and going to happen again in one queue.
So when you look at the first one yes sequential when you look at the first quarter, we expect a year on year.
To be up similar to what we've seen in the fourth quarter ex fuel and this is what we what we have seen in the month of January now some of the dynamics that impacted our yield in the fourth quarter, our sell through for the first quarter, which includes the mix change between national and local and local weight per shipment. It still has a similar dynamic of what we saw in.
In the fourth quarter, so far here into.
At the beginning of the first quarter, so that dynamic and mixed change has not changed from the fourth quarter. The only change is the G. A riotous we took in the month of January now typically our local accounts roughly a quarter of our business. So obviously that that's about a 1% flow through on a call it 1% to 2% flow through on yield on total <unk>.
And yield associated with it. She arrived we took in January but again, it's the same dynamics for national to local ship and dynamic for length of haul are still impactful in the first quarter as well.
Okay, and then alright, so I guess I'll just take this offline because when I look at weight per shipment. It all other things being equal should help yield I'm going down at least or questions about the network. Here. You know you you had some nice you know damage rates and a quarter's best numbers in six years that's fantastic.
You have a 14% on top of 14 point on time improvement could you could you compare the on time improvement sort of where you've been historically. So you you you gave the year over year, where does that put you on a historic on time performance level versus our versus your old numbers.
So we are back to pre to pre COVID-19 levels on these numbers for quality, which is the damage frequency piece, we are back to the best in six years and an all time in another metric. We use internally is what would be called network fluidity, we're back to what we wouldn't people but are they.
And and where when you look at your network right now and I know, you're adding terminals and everything so so how much excess capacity is in the network and is that going to increase as you add terminals and then you just eventually take that down.
So in terms of overall capacity in the network with roughly in the 20% available capacity across the network. However in some markets we already tapped out on capacity I mentioned earlier on for example, the market's good opening up and when we opened up in Atlanta, it's sort of an old over through the course of 2022.
We've seen volume in that market uptick considerably because we had the customers we had the demand and we need just more physical space now when you look at our plan of adding 900 net new doors through the course after three years. Since we started Oh. She has 2.0 plan that's roughly around 3% per year and it is in markets, where we already were tapped out on capacity.
And we are adding more capacity to handle more volume for our customers.
I appreciate the color and time as always guys.
Thank you.
Thank you ladies and gentlemen, our final question. This morning comes from the line of Jack Atkins with Stephens Inc. Please proceed with your question.
Okay, great. Thank you for squeezing me in here I appreciate it I guess, maybe kind of going back to two an earlier line of questioning on just sort of a networking and network investments I mean, Mario when I kind of think about the last three years.
Your EBIT at LCL is up 25% or so you're your own peers L. T. L are up on average about 200% over that timeframe. So I guess conceptually and strategically you know why does the network deserve to be able to invest more capital into expansion when you haven't sort of been able to justify.
The capital that's already in place I would think the idea would be to really improve the performance of the existing network and improved price improve lane balance.
Why why are we adding capacity when we're not getting an appropriate return on the capacity already in place.
Yes, Jack it's Carl So if we look at just from a return on invested capital perspective, we are actually getting a very sizable return. It. So you know if we look at what we did as you know running probably about 34% as far as on a return on investment capital. So reinvesting into the network. Obviously is very is.
It is a pretty big benefit as it relates to what we're getting for those investments.
And the other performance versus peers.
Yeah, when we look overall I mean, it would be.
That's quite a bit that attracted to pass a lot of it went back to the capacity we have into the network. So on a vehicle, but all the way through end of 2020 one the amount of capital reinvested into the business was based on at maintenance Capex pretty fresh equipment, but not to add capacity. So we can handle more volume and obviously, we have discussed quite a bit to what happened back in <unk>.
But in 'twenty, one and these weird the dynamics now moving forward, we're solving for all of these things. So we and we are investing capital in capacity. So we can say, yes, more often to the customer and ahead of them that we are very focused on continuous improvements in service to be best in class and the service we offer our customers and these over time will pay dividends both in terms of.
I'll turn expansion and higher returns through our plans for 2007.
Thank you for allowing me to ask a question.
Thank you Vicky.
Thank you, ladies and gentlemen that concludes our time allowed for questions I'll turn the floor back to Mr. Harris for any final comments.
Thank you everyone for joining us this morning, and I'm proud that we delivered solid results across the business.
Want to thank our 38000 team members not just for the progress we've made but also for the momentum they have created in.
North America this would be our first full year as a pure play LCL carrier.
And we have a strong organization who's bringing high energy all three parts of our growth strategy.
Investing in network capacity ahead of demand.
Providing best in class service to earn market share and optimizing pricing and operations through our technology.
We're confident that would make more progress this year with all three of these objectives and we look forward to seeing you at upcoming conferences operator, please close the line.
Thank you. This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.