Q3 2023 XPO Logistics Inc Earnings Call

Welcome to the S. P O third quarter 2023 earnings conference call and webcast. My name is Robert and I'll 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.

Have a question please dial star one on your telephone keypad.

Limit yourself to one question when you come up into the queue. If you have additional questions you're welcome to get back into 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 this call the company will be making certain forward looking statements within the meaningful 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.

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 also may 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 of the company's website.

I will now turn the call over to X P. O S Chief Executive Officer, Mary O'hare Mr. Harris, you may begin.

Good morning, everyone. Thanks for joining our call.

I'm getting Greenwich with Kai Louis Smith, our Chief Financial Officer.

And Ali if I agree our chief strategy Officer.

This morning, we reported financial results, that's the way to well above expectations for the growth and profitability. Despite a soft market for freight transportation.

It was a strong third quarter put us company wide.

We grew revenue year over year to $2 billion.

And improved our adjusted EBITDA to $278 million, an increase of 6% year over year.

Both segments of the business grew adjusted EBITDA in the quarter.

Adjusted diluted EPS for the company was 88 cents, which was also higher than expected.

I want to use my comments. This morning to give you a progress report on the four pillars of our plan for the LTE at a 2.0.

Starting with customer service, but we've made great progress this quarter.

Our claims ratio for damages was 0.4% and.

An improvement from 0.7% in the prior quarter.

To put that in context, when we launched LTE L 2.0, nearly two years ago. Our claims ratio was one 2%.

So we've been steadily making good on our promise to elevate service.

Our third quarter claims ratio is our best result ever.

And in the month of September we exited the quarter with the best damage frequency level in our history.

Yeah.

Another key service metric its on time performance.

Was eight percentage points better in the quarter compared with last year.

We're very focused on ensuring that our service standards remain high as we grow.

In the third quarter, our shipment count was significantly higher as we took more volume into our network.

While at the same time, we delivered meaningful service improvements.

And we're already thinking the next steps forward with our investments in service.

This includes enhancing our training programs and loading procedures and it's the thing I would field operations with new service tools.

The high caliber stress and airbag systems, we're rolling out are generating positive returns in a short period of time.

For example in the service centers with a you airbag systems, we're already seeing a 20% improvement in damage frequency.

Our strong commitment to service is critical for our customers and while we've made significant progress we can clearly see the runway we have for further improvement.

Our top priority is to be the best in class Lts service provider in the coming years.

The second bidder of LTE has 2.0, it's investing in our network.

Our business has historically generated a high return on invested capital.

Since the launch of LCL to 0.0, we've added 10000 trailers to a thousand tractors and over 500 net new doors.

This has allowed us to take on more freight for our customers, while maintaining strong network fluidity.

More than two thirds of our 2023 capex is being deployed to increase the capacity of our fleet.

Year to date, we've added more than a thousand tractors, which brought down the average tractor age to 5.2 years from five nine years at the end of 2020 two.

And we are on track to exceed our production target of 6000 youth theaters this year.

Year to date, we've manufactured over 4900 trailers in house facility in Arkansas.

In addition, we expanded our service center doors in the Atlanta, and Dallas Metro areas in July.

And we broke ground on a new facility in Central Florida, which is a key growth market for us.

Consistent with the plan, we outlined that's good adding new doors and markets with our investments in capacity can sustain more growth over time.

To date, we've added 531 net new doors I guess, it's already about 900 and.

And we expect to open the remainder by early 2024, primarily at existing terminals.

These targeted expansions are performing well and exceeding our return hurdles.

I want to touch on one of the long term targets, we introduce with LTE has 2.0.

What's for Capex allocation of 8% to 12% of revenue on average through 2027.

Given the recent market dynamics and the opportunity at hand with accelerating the pace of that spend.

As a result, our capex this year will be 12% to 13% of revenue and will likely continue to exceed our target range in the near term.

The third pillar of our plan is to accelerate yield growth.

In the third quarter, we focused on strengthening our underlying pricing trends such as contact thing you would pricing.

And executed a number of other initiatives to align the price we received with the value we deliver.

Yoga is our single biggest opportunity for margin improvement and you saw this impact in our earnings release this morning.

We could all yield excluding fuel by six 4% year over year.

Presenting a significant acceleration from the first half of the year.

We see a double digit pricing opportunity that we expect to capture over the coming years through three primary levers.

First as we continue to improve our service customers are willing to pay a premium price for the value we deliver.

We're seeing this with both contract renewals and new business.

We also see a significant opportunity to grow our accessorial revenue.

Including a range of value added services, such as retail store Rollouts and growth city consolidations.

Our services that our customers are asking for it.

Lastly, we're focused on growing our local customer base, which is a higher margin business for us.

In the third quarter, we achieved double digit shipment growth and our local sales channels.

And we are expanding our look salesforce to reflect the scale of this opportunity.

So while we had strong yield growth in the quarter. The key point is the momentum it indicates going forward. We're confident that we'll continue to improve our yield in the coming years.

The final pillar of LCL to point, Oh, it's cost efficiency.

Pacifically with purchase transportation variable costs and overhead.

In the third quarter, what do you used I would purchase transportation cost by 21% year over year by covering more line haul miles in house, but also pay Yang lowered contact rates for the miles we outsource.

We ended the quarter with 21, 5% of line haul miles outsourced to third parties.

Which was a 200 basis points reduction year over year.

Even though we purchase more transportation on a short term basis to cover the recent inflection in volume.

I would have done is accelerate bringing more miles in house with initiatives tailored to our line haul network.

For example, we're in the process of adding more driver genes and sleeper trucks for long distance halls.

We're targeting a few hundreds of these teams to be in operation by the end of 2024, which will increase the efficiency and flexibility of our service.

We're targeting at least a 50% reduction in third party line haul miles as a percent of total by 2027 compared with 2021.

Yeah.

And also the margin opportunity, we have with variable cost is labor.

We manage this effectively in the third quarter.

Head count and labor hours per day were roughly flat year over year, while our shipment count was up by high single digits.

Our ability to realize these productivity gains while also improving our service metrics reflects the strong execution of our operational teams and the strength of our proprietary technology.

That's not just on the key points of our plan and the progress we made in the third quarter with more to follow.

We're generating record service levels.

Turning profitable market share and driving yields higher.

Oh, the critical levers of margin expansion and I would have to see how the business.

We're continuing to make strategic investments in our network and we have the agility to capitalize on changes in market conditions.

At the same time, what are becoming more cost efficient with Atwood operations. So we can translate revenue growth into earnings at a higher rate.

What do you mean solidly on track to deliver on our outlook of at least 600 basis points of adjusted operating ratio improvement through 2027.

Before I close I want to mention that this week marks I would one year anniversary as a standalone LPL provider in North America.

I couldn't be more proud of the progress we've made and will continue to make as we work to realize the full potential of X P O.

We're well underway in executing on the strategy, we initiated at the end of 2021.

A focused high energy customer loving organization and will continue to build on our momentum.

I want to take this opportunity to thank our thousands of dedicated employees for their world class support of X P O.

We have a phenomenal team driving our strategy to be the best in the industry.

Now I'm going to hand, the call over to Kyle to discuss the third quarter results I'll over to you.

Thank you Mario and good morning, everyone I'll take you through our key financial results.

Balance sheet and liquidity.

Revenue for the total company was $2 billion up 2% year over year and up 3% sequentially from the second quarter.

In our NGL segment revenue was up 2% year over year.

8% sequentially.

Excluding fuel LCL revenue was up 8% year over year and up 7% sequentially.

Salary wages and benefits for LPL or 10% higher in the quarter than a year ago.

The increase was primarily related to higher incentive compensation to account for the team's strong third quarter performance as well as the impact of wage inflation or.

Our improvements in productivity, partially offset these costs.

We handled more shipments with lower head count and fewer labor hours than in the third quarter a year ago.

Importantly, it was the third consecutive quarter that shipment count grew at a faster pace than labor hours.

And the spread has widened sequentially with each period.

In the third quarter, our shipment count per day grew by 8% year over year.

Labor hours increased by less than 1%.

We were also more cost efficient with purchase transportation.

Through a combination of in sourcing and rate negotiations.

Our expense for third party carriers was $97 million in the quarter.

Which was down year over year by 21%.

Depreciation expense in the quarter increased by 29% or $15 million.

Reflecting our commitment to reinvesting in the business.

This remains our top priority for capital allocation.

In the third quarter, our Capex was primarily allocated to purchasing new tractors from the Oems and manufacturing more trailers in house.

Next I'll add some detail to adjusted EBITDA, starting with the company as a whole.

We generated adjusted EBITDA of $278 million in the quarter.

Which was up 6% from a year ago.

Reflecting a year over year increase in both North American LCL and the European business.

Our adjusted EBITDA margin was 14% Rep.

Representing a year over year improvement of 50 basis points companywide.

And we reduced third quarter corporate expense to $7 million as we continue to rationalize our corporate cost structure for the Standalone business.

This was a year over year savings of 67% or $14 million.

Looking at just the LCL segment, we grew adjusted EBITDA year over year to $241 million.

Our revenue growth and cost efficiencies more than offset nonoperational headwinds from lower fuel surcharge revenue and pension income.

In our European Transportation segment, adjusted EBITDA increased to $44 million for the quarter.

Yeah.

Companywide, we reported operating income of $154 million for the quarter up 11% year over year.

Our net income from continuing operations was $86 million in the quarter.

Representing diluted earnings per share of 72 cents.

This compares to income of $92 million and diluted EPS of <unk> 79, a year ago.

The year over year decline in third quarter net income was primarily due to an $11 million decrease in pension income and a $6 million increase in interest expense this year.

We also had $8 million of transaction and integration costs related to the Hart spinoff.

And another $1 million of restructuring charges across our segments.

These costs stepped down materially from the first half of the year.

On an adjusted basis, our EPS for the quarter was 88.

Which is down 7% from a year ago.

Also reflecting the impact of lower pension income and higher interest expense.

And lastly.

We generated $236 million cash flow from continuing operations in the quarter.

$133 million of net Capex.

Moving to the balance sheet, we ended the quarter with $355 million of cash on hand.

Combined with available capacity under our committed borrowing facilities.

This gave us $944 million of liquidity.

We had no borrowings outstanding under our ABL facility at quarter end.

And our net debt leverage was two two times trailing 12 months adjusted EBITDA.

Our capital structure. It gives us the financial flexibility to execute on the significant growth opportunities we have X P F.

Before I wrap up I want to highlight some updates to our full year 2023 planning assumptions.

We now expect the gross Capex will be in the range of $675 million to $725 million. This year given the opportunities we have to invest in network capacity to drive long term growth.

We're also projecting interest expense of $170 million to $175 million pension income of $15 million to $20 million and an effective tax rate of 23% to 24%.

Rob: Welcome to the XPO third quarter 2023 earnings conference call on webcast. My name is Rob and I will be your operator for today's call. At this time, all participants are on a listen only mode. Later we will conduct a question in the answer session. If you have a question, please dial 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.

Our assumption for diluted share count remains unchanged at 118 million shares for the full year.

Now I'll turn it over to Ali who will cover our operating results.

Thank you Kyle I'll start with the operating results for our L. T L segment.

In the third quarter, we had a year over year increase in shipment count of seven 8% led by 13% growth in our local sales channel.

Speaker: Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-gap financial measures. During this call, the company will be making certain forward-looking statements within the meeting applicable securities laws, which by their nature involve a number of risks, uncertainties, and other factors that could cause actual results to different materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to different materially is contained in the company's SEC filings as well as in its earnings release.

As a result, our tonnage per day increased by three 1%.

This more than offset the impact of macro conditions.

Which continued to put pressure on our industry.

Our weight per shipment declined four 3% in the quarter compared with a year ago, which was slightly better than in the second quarter.

There are two key drivers behind the solid growth we reported.

Speaker: 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 also may refer to certain non-gap financial measures as defined under applicable SEC rules. Reconciliation of such non-gap financial measures to the most comparable gap 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-gap financial measures and the investor section of the company's website.

First we're continuing to gain market share because of the significant service improvements, we're making in the network.

And second when yellow exited the L T L market.

We were well positioned to onboard incremental freight given that we've been investing in expanding our network since 2021.

We also demonstrated that we have the operational discipline to take on more volume while at the same time continuing to improve our service levels.

On a monthly basis, our July tonnage per day was up four 2% year over year.

Rguest was up three 3%.

Mario Harik: I'll announce in the call over to XBO's chief executive officer, Mario Harrick. Mr. Harrick, you may begin. Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Kyle Wisments, our chief financial officer and Ali Fagri, our chief strategy officer. This morning, we reported financial results that were well above expectations for growth and profitability despite a soft market for freight transportation. It was a strong third quarter for us company-wide.

September was up two 2%.

Looking just at shipments per day July was up eight 8% year over year.

August was up eight 3%.

And September was up six 6%.

Our shipment count increased sequentially by more than a thousand shipments per day every month of the quarter from July to September.

On a two year stack basis monthly tonnage and shipment count also improved each month throughout the third quarter.

Mario Harik: We grew revenue year-over-year to $2 billion and improved our adjusted EBITAB to $278 million, an increase of 6% year-over-year. Both segments of the business grew adjusted EBITAB in the quarter. Adjusted that using EPS for the company was 88 cents, which was also higher than expected.

With October almost complete our preliminary tonnage per day is up approximately 2.5% year over year and shipment count is up 6%.

On a sequential basis from September October tonnage and shipment counts are down 2.5% with both outperforming seasonality.

Mario Harik: I want to use my comments this morning to give you a progress report on the four pillars of our plan for LTL 2.0, starting with customer service, where we've made great progress this quarter. Our claims ratio for damages was 0.4%, an improvement from 0.7% in the prior quarter. To put that in context, when we launched LTL 2.0 nearly two years ago, our claims ratio was 1.2%. So we've been steadily making good on our promise to elevate service. Our third quarter claims ratio is our best result ever. And in the month of September, we exited the court with the best damage frequency level in our history.

Looking at yields in the third quarter, we grew yield excluding fuel by six 4% year over year, which is an acceleration from the second quarter.

On a sequential basis, we increased yield ex fuel quarter over quarter outperforming typical seasonality by 290 basis points.

And importantly, we accelerated yield growth as the quarter progressed.

Supported by our strong customer relationships and pricing initiatives.

Our underlying pricing trends also strengthened.

With contract renewal pricing up 9% in the quarter compared with a year ago.

We expect year over year yield growth ex fuel to further accelerate in the fourth quarter.

And we're excited about the long term impact that our yield initiatives will have on profitability.

Mario Harik: In other key service metric, it's on time performance. This was eight percentage points better in the quarter compared with last year. We're very focused on ensuring that our service standards remain high as we grow. In the third quarter, our shipment count was significantly higher as we took more volume into our network while at the same time we delivered meaningful service improvements. And we're already taking the next steps forward with our investments in service.

Turning to margin performance, our third quarter adjusted operating ratio was 86, 2%.

Which was 60 basis points higher than a year ago.

On a sequential basis, we improved adjusted or by 140 basis points compared with the second quarter.

This outperformed seasonality by 370 basis points.

Moving to our European business, we delivered another solid financial quarter with adjusted EBITDA growth of 2% compared with a year ago.

Mario Harik: This includes enhancing our training programs and loading procedures and accepting our field operations with new service tools. The high-calibre straps and air-back systems we're rolling out are generating positive returns in a short period of time. For example, in the service centers with the new air-back systems, we're already seeing a 20% improvement in damage frequency. Our strong commitment to service is critical for our customers. And while we've made significant progress, we can clearly see the runway we have for further improvement.

This was supported by strong pricing, which outpaced inflation as well as cost discipline.

While macro conditions in Europe remained soft overall, our sales pipeline is robust and the team continues to execute well, especially in the U K, where we drove positive organic growth in the quarter.

I'll close with the drivers behind our momentum, including the strong outperformance of our third quarter operating ratio.

Mario Harik: Our top priority is to be the best in class LTL service provider in the coming years.

First we continued to make significant improvements in service across the board and delivered record results.

Mario Harik: The second pillar of LTL 2.0 is to invest in our network. Our business has historically generated a high return on invested capital. Since the launch of LTL 2.0, we've added 10,000 trailers, 2,000 tractors, and over 500 net new doors. This has allowed us to take on more freight for our customers while maintaining strong network fluidity. More than two-thirds of our 2023 CAPEX is being deployed to increase the capacity of our fleet.

We also accelerated yield growth in the quarter and will accelerated again in the current quarter.

We expect our robust yield performance to continue into 2024.

And we we operated far more productively by leveraging our technology and effectively managing our labor costs.

In summary, our strategy is working X P O in North America is stronger as a Standalone L. T. L company with focused execution and our results will continue to reflect that.

Mario Harik: Year-to-date, we've added more than 1,000 tractors, which brought down the average tractor age to 5.2 years from 5.9 years at the end of 2022. And we'd on track to exceed our production target of 6,000 new traders this year. Year-to-date, we've factored over 4,900 trailers at our in-house facility in Arkansas. In addition, we expanded our service center doors in the Atlanta and Dallas metro areas in July. And we broke ground on a new facility in central Florida, which is a key growth market for us.

Now we'll take your questions operator, please open the line for Q&A.

Thank you.

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Mario Harik: This is consistent with the plan we outlined that we're adding new doors and markets where our investments in capacity can sustain more growth over time. To date, we've added 531 net new doors against a target of 900. And we expect to open the remainder by early 2024, primarily at existing terminals. These targeted expansions are performing well and exceeding our return hurdles.

Thank you and our first question today is from the line of Chris Wetherbee with Citigroup. Please proceed with your questions.

Yeah, Hey, thanks, good morning, guys.

Maybe first if we could start on operating ratio and how you might think about the opportunity as you move through the fourth quarter and then maybe bigger picture for next year. So I guess, you know could you help us a little bit with what you view as normal seasonality and sort of what you think maybe you could do relative to normal seasonality and for cube.

Mario Harik: I want to touch on one of the long-term targets we introduced with LTL 2.0, which was for CAPEX allocation of 8-12% of revenue on average through 2027. Given the recent market dynamics and the opportunity at hand, we're accelerating the pace of that spend. As a result, our Catholics this year will be 12-13% of revenue and will likely continue to exceed our target range in the near term.

Hey, Chris said this is Mario so things starting with the first with the fourth quarter. We can give you some colors like we'd like we usually do on tonnage yields and and ultimately what the board would do and then given out before 2024 on the tonnage side following our market share gains in the third quarter, we expect to be in line with seasonality.

In the fourth quarter, which implies Q4 tonnage being up low single digits on a year on year basis, they'll put us on the tonnage side normal seasonality Q3 to Q4 is a 4% sequential decline October.

Mario Harik: The third pillar of our plan is to accelerate yield growth. In the third quarter, we focus on strengthening our underlying pricing trends, such as constructor and you will pricing. And executed a number of other initiatives to align the price we received with the value we deliver. Yield is our single biggest opportunity for margin improvement. And you saw this impact in our earnings release this morning. We grew yields excluding fuel by 6.4% year over the year, representing a significant acceleration from the first half of the year.

October was better than seasonality, but this was also driven by a small increase in volume earlier in the month given a cyber attack is another NTL carrier and we'll give another update on November tonnage and in early December on the yield front as we gained traction in atwood initiatives yield growth improved through the third quarter and we do expect Q.

40 yield ex fuel accelerate versus Q3 and on a year on year basis to be in the high single digit range and coolant and ultimately if at all in the fourth quarter. We typically see seasonally we see a deterioration of our of 310 basis points from Q3 to Q4, and we expect to outperform that seasonality by somewhere in.

Mario Harik: We see a double digit pricing opportunity that we expect to capture over the coming years through three primary levers. First, as we continue to improve our service, customers are willing to pay a premium price for the value we deliver. We're seeing this with both contract renewals and new business. We also see a significant opportunity to grow our accessorial revenue, including a range of value added services, such as retail store rollouts and grocery confolidations.

100 basis points range, it's all on a year on year basis. This implies an improvement offset all P&L 200 basis points in Ohio, and the magnitude of the outset cordless will depend on what the tonnage in vitamin doesn't get back half of the quarter. As you know Q4 is usually a tough quarter to predict what the with the holidays now for 'twenty 'twenty four we do expect a strong year.

The biggest swing factor will be the macro and what the macro does through through the course of 'twenty 'twenty four but that said we have a lot of company specific initiatives as we have mentioned in the opening remarks, our service product continues to improve heading company records I would eat yogurts that Saturday. Thank you had in the fourth quarter and we expect a strong year for yield in 2024.

Mario Harik: These are services that our customers are asking for. And lastly, we're focused on growing our local customer base, which is a higher margin business for us. In the third quarter, we achieved double digit shipment growth in our local sales channel, and we're expanding our local sales force to reflect the scale of this opportunity. So while we had strong yield growth in the quarter, the key point is the momentum it indicates going forward. We're confident that we'll continue to improve our yield in the coming years.

And we expect to continue to make great progress driving pulse deficiencies, including line hauled in sourcing and accelerating that and productivity improvements and labor as well. So from an award perspective for 2020 food or we do expect a strong year, but we'll see what the macro would they go see it over the quarters to come.

Mario Harik: The final pillar of LTL 2.0 is cost efficiency, specifically with purchase transportation, variable costs and overhead. In the third quarter, we reduced our purchase transportation cost by 21% year over year by covering more line haul miles in house, while also paying lower contract rates for the miles we outsourced. We ended the quarter with 21.5% of line haul miles outsourced to third parties, which was the 200 basis points reduction year over year.

That's very helpful. I appreciate all that color and just one follow up on 2024 as you think about sort of the longer term operating ratio targets that you guys laid out through 2027.

What you've seen with the post yellow world the pricing opportunity in some of the significant improvements you're making around the service side is it reasonable to assume or can you give us a sense of what the cadence of that overall or improvement might look like is it front end loaded is it back end loaded any kind of thoughts about how that cadence should present itself, particularly given what we're seeing in the market currently.

Yes, so first on the on the number itself. We've always said, there's at least 600 basis points by 2027, but we're not stopping at 600 and we're not stopping in 2027 and I think there's a cadence of improvement based on what we're seeing short term, it's fair to assume we can get there faster.

Mario Harik: Even though we purchased more transportation on a short-term basis to cover the recent inflection and volume. Our plan is to accelerate bringing more miles in house with initiatives tailored to our line haul network. For example, within the process of adding more driver teams and sleeper trucks for long distance haul. We're targeting a few hundreds of these teams to be in operation by the end of 2024, which will increase the efficiency and flexibility of our service. We're targeting at least a 50% reduction in third-party line haul miles as a percent of total by 2027 compared with 2021.

Obviously, as we execute well, we're going to keep on posting these numbers and going from there and it's pulled defensive it's obviously short term what the macro does in 'twenty 'twenty four and it must be expect obviously, a strong outlook going going from here.

Our next question comes from the line of Scott Group with Wolfe Research. Please proceed with your questions.

Hey, Thanks, Good morning, guys I wanted to dig into the pricing opportunity a little bit. So I think you said contract renewals up.

9% is is that a.

Mario Harik: In other margin, opportunity we have with variable costs is labor. We manage this effectively in the third quarter. Our headcount and labor hours per day were roughly flat year over year, while our shipment count was up by high single digits. Our ability to realize these productivity gains while also improving our service metrics reflects the strong execution of our operational teams and the strength of our proprietary technology.

The number that you view as sustainable over the next few quarters.

Help us think about I don't know, if you guys announced that you or I or or what you're planning on the G. R. I and then maybe touch on the accessorial value added opportunity or are we seeing any of that benefit yet or is that still all incremental.

Hey, Scott its Kyle So do you think about the contract renewal rates, you said, 9%, what we're seeing in Q3 and relative to G. R. I just one clarification too is that the contract renewals were impacted most of the business. So we'll go through an annual cycle increase so so we expect those to be in the high single digit range and then when you think about the G. R I for us.

Mario Harik: That touches on the key points of our plan and the progress we made in the third quarter with more to follow, with generating record service levels gaining profitable market share and driving yield higher. These are the critical levels of margin expansion in our LTL business. We're continuing to make strategic investments in our network and we have the agility to capitalize on changes and market conditions. At the same time, we're becoming more cost efficient with our operations so we can translate revenue growth into earnings at a higher rate. We remain solidly on track to deliver on our outlook of at least 600 basis points of adjusted operating ratio improvement through 2021.

We're going to go through an annual process and we'll follow our normal timelines, we've communicated customers here in the fourth quarter and then go live with increases in Q1.

And then I think your second question then was on Accessorial Scott.

Now as a sort of those are one of many yield initiatives. We're excited about currently that I saw was about 10% of our revenue worked hard and get closer to 15%. That's a combination of offerings, we have today as well as some new service offerings.

And then in Q2, we did begin rolling out new tools that helps us really captured more location based and time based accessorial, we started seeing an impact from that in Q3, and we also have a team that's working on growing our premium service offerings. So those should help us really drive that high single digit impact in Q4 as well as positive yield in 2024.

Mario Harik: Before I close, I want to mention that this week marks our one year anniversary as a standalone LTL provider in North America. I couldn't be more proud of the progress we've made and will continue to make as we were to realize the full potential of XPO. With well underway and executing on the strategy, we initiated at the end of 2021 with a focused, high energy customer loving organization and will continue to build on our momentum. I want to take this opportunity to thank our thousands of dedicated employees for their world-class support of XPO. We have a phenomenal team driving our strategy to be the best in the industry.

Okay. Thanks, and then.

But you guys are talking a lot about the claims and seeing some nice improvement.

Is there any way to help us think about what does lower claims actually mean for the model does it mean.

Lower costs as you mean, better price and how quickly do we see any sort of benefit of a lower claim showing up in the model.

Yeah. Thanks, Scott. This is hey, this is Mario what when you look at the claims it's one of our core areas of focus as a company is improving service for the customers.

Kyle Wismans: Now, I'm going to head the call over to Kyle to discuss the two-quarter results. Kyle, over to you. Thank you, Mario. Thank you. Good morning, everyone. I'll take you through our key financial results, balance sheet and liquidity. Revenue for the total company was $2 billion, up 2% year-to-year, and up 3% sequentially from the second quarter. In our LTL segment, revenue was up 2% year-to-year, and up 8% sequentially. Excluding fuel, LTL revenue was up 8% year-to-year, and up 7% sequentially.

And then I would industry, whatever we provide better service and we keep on that trajectory and eventually our goal is to be the best in class and to get to get to a 41% claims ratio customers are willing to pay a higher premium for the value that you would offer there. So what you would see an impact on pricing and we already are seeing that here in the third quarter as Kyle just mentioned our contract renewals are up to <unk>.

9% and most of that was driven by these improvements in service and to keep it in mind. Scott also what it was when we started the MTL 2.0, I would I would damage claims whether its one 2% and we've been able to take this here in the third quarter to accompany best so a multitude of initiatives. So all the way from incentive comp to the local incentive comp programs for.

Kyle Wismans: Gallery wages and benefits for LTL were 10% higher than a quarter than a year ago. The increase was primarily related to higher incentive compensation to account for the team's strong third quarter performance. As well as the impact of wage inflation, our improvements and productivity partially offset these costs. We handled more shimmings with lowered headcount and fewer labor hours than in the third quarter a year ago. Importantly, it was the third consecutive quarter that shimmin count grew at a faster pace than labor hours, and the spread is widened sequentially with each period.

We call the Gladiators and incentivize our supervisors to load with quality. So we're all in.

Our new technology, and how we lead our traders and moving forward. The combination of airbags, if you're launching an all service centers higher quality straps and improvements across across the board. All of these would be do you need a higher premium on price over time. So that's how we see the impact of the medium to long term of that continuous improvement and serve.

Or is there is a benefit on the P&L, obviously, it's our claims Baldur's announced would go down.

That's that's small in comparison when you look at it versus the improvements in pricing, we can pick up over the quarters and years to come.

Kyle Wismans: In the third quarter, our shimmin count per day grew by 8% year-to-year, while labor hours increased by less than 1%. We were also more cost-efficient with purchase transportation through a combination of in-sourcing and rate negotiation. Our expense for third-party carriers was $97 million in the quarter, which was down year over year by 21%. Depreciation expense in the quarter increased by 29% or $15 million. Reflecting our commitment to reinvesting in the business.

Our next question is from the line of Ken <unk> with Bank of America. Please proceed with your questions.

Great Good morning Marriott team.

Just talk about the accelerating yields you only target about 100 basis points to outperform seasonality. When you just did 370 basis points, maybe you can kind of delve into the why we should not or what the opportunity is to see better versus why you think it maybe it takes a step back from outperforming seasonality versus what you do.

Just posted.

Sure Ken This is Ali so we do expect to outperform seasonality by 100 basis points, that's going to be primarily driven by our stronger yield growth just keep in mind, we are coming off nearly 400 basis points of outperformance versus seasonality in the third quarter. So we're delivering 100 basis points on top of that 400.

Kyle Wismans: This remains our top priority for capital allocation. In the third quarter, our cat-x was primarily allocated to purchasing new tractors from the OEMs and manufacturing more trailers in-house. Next, I'll add some details to adjusted EVA, starting with the company as a whole. We generated a adjusted EVA of $278 million in the quarter, which was up 6% from a year ago. Reflecting a year over year increase in both North American LTL and the European business.

With that we delivered in the third quarter I'd also point out that on a year over year basis that 100 basis points of outperformance versus seasonality would imply 200 basis points of year over year or improvement and about 20% EBITDA growth and our L. T. L segment ex real estate are there are also a few short term impacts to consider.

From the investments, we're making as we continue to invest in incremental capacity that comes with higher depreciation that was about 120 basis points year over year headwind to or in the third quarter. We would expect a similar impact in Q4. We're also investing in growing our local sales force and overall, we do expect these investments to generate.

Kyle Wismans: Our adjusted EVA margin was 14%, representing a year over year improvement of 50 basis points company-wide. And we reduced third-quarter corporate expense to $7 million, as we continued to rationalize our corporate cost structure for the standalone business. This was a year over year savings of 67% or $14 million. Looking at just the LTL segment, we grew adjusted EVA year over year to $241 million. Our revenue growth and cost efficiencies more than offset non-operational headwinds from lower fuel surcharge revenue and pension income.

Strong returns for us over the medium to long term, but they will have a modest cost impact over the next few quarters. So we feel comfortable with the roughly 100 basis points of outperformance versus seasonality for or it is still very early in a dynamic environment and ultimately that magnitude of outperformance is going to depend on how tonnage progresses through the rest of this quarter.

<unk>.

Great. Thanks for the clarification early that's great stuff and great detail on the on the progress so far so congratulations on a great quarter.

Can you talk a bit about your thoughts on on I guess two things one on the yellow I guess you have 294 service centers. How are you thinking about positioning into this are there different locations you may want to expand on how do you think that process goes do you think it brings more than needed capacity into the sector and does that impact.

Kyle Wismans: In our European transportation segment, adjusted EVA increased to $44 million for the quarter. Company-wide, we reported operating income of $154 million for the quarter, up 11% year over year. Our net income from continuing operations was $86 million in the quarter, representing deluded earnings per share of 72 cents. This compares to income of $92 million and deluded EPS of 79 cents a year ago. The year over year decline in third quarter net income was primarily due to an $11 million decrease in pension income and a $6 million increase in interest expense this year.

The ability to get pricing and then on that pricing can you talk about.

How much have you already renewed versus what is still to come.

Yeah sure sure Ken This is Mario I'll do a yellow service centers. It is unfortunate you put us to potentially accelerate our capacity growth.

Participating in the process and we'll see how things play out over over the next few months I would focus from a physical network capacity perspective has been to grow the network in markets, where we see higher demand from our customers over time and we don't look at these things for the next couple of years, but if you look at it over the next 10 plus years in terms of where the freight market.

Kyle Wismans: We also had $8 million of transaction and integration costs related to the arts of spin-off and another $1 million of restructuring charges across our segments. These costs step down materially from the first half of the year. On an adjusted basis, our EPS for the quarter was $0.88, which is down 7% from a year ago. General, also reflecting the impact of lower pension income and higher interest expense. And lastly, we generated $236 million cash flow from continuing operations in the quarter and deployed $133 million of net Catholics.

<unk> would be a would have more demand and then overtime as well so as I mentioned earlier, we've opened up so far more than 500 net new doors during the quarter, we extended two service centers into Atlanta, and Dallas Metro areas and we just broke it out in a service center in Central Florida, though and we're going to continue executing on that plan, but I got these yellow service centers.

We'll see where the process rolls out and it will help us accelerate that plan over over the years to come that would sort of capacity coming back into the network. It's tough to estimate what percent of these service centers would be back into the hands of LPL carriers, we estimate it to be roughly about 50%, but it will depend on other uses for the for the land or the other or these locations.

Put other industrial type applications now for the service centers that will come back into S. T. L. It will take time keep in mind that a lot of these service centers to go back but the process has to play out and then a lot of these service centers to get back into operations. They take time to get up to the standards of the different carriers that could be we estimate it to be in the year.

Kyle Wismans: Moving to the balance sheet, we ended the quarter with $355 million cash on hand. Combined with available capacity under committed borrowing facilities, this gave us $944 million of liquidity. We had no borrowing outstanding under our AVL facility in quarter hand, and our net debt leverage was 2.2 times trailing 12 months adjusted EBITDA. Our capital structure gives us the financial flexibility to execute on the significant growth opportunities we have to XPO.

Strange for them to get back into a into the industry and they will get back into the hands of more premium priced operators see what type of a rising tide for pricing across the entire industry.

The last thing I'll say it again.

That's capacity went out at a time, where shipment counts in our industry has found the underlying demand is down 10% across the across all the different carriers. So whenever the macro Titans again, you want to have enough capacity and is he able to handle all of that freight how soon it over to Pat to discuss our yield yeah from a renewal standpoint, Ken.

Kyle Wismans: Before I wrap up, I want to highlight some updates to our full year 2023 planning assumptions. We now expect that gross Catholics will be in the range of $675 to $725 million this year. Given the opportunities we have to invest in network capacity to drive long-term growth. We're also projecting interest expense of $170 to $175 million, pension income of $15 to $20 million, and an effective tax rate of $23 to $24%. Our assumption for the limited share count remains unchanged at $118 million shares for the full year.

<unk> for contract renewals is pretty level across the year, we have a disproportionately slightly higher amount in Q4 that will cycle through here in the quarter, but it was fairly even across the across the year.

Our next question is from the line of fatty Chevron with BMO capital markets. Please proceed with your question.

Yeah.

Okay. Thank you good morning, Mario and team.

Just a question on yield.

You mentioned double digit pricing opportunity.

In coming years from service Accessorial, and local customer base, but when you look at it.

Ali Fagri: Now, I'll turn it over to our lead who will cover our operating results. Thank you, Kyle. I'll start with the operating results for our LTL segment. In the third quarter, we had a year-over-year increase in shipment count of 7.8%, led by 13% growth in our local sales channel. As a result, our tonnage per day increased by 3.1%. This more than offset the impact of macro conditions would continue to put pressure on our industry.

Kind of past quarter third quarter.

Where where are you having more success it sounds like I'm getting some penetration in our local customer base five and what's the kind of areas, where you're seeing a greater contribution through the year, but that's just for your local customer base on its fairly spread across the three.

We kind of leave it more pricing.

And so how do you when you look at the three of them the biggest impact in the third quarter was the improvement of service because when you look at our claims ratio hitting a point, 40% customers seeing the trend of improvement and those relationships with our customers and to keep on improving over time as well. This is where we're seeing the most amount of.

Ali Fagri: Our weight per shipment declined 4.3% in the quarter compared with a year ago, which was slightly better than in the second quarter. There are two key drivers behind the solid growth we reported. First, we're continuing to gain market share because of the significant service improvements we're making in the network. And second, when yellow exited the LTL market, we were well positioned to onboard incremental freight, given that we've been investing and expanding our network since 2021.

Success that these contract renewals are coming in and customers understand that we are investing in the network, but on the investing in people and to be able to support that service them, the right way and that's leading to higher a higher yield and price gains on the <unk> side, we're still early innings and we believe these over the quarters to come as we launched the premium service.

As we mentioned and as we sell them to existing customers and new customers. We see that's going to happen I get over the quarters and years to come the bridges accessorial gap on the local side, we're making a lot of progress I mean, he didn't do in the third quarter, we increase our shipment counts and the local channel by 13% on a year on year basis. However, this channel is more.

Ali Fagri: We also demonstrated that we have the operational discipline to take on more volume while at the same time continuing to improve our service levels. On a monthly basis, our July tonnage per day was up 4.2% year-over-year, August was up 3.3%, and September was up 2.2%. Looking just at shipments per day, July was up 8.8% year-over-year, August was up 8.3%, and September was up 6.6%. Our shipment count increased sequentially by more than 1,000 shipments per day every month of the quarter from July to September.

Impacted by the softer macro so the weight per shipment is so significantly down to the local channels. So although we're making progress we're still not seeing the impact on yield, but as we saw seeing tonnage in that channel to improve because we're gaining market share you would see that becoming a tailwind for the yield over the quarters and years to come as well.

Okay. Thank you.

The next question is from the line of Tom <unk> with UBS. Please proceed with your questions.

Ali Fagri: On a two-year stack basis, monthly tonnage and shipment count also improved each month throughout the third quarter. With October almost complete, our preliminary tonnage per day is up approximately two and a half months. On a sequential basis from September, October tonnage and shipment counts are down two and a half percent with both outperforming seasonality. Looking at yield in the third quarter, we grew yield excluding fuel by 6.4% year over year, which is an acceleration from the second quarter.

Hi, Yeah, good morning, and congratulations on the strong progress on the or and in service and pricing all of those are all the things that are I think a really positive.

I wanted to see Marty if you could comment a little bit on that.

The kind of underlying trend in freight and how you kind of weave that in it seems like the I guess the monthly tonnage numbers are I don't know if it's a you know kind of stabilizing or how you want to view it but but you know there are a little bit lighter maybe at the end of the quarter. So I don't know if you think the underlying freight market is stable or if you could offer.

<unk> trends some thoughts on that and also how you think about that change in in weight per shipment looking forward does that become more neutral or should we think about that even into 'twenty for that that's maybe a bit of a continuing reduction in weight per shipment.

Ali Fagri: On a sequential basis, we were able to see how much we were able to do. We increased yield X fuel quarter over a quarter outperforming typical seasonality by 290 basis points. And importantly, we accelerated yield growth as the quarter progressed, supported by our strong customer relationships and pricing initiatives. Our underlying pricing trends also strengthened with contract renewal pricing up 9% in the quarter compared with a year ago. We expect year over year yield growth X fuel to further accelerate in the fourth quarter.

Okay. Thanks, Thanks, Tom I'll start by first covering the demand side than the all you can walk through the cadence in the quarter as well because our comps are not similar to the other carriers in the back half of this year compared to last year. So there. There are a few things we can begin to build into it with more details, but if you take a step back on the customer demand side. If this is a fluid environment.

It's hard to call it but the macro will do when we look at the demand environment more recently the underlying environment has been bouncing along the bottom since the month of April of this year. So it's been softer demand overall for LTE else now in terms of outlook. We do survey our customers on a quarterly basis, our top customers and give them the last.

Ali Fagri: And we're excited about the long-term impact that our yield initiatives will have on profitability. Turning to margin performance, our third quarter adjusted operating ratio was 86.2%, which was 60 basis points higher than a year ago. On a sequential basis, we improved adjusted OR by 140 basis points compared with the second quarter. This outperformed seasonality by 370 basis points. Moving to our European business, we delivered another solid financial quarter with adjusted EBITDA growth of 2% compared with a year ago.

Survey last week for the fourth quarter, our customers with a more balanced so some customers were seeing some strength in demand, while others were seeing softer demand, but generally it was balanced in terms of where we were earlier in the year heading into 2024, we are hearing more optimism from customers about demand picking up.

There's such a big number but its still that is more customer with expected demand pickup versus customers that expect more softness or flat now when you look at some of the indices, we look at well.

Ali Fagri: This was supported by strong pricing, which outpaced inflation, as well as cost discipline. While macro conditions in Europe remain soft overall, our sales pipeline is robust and the team continues to execute well, especially in the UK, where we drove positive organic growth in the quarter. I'll close with the drivers behind our momentum, including the strong outperformance of our third quarter operating ratio. First, we continue to make significant improvements in service across the board and delivered record results.

About two thirds of our customers are industrial companies and I S. N manufacturing index is a good proxy it did pick up a bit to 49 last month, some under 50, but it did pick up a bit and same thing on the retail side, we saw retail sales accelerate.

Seven 7% bump over the month of September and this was also slightly better than expected. So we're seeing things remain soft slightly improve inc. With a bit more optimism going into the first half of next year, but it's still very tough to call. The macro at this point, there's a lot of cross signals here.

Tom This is all the in terms of the cadence through the quarter as Mario mentioned, we did have tougher compares in the second half of the year last year as our market share gains were accelerating so if you look at it on a two year stacked basis, our shipment counts and tonnage both accelerated throughout the third quarter and that two year acceleration continued into.

Ali Fagri: We also accelerated yield growth in the quarter and we'll accelerate it again in the current quarter. We expect our robust yield performance to continue into 2024, and we operated far more productively by leveraging our technology and effectively managing our labor costs. In summary, our strategy is working. XBO in North America is stronger as a standalone LPL. Company with Focus Execution and our results will continue to reflect that.

The month of October also if you look at it just on a shipment count basis, we saw our shipment counts improve by more than a thousand shipments each month of the third quarter from July to September and then as we moved into October as we noted at the October outperformed seasonality relative to the month of September.

Just one quick follow up do you have any thoughts you can offer on our line haul miles and kind of where you're going in terms of making further gains to improve that quite a bit with the insourcing. Just wondering how you think about the opportunity is going forward do you improve a lot from that I think you said like 'twenty, 1.5% are outsourced.

Speaker: Now, we'll take your questions.

Speaker: Operator, please open the line for Q&A. Thank you. At this time we'll be conducting a question and answer session. If you'd like to ask a question today please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. 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.

Speaker: So that we may address questions as many participants as possible. We answer you please ask only one question and one follow-up. If you have additional questions you may recue in time permitting those questions will be addressed. Thank you.

Yeah. So on <unk> for the third quarter, we've got outsourced when you want it in a half percent where are we in source that roughly 200 basis points on a year on year basis now keep in mind. The problem. It's something that we we did invest in on a sequential basis Q2 to Q3, we did get a bit more third party line haul miles given the infection in volume.

Moving forward, we expect to move quickly on in sourcing as I mentioned earlier, we are excited about the program. We're launching called the roads Flex operation. It's a program, where we have teams of drivers and sleeper cab trucks that move freight across longer hauls and this will enable us to move faster on the in sourcing process.

Christian Wetherbee: And our first question today is from the line of Chris Wetherbee with City Group. Please just see with your questions. Yeah, thanks.

Mario Harik: Good morning guys. You may be first of the day. Let's start on operating ratio and how you might think about the opportunity as you move through the fourth quarter and then maybe bigger picture for next year. So I guess you help us a little bit with what you view as normal seasonality and to what you think maybe you could do relative to normal seasonality and for Q.

We do expect to be in source at least 50% of the miles by 2027, but given this new program. We're launching we expect to accelerate that over the quarters and years to come here.

Mario Harik: Hey Chris, this is Mario. Sure things starting with first with the fourth quarter. We can give you some colors that we like we usually do on punish yield and ultimately what we'll do and then given out for 2024 on the tonnage size following our market share gains in the third quarter. We expect to be in line with seasonality in the fourth quarter, which implies Q. 4 tonnage being up close single digit on a year on year basis.

Thank you the.

Our next question comes from the line of Ravi Shankar with Morgan Stanley. Please proceed with your question.

Thanks, everyone. So good traction would be with a service improvement. So I'm just trying to get an understanding of what.

What percentage of the fruit on this tree are low hanging versus higher up I'm, just trying to get a sense of whether we can expect this traction of improvement to continue in the coming quarters or does it get incrementally a little bit harder from here.

Mario Harik: Now for us on the tonnage side normal seasonality Q. 3 to Q. 4 is a 4% sequential decline. October was better than seasonality, but this was also driven by small increase in volume earlier in the month given its five and a tag at another LPL carrier and will give another update on November and early December on the year from as we gain traction in our initiatives yield growth improved through the third quarter and we do expect you for yield to accelerate versus Q.

Yeah, so yeah, so ravi but from our perspective.

Our top players like yourself one of the top priorities is to improve service and continue to improve service for our customers and I would go to is to be best in class and get to a 0.1% claims ratio over time now we've made tremendous progress you look from end of 2021 through Q3 of this year, we went from 112% damage claims ratio down to zero.

4%, however, the improvement from here won't be linear and it will take time, it's not something but every quarter. We're gonna posted a 3% improvement from points from 47 to a point for now we have rolled out multiple new initiatives heading into 2024 with Dave coming onboard and the operating team are implementing.

Mario Harik: 3 and on a year on year basis to be in the high single digit range improvement and ultimately for all in the fourth quarter. We typically see seasonally we see a deterioration of OR of 310 basis points from Q. 3 to Q. 4 and we expect to alcohol form that seasonality by somewhere in the hundred basis point range. So on a year on year basis, this implies an improvement of roughly an out 200 basis points in OR and the magnitude of the outcome for this will depend on what the tonnage environment does in the back half of the quarter as you know Q.

Number of initiatives, including higher quality straps, you airbag systems that we are launching across all of our service centers and Ravi I'll tell you here from the first couple of service centers. We've launched we've seen an incremental reduction of more than 20% of damages just with these new tools and programs that we launch it but we're very excited about and we're also enhancing our training program.

Mario Harik: 4 is usually a tough quarter to predict with the holidays. Now for 2024, we do expect a strong year. The biggest swing factor will be the macro and what the macro does through the course of 2024. But as said, we have a lot of company specific initiatives as we have mentioned in our opening remarks, our service product continues to improve heading company records. Our yield is accelerating here in the fourth quarter and we expect a strong year for yield in 2024.

Mario Harik: And we expect to continue to make great progress driving past efficiencies, including line haul in sourcing and accelerating that and productivity improvements in labor as well. So from an OR perspective for 2024, we do expect a strong year, but we'll see where the macro take us here over the quarter.

And how we load trailers, they can get to the next level as well and I mentioned earlier line hauled in sourcing that's another measure of service improvement because today when we use a third party carrier. They typically have 53 feet trailers that don't have the borrowers and then we call. It the <unk> system to separate freight from them from effectively having two decks afraid.

Well, we have that then I would equipment. So as we make progress on in sourcing third party line haul who will continue to see these improvements in service as well as we had all these things out but again the progress is fantastic September was a company record and damage frequency. So how the how many damage to be calls versus the shipments that we move in October it was even better than the month of <unk>.

Mario Harik: That's very helpful. I appreciate all that color and just one follow-up on 2024s. You think about sort of a longer term operating ratio target that you guys laid out through 2027, given what you've seen with the Post-Yellow World, the pricing opportunity and some of the significant improvements you're making around the service side. Is it reasonable to assume or can you give us a sense of what the cadence of that overall OR improvement might look like?

September so great trajectory ahead, but again it won't be linear over the quarters and years to come.

Got it very helpful. Mario maybe as a follow up on the same topic and if you had said earlier that you know better service begets, a better pricing and better share.

Mario Harik: Is it front-end loaded? Is it back-end loaded? And you kind of thought about how that cadence should present itself, particularly given what we're seeing in the market currently. Yes, so first on the number itself, we've always said at least 600 basis points by 2027, but we're not stopping at 600 and we're not stopping at 2027. And I think there's the cadence of improvement based on what we're seeing, short term. It's fair to assume we can get there faster, but obviously as we execute, we're going to keep on posting these numbers and going from there. And it will defend it at obviously short term on the macro thus in 2024, but we expect obviously a strong outlook going from here.

What does that conversion process looked like how does that cause that kind of immediate does that won a contract cycle does that take a couple of years again, just trying to figure out kind of what the longer term trajectory of that improvement looks like.

Hey, Ravi it's Kyle so when you think about it we're going to go through all of our again about 20% of our customers are using a standard tariff are really that'll get impacted by the G. R. O. The other 80% will go through contract renegotiations that cycle is fairly consistent meaning we can cover the same number of contracts almost every quarter the fourth quarter is slightly higher.

Sure.

But we'll see that improvement basically progressed through the next several quarters to capture a lot of the service improvements that we're seeing right now in the network.

Scott Group: Next question comes from the line of Scott Group with more research. Please excuse your questions. Hey, thanks.

Our next question is from the line of Jason Seidl with T. D. Cowen. Please proceed with your question.

Thank you operator, Mario and team good morning, guys.

Kyle Wismans: Good morning, guys. I want to dig into the pricing opportunity a little bit. So I think you said contract renewals up 9%. Is that a number that you view as sustainable over the next few quarters? Help us think about, I don't know if you guys announced a GRI or what you're planning on the GRI and then maybe touch on the asusorial value added opportunity. Are we seeing any of that benefit yet?

Congrats on the progress in the <unk> 2.00, well wanted to focus a little bit on your cost per shipment how should we think about the increases in the cost per shipment or the decreases.

As we roll into 2024, especially around you are rolling out that airbag system throughout the rest of the network.

Yeah. This is Kyle so when you think about cost per shipment, let me start a little bit with Q3 and in some of the cost we saw slightly higher in the quarter. So from a cost per shipment standpoint overall, we're down about 2% Theres a theres progress made in a lot of areas. Mario has talked about the insurance and claims that was down almost 35% in the quarter. We also.

Kyle Wismans: Or is that still all incremental? Hey, Scott is Kyle. So if you think about the contract renewal rates, you said 9% were seeing in Q3 and relative to the GRI, just one clarification too is that the contract renewal will impact most of the business. So we'll go through annual cycle increase. So we expect those to be in the high single digit range. And then when you think about the GRI for us, you know, we're going to go through annual process and we'll follow our normal timeline.

Sorry drop in fuel, there's a couple of areas, where we saw kind of higher transitory costs in the third quarter. That's going to include some of the purchased transportation expense. So we were about $10 million sequentially and that's reflecting.

Kyle Wismans: So we communicate to customers here in the fourth quarter and then go live with increases in Q1. And then I think your second question was on asusorial, Scott, you know, asusorials are one of many yielding issues we're excited about currently that asus was about 10% of our revenue worked hard and get close to 15%. That's the combination of offerings we have today as well as some new service offerings. And then in Q2 we did begin rolling out new tools.

The upper needed really to make sure we can service the additional shipments in the network. We would expect as we continue to ramp up the line haul and sourcing for that to come down both in Q4 and into 'twenty four.

So overall, you would expect cost per shipment to trend down into 24, just wanted to clarify that.

No I think we're expecting more cost productivity into into Q4 and into 'twenty four.

Kyle Wismans: That helped us really capture more location based and time based asusorials. We started seeing the impact from that in Q3. We also have a team that's working on growing our premium service offerings. So those should help us really drive that high single digit impacting Q4 as well as positive yield in 2024.

Okay Fair enough and then as a follow up I know, we haven't really brought it up because it hasn't been a focus but you know maybe a little bit of an update on Europe and then you know as we roll into the new year or do you think.

M&A market might be favorable enough to bring that back up again.

Yeah.

Mario Harik: Okay, thanks. And then you guys are talking a lot about the claims, seeing some nice improvement. Is there any way to help us think about what does lower claims actually mean for the model? Does it mean lower costs? Is it mean better price? And how quickly do we see any sort of benefit of a lower claim showing up in the model? Thanks, Scott.

Well just I would also note that remains to be a pure play in North American LPL carrier, but in the meantime, I would've European business continues to perform really well when you look at the European economy has been softer he had over the last couple of quarters, but the team that was able to deliver great results growing EBITDA on a year on year basis, I'm just firing on all cylinders.

Onboarding more customers, we are getting more cost efficient than our European business and the team is performing well, but long term I would call continues to be a if you play North American Mcl company.

Mario Harik: This is Mario. When you look at claims, it's one of our core areas of focus as a company is improving service for the customers. And in our industry, whenever we provide better service and we keep on that trajectory, and eventually our goal is to be the best in class and to get to get to a 0.1% claims ratio, customers are willing to pay a higher premium for the value that we would offer there.

Thank you. The next question is from the line of Brian <unk> with J P. Morgan. Please proceed with your questions.

Hey, good morning, Thanks for taking the question just wanted to see if you could comment Mario on capacity available in the network you know, what's what's actually the limitation of the bottleneck now I know last quarter, you talked about needing to add some more talks about the doors, you're adding the new service Center you broke ground on where does that stand and how do you see you know the limitations.

Mario Harik: So what you would see is an impact on pricing. And we already are seeing that here in the third quarter, as Kyle just mentioned, our contract renewals are up to 9%. And most of that was driven by these improvements in service. And to keep in mind, Scott, also when we started LCL 2.0, our damage claims were at 1.2%. And we've been able to take this here in the third quarter to accompany this to a multitude of initiatives all the way from incentive comp to the local incentive comp programs for we call the gladiator to incentivize our supervisors to load with quality to rolling out new technology and how we rate our traders.

At this point, you're running up into any conditions that need a little bit more capital expenditure, especially when you are.

Boosting that up here in the fourth quarter looks like a pretty big increase to get to that mid year target midpoint of that target rather you just raised.

In the third quarter, we had high teens excess capacity in our network from me from a physical perspective. So in terms of how many doors, we have but as you know this is not evenly distributed across our network in some markets. We are bumping against capacity limits, but in many many markets. We have a we have available capacity from the west.

Mario Harik: And moving forward, the combination of airbags, if you're launching in all service centers, higher quality straps and improvements across the board, all of these would lead to even higher premium on price over time. So that's how what we see the impact on the medium to long term of that continued improvement and service. There is a benefit on the PNL, obviously, I would claim scholars amount would go down, but that's small in comparison when you look at it versus the improvements in pricing, we can pick up over the quarters and years to come.

Perspective, and our service center expansion plan, thus contemplate those markets, where we see that higher demand from customers. What do we got to extent physical capacity, but we were run rating in the high teens I would go to to be into 2025% range is where we would like to be on a on a longer term basis now in terms of rolling stock capacity.

Kenneth Hoexter: Our next question is from the line of Ken Hexter with Bank of America. Please just hear with your question. Great.

We have had tremendous progress since the beginning of LTE. A 2.0, we've added more than 10000, new theaters over the last year and a half two years. We've added 2000 tractors saw with fleet and this is enabling us to be able to take on more customers, but also on board efficiently you'll see us here in the third quarter, we were able to handle 8% more shipments why.

Ali Fagri: Good morning, Mario and team. Just talk about the accelerating yields yet you only target about 100 basis points to outperform seasonality when you just did 370 basis points. Maybe you can kind of delve into the why we should not or what the opportunity is to see better versus why you think it maybe takes a step back from outperforming seasonality versus what you just posted. Sure.

Gaining productivity I mean, I would head count was down on a year on year basis, and I would leave it hours were up slightly versus an 8% increase in shipments and equipment to help us manage that and all the people side. We're staffed for current volumes, but we do have headroom as well and if the demand continues to increase we can we can staff up toward that that's quite a stable market.

Ali Fagri: Ken, this is Ali. So we do expect to outperform seasonality by 100 basis points. That's going to be primarily driven by our stronger yield growth. Just keep in mind we are coming off nearly 400 basis points of outperformance versus seasonality in the third quarter. So we're delivering 100 basis points on top of that 400 that we delivered in the third quarter. I'd also point out that on a year-over-year basis, that 100 basis points about performance versus seasonality would imply 200 basis points of year-over-year OR improvement and about 20 percent EBITDA growth in our LTL segment X real estate.

So much easier to hire into we have our driver's schools as well. So we feel good from the people perspective, but generally if you take a step back we feel great from a capacity perspective, and we continue to invest in the network and we're well positioned to capitalize on any upswings in freight.

Okay, great. So as a quick follow up maybe you can looking longer term are you been able to sort of bridge the two.

Buckets.

Ali Fagri: There are also a few short-term impacts to consider from the investments we're making as we continue to invest in incremental capacity that comes with higher depreciation. That was about 120 basis points year-over-year headwind to OR in the third quarter. We would expect a similar impact in Q4. We're also investing in growing our local sales force and overall we do expect these investments to generate strong returns for us over the medium to long-term, but they will have a modest cost impact over the next few quarters.

You know performance of productivity of pricing yield versus where it was all of the things we're talking about here in terms of starting to narrow the gap with some of your peers. Just wanted to see you can lay out some of the thoughts are in terms of where those where those pieces are going to come from and if you're able to quantify them and some of those buckets like accessorial shields productivity.

Et cetera. Thanks.

Thank you.

The biggest component is going to come from yield as I mentioned in my prepared remarks, we see a double digit incremental opportunity over the coming years through the three main levers I mentioned, which is one is that our service and continue to make to get this higher price from customers, who understands but investing in the network and investing in the business that is roughly half the yoga pushing it Richard.

Ali Fagri: So we feel comfortable with the roughly 100 basis points about performance versus seasonality for OR. It is still very early in a dynamic environment and ultimately that magnitude about performance is going to depend on how tonnage progresses through the rest of this quarter.

And the other half is we we we expect foot accessorial should go from roughly 10% of revenues of 15 plus percent of revenue range.

Speaker: Great. Thanks for the clarification there, Lee.

Speaker: That's great stuff and great detail on the progress so far.

Mario Harik: So congratulations on a great quarter. Can you talk a bit about your thoughts on, I guess, two things, one on the yellow. I guess you have 294 service centers. See, how are you thinking about positioning into this? Are there different locations you may want to expand on? How do you think that process goes? Do you think it brings more than needed capacity into the sector? Does that impact the ability to get pricing and then on that pricing? Can you talk about how much of have you already renewed versus what is still to come?

On the premium services, we are implementing what I like about this program. These are services that our customers are asking for so we're taking care of the customer and we're making a higher a high yield to yield any higher and higher margin and then finally on the local channel side by growing our local sales force and here. So far this year, we've increased our sales team the count.

10% to 15%, so far and I would go to to get to more than 30% increase in overall sales head count by end of next year, and that's enabling us to gain market share in that local channels that would also help bridge the gap, but but the lion share of the opportunity that's come from price. The second category is that all in sourcing third party line haul and we are accelerating death without.

Speaker: Sure. This is Mario. On the yellow service centers, it is an opportunity for us to potentially accelerate our capacity growth. We are all participating in the process and we'll see how things play out over the next few months. Our focus from a physical network capacity perspective has been to grow the network and markets where we see higher demand from our customers over time. We don't look at these things for the next couple of years but we look at it over the next 10 plus years in terms of where the freight markets will have more demand in them over time as well.

Flex team out and I would eat program, 14th drivers and we would get higher service and lower costs, which is also to you to go then we're going to continue to improve efficiency as well. So when you combine all of these things that going in yield is number one by a long shot but then all the other areas would help making sure that you've got running more efficiently as well.

Our next question is from the line of Stephanie Moore with Jefferies. Please proceed with your question.

Speaker: As I mentioned earlier, we've opened up so far more than 500 net new doors. Here in the quarter, we extended two service centers in the Atlanta and Dallas metro areas and we just broke down in a service center and central floor. We're going to continue executing on that plan. I guess these yellow service centers will see where the process rolls out and it will help us accelerate that plan over the years to come.

Hi, good morning, Thank you.

Thank you I guess, you touched you touched on a little bit of that and just in the previous question, but maybe test a double click on it a little bit more could you talk a little bit about kind of the labor additions that you've had to me just given the disruption from the you know close yellow bankruptcy now where you think you kind of our position today.

Speaker: Now in terms of capacity coming back into the network, it's tough to estimate what percent of these service centers will be back in the hands of LTL carriers. We estimate it to be roughly 50%. But it will depend on other uses for the land or these locations for other industrial type applications. Now for the service centers that will come back into LTL, it will take time, keep in mind that a lot of these service centers to go back first, the process has to play out and then a lot of these service centers to get back into operations, they take time to get up to the different standards of the different carriers.

No adequately staffed.

And what areas, where you have added maybe it you know there's a lot of time at Salesforce and then kind of your view as we go through 2020 for kind of incremental hiring team. Thanks.

Sure. Stephanie this is all the so if you look at the third quarter, our head count was down slightly on a year over year basis, and that's relative to shipment counts up high single digits. So we did a great job managing head count relative to the volumes in the network also if you look at it at a labor hours perspective labor hours were up less than one.

Speaker: That could be, we estimated to be in the year plus strange for them to get back into the industry and they will get back into the hands of more premium priced operators so you would have rising tide for pricing across the entire industry. And the last thing I'll say also again, that capacity went out at a time where ship and count in our industry, it's down the line demand is down 10% across all the different carriers.

1% year over year again versus shipment counts up 8% year over year, and more importantly that spread between labor hours and shipment count accelerated through the year from low single digits in the first quarter to high single digits in the third quarter now as we think about the fourth quarter, we would expect total head count and labor hours for <unk>.

Speaker: So whenever the macrotitons again, you won't have enough capacity in that LTL to handle all of that freight. So over the time to discuss that yield. Yeah, from the renewals standpoint, the cadence for contract renewals is pretty level across the year. We have a disproportionately slightly higher amount in Q4 that we'll cycle through here in the quarter. But it's fairly even across the year.

To be roughly the same as the third quarter on both a quarter over quarter and year over year basis, we've done a really good job again of managing productivity in the third quarter, we expect that to continue into <unk> and then into 2024 as well. So we are staffed for our current volumes and we have some headroom if demand does increase we wanted to make sure were staff for that.

Fadi Chamoun: Thank you.

That is well I think the positive side as the labor market is looser than it has been in recent years. So we're confident in our ability to flex up labor as needed and we're going to continue to manage head count effectively relative to the volumes, we're moving through the network.

Fadi Chamoun: Our next questions are in the line of Fadi Chamoun with PMO Capital Markets. Please excuse your third question.

Mario Harik: Okay, thank you. Good morning, Mario and team. Just question on yield. You mentioned double digit pricing opportunity incoming years from service, assessorial and local customer base, but when you look at this kind of pass quarter, third quarter, where are you having more success? It sounds like you're getting some penetration in local customer base. What's the kind of areas where you're seeing a greater contribution to the yield assessorial local customer base or is fairly spread across the three kind of levers of pricing?

Got it. Thank you and then just a follow up can you talk a little bit about you know as you think about that going into 2020 for your thoughts in terms of incentive compensation, if maybe you're looking to align metrics. Both at the top and then I'll lay down to the terminal level with kind of new targets.

Any change in philosophy, there as you kind of prepare for my time before.

It takes I think Stephanie this is Mario so.

This last year and the one prior in 2022 as well we did change our incentive comp structure that it used to be only based on EBITDA growth on a year on year basis, but we had a good portion of the incentive comp plan is switched to also focus on quality and on time service and that was part of the reason why we were able to drive meaningful <unk>.

Mario Harik: So Fadi, when you look at the three of them, the biggest impact in the third quarter, what's the improvement of service? Because when you look at our claims ratio, hitting a point 4%, customers seeing the trends of improvement and those relationships with our customers are keep on improving over time as well. This is where we're seeing the most amount of success that these contract renewals are coming in and customers understand that we are investing in the network, we're investing in people and to be able to support and service them the right way, and that's leading to higher yield and price gains.

<unk> and both of these categories are here through the course of the year. Since we started MTL to photo now if you look moving forward, we are contemplating a change to switch from having <unk> as being the compensation driver and this is for field operations at the service center level and at the regional level to using or expansion.

As it being as being the key metric foot profits improvement for our for the compensation program. We're still early in exactly that there's still a few months before we start that we saw 2024, but that's one change would be I'll call. It the planning for it for next year.

Mario Harik: On the assessorial side, we're still early innings and we believe these over the quarters to come as we launch the premium services we mentioned and as we tell them to existing customers and new customers, we see that's going to happen over the quarters and years to come, the bridge at assessorial gas. On the local side, we're making a lot of progress. I mean here in the in the third quarter, we increase our shipment count on the local channel by 13% on a year on a year basis.

Thank you.

Mario Harik: However, this channel is more impacted by this faster macro, so the weight per shipment is still significantly down in the local channel. So although we're making progress on it, we're still not seeing the impact on yield, but as we start seeing tonnage in that channel improve because we're gaining market share, you would see that becoming a tailwind 40 years over the quarters and years to come as well.

The next question is from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.

Mario Harik: Okay, thank you.

Thanks, Good morning, I'm, Mike I was hoping you could touch on on on Capex. You mentioned, it's gonna be above your long term guidance range here into the end of the year for this year and it sounds I I heard that it was going to be elevated again next year and the way you position. It just kind of curious if that's.

Your anticipation and is it predominantly tractors towers, new doors, just if you could kind of kind of hone in a little bit on where the excess spending will be and I'm curious if you're spending anything in Europe, because that is picking up I know that that's and I said that that may not be with you forever, but it's a.

Tom Wartovitz: The next questions are in the line of Tom Wartovitz with UBS. This is you with your questions. Yeah, good morning and congratulations on the strong progress on the OR and service and pricing, all those all those things that I think are really positive. I wanted to see Mari, if you could comment a little bit on the underlying trend in freight and how you kind of weave that in. It seems like the monthly tonnage numbers are, I don't know if it's kind of stabilizing or how you want to view it, but they're a little bit lighter maybe at the end of the quarter.

Just curious if that's an area, where you're having to increase capex as well. Thanks.

He's got his Kyle so as we mentioned earlier you know this year, where things were going to be in that 12% to 13% range.

And if you think about the investments we made in the last 18 months that includes over 2000 tractors and 10000 trailers. That's really helped enable the share gains and reason disruption. So everything got more specifically, what's what we're investing in right now to put us above that 12% range really two things I can point to one we're going to produce more trailers at our sushi facility initially in the year were.

Tom Wartovitz: So I don't know if you think underlying freight market is stable or if you could offer some trends, some thoughts on that. And also how do you think about that change in weight per shipment looking forward? Does that become more neutral or should we think about that even into 24 that that's maybe a bit of a continuing reduction in weight per shipment? Thanks, thanks Tom.

<unk> 6000, we're not going to produce more about 7000 trailers and the second thing is something we mentioned earlier on the call are sleeper cab initiative. So we're going to bring about 100 tractors in the network to do that.

For us it's going to do a couple of things it'll help us accelerate line-haul insourcing Theres, obviously, a service benefit and a cost benefit there, but both of these efforts are really pull forwards.

Mario Harik: I'll start by first covering the demand side and Ali can walk through the cadence in the quarter as well because I would comp are not similar to the other carriers in the lack half of this year compared to last year. So there are a few things we can drill into it with more details. But if you take a step back on the customer demand side, it is a fluid environment and it's hard to call what the macro will do when we look at the demand environment.

Our capacity investments for us and if you think about the investments we make in total in general we expect very high returns from our <unk> investments you know where to 30%. So we think this is the right place for us to be to be investing in the company.

Great. Thanks, I appreciate that.

Oh go ahead.

Yeah, I was going to say that the only thing to touch on from your question was Europe. So Europe about 10% of our gross Capex in general that's been about pretty consistent for the business and will remain there.

Mario Harik: More recently, the underlying environment has been bouncing along the bottom since the month of April of this year, so it's been softer demand overall for LPLs. Now in terms of outlook, we do survey our customers on a quarterly basis, our thought customers. And given the last survey last week, for the fourth quarter, our customers were more balanced. So some customers were seeing some strength in demand, while others were seeing softer in demand.

Alright, Thanks, Scott I appreciate that yeah for my follow up real quick just you mentioned at the top of the call. The eight percentage points of our on time improvement year over year that sounds impressive I'm sure that goes into a helping you interact and for your for your sales folks on a on a new business.

Mario Harik: But generally it was balanced in terms of where we were earlier in the year. Having into 2024, we are hearing more optimism from customers about demand picking up. But again, it's not a big number, but it's still that it's more customers that expect a demand pick up versus customers that expect more softness or flat. Now, when you look at some of the indices we look at, well, two-thirds of our customers are industrial companies and the ISM manufacturing index is a good proxy.

Just curious if you could put that a little bit more into perspective. How is that is that trending is that something that you know now that you've seen I'm. The first month of the fourth quarter is that something that youre going to continue to see trending very well here through the end of the year.

Yeah, absolutely yeah. When you look at all of our service metrics here in the month of October we've seen a step up from where we were in in the third quarter as well I mentioned earlier for example, I mean, all types continues to do well and I would echo what fluidity. The best it's been in a long long, while which is which is great to see and our customers appreciate that and similarly.

Mario Harik: It did pick up a bit to 49 last month. It's still under 50, but it did pick up a bit. And same thing on the retail side, we saw the retail sales accelerate to 0.7 percent month over month and September. And that was also slightly better than expected. So we're seeing things remain soft, slightly improving, with a bit more optimism going to the first half of next year. But it's still very tough to call the macro at this point. There's a lot across signals here.

The damages side in terms of damage frequency and we've seen a further improvement from September was a company record leasing back to 1996 and October was even better than September.

Ali Fagri: Good morning, Tom. This is Ollie. In terms of the cadence through the quarter, as Mario mentioned, we did have tougher compares in the second half of the year last year as our market share gains were accelerating. So if you look at it on a two-year stack basis, our shipment counts and tonnage both accelerated throughout the third quarter. And that two-year acceleration continued into the month of October. Also, if you look at it just on a shipment count basis, we saw our shipment counts improved by more than 1,000 shipments each month of the third quarter from July to September. And then as we moved into October, as we noted, October outperformed seasonality relative to the month of September.

Thank you.

We've reached the end of the question and answer session I'll now turn the call over to Mary Harris for closing remarks.

Thank you operator, and thank you all for joining US today as you saw from what we what we reported this morning, but in a strong position as we begin our second year as a stand alone <unk> business in North America. Our solid momentum is driven by continued execution of our <unk> 2.0 plan at <unk>, our entire business from revenue earned.

<unk> and yield growth the significant service improvements also do you think efficiencies and market share gains.

We're still in the early innings here and there's a lot more of it achieve look forward to speaking with you all at our next call. Thank you.

Mario Harik: One quick follow-up, do you have any thoughts you can offer on line haul miles and kind of where you're going in terms of making further gains? You improve that quite a bit with the insourcing, just wondering how you think about the opportunity is going forward. Do you improve a lot from that? I think you said like 21.5% outsourced, thanks. So for the third quarter, we were outsourced 21.5% where we ensourced roughly 200 basis points on a year-on-year basis.

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

Okay.

Mario Harik: Now, keep in mind, Thomas, we did invest in honest sequential basis, Q2 to Q3. We did get a bit more a third-party line haul miles given the infection and volume. But moving forward, we expect to move quickly on insourcing. As I mentioned earlier, we are excited about a program we're launching called The Road to Flex, it's a program where we have teams of drivers in sleeper cab trucks that move freight across longer hulls, and this will enable us to move faster on the insourcing process. We do expect to be to insource at least 50% of the miles by 2027, but given this new program, we're launching, we expect to accelerate that over the quarters and years to come here.

Speaker: Thank you.

Ravi Shanker: The next question comes from the line of Ravi Shankar. It was Morgan Stanley.

Ravi Shanker: Please excuse your question. Thanks, everyone. So good traction with the service improvements. I'm just starting to get our standing off. What percentage of the fruit on this tree are low-hanging versus higher up? I'm just starting to get a sense of whether we can expect this traction of improvement to continue in the coming quarters, or does it get incrementally a little bit higher from here? So Ravi, from our top priority, one of the top priorities is to improve service and continue to improve service for customers.

Ravi Shanker: And our goal is to be less than class and get to 0.1% claims ratio over time. Now, we've made tremendous progress. You look from end of 2021 through Q3 of this year. We went from 1.2% damage claims ratio down to 0.4%. However, the improvement from here won't be linear and it will take time. It's not something where every quarter we're going to post 0.3% improvement from 0.7 to 0.4. Now, we have rolled out multiple new initiatives heading into 2024 with Dave coming on board and the operating team are implementing a number of initiatives including higher quality straps, new airbags systems that we are launching across all of our service centers.

Ravi Shanker: And Ravi, I'll tell you here from the first couple of service centers we've launched, we've seen an incremental reduction of more than 20% of damages just with these new tools and programs that we launched that we were very excited about. And we're also enhancing our training programs and how we load trailers taking it to the next level as well. And I mentioned earlier, line haul in sourcing. That's another measure of service and improvement because today when we use a third party carrier, they typically have 53 feet trailers that don't have the bars in them.

Ravi Shanker: And we call it the safe tax system to separate freight from effectively having two decks of freight, but we have that in our equipment. So as we make progress on in sourcing third party line haul, we will continue to see these improvements in service as well as we roll these things out. But again, the progress is fantastic. September was a company record in damage frequency. So how many damage do we cause versus the shipments that we moved? And October got even better than the month of September. So great trajectory ahead. But again, it won't be linear over the course and years.

Ravi Shanker: Go on, it's very helpful, Mario May is a follow-up on the same topic and if you're a sit earlier that better service gets better pricing and better share, what does that conversion process look like? How does that take? Is that kind of immediate? Is that one contract cycle? Is that take a couple of years? Again, just trying to figure out what the longer term trajectory of this improvement looks like.

Kyle Wismans: Hey, Robbie, Kyle. So, when you think about it, we're going to go through all of our, again, about 20 percent of our customers are using a standard tariff, really, that'll get them back up by the GRI. The other 80 percent will go through contract renegotiations.

Kyle Wismans: That cycle is fairly consistent, meaning we cover the same number of contracts almost every quarter. The fourth quarter is slightly higher, but we'll see that improvement basically progressed to the next several quarters that capture a lot of the service improvements that we're seeing right now in the network.

Jason Sidal: Our next question is from the line of Jason Sidal with TD County. Please excuse your questions.

Kyle Wismans: Thank you, operator Mario and team. Good morning, guys. Congrats on the progress in the LTL 2.0. I wanted to focus a little bit on your cost per shipment. How should we think about the increases in the cost per shipment or the decreases as we roll into 2024, especially around you rolling out that airbag system throughout the rest of the network?

Kyle Wismans: Hey, guys, it's Kyle. So, when you think about cost per shipment, let me start a little bit with you. The Q3 and in some of the costs we saw are slightly higher in the quarter. So, from a cost per shipment standpoint, overall, we're down about 2 percent. There's progress made in a lot of areas. Mario's talked about the insurance in claims. That was down almost 35 percent in the quarter. We also saw a draft in fuel.

Kyle Wismans: There's a couple areas where we saw kind of higher transitory costs in the third quarter. That's going to include some of the purchase transportation expense. So, we're about 10 million sequentially, and that's reflecting the effort needed really to make sure we can service the additional shipments in the network. We'd expect as we continue to ramp up the line haul insourcing for that to come down both in Q4 and into 24. So, overall, you expect cost per shipment to trend down into 24? Just wanted to clarify that. No, I think we're expecting more cost productivity into Q4 and into 24.

Kyle Wismans: Okay, fair enough.

Mario Harik: And then, as a follow-up, I know we haven't really brought it up because it hasn't been a focus, but maybe a little bit of an update on Europe, and then, as we roll into the new year, do you think the M&A market might be favorable enough to bring that back up again? Just, our long-term plan remains to be, if you're playing an American LTL carrier, but in the meantime, our European business continues to perform really well.

Mario Harik: When you look at the European economy, it's been softer here over the last couple of quarters, but the team was able to deliver great results growing EBTAP on a year-on-year basis, I'm just finding on all cylinders. We're onboarding more customers. We're getting more cost-efficient than our European business, and the team's performing well. But long-term, our goal continues to be, if you're playing North American LTL company.

Speaker: Thank you.

Speaker: Thank you for your questions. Hey, good morning, thanks for taking the question. I just wanted to see if you could comment Mario on capacity available in the network, and what's actually the limitation of the bottleneck.

Mario Harik: I don't know. Last quarter you talked about needing to add some more. You talked about the doors you're adding, the new service center you broke ground on. Where does that stand? And how do you see the limitations at this point? You're running up into any conditions that need a little bit more capital expenditures, especially when you're running up into any conditions that need a little bit more capital expenditure. Boasting that up here in the fourth quarter looks like a pretty big increase to get to that mid-year target, mid-point of the target rather you just raised.

Mario Harik: In the third quarter, we had high teen success capacity and our network from a physical perspective, so in terms of how many doors we have. But as you know, this is not even distributed across our network. In some markets, we are bumping against capacity limits, but in many, many markets, we have available capacity from a doors perspective. And our service center expansion plan does contemplate those markets where we see that higher demand from customers, where we got to expand physical capacity, but we were run rating in the high teens.

Mario Harik: I would go to the end of 2025 percent range is where we would like to be on a longer term basis. Now, in terms of rolling stock capacity, we have had tremendous progress since the beginning of LTL 2.0. We've added more than 10,000 new traders over the last year and a half to years. We've added 2,000 track doors to our fleet, and this is enabling us to be able to take on more customers, but also run more efficiently.

Mario Harik: You see it here in the third quarter, we were able to handle 8% more shipments. While gaining productivity, I mean, our headcount was down on the year-on-year basis, and our labor hours were up slightly, versus an 8% increase in shipments. And equipment helped us manage that. And on the people's side, we're staffed for current volumes, but we do have headroom as well. And if the demand continues to increase, we can staff up for that.

Mario Harik: The current labor markets are much easier to hire into. We have our driver schools as well, so we'll be good from a people perspective. But generally, if you think it's that bad, we feel great from a capacity perspective, and we continue to invest in the network, and we're well positioned to capitalize on any ups, swings, and pray.

Mario Harik: Okay, great. So as a quick follow-up, maybe you can looking longer term. You've been able to sort of bridge the different buckets, you know, performance of productivity of pricing, yield, assessorials, all things we're talking about here, in terms of starting to narrow the gap with some of your peers, just want to see if you can lay out some of the thoughts in terms of where those, where those pieces are going to come from, and if you're able to quantify them in some of those buckets, like assessorials yields productivity.

Mario Harik: Thank you. The biggest component is going to come from yield. As I mentioned in my prepared remarks, we see a double digit increment of yield opportunity over the coming years through the three main levers I mentioned, which is one is around service, and it continues to get this high of pride from customers who understand we're investing in the network and investing in the business. That's roughly half the yield opportunity to bridge the gap.

Mario Harik: And the other half is we expect for assessorials to go from roughly 10% of revenue to the 15 plus percent of revenue range based on the premium services we are implementing. And what I like about this program, these are services that our customers are asking for. So we're picking care of the customer and we're making a higher, a higher yield and a higher margin. And then finally, on the local channel side by growing our local sales force and here so far this year, we've increased our sales team account by 10 to 15% so far.

Mario Harik: And I would go to get to more than 30% increase and overall sales headcount by end of next year. And that's enabling us to gain market share in that local channel that would also help bridge the gap. But the lion's share of the opportunity has come from price. The second category is that I'm in sourcing third party line haul and we are accelerating there for our road flex team out and our new program for team drivers.

Mario Harik: And we would get higher service and the work cost and which is also really good. Then we're going to continue to improve efficiency as well. So when you combine all of these things again, yield is number one by a long shot. But then all the other areas will help making sure that we are running more efficiently as well.

Stephanie Moore: Our next question is from the line of Stephanie Moore with Jeffries. Please excuse your questions.

Ali Fagri: Hi, good morning. Thank you. I guess you touched on a little bit of this and just in this previous question, but maybe just to double click on it a little bit more. Could you talk a little bit about kind of the labor additions that you've had to make just given the disruption from the, you know, post-Yellow Bankruptcy. You know, where you think you kind of are positioned today, you know, adequately staffed, what areas where you have added.

Ali Fagri: Maybe it's you noted a little bit on the sales force and then kind of your view as we go through 2024 kind of incremental hiring needs. Thanks. Sure, Stephanie, this is Ali. So if you look at the third quarter, our head count was down slightly on a year-over-year basis. And that's relative to shipment counts up high single digits. So we did a great job managing head count relative to the volumes in the network.

Ali Fagri: Also, if you look at it at a labor hours perspective, labor hours were up less than 1% year-over-year again versus shipment counts up 8% year-over-year. And more importantly, that spread between labor hours and shipment counts. Accelerated through the year from low single digits in the first quarter to high single digits in the third quarter. Now as we think about the fourth quarter, we would expect total head count and labor hours for 4Q to be roughly the same as the third quarter on both a quarter over quarter and year-over-year basis.

Ali Fagri: We've done a really good job again in managing productivity in the third quarter. We expect that to continue into 4Q and then into 2024 as well. So we are staff for current volumes and we have some head room. If the man does increase, we want to make sure we're staff for that as well. I think the positive side is the labor market is looser than it has been in recent years. So we're confident in our ability to flex up labor as needed. And we're going to continue to manage head count effectively relative to the volumes moving through the network. Got it. Thank you.

Mario Harik: And then just follow up. Can you talk a little bit about, you know, as you think about me, if I go into 2024, your thoughts in terms of incentive compensation, if maybe you're looking to align metrics, both that from the top and then all the way down to the terminal level with kind of new targets, any changes in philosophy there as you kind of prepare for 2024? Thanks, Stephanie. This is Mario.

Mario Harik: So this last year and the one prior in 2022 as well, we did change our incentive comp structure. It used to be only based on ev tag growth on a year on year basis, but we had a good portion of the incentive comp plan switched to also focus on quality and on time service. And that was part of the reason why we were able to drive meaningful improvement in both of these categories here in the course of the years since we started LPL 2.0.

Mario Harik: Now, if you look moving forward, we are contemplating a change to switch from having ev tag as being the compensation driver and this is for field operations at the service center level and at the regional level. So using our expansion as being the key metric for profits improvement for the compensation program. We're still early an example. There's still a few months here before we start 2024, but that's one change we are contemplating for next year. Thank you.

Scott Schneeberger: The next question is from the line of Scott Schneeberger with Oppenheimer. This is your third question.

Kyle Wismans: Thanks, good morning. Mario, I was hoping you could touch on CapEx. You mentioned it's going to be above your long term guidance range here in the end of the year for this year. And it sounds I'm sure that it was going to be elevated again next year in the way you position it. Just kind of curious if that's your anticipation. And is it predominantly traction showers, new doors, just if you could kind of kind of hone in a little bit on where the excess spending will be and curious if you're spending anything in Europe, because that is picking up. I know that that's. And that may not be with you forever, but it's just curious that that's an area where you're having to increase CapEx as well.

Kyle Wismans: Thanks. It's kind of Kyle. So as we mentioned earlier, you know, this year we're going to be in a 12 to 13% range. And if you think about the investments we made in the last 18 months, that includes over 2000 tractors and 10,000 trailers. That's really helped enable to share gains and recent disruption. So if you think about more specifically, what we're investing in right now to put us above that 12% range, really two things I can point to.

Kyle Wismans: One, we're going to produce more trailers at our Cersei facility. Initially in the year, we were thinking 6,000. We're not going to produce more about 7,000 trailers. And the second thing is something we mentioned earlier on the call are sleeper cabin issues. So we're going to bring about a hundred tractors in the network to do that. For us, it's going to do a couple things. It'll help us accelerate line haul into our thing.

Kyle Wismans: There's obviously a service benefit and a cost benefit there. But both of these efforts are really pulled forward of capacity investments for us. And if you think about the investments we make in total, in general, we expect very high returns from our LTL investments, you know, worth a 30%. So we think this is the right place for us to be to be investing in the company.

Kyle Wismans: Great thing. I appreciate that. Oh, go ahead, guys. Yeah, I was going to say, just the only thing to touch on from your question was your. So Europe's about 10% of our gross capital in general. That's been about pretty consistent for the business and more remain there.

Kyle Wismans: Alright, thanks. I appreciate that. You know, from my follow up real quick, just you mentioned at the top of the call, the 8 percentage points of of on time improvement year over year. That sounds impressive. I'm sure that goes into helping you interact for your for your sales folks on on new business wins. Just curious if you could put that a little bit more into perspective. How is that? Is that trending? Is that something that's, you know, now that you've seen the first month of the quarter? Is that something that you're going to continue to see trending very well here through the end of the year?

Mario Harik: Absolutely. When you look at all of our service metrics here in the month of October, we've seen a step up from where we were in in the third quarter as well. I mentioned earlier, for example, I mean on time continues to do really well. And I would ask for clarity. This has been in a long, long while, which is, which is great to see. And our customers appreciate that. And similarly on the damages side in terms of damage frequency, we've seen a further improvement from when September was a company record dating back to 1996. And October was even better than September.

Speaker: Thank you.

Mario Harik: We've reached the end of the question and answer session. Now I'll turn the call over to Mario Harris for a closer. Marks. Thank you, Operator, and thank you all for joining us today. As you saw from what we reported this morning, we're in a strong position as we begin our second year as a stand-alone LTA business in North America. Our solid momentum is driven by continued execution of our LPL 2.0 plan and it stands our entire business from revenue, earnings and yield growth to significant service improvements, operating efficiencies and market share gains. We're still in the early endings here and there's a lot more we'll achieve.

Mario Harik: Look forward to speaking with you all on our next call. Thank you.

Speaker: This concludes these conference. Let me disconnect your lines at this time.

Speaker: Thank you for your participation.