Q2 2024 XPO Logistics Inc Earnings Call

Speaker Change: © BF-WATCH TV 2021

Speaker Change: Unknown Executive, Kyle Wismans Unknown Executive, Kyle Wismans

Operator: Welcome to the XPO Second Quarter 2024 Earnings Conference Call and Webcast.

Sachi: Welcome to the XPO second quarter 2024 earnings conference call and webcast. My name is Sachi, and I will be your operator for today's call.

Sachi: Welcome to the XPO second quarter 2024 earnings conference call and webcast. My name is Sachi and I will be your operator for today's call.

Operator: My name is Sachi, and I will be your operator for today's call. At this time, all participants are named and listen-only mode. Later, we will conduct a question-and-answer session. If you have a question, please dial star one on your telephone keypad. Please let me 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.

Speaker Change: At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you have a question, please dial star 1 on your telephone keypad.

Speaker Change: 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.

Sachi: Please note that this conference call is being recorded. Before the call begins, I will read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of the 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 statement.

Operator: Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of the 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.

Speaker Change: 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.

Speaker Change: During this call, the company will be making certain forward-looking statements within the meaning of the 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.

Speaker Change: 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.

Operator: During this call, the company may also refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliation 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.

Operator: 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, and the investor section of the company's website.

Speaker Change: 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.

Operator: I will now turn the call over to XBO's Chief Executive Officer, Mario Harrick. Mr. Harrick, you may begin.

Sachi: 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. I will now turn the call over to XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Speaker Change: I will now turn the call over to XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Mario Harik: Good morning, everyone. Thanks for joining our call. I'm Giden Grenish with Kyle Wisments, our Chief Financial Officer, and Ali Fagri, our Chief Strategy Officer. This morning, we reported a strong second quarter for both revenue and earnings in its off-market for freight and exportation. Company-wide, we grew revenue year-over-year by 9% to $2.1 billion. And we increased our adjusted EBTA by 41% to $343 million.

Mario Harik: Good morning, everyone. Thanks for joining our call. This morning, we reported a strong second quarter for both revenue and earnings in a soft market for freight transportation. Company-wide, we grew revenue year-over-year by 9% to $2.1 billion. Adjusted value to EPS was 58% higher year over year at $1.12.

Mario Harik: Good morning, everyone. Thanks for joining our call.

Speaker Change: I'm here in Greenwich with Kyle Wismans, our Chief Financial Officer, and Ali Faghry, our Chief Strategy Officer.

Mario Harik: I just evaluated ETS; was 58% higher, yet over the year, at $1.1. A source of the strategy that's driving our above-market earnings growth and much in expansion.

Speaker Change: Adjusted value to EPS was 58% higher year over year at $1.12.

Mario Harik: I'll start with a strategy that's driving our above-market earnings growth and margin expansion. This compares with 0.3% in the first quarter and 0.7% last year. Since late 2021, when we started LTL 2.0, we've driven more than a 75% reduction in damage frequency.

Mario Harik: There are four bidders to LTL 2.0. First is to provide world-class service that revolves around the service metrics that are most important to our customers. In the second quarter, we improved one of the most important metrics, damage claims ratio, to a company record of 0.2%. This compares with 0.3% in the first quarter and 0.7% last year. In late 2021, when we started LTL 2.0, we've driven more than a 75% reduction in damage frequency. We also improved our on-time performance on a year-over-year basis for the ninth consecutive quarter. You already have one of the industry's fastest networks of one- and two-day length.

Speaker Change: Since late 2021, when we started LTL 2.0, we've driven more than a 75% reduction in damage frequency.

Mario Harik: And when coupled with our strong on-time performance, this is a key differentiator for our customers. We achieved these improvements while handing higher volume across our network by prioritizing both operational excellence and network investment.

Speaker Change: by prioritizing both operational excellence and network investment.

Mario Harik: Specifically, we have two major levers with long-round weight to improve our service. One is the opening of 28 new service centers, and the other is our in-sourcing of first-year transportation. In addition, we're constantly implementing a number of shorter-term initiatives. For example, we now have a freight airbag system installed in over 95% of our service centers. We're seeing a strong return on this investment through a reduction in damage claims. The second center is to invest in network capacity. Over the past three years, we've added nearly 14,000 trailers and more than 4,000 tractors to our fleet. This is a high return use of capital that allows us in-sourced line haul transportation, drive operational efficiencies, and improve customer service levels.

Speaker Change: Specifically, we have two major levers with long runways to improve our service.

Mario Harik: We also improved our on-time performance on a year-over-year basis for the ninth consecutive quarter. We already have one of the industry's fastest networks of one and two day lanes. And when coupled with our strong on-time performance, this is a key differentiator for our customers. We achieved these improvements while handling higher volumes across our network by prioritizing both operational excellence and networking. One is the opening of 28 new service centers, and the other is our outsourcing of precious transportation.

Speaker Change: One is the opening of 28 new service centers, and the other is our insourcing of precious transportation.

Speaker Change: In addition, we're constantly implementing a number of shorter-term initiatives.

Speaker Change: For example, we now have a freight airbag system installed in over 95% of our service centers.

Mario Harik: We're seeing a strong return on this investment through a reduction in damage claims. Over the past three years, we've added nearly 14,000 trailers and more than 4,000 tractors to our fleet. This is a high-return use of capital that allows us to insource line haul transportation, drive operational efficiency, and improve customer service levels. So far this year, we've added over 1,900 new tractors, bringing down the average age to four years from five years at the end of 2023. And as the only U.S. freight transportation company to produce its own trailers.

Speaker Change: The second center is to invest in network capacity.

Speaker Change: This is a high-return use of capital that allows us to insource line haul transportation, drive operational efficiencies, and improve customer service levels.

Mario Harik: So far this year, we've added over 1,900 new tractors, taking down the average age to four years from five years at the end of 2023. These new tractors are more efficient to operate, resulting in a double-ditched decline in our fleet maintenance costs in the second quarter. We've also manufactured over 2,600 trailers here today at our in-house production facility in Arkansas.

Speaker Change: So far this year, we've added over 1,900 new tractors, bringing down the average age to 4 years from 5 years at the end of 2023.

Speaker Change: These new tractors are more efficient to operate, resulting in a double-digit decline in our fleet maintenance costs in the second quarter.

Mario Harik: As the only U.S. freight transportation company to produce its own trailers, we can create capacity when our customers need it and until our cost. In addition, we're continuing to roll out the 28 service centers we acquired in December. We've opened 14 so far and expect to open another 10 in the back half of the year. The last four will be operational by early 2025, on track with our plans. These sites are in fast-growing freight markets. Each new center will help us operate more efficiently in the near term, while giving us more capacity when the cycle recovers.

Speaker Change: As the only U.S. freight transportation company to produce its own trailers, we can create capacity when our customers need it and at a lower cost.

Mario Harik: We can create capacity when our customers need it and at a lower cost. We've opened 14 so far and expect to open another 10 in the second half of the year. The last four will be operational by early 2025, on track with our plan. Each new center will help us operate more efficiently in the near term while giving us more capacity when the cycle recovers. We've been reporting strong yield growth, and we're still in the early innings, which helps us deliver 440 basis points of adjusted operating ratio improvement. We have three distinct levers for yield improvement.

Speaker Change: In addition, we're continuing to roll out the 28 service centers we acquired in December .

Speaker Change: These sites are in fast-growing freight markets.

Speaker Change: Each new center will help us operate more efficiently in the near term, while giving us more capacity when the cycle recovers.

Mario Harik: Our larger footprint also uses freight re-handling and brings us closer to our customers. And as our network continues to expand, the benefits of service will grow.

Speaker Change: And as our network continues to expand, the benefits to service will grow.

Mario Harik: Our third area of focus is yield, which is our single biggest opportunity for margin improvement. We've been reporting strong yield growth, and we're still in the early earnings. In the second quarter, we grew yield excluding fuel by 9% year-over-year, which helped us deliver 440 basis points of just an operating racial improvement. We have three distinct levers for yield improvement, but aligning our price for the value we deliver, we're growing our asusorials business, and we're expanding our local customer base. In the second quarter, our contracts renewal pricing increased year-over-year by half single-digit for the fourth consecutive quarter, driven by the service improvements we're making.

Speaker Change: In the second quarter, we grew yield-excluding fuel by 9% year-over-year, which helped us deliver 440 basis points of adjusted operating ratio improvement.

Mario Harik: We're aligning our price with the value we deliver. In the second quarter, our contract renewal pricing increased year over year by a hat single digit. We're rolling out premium services that our customers are asking for, like our expanded trade show service. We recently opened a new service center in Las Vegas, and we're already seeing strong customer demand for this offering. For our industrial base, we launched an expanded cross-border service called Mexico Plus that adds more capacity and border crossing points, supporting our customers who are shifting production to North America from overseas. In the second quarter, we reduced our purchased transportation costs by 22% year-over-year through a combination of insourcing line haul and paying lower contract rates to third-party carriers.

Speaker Change: We're aligning our price with the value we deliver, we're growing our accessorials business, and we're expanding our local customer base.

Speaker Change: In the second quarter, our contract's renewal pricing increased year-over-year by a half single digit for the fourth consecutive quarter, driven by the service improvements we're making.

Mario Harik: And asusorials generated double-digit revenue growth in the quarter, we're only out premium services that our customers are asking for, like our expanded freight show service. We recently opened a new service center in Las Vegas, and we're already seeing strong customer demand for this offering. But our industrial base will launch an expanded cross-border service called Mexico Plus that adds more capacity and border crossing points that supports our customers who are shifting production to North America from overseas. We're also continuing to earn more market share from our local customer base, which is a higher-margin business. In the second quarter, we increased shipments from local customers by over 9% compared to the year ago.

Speaker Change: We're also continuing to earn more market share from our local customer base, which is a higher margin business.

Speaker Change: In the second quarter, we increased shipments from local customers by over 9% compared to the year ago.

Mario Harik: The final pillar of our strategy was cost efficiency. The opportunities here are in purchase and transportation, valuable costs, and overhead. In the second quarter, when it used our purchase and transportation costs by 22% year-over-year through a combination of insulting line haul and paying lower contract rates to third-party carriers. We ended the quarter with 15.9% of line haul miles outsourced to third parties, which was a reduction of 490 basis points year-over-year. This is the lowest-level outsourced in our company's history, and we expect to accelerate the pace as we move forward. When we transport the freight ourselves, we have more quality control and more flexibility.

Speaker Change: The opportunities here are in purchase transportation, variable costs, and overhead.

Speaker Change: In the second quarter, we reduced our purchased transportation costs by 22% year-over-year through a combination of insourcing line haul and paying lower contact rates to third-party carriers.

Mario Harik: We ended the quarter with 15.9% of line haul miles outsourced to third parties. Our drivers and service centers can move freight faster with NET3 handling, which reduces damage. This is a direct result of the team's execution, as well as our proprietary technology for labor planning. The second quarter was our sixth straight quarterly improvement in labor productivity. In the UK, the increase was in the high teens, and in France, it was in the high single digits.

Speaker Change: This is the lowest level outsource in our company's history.

Speaker Change: And we expect to accelerate the pace as we move forward.

Speaker Change: When we transport the freight ourselves, we have more quality control and more flexibility.

Mario Harik: Our drivers and service centers can move freight faster with less free handling, which reduces damages. We also get better utilization of our trailers by redeploying them at their destination. We expect to have a few hundred driver teams and seeker cap trucks on the road by year end to support more resources. Lastly, we're continuing to manage labor costs effectively in our operations. This is a direct result of the team's execution as well as our proprietary technology for labor planning. The second quarter was our sixth straight quarterly improvement in labor productivity.

Speaker Change: We also get better utilization of our trailers by redeploying them at their destination.

Speaker Change: Expect to have a few hundred driver teams and sleeper cab trucks on the road by year-end to support more resources.

Speaker Change: Lastly, we're continuing to manage labor costs effectively in our operations.

Speaker Change: This is a direct result of the team's execution, as well as our proprietary technology for labor planning.

Speaker Change: The second quarter was our sixth straight quarterly improvement in labor productivity.

Mario Harik: Turning to Europe, our business continues to outperform the industry in a soft macro. On a year-over-year basis, we increase segments revenue by 4%. We also delivered the highest quarterly EVTAP since 2019, with year-over-year growth of 7%, driven by a combination of top-line growth and discipline cost control. Our strongest EVTAP growth was in the UK and France. In the UK, the increase was in the high team, and in France, it was in the high single digit.

Speaker Change: Turning to Europe, our business continues to outperform the industry in a soft macro.

Speaker Change: We also delivered the highest quarterly EBITDA since 2019, with year-over-year growth of 7%, driven by a combination of top-line growth and discipline cost control.

Speaker Change: Our strongest EBITDA growth was in the UK and France. In the UK the increase was in the high teens and in France it was in the high single digits.

Mario Harik: In summary, our strongest results in the first half of the year demonstrate the discipline progress we're making with the many initiatives we've put in place. Importantly, we're delivering record service levels with a direct connection between service and profitability. This dynamic is at the core of our strategy. It enables us to outpace the markets with yield growth and profitable market share gains while operating more cost-efficiently at scale. We're also continuing to invest capital where it can sustain high returns over time. These are all inherent strengths of our company that's with use to improve the business in any environment.

Mario Harik: Importantly, we're delivering record service levels with a direct connection between service and profitability. This dynamic is at the core of our strategy. Together with our operating momentum, they create a powerful foundation for future growth. $2.1 billion.

Speaker Change: It enables us to outpace the market with yield growth and profitable market share gain while operating more cost-efficiently at scale.

Speaker Change: These are all inherent strengths of our company that we'll use to improve the business in any environment.

Mario Harik: Together, with our operating momentum, they create a powerful foundation for future growth.

Speaker Change: Together, with our operating momentum, they create a powerful foundation for future growth.

Kyle Wismans: Now, I'm going to head the call over to Kyle to discuss the financial results.

Kyle Wismans: Kyle, over to you.

Kyle Wismans: Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet, and liquidity. We reported a strong second quarter across the company, with revenue up 9% year-over-year to $2.1 billion. This includes top-line growth of 12% in our LTL segment, 4% growth in Europe. Excluding fuel, our LTL revenue was up 13% year-over-year. As we took on more business in LTL, we also improved our labor productivity. From the first to second quarter, we reduced our head count sequentially, while our shipments per day increased by 4%. This helped to mitigate the cost of salary, wages, and benefits, which in total were 11.5% higher in the quarter than a year ago.

Speaker Change: Thank you, Mario, and good morning, everyone.

Mario Harik: I'll take you through our key financial results, balance sheet, and liquidity.

Speaker Change: We're reporting a strong second quarter across the company.

Mario Harik: This included top-line growth of 12% in our LTL segment. From the first to second quarter, we reduced our headcount sequentially, while our shipments per day increased by 4%. This helps to mitigate the cost of salary, wages, and benefits, which were 11.5% higher in the quarter than a year ago. Our expense for third-party carriers was down year-over-year by 22%, up 41% from a year ago, which was a year-over-year improvement of $380,000, for a year-over-year savings of 70%.

Speaker Change: This includes top-line growth of 12% in our LTL segment.

Speaker Change: 4% growth in Europe .

Speaker Change: Excluding fuel, our LTL revenue was up 13% year-over-year.

Speaker Change: From the first to second quarter, we reduced our headcount consequentially, while our shipments per day increased by 4%.

Kyle Wismans: This primarily reflects wage and benefit inflation, as well as incentive compensation aligned with the segment's strong second quarter performance. We were also more cost-efficient with purchase transportation, primarily due to our in-sourcing initiative. Our expense for third-party carriers was down year-over-year by 22%, which equates to a $19 million savings in the quarter. Additionally, we continued to improve our savings cost, with our cost per mile down 12% year-over-year. Depreciation expense increased by 24% year-over-year, or $15 million. Reflecting investments we're making in the business. This continues to be our top priority for capital allocation in LTL. Our second quarter capital is primarily allocated to purchase tractors in the OEMs and manufacture more trailers than houses.

Speaker Change: We were also more cost-efficient with purchased transportation, primarily due to our insourcing initiative.

Speaker Change: Our expense for third-party carriers was down year-over-year by 22%.

Speaker Change: Additionally, we continue to improve our maintenance costs, with our costs per mile down 12% year-over-year.

Speaker Change: Depreciation expense increased by 24% year-over-year, or $15 million.

Speaker Change: Reflecting investments we're making in the business.

Speaker Change: This continues to be our top priority for capital allocation in LTDEL.

Speaker Change: Our second quarter CapEx is primarily allocated to purchase tractors from the OEMs and manufacture more trailers in-house.

Kyle Wismans: Next, I'll add some details to adjusted EBITDA, starting with the company as a whole. We generated adjusted EBITDA of 343 million dollars in a quarter, up 41% from a year ago. Our adjusted EBITDA margin was 16.5%, which was a year-over-year improvement of 380 basis points. This was supported by margin improvement in both segments, and the continued rationalization of our corporate cost structure. In the second quarter, our corporate net expense was $3 million dollars for a year-over-year savings of 70%. Looking at just the LTL segment, we grew adjusted operating income by 51% year-over-year to $214 million.

Speaker Change: We generated adjusted EBITDA of $343 million in the quarter, up 41% from a year ago.

Speaker Change: which was a year-over-year improvement of 380 basis points.

Mario Harik: Looking at just the LTL segment and our European Transportation Segment, adjusted operating income was up 84% year over year, and we grew net income from continuing operations by 384% to $150 million, representing delivered earnings per share of $1.25. Note that we excluded the tax benefit from adjusting net income in our second quarter reporting.

Speaker Change: Looking at just the LTL segment, we grew adjusted operating income by 51% year-over-year to $214 million.

Kyle Wismans: And we grew adjusted EBITDA by $243 to $297 million. This reflects the combined impacts of our pricing gains, cost efficiencies, and the increase in volume. In our European transportation segment, adjusted operating income was $199, which was a 6% increase from the prior year. And we grew adjusted EBITDA by 7% to $49 million. Returning to the company as a whole, we reported operating income of $197 million dollars for the quarter, up 84% year-over-year. And we grew net income from continuing operation by 384% to $150 million, representing the risk earnings per share of $1.25. The increase in net income from continuing operations includes a one-time tax benefit of $41 million, related to the reorganization of our legal entities in Europe.

Speaker Change: and grew adjusted EBITDA by 43% to $297 million.

Speaker Change: This reflects the combined impacts of our price and gains.

Speaker Change: Cost Efficiencies.

Speaker Change: And we grew Adjusted EBITDA by 7% to $49 million.

Speaker Change: Up 84% year-over-year.

Speaker Change: And we grew net income from continuing operations by 384%.

Kyle Wismans: We expect to receive a net cash refund of approximately $45 million in 2025. Note that we excluded the tax benefit from adjusted net income in our second quarter reporting. On an adjusted basis, EPS increased by 58% year-over-year from $1.12.

Speaker Change: We expect to receive a net cash refund of approximately $45 million in 2025.

Kyle Wismans: Lastly, we generated $210 million of cash flow from operating activities in the quarter and deployed $184 million of net cat-backs. Moving to the balance sheet, we ended the quarter with $250 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $836 million of liquidity. We had no borrowings upstanding under our ABL facility at quarter end. Our net debt leverage ratio at the end of the quarter was 2.7 times trailing 12 months adjusted either. This was an improvement from 2.9 times at the end of the first quarter. We expect to further reduce our leverage in the second half of the year.

Mario Harik: Moving to the balance sheet, we ended the quarter with $250 million of cash on hand. Now, I'll turn it over to Ali, who will cover our operating costs. Looking just at shipments per day, April was up 4.7%. May was up 3.8%, on a two-year stack basis, July shipments per day and revenue per day meaningfully accelerated versus June. We also delivered another quarter of above-market yield growth. We grew yield, excluding fuel, by 9% compared with the prior year.

Speaker Change: Combined with available capacity under our committed borrowing facility, this gave us eight hundred and thirty six million dollars of liquidity.

Speaker Change: We had no borrowings upstanding under our ABL facility at Quarter Act.

Speaker Change: Our net debt leverage ratio at the end of the quarter was 2.7 times trailing 12 months adjusted EBITDA.

Speaker Change: This was an improvement from 2.9 times at the end of the first quarter.

Speaker Change: And we expect to further reduce our leverage in the second half of the year.

Kyle Wismans: The ongoing investments we're making are enhancing our earnings growth trajectory and will support our long-term goal of achieving an investment-grade profile.

Speaker Change: The ongoing investments we're making are enhancing our earnings growth trajectory and will support our long-term goal of achieving an investment-grade profile.

Ali Fagri: Now, I'll turn over to Ali, who will cover our operating zones.

Speaker Change: Now, I'll turn it over to Ali, who will cover our operating zones.

Ali Fagri: I'll start with our LTL segment, which reported another quarter of profitable growth, reflecting strong execution of our operating zones. International Teams. On a year-over-year basis, we increased our shipments per day by 4.5% in the quarter, led by more than 9% gross in our local sales channel. On a monthly basis year-over-year, our April punnets per day was up 3.1%. May was up 2.4%, and June was up 4.6%. Looking just as shipments per day, April was up 4.7%; May was up 3.8%; and June was up 4.9%. For July, we estimate punnets and shipments per day to be about flat-year-over-year, with both trends outperforming seasonalities.

Ali Faghry: Thank you, Kyle. I'll start with our LTL segment, which reported another quarter of profitable growth, reflecting strong execution by our operational teams.

Ali Faghry: On a year-over-year basis, we increase our shipments per day by 4.5% in the quarter, led by more than 9% growth in our local sales channel.

Ali Faghry: Notably, we grew tonnage per day by 3.4%, which is an acceleration from 2.6% in the first quarter.

Speaker Change: Our weight per shipment was down 1.1% with the year-over-year decline moderating from the prior quarter.

Speaker Change: This was our fourth consecutive quarter of the over-the-year improvement in weight per shipment.

Speaker Change: On a monthly basis, year over year, our April tonnage per day was up 3.1%.

Ali Fagri: On a two-year stack basis, July shipments per day, and punnets per day, meaningfully accelerated versus June. Our pricing trends remain strong, as we continue to align our pricing with our service quality and premium offerings. For the second quarter, our contract renewal pricing was up year-over-year by 8%. We also delivered another quarter of a buff market yield growth. We grew yield excluding fuel by 9%, compared with the prior year. While our improving weight per shipment was a modest mixed headwind to yield, our revenue per shipment x fuel increased sequentially for the sixth consecutive quarter and was up 7.4% year-over-year.

Speaker Change: For the second quarter, our contract renewal pricing was up year-over-year by 8%.

Speaker Change: While our improving weight per shipment was a modest mixed headwind to yield, our revenue per shipment, XFUEL, increased sequentially for the sixth consecutive quarter and was up 7.4% year over year.

Ali Fagri: We expected continued increasing both yield and revenue per shipment quarter-over-quarter in the back half of this year, reflecting ongoing momentum with our pricing initiative. Turning to margin, we improved our second quarter adjusted operating ratio by 440 basis points to 83.2%. We've now delivered year-over-year margin expansion of around 400 basis points for three consecutive quarters. Equentially, our adjusted OR improved by 250 basis points, coming in at the high end of our guided range. Our robust margin performance was primarily driven by yield and volume growth, bolstered by our cost initiatives and productivity gains. Moving to the European business, we improved volumes throughout the quarter with strong pricing that outpaced inflation.

Speaker Change: Turning to margin, we improved our second quarter adjusted operating ratio by 440 basis points to 83.2 percent.

Speaker Change: We've now delivered year-over-year margin expansion of around 400 basis points for three consecutive quarters.

Speaker Change: Moving to the European business, we improve volume throughout the quarter with strong pricing that outpaced inflation.

Ali Fagri: Our organic revenue growth in June was the highest year to date for the segment overall. And in the UK, an important market for us, organic revenue in June increased year-over-year by double digits. Our sales pipeline has grown to a record $1.3 billion, and the team continues to earn new business from blue chip customers, strengthening our position in key European geographies.

Speaker Change: Our organic revenue growth in June was the highest year-to-date for the segment overall.

Mario Harik: And in the UK, an important market for us, organic revenue in June increased year over year by double digits. Before we go to Q&A, I want to summarize the considerable progress we're making toward becoming the LTL service leader in North America. Our service metrics are at record levels, and there is ample runway for further improvement, primarily through line haul insourcing and labor productivity. We're confident that our strategy will drive significant margin expansion over the years to come. Please limit yourself to one question when you come up in the queue.

Speaker Change: Our sales pipeline has grown to a record 1.3 billion dollars and the team continues to earn new business from blue chip customers, strengthening our position in key European geographies.

Ali Fagri: Before we go to Q&A, I want to summarize the considerable progress we're making toward becoming the LTL service leader in North America. Our service metrics are at record levels, and there is ample runways for further improvement. This is earning us profitable market share and above-market yield growth. We're also optimizing our network with meaningful cost efficiency, primarily through line haul, in sourcing and labor productivity. And we just reported another strong quarter of revenue and earnings growth in a soft macro. We're confident that our strategy will try significant margin expansion over the years to come.

Speaker Change: Before we go to Q&A, I want to summarize the considerable progress we're making toward becoming the LTL service leader in North America.

Speaker Change: Our service metrics are at record levels and there is ample runway for further improvement.

Speaker Change: And we just reported another strong quarter of revenue and earnings growth in a soft macro.

Operator: Now we'll take your question. Operator, please open the line for Q&A.

Operator: Thank you. 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.

Ken Hexter: The first question is from Ken Hexter from Bank of America. Please go ahead.

Speaker Change: The first question is from Ken Hoexter from Bank of America. Please go ahead.

Mario Harik: If you have additional questions, you're welcome to get back in the queue, and we'll take as many as we can. Hey, great, good morning, and congratulations on the strong results. Yeah, you got it, Ken. This is Mario.

Mario Harik: Hey, great good morning and grads on the scoring results. Maybe I'll just kind of wrap on that. Your tonnage and shipment is accelerated in June. Maybe your thoughts on the market here is share gains, benefits and new facilities, and relaying that you know you've always given some thoughts on the sequential move and in the operating ratio. Obviously, you've got a lot of seasonality that typically increases. Maybe your thoughts as we go into third and fourth quarter. Thanks.

Ken Hoexter: Hey, great, good morning and congrats on the strong results.

Ken Hoexter: Maybe, Ali, just to kind of wrap on that, your tonnage and shipments accelerated in June . Maybe your thoughts on the market here.

Ken Hoexter: Share gains, benefits of new facilities, and relaying that, you know, you've always given some thoughts on the sequential move in the operating ratio. Obviously, you've got a lot of seasonality that typically increases it. Maybe your thoughts as we go into the third and fourth quarter. Thanks.

Mario Harik: Yeah, you got a 10. This is Mario.

Mario Harik: First, I'll start with the market. So we're continuing to see a soft freight market, but it's stable. If you look at the month of June, the ISM was in the high 40s, at $48, $49. And industrial demand was relatively stable.

Mario Harik: First off, start with the market. So we're continuing to see a soft rate market, but it's stable. If you look at the month of June, the ISM was in the high 40s; that's 48, 49. And the industrial demand was relatively stable. It did pick up a bit from the month of May on the line demand on the industrial size, but again, not major growth there. On the retail side, retail sales came in better, and we did see the retail sector also hold up and increase a bit as well. But sequentially, we did see a pickup in the month of June compared to where we were in May.

Mario Harik: It did pick up a bit from the month of May on the underlying demand for industrial products, but again, not major growth there. On the retail side, retail sales came in better.

Speaker Change: And the industrial demand was relatively stable. It did pick up a bit from the month of May on the underlying demand on the industrial side, but again, not major growth there.

Mario Harik: And we did see the retail sector also hold up and increase a bit as well. But sequentially, we did see a pickup in the month of June compared to where we were in May. Now, if you take a step back on the quarter in July, starting there on tonnage, for us, July tonnage is, you know, call it about flattish, which outperforms seasonality by one to two points. And we expect a similar outperformance for the third quarter as a whole.

Mario Harik: Now, if you take a step back on the quarter and July is starting, there on punish. For us, July's punish is, you know, called about flatish, which outperform seasonality by one to two points, and we expect a similar outperformance for the third quarter as a whole. Now, when we look at seasonalities, we do exclude the impact of COVID since, if you recall, Q2, Q3 back then was a big upswing with the client in Q2. And similarly, when you look at yellow last year, it was outside of seasonal norms. So if you apply seasonality to the implied punish in the third quarter to be downed, those single digits, and we expect to do better than that where we expect to be flatish on punish for the third quarter as a whole.

Speaker Change: And we expect a similar outperformance for the third quarter as a whole. Now, when we look at seasonality...

Mario Harik: Now, when we look at seasonality, we do exclude the impact of COVID since, if you recall, Q2 to Q3 back then was a big upswing with the decline in Q2. And similarly, when you look at yellow fever last year, it was outside of seasonal norms.

Ken Hoexter: We do exclude the impact of COVID since, if you recall, Q2 to Q3 back then was a big upswing with the decline in Q2.

Mario Harik: So, if you apply seasonality, it would imply tonnage in the third quarter to be down below single digits. And we expect to do better than that, where we expect to be flattish on tonnage for the third quarter as a whole. Now, the other moving part for OR, going to your question on margin, is on the yield front, and where we expect a strong quarter for yield, as our initiatives continue to gain traction, we expect to be in the mid to high single-digit range on year-on-year improvement for yield, even as we wrap the buffer. Waste per shipment could be a swing factor. We've seen that improve here through the course of the year for us.

Ken Hoexter: And similarly, when you look at yellow last year, it was outside of seasonal norms. So if you apply seasonality, it would imply tonnage in the third quarter to be down below single digits, and we expect to do better than that, where we expect to be flattish on tonnage for the third quarter as a whole.

Mario Harik: Now, the other moving part for all are going to your question on margin is on the yield front and where we expect a strong quarter for yield as our initiatives continue to get traction. We expect to be in the mid to high single digit range on a year-on-year improvements for yield even as we have the upper columns. We expect could be a swing factor. We've seen that improve here through the course of the year for us. And it doesn't apply an acceleration on a two-year stack for yield Q3 versus the first half. And it doesn't apply a sequential increase on an absolute dollar basis from Q2 going into Q3 as well.

Mario Harik: And it does imply an acceleration on a two-year stack for yield, Q3 versus the first half, and it does imply a sequential increase on an absolute dollar basis from Q2 going into Q3 as well. Ultimately, from an OR perspective, we also expect a strong quarter for margin improvement. We expect OR to increase sequentially by 100 to 150 basis points, which is in line with seasonality. But similar to my comments on volume, if you do exclude the outlier quarters with COVID and the yellow bankruptcy, typical seasonality is 2 to 250 deterioration. And we expect to do much better than that, driven by volume, yield growth, and all the cost efficiencies we're implementing. Very helpful. Thank you, Mario.

Mario Harik: Ultimately, from an OR perspective, we also expect a strong quarter for margin improvement. We expect OR to increase sequentially by 100 to 150 basis points, which is in line with seasonality. But similar to my comments on volume, if you do exclude the outlier corners with COVID and the yellow bankruptcy, typical seasonality is 2 to 250 deterioration. And we expect to do much better than that, driven by volume, yield growth, and all the past efficiencies were implemented.

Ken Hoexter: Ultimately, from an OR perspective, we also expect a strong quarter for margin improvement. We expect OR to increase sequentially by 100 to 150 basis points, which is in line with seasonality.

Ken Hoexter: Similar to my comments on volume, if you do exclude the outlier quarters with COVID and the yellow bankruptcy, typical seasonality is 2 to 250 deterioration, and we expect to do much better than that, driven by volume, yield growth, and all the cost efficiencies we're implementing.

Ken Hexter: Very helpful.

Mario Harik: Thank you, Mario. You got it.

Speaker Change: Very helpful. Thank you, Mario.

Scott Group: The next question is from Scott Group from Will for Research. Please go ahead.

Mario Harik: You got it. The next question is from Scott Group from Wolf Research. Please go ahead. Hey Scott, it's Kyle.

Mario Harik: You got it.

Ken Hoexter: The next question is from Scott Group from Wolf Research. Please go ahead.

Scott Group: Hey, thanks.

Scott Group: Just wanted to follow up on operating ratio. So thanks for the color on Q3.

Scott Group: Hey, thanks. Just want to follow up on operating ratio.

Scott Group: How are you now thinking about the full-year guide in terms of full-year OR, and then I know it's early, but clearly some continued good momentum on price and claims. How do you think this sets up from an OR perspective heading into 2025?

Speaker Change: The full year guide in terms of full year OR and then I don't know I know it's it's early but you know

Kyle Wismans: It's got it, Kyle. So when you think about 2024, we think it's going to be a strong year of margin improvement. Initially, we thought the year would be in the 250 to 250 basis point range for the year of improvement, and we expect to land towards a high end of that range.

Kyle Wismans: So when you think about 2024, we think it's going to be a strong year of margin improvement, and that gives them a lead from what we've seen so far in the first half and, assuming a stable macro in the back half of the year. Thank you, guys. I appreciate it. Great. Thanks so much.

Ken Hoexter: Hey Scott, it's Kyle. So when you think about 2024, we think it's going to be a strong year of margin improvement.

Speaker Change: Initially, we thought the year would be in the 150 to 250 basis point range for the year of improvement, and we expect to land towards the high end of that range. And that's given the momentum we've seen so far in the first half, and assuming a stable macro in the back half of the year.

Kyle Wismans: And that's given them life, and we've seen so far in the first app, and assuming a stable macro in the back half of the year. And so for 2025, we expected a strong year in 2025 for all of the improvement and earnings growth as well. Obviously, we're not immune to the macro. macro would be the biggest swing factor there, but they expected a very strong year. And if you take a step back, we are driving above-market yield growth, and that's driven by the continuous service improvements that we are doing across the network, and that's translating into our gaining profitable market share, and customers want to give us more business.

Scott Group: Scott, for 2025, we expect a strong year in 2025 for all improvement and earnings growth as well. Now, obviously, we're not immune to the macro. Macro will be the biggest swing factor there, but we expect a very strong year. And if you take a step back,

Speaker Change: We are driving above market yield growth and that's driven by the continuous service improvements that we are doing across the network and that's translating into gaining profitable market share and customers want to give us more business and we're driving higher yield since they know that for us to provide this great service we got to invest in our business.

Kyle Wismans: And we're driving higher yields since they know that for us to provide this great service, we've got to invest in our business. We're also renting contributions from premium services and the growth of the local channel or the local accounts. When you look at premium services, we already launched a good number of them here through the course of the year between retail store roll outs or retail solutions to trade shows, to cross-border Mexico extending the service. And we're continuing to make great progress on insourcing. You saw here our results in the quarter. We got to a record level of insourcing of 15.9 percent, and we're ahead of our plan to get to the low-level, digit low teams, and we expect to continue to accelerate that.

Speaker Change: We're also renting contributions from premium services and the growth of the local channel or the local accounts.

Ken Hoexter: And we're continuing to make great progress on insourcing. You saw here our results in the quarter. We got to a record level of insourcing of 15.9% and we're ahead of our plan to get to the low double-digit load teams and we expect to continue to accelerate that.

Kyle Wismans: And ultimately, we're opening up the new service centers, and these are contributing to cost efficiencies in the near term, but as the cycle starts inflecting at some point, they're going to give us more capacity as well, and they will be both all-or-accretive and EPS-accretive in 2025. So overall, we expect this strong year, and we'll talk more about 2025 expectations as we report the fourth quarter results this year.

Ken Hoexter: And ultimately, we're opening up the new service centers, and these are contributing to cost efficiencies in the near term. But as the cycle starts inflecting at some point, they're going to give us more capacity as well, and they will be both OR-accretive and EPS-accretive in 2025.

Ken Hoexter: So overall, we expect a strong year and we'll talk more about 2025 expectations as we report the fourth quarter results this year.

Kyle Wismans: And Abbot, did you give the pricing renewals number in the quarter? It's got its cost, so the renewals in the quarter were up 8 percent.

Speaker Change: And I thought, did you give the pricing renewals number in the quarter?

Speaker Change: He's got it, Kyle. So the renewals in the quarter were up 8%.

Scott Group: Thank you guys, appreciate it. You got to thank you.

Speaker Change: Thank you guys. Appreciate it.

Daniel Imbro: The next question is from Daniel Imbrough from Stephen Sink. Please go ahead.

Kyle Wismans: You got it. Thank you.

Speaker Change: The next question is from Daniel Imbro from Stevens Inc. Please go ahead.

Daniel Imbro: Yeah, good morning, guys. Thanks again for your questions. Maybe if we could follow up more on the pricing on the access to real-side, I think there was a 5 percent gap when we came into this year between you and your best-in-class peer. I'm curious how much of that you think you've captured so far, and you mentioned a few of the services you've rolled out of. I'm curious, have you introduced enough to close that gap fully? I guess, how long do you think it would take me to close that access to real-price gap as well? Thanks.

Daniel Imbro: Yeah, good morning guys. Thanks for taking our questions.

Daniel Imbro: Um, maybe if we could follow up Mario on the pricing on the accessorial side. Um, I think there was a 5% gap when we came into this year between you and your best-in-class peer. I'm curious how much of that you think you've captured so far. And you mentioned a few of the services you've rolled out. I'm curious...

Mario Harik: Yeah, you guys. So when you look at it, the difference on assessorial revenue as a percent of total from where we are today and where we want to be, where best-in-class is, there's roughly a five-point difference. So we have grown this last quarter accessorial revenue double digits on a year-on-year basis, and we are making inroads, so we're getting to that 15 percent.

Speaker Change: Yeah, you got it. So when you look at it, the difference on assessorial revenue as a percent of total from from where we are today and where we want to be, we're best in classes.

Speaker Change: There's roughly a five points difference. So we have grown this last quarter, accessorial revenue, double digit on a year-on-year basis, and we are making inroads towards getting to that 15%. Currently, we're still in the, call it low-double-digit, low-teams territory.

Mario Harik: Currently we're still in the, in the call it low double digit low T in territory, and we believe that overall over the years to come, if we gain an incremental point of yield from assessorials over the next, you know, call it 3, 4, 5 years, that would be a good cadence for us in terms of how we realize that. In terms of the services themselves, as you know that whenever you launch in your service, in your product, you build the pipeline, you have all the, you train your sellers, and you start building that pipeline over time, and we're seeing a lot of great traction.

Daniel Imbro: In terms of the services themselves, as you know...

Speaker Change: Unknown Speaker 07.01.21

Mario Harik: There's still roughly, you know, call it about 3 or 4 services we want to be launching over the course of the next year that we're currently working on, but we already have made really great progress on launching some of these services, like I mentioned trade shows, or retail store rollouts, or retail solutions, and many of these other services.

Speaker Change: Call it about three or four services we want to be launching over the course of the next year that we're currently working on, but we already have made really great progress on launching some of these services, like I mentioned, trade shows or retail store rollouts or retail solutions and many of these other services.

Daniel Imbro: I just took whatever; that was one point per year for the next few years. Mario was your expectation? This is how we think about it. Great. Thanks so much. That's a lot.

Daniel Imbro: And just to clarify, that was one point per year for the last few years, Mario, was your expectation? This is how we think about it.

Mario Harik: You got it.

Mario Harik: Great. Thanks so much.

Fadi Chamoun: The next question is from Fadi Chamoun from BMO Capital Markets.

Mario Harik: You got it.

Mario Harik: The next question is from Sadi Shamoon from BMO Capital Markets. Please go ahead.

Fadi Chamoun: Please go ahead. Yes, good morning.

Mario Harik: Thank you.

Fadi Chamoun: Mario, so I mean, you know, big, big kind of piece of the OR improvement. It's an improvement strategy over the medium time. It's kind of that revenue for shipment to outgrow the market consistently, and that's the story of the spot of that and all of these things.

Unknown Speaker: Unknown Speaker ...per shipment to outgrow the market consistently and necessary as part of that and all of these things. I'm wondering if you can give us kind of behind the scene description, maybe example.

Fadi Chamoun: I'm wondering if you can give us kind of behind the scene description, maybe example of how the service improvement in the last maybe, you know, six, eight quarters that you've been going at it have changed revenue makes have changed how. Your shipment profile with your customer is changing, or your customer profile is changing.

Speaker Change: of how the service improvement in the last maybe, you know, six, eight quarters that you've been going at it have changed the revenue mix, have changed how your shipment profile with your customer is changing or your customer profile is changing.

Mario Harik: Thanks, thanks, Fadi. If you take a step back and our industry customers want great service, and the reason why they want that is because that avoids disruptions in their supply chain and how they move a product from their locations to their customers' locations. And as you said, we've made tremendous progress on that over the last two years. We've reduced our damage claims ratio from 1.2% a new company record here of 0.2%, and our customers see that. Even we in our new service centers, we put a slogan that says we love our customers with three hearts next to it.

Speaker Change: And our customers see that, even we, in our new service centers, we put a slogan that says we love our customers with three horse next to it.

Mario Harik: And when you, when this is a relationship with building with the customers, they want to give you more phrase, they want to give you more profitable phrase. So, in terms of the impact on the next, we are being disciplined and disciplined in terms of what we're taking on. So if we see a kid that the or a pallet that is non conforming and size doesn't fit well in an LPL network, if we see phrase that is not operating at a desirable margin for whatever reason, whether it's a customer who's not willing to pay a premium price, then we are turning away that phrase or we are pricing it accordingly.

Kyle Wismans: Unknown Executive, Kyle Wismans

Speaker Change: We are being disciplined in terms of what we're taking on.

Unknown Executive: Best of luck, then we are turning away that freight, or we are pricing it accordingly. And if we see a customer who wants to grow with us, whose freight fits our network, and it operates at a good margin, we're onboarding that freight. So we are being selective in terms of the freight we are taking on while supporting our customers. And we're also growing. Now, in terms of mix, it's largely unchanged between the industrial side and the retail side. We're still in the same proportions.

Mario Harik: And if we see a customer who wants to grow with us, who's phrases and with network that operates at a good margin, but onboarding that phrase. So we are being selective in terms of the phrase we are taking on while supporting our customers. And we're also growing that in terms of mix; it's largely unchanged between the industrial side and the retail side. We're still the same proportions, but where we are seeing faster growth is in the local channel. These are mom-and-pop shops. We have now 25% more sellers in our ranks, and we're being able to gain more profitable market share in that channel.

Kyle Wismans: And we're also growing. Now in terms of mix, it's largely unchanged between the industrial side and the retail side. We're still the same proportions, but where we are seeing faster growth is in the local channel. These are mom-and-pop shops. We have now 25% more sellers in our ranks, and we're being able to gain more profitable market share in that channel. So far, year to date, we've added more than 5,000 new customers in that channel, and we believe that that's going to grow with us here over the years to come.

Ali: But where we are seeing faster growth is in the local channel. These are mom-and-pop shops. We now have 25% more sellers in our ranks, and we're being able to gain more profitable market share in that channel. So far, year-to-date, we've added more than 5,000 new customers in that channel, and we believe that that channel is going to grow with us here over the years to come. Morning, Chris. This is Ali.

Mario Harik: So for a year today, to added more than 5,000 new customers in that channel, and we believe that that's going to grow with us here over the years to come.

Fadi Chamoun: Okay, I appreciate it.

Mario Harik: Thank you.

Chris Weatherby: The next question is from Chris Weatherby from Wells Fargo.

Chris Weatherby: Please go ahead. Hey, thanks.

Kyle Wismans: The next question is from Chris Wetherbee from Wells Fargo. Please go ahead.

Chris Weatherby: Good morning, guys. You guys have been opening new facilities. Not all of them are net new facilities, and I think you have still some in the back half of the year.

Chris Wetherbee: Hey, thanks. Good morning, guys. You know, you guys have been opening new facilities. Not all of them are net new facilities, and I think you have still some in the back half of the year, but I guess...

Ali Fagri: But I guess there's no way to think about sort of the relative profitability of the new facilities this year relative to maybe what the facilities have been up that have been open for a longer period of time or operating out. I guess we're just trying to get a sense of maybe how things could look as we get into potentially a better tonage environment in 2025 as those facilities ramp up.

Speaker Change: Is there a way to think about the relative profitability of the new facilities this year relative to maybe what the facilities that have been open for a longer period of time are operating at? I guess we're just trying to get a sense of maybe...

Ali Fagri: Good evening, Chris. This is Ali. So when you think about the sites we're launching here, as we noted before, we would expect the service centers to be OR neutral this year. As you move through the year, we're going to continue to ramp sites. We're going to have another 10 online by the end of the year, and then we'll open the remaining handful in early 2025. As the sites continue to mature, we would expect them to turn OR accretive into 2025 and also EPS accretive as well. And everything we've seen so far from the 14 sites we've opened already confirms our view that as we get into 2025, these service centers are going to be contributing from, meaningfully from a bottom line perspective.

Ali: So when you think about the sites we're launching here, as we noted before, we would expect these service centers to be OR neutral this year. As you move through the year, we're going to continue to ramp up sites. We're going to have another 10 online by the end of the year, and then we'll open the remaining handful in early 2025. As these sites continue to mature, we would expect them to turn OR accretive in 2025 and also EPS accretive as well.

Ali: And everything we've seen so far from the 14 sites we've opened already confirms our view that as we get into 2025, these service centers are going to be contributing meaningfully from a bottom line perspective. The next question is from Jonathan Chappell from Evercore ISI. Please go ahead. The next question is from Stephanie Moore from Jeffries. Joe, this is Mario.

Chris Weatherby: Yeah, thank you. Appreciate it.

Speaker Change: Got it. Thank you. Appreciate it.

Jonathan Chappelle: The next question is from Jonathan Chappelle from Evercore, ISI. Please go ahead.

Speaker Change: The next question is from Jonathan Chappell from Evercore ISI. Please go ahead.

Jonathan Chappelle: Thank you.

Jonathan Chappelle: Good morning.

Ali Fagri: Ali mentioned, running for 108x fuel, continuing to increase sequentially throughout the rest of the year. Is mix starting to stabilize a little bit, and is this just pure core pricing and asset soils? Because you're coming up against some very difficult year-over-year comms, and sequential increases would insinuate kind of low to mid-single digit year-over-year increases as well. So can you help us think about maybe the continued headwinds of mix versus the core pricing momentum? Sure, John.

Jonathan Chappell: Thank you. Good morning. Ali, you mentioned revenue per 108x fuel continued to increase sequentially throughout the rest of the year.

Speaker Change: Is mix starting to stabilize a little bit and is this just pure core pricing and asset soils because you're coming up against some very difficult year-over-year comps and sequential increases would insinuate...

Ali Fagri: So when you think about mix, the big factor for us has been weight-per-shipment. Now weight-per-shipment was down about a percent on a year-over-year basis in the second quarter. If you just roll forward seasonality from what we saw in July from a weight-per-shipment standpoint through the rest of the quarter, we would expect weight-per-shipments in Q3 to be down in that 1% range year-over-year, similar to what we saw in the second quarter. And in a similar decline also in Q4, as well as our baseline forecast. So overall, we would expect mix from a weight-per-shipment standpoint to be relatively stable in the second half of the year relative to what we saw in the second quarter.

Ali Fagri: When you think about our revenue-per-shipment outlook, we do expect a strong year from a revenue-per-shipment standpoint. As I noted earlier, we would expect revenue-per-shipment to increase sequentially both in Q3 and in Q4 and also accelerate on a two-year stack basis as well in the second half of the year versus the first half of the year. And our ability to drive that sequential improvement in two-year stack acceleration really goes back to all of the company-specific pricing initiatives that we're executing on that are allowing us to drive that above-market growth.

Speaker Change: As I noted earlier, we would expect revenue per shipment to increase sequentially both in Q3 and in Q4, and also accelerate on a two-year stack basis as well in the second half of the year versus the first half of the year. And our ability to drive that sequential improvement in two-year stack acceleration really goes back to all of the company-specific pricing initiatives that we're executing on that are allowing us to drive that above-market growth.

Ali Fagri: Got it.

Ali Fagri: Thanks, Ellie.

Stephanie Moore: The next question is from Stephanie Moore from Jeffries. Please go ahead.

Speaker Change: Transcribed by https://otter.ai

Joe Haftling: Hey, good morning, everyone. This is Joe Haftling on for Stephanie. Congrats on the good results. I guess I wanted to ask on the terminal openings, and you know, you mentioned the OR neutral impact. So I kind of wanted to ask on, you know, how are you able to mitigate these cost headwinds from new terminal openings? Is it just better revenue quality flowing through the new terminals? You mentioned, you know, from a near-term perspective, it almost sounded like it was a cost of productivity advantage. You know, compared to some of your piercings and some growing pains on the new terminal headwinds, I wanted to know how you're able to kind of keep that OR neutral outlook on the new terminal opening.

Joe Hafling: Hey good morning everyone, this is Joe Hafling on for Stephanie. Congrats on the good results. I guess I wanted to ask on the terminal openings and you know you mentioned the OR neutral impact so I kind of wanted to ask on you know how are you able to mitigate these cost headwinds from

Kyle Wismans: Unknown Executive, Kyle Wismans

Joe Haftling: Joe, this is Mario. So what do you think of the openings that we are doing? So far, we opened up 14 service centers out of the 28 that we acquired. And out of the mix of these service centers, six of them are net ads. So these are markets where we are adding an incremental terminal and eight or relocations where we went from a smaller service center to a larger service center. Now keep in mind that we already have a network that covers all zip codes in North America. So for us, the openings are about adding capacity, but in the near term, it's about gaining efficiency and improving service as well.

Mario Harik: So, what do you think of the openings that we are doing? So, so far, we have opened 14 service centers out of the 28 that we acquired. And out of the mix of these service centers, six of them are net ads, so these are markets where we are adding an incremental terminal, and eight are relocations where we went from a smaller service center to a larger service center. Now, keep in mind that we already have a network that covers all zip codes in North America.

Speaker Change: And eight are relocations where we went from a smaller service center to a larger service center. Now keep in mind that we already have a network that covers all zip codes in North America. So for us, the openings are about adding capacity.

Mario Harik: So for us, the openings are about adding capacity, but in the near term, it's also about gaining efficiency and improving service as well. So when you think of the first tier of service centers that we've opened up, we've only added 15 at headcount to support these openings, and compare that to the fact that we have 23,000 people. So it has almost no impact, no impact on cost, and the team has been executing very well on these openings.

Mario Harik: So when you think of the first tier of service centers that we've opened up, we've only added 50 net headcounts to support these openings and compared that to we have 23,000 people. So it has a almost no impact, no impact on cost. And the team has been executing very well on these openings. So give you an example, you look at a market market like Brooklyn, New York. We used to have 30, 40 doors in that market small yards; we were tapped out on capacity. Now we move into one of the larger service centers in Brooklyn, north of 80 doors, beautiful yard, gives us much more capacity to look at a market like Nashville. For example, we used to have a site in southeast of Nashville.

Speaker Change: We used to have 30, 40 doors in that market, small yards, we were tapped out on capacity. Now we moved into one of the largest service centers in Brooklyn, north of 80 doors, beautiful yard, gives us much more capacity.

Mario Harik: So to give you an example, you look at a market like Brooklyn, New York; we used to have 30, 40 doors in that market, small yards; we were tapped out on capacity. Now we have moved into one of the larger service centers in Brooklyn, north of 80 doors, a beautiful yard, gives us much more capacity. You look at a market like Nashville, for example; we used to have a site in southeast Nashville, and every day, we dispatched 30, 35 drivers north of Nashville for an hour each way to get to the customer pickup and delivery locations.

Kyle Wismans: You look at a market like Nashville, for example, we used to have a site in southeast of Nashville, and every day we used to dispatch 30-35 drivers north of Nashville for an hour each way to get to the customer pickup and delivery locations. Well, as soon as we opened up our Goodlitsville location north of Nashville, we relocated 35 of our drivers to that new location, and now we can cover that market with 10-15 minutes drive time to get to the customer locations.

Mario Harik: And every day, we used to dispatch 30, 35 drivers north of Nashville for an hour each way to get to the customer pick up and delivery locations. Well, as soon as we opened up our good, good location, north of Nashville, we relocated 35 of our drivers to that new location. And now we can cover that market with 10 to 15 minutes drive times to get to the customer locations. So all of these service centers, we opened up so far, been on track, on time, either meeting or exceeding our expectation on cost efficiencies. And where we've opened them up, we've seen just in line hall alone, 23 points of productivity pick up, associated with the more space that we have with these service centers.

Kyle Wismans: So all of these third centers we opened up so far have been on track, on time, either meeting or exceeding our expectation on cost efficiencies.

Mario Harik: And where we've opened them up, we've seen just in Lion Hall alone, two to three points of productivity pickup associated with the more space that we have with these service centers. So the execution has been very well, and it is going very well, and we expect that to continue here through the course of the year and into early next year.

Mario Harik: So the execution has been very well going very well. And then we expect that to continue here through the course of the year, going into the next year.

Joe Haftling: Great, really impressive stuff.

Mario Harik: Next for the time and congrats on the quarter. Thank you.

Speaker Change: Great, really impressive stuff. Thanks for the time and congrats on the quarter.

Tom Wadewitz: The next question is from Tom Wadewitz from UBS. Please go ahead.

Kyle Wismans: The next question is from Tom Wadewitz from UBS. Please go ahead.

Tom Wadewitz: Yeah, good morning. And yeah, you know, really strong results.

Tom Wadewitz: Yeah, good morning. And yeah, you know, really strong results. Wanted to see Mario, if you could give us any thoughts on what might cause deviation versus normal seasonality in 3Q. I think you, you know, you tend to give us a somewhat conservative framework, you know, and consistently give good results.

Mario Harik: I wanted to see, Mario, if you could give us any thoughts on what might cause deviation versus normal field seasonality and three key, with thank you. You know, you tend to give us somewhat conservative framework, you know, and consistently give a good results. What do you think might help you to do better than that 100 to 150. In deterioration sequentially in OR.

Mario Harik: And then just a broader question as well. I think there have been concerns about the pricing environment given the soft backdrop. And that there might be some kind of wrinkles and, you know, a little bit of increase in competition. And just wanted to get your thoughts on whether you're seeing that at all or whether you're just, you know, kind of seeing, you know, continued, very stable, very favorable pricing backdrop.

Speaker Change: you know, a little bit of increase in competition. And just wanted to get your thoughts on whether you're seeing that at all, or whether you're just, you know, kind of seeing, you know, continued very stable, very favorable pricing backdrop. Thank you.

Mario Harik: Thank you.

Mario Harik: Thanks. First of all, to clarify, in the third quarter, we would be in line with seasonality, but when you exclude the outlier quarters of COVID or the yellow bankruptcy or meaningfully doing better than seasonality on OR sequential changes from Q to Q3. But the said when you look at what could allow us to outperform the high end of the range of 150 to 250 full year guide. A lot of it would be based on one what happens in the from a macro perspective; we're not assuming any improvement. We're assuming the stable macro, but no, no pick up and demand in the back half of the year.

Mario Harik: First off, to clarify, in the third quarter we would be in line with seasonality, but when you exclude the outlier quarters of COVID,

Kyle Wismans: Unknown Executive, Kyle Wismans

Mario Harik: So obviously, if you see stronger demand, that could lead to better results that are also a lot of using credit things that we are executing on when it comes to, for example, services with launching with the premium services with launching. We thought if you have a great pipeline, we're converting that pipeline. If that goes ahead of the land, we can see upside as well. So there are many of these initiatives that we're doing. If we see upside in them, we expect to do better than where we are currently lending for the full year. Now, when you take a step back and you think about the pricing environment, we're still seeing a very favorable pricing environment in our industry.

Kyle Wismans: Unknown Executive, Kyle Wismans

Speaker Change: Now when you when you take a step back and you think about the pricing environment

Speaker Change: We're still seeing a very favorable pricing environment in our industry. You look at our yield numbers, as Ali mentioned earlier, we expect acceleration on a two-year stack, sequential acceleration as well on yield.

Mario Harik: You look at our yield numbers, as Ali mentioned earlier. We expect acceleration on a two-year stack, sequential acceleration as well on yield. Our contact renewals were called at 8% in the second quarter. We expected to be in the same and the same ballpark in the third quarter as well. We continue to see a good environment out there, especially if you're providing the great service product that we are. That is the biggest driver for being able to drive those meaningful yield improvements. And we're seeing that materialized in our business.

Speaker Change: Our contract renewals were at 8% in the second quarter. We expect to be in the same ballpark in the third quarter as well. We continue to see a good environment out there, especially if you're providing the great service product that we are. That is the biggest driver for being able to drive those meaningful yield improvements, and we're seeing that materialize in our business.

Mario Harik: So, okay, so you're really not seeing a change in a competitive dynamic? No, we're not seeing it.

Speaker Change: So, okay, so you're really not seeing a change in a competitive dynamic.

Brian: No, we're not seeing it in terms of the overall industry. And then from a cost standpoint, Brian, if you think about salary, wage, and benefits, just labor being our largest cost element, in terms of headcount for Q3, we think we're going to be up less than our shipment growth sequentially. We would expect shipments per day in the third quarter to be up modestly, but we're going to do what we did in Q2, when we were up sequentially 4% on shipments and headcount was actually down.

Mario Harik: Okay, great. Thanks for the time.

Brian Ossenbeck: Thank you.

Brian Ossenbeck: The next question is from Brian Ossenbeck from J.P.

Speaker Change: Thank you.

Brian Ossenbeck: Morgan. Please go ahead.

Kyle Wismans: The next question is from Brian Ossenbeck from J.P. Morgan. Please go ahead.

Mario Harik: All right, thanks.

Kyle Wismans: Good morning.

Kyle Wismans: Samaria, you said you're still in the early innings of the yield story at XPO. We're renewing it.

Brian Ossenbeck: To Mario, you said you're still in the early innings of the yield story at XPO. Renewing at high synergies now, I wanted to see what your confidence, what you think is driving that in the future as you look into next year.

Kyle Wismans: Hi, Samaria. You just now wanted to see what your confidence, what you think is driving that in the future as you look into next year. And then maybe Kyle or Ali can give us a little bit more clarity details behind the different cost buckets that are getting you to that OR progression, you know, whether it's labor productivity, additional line haul, insurance was a decent improvement here in the quarter. So, anything more specific on those separate buckets behind the OR would be helpful.

Kyle Wismans: Unknown Executive, Kyle Wismans

Mario Harik: Yeah, I'll start first with the, with the context in you and what gives us confidence and pricing. So we expect to help perform the market from a yield growth perspective. But we're obviously not immune to the macro. If, if things change from an underlying demand perspective, that could change the environment. And if things pick up, you would see massive yields improvement in our business.

Mario Harik: But there are three reasons for that. Number one source was service. The service improvements we're doing for our, we're making for our customers are drastic. I mean, if you think about where we were two years ago, where we are now. And we hear it from our customers all the time when they see the level of support we're giving them, the focus on picking up on time, delivering on time, delivering damage-free every single time. That leads to customer, again, want to give you a profitable market share. And they understand that we've got a charge or a price for that.

Mario Harik: The second area is around the premium services. That's a big opportunity for us. As I mentioned earlier on, we want to go call it from the low-double digit, low-teen, as a sort, as a percent of revenue to the mid-teens. And that's another opportunity as we continue to allow the premium services and build a pipeline. And that pipeline converse, we're going to see more profitable trade in that segment.

Mario Harik: And then finally, on the local channel, we've onboarded all the local, the incremental local sellers we've wanted to add since last year. And now, as these local sellers ran, and that contributions become continuous to build, we're going to see higher growth in that channel, which comes in higher yield and higher margin as well. So these are the three levers that we look at in terms of that yield improvement.

Kyle Wismans: And then, from a cost standpoint, Brian, if you think about salary, wage, and benefit—just labor being our largest cost element—in terms of headcount for Q3, we think we're going to be up less than our shipment growth sequentially. We would expect shipments per day in the third quarter to be up modestly. But we're going to do what we did in Q2 when we were up sequentially 4 percent on shipments, and headcount was actually down. So I think when you think about that cost area, which is our largest, you know, you think you're probably up mid-single digit quarter on quarter.

Speaker Change: And then from a cost standpoint, Brian, if you think about salary, wage and benefit, just labor being our largest cost element.

Brian: So I think when you think about that cost area, which is our largest, you think you're probably up mid-single-digit percent quarter-on-quarter. And then, probably, the second area I'd point to is line haul insourcing. We're going to continue to insource more line haul. You saw purchase transportation down 22% in the second quarter. I'd expect that improvement to continue and accelerate in the third quarter. Thanks, Ravi

Brian Ossenbeck: So I think when you think about that cost area, which is our largest, you know, you think you're probably up mid-single-digit quarter-on-quarter. And then probably the second area I'd point to is line haul insourcing. We're going to continue to insource more line haul. You saw purchase transportation down 22 percent in the second quarter. I'd expect that improvement to continue and accelerate in the third quarter.

Kyle Wismans: And then probably the second area I'd point to is line haul insourcing. We're going to continue to insource more line haul. You saw purchase transportation down 22 percent in the second quarter. I'd expect that improvement to continue and accelerate in the third quarter. And teasing in particular, our kind of insurance is that just won't be from quarter to quarter. From a Q2 per second, we think insurance is going to be fairly consistent when you think sequentially.

Brian Ossenbeck: From a Q2 perspective, we think insurance is going to be fairly consistent when you think sequentially.

Bruce Chan: The next question is from Bruce Chan from Steeple. Please go ahead.

Speaker Change: The next question is from Bruce Chan from Stiefel. Please go ahead.

Bruce Chan: That. Thanks, and good morning, everyone.

Bruce Chan: Maybe just to follow up, Ali, on those comments around the PT reductions accelerating in the back half, you know, really nice to see that, I think especially in a world with chief spot and soft demand here.

Bruce Chan: Thanks, and good morning, everyone. Maybe just to follow up, Ali, on those comments around the PT reductions accelerating in the back half. You know, really nice to see that, I think, especially in a world with

Ali Fagri: Can you maybe just remind us of what your target is for that outsource line, half percentage this year and long term? And then, you know, maybe help us think through any market factors that would influence the pace of reductions, whether up or down. Sure, Bruce, so when you think about our progress that we made in the second quarter, we were able to bring our third-party line haul miles as a percentage of total down to sub-16%. It came in at 15.9%, which was a company record for us and improved by nearly 500 basis points on a year-over-year basis.

Bruce Chan: Chief Spot and Soft Demand here. Can you maybe just remind us of what your target is for that outsourced line haul percentage this year and long term and then, you know, maybe help us think through any market factors that would influence the pace of reductions whether up or down.

Ali Fagri: Now, our goal is to get that number down to the low teams by 2027. However, given the progress that we've made so far over the last several quarters, we would expect it to get there much quicker. And our goal would be to continue in sourcing even beyond that into the single digits. More recently, we have been rolling out initiatives to accelerate that pace of insourcing, specifically team drivers and sleeper cab trucks. We'd expect to have a few hundred of these teams in our fleet by the end of the year. And that's going to allow us to accelerate that pace of insourcing even beyond what you've seen us deliver over the last several quarters.

Ali Fagri: In terms of the market factors influencing the pace of insourcing, we have a lot of confidence that we can deliver the continued insourcing in any macro environment. So our expectation is that as we move into the second half of the year and into 2025, you're going to continue to see both line haul miles as a percentage of total, as well as our purchase transportation expense on the P&L continue to move lower.

Ali Fagri: Great, that's very helpful.

Ali Fagri: Thank you.

Speaker Change: Great, that's very helpful, thank you.

Ravi Shankar: The next question is from Ravi Shankar from Oregon Stanley.

Ravi Shankar: Please go ahead. Thanks, everyone.

Kyle Wismans: The next question is from Ravi Shanker from Morgan Stanley . Please go ahead.

Ravi Shankar: Marty, you said earlier that you're seeing outside growth in small local channel, mom-and-pop business, versus national accounts.

Mario Harik: Can you unpack that a little bit more because I thought that maybe 12, 15 months ago, kind of you had onboarded a couple of large national accounts as well. How does that make shifting?

Speaker Change: Unknown Executive, Kyle Wismans

Mario Harik: What is the actual kind of mix difference between the local channel and the enterprise channel, and also usually in up cycles, which part of the business kind of accelerates faster, the national networks or the local networks? Thanks, sir. Thanks, Ravi.

Unknown Executive: When you look at our local channels, the shipment growth in that channel here over the last quarter was above 9%. Compare that to how the overall network has grown. It's almost double the rate of growth for the rest of the network, so we're seeing meaningful progress in terms of getting more of those stickier relationships with local accounts. And the reason why that's really good business, again, it's a higher-yielding business, but you also have a great local relationship with that customer that can grow with you over time as they grow their business. Now, in terms of how they react to a macro environment, they are about the same.

Mario Harik: When you look at our local channel, the shipment growth in that channel year over the last quarter was above 9%. Compare that to the overall network has grown. It's almost double the rate of growth for the rest of the network. So we're seeing meaningful progress in terms of getting more of those particular relationships with local accounts. And the reason why that's really good business, again, is to say how you're yielding business, but you also have a great local relationship with that customer that can grow with you over time as they grow their business. Now, in terms of how they react to a macro environment, they are about the same.

Speaker Change: Thanks, Ravi. When you look at our local channels, so the shipment growth in that channel here over the last quarter was above 9%, compare that to the overall network has grown. It's almost doubled the rate of growth for the rest of the network.

Speaker Change: So we're seeing meaningful progress in terms of getting more of those stickier relationships with local accounts. And the reason why that's really good business, again, it's a higher yielding business, but you also have a great local relationship with that customer that can grow with you over time as they grow their business.

Speaker Change: Now, in terms of how they react to a macro environment, they are about the same. I mean, what you typically see with the local accounts...

Unknown Executive: I mean, what you typically see with the local accounts is that in a softer macro, the weight per shipment in that channel goes down higher than in a strong macro compared to the national or the larger accounts because, usually, larger accounts use CMS systems to optimize how they're moving the freight. From a local perspective, you can imagine if you had a local manufacturer, as an example, they might be shipping 2,000 pounds on a pallet in a strong economy. And in a soft economy, they might be shipping less product. It could be 1,000 pounds on a pallet. So it depends on the economy and weight per shipment more on the local channel.

Mario Harik: I mean, what you typically see with the local accounts is that in a softer macro, the weight for shipment in that channel goes down higher than in a strong macro compared to the national or the larger accounts because usually larger accounts, they use CMS systems to optimize how they're moving the phrase. From a local perspective, you can imagine if you had a local manufacturer as an example. They might be shipping typically 2,000 pounds in a pallet in a strong economy, and in a soft economy that might be shipping less product. It could be 1,000 pounds of pallet.

Speaker Change: From a local perspective, you can imagine if you had a local manufacturer, as an example, they might be shipping...

Speaker Change: Typically 2,000 pounds in a pallet in a strong economy and in a soft economy that might be shipping less product. It could be 1,000 pounds a pallet.

Mario Harik: So it depends on the economy impacts weight for shipment more on the local channel.

Speaker Change: So it depends on the economy impacts weight per shipment more on the local channel. But we do expect in the cycle recovery, both to grow meaningfully and be tailwinds, especially on the local side for tonnage and ultimately margins as well.

Unknown Executive: But we do expect, in a cycle recovery, both to grow meaningfully and be tailwinds, especially on the local side for tonnage and ultimately margins as well. The next question is from Jason Seidl from T.D. Cowan & Company. Please go ahead. Perfect. I appreciate the time, guys. Thank you. Can you maybe talk about what you're thinking in terms of incremental margin potential over the next several years? Thanks, for five years, given that flea day is just one, Next year you would expect to come back into that 8-12% range and maybe what some of the priorities might be. I know it's kind of early, but... The next question is from Kevin Gainey from Thompson-Davison Company. Please go ahead. BF-WATCH TV 2021

Mario Harik: But we do expect in a cycle recovery, both to grow meaningfully and the tailwinds, especially on the local side, for tonnage and ultimately margins as well.

Ravi Shankar: Thank you.

Speaker Change: Understood. Thank you.

Jason Seidl: The next question is from Jason Seidl from TD Cowan & Company. Please go ahead.

Speaker Change: The next question is from Jason Seidl from TD Kowloon & Company. Please go ahead.

Jason Seidl: Thank you, operator. Mary, you still talked a little bit about a sluggish backdrop, but you know some others have noted some green shoots along the way.

Jason Seidl: Thank you, Arbiter. Mary, you still talked a little bit about a sluggish backdrop, but, you know, some others have...

Mario Harik: I was wondering if you can give us a little bit more color about the demand function and what your customers are telling you to expect in the back half of the year, and then just looking also for clarification, the 8% renewal rate, what percent of the overall business did that cover? Yeah, I'll start first, and I'll turn it over to Kyle for the renewal side, but in terms of the backdrop, Jason, we're seeing a stable macro but soft demand, a continuous soft demand. So what's with eating from customers? We usually survey our large customers every quarter, and the same for the back half of the year. About half of them said they expect things to be flatish in the back half.

Speaker Change: Yeah, I'll start first and I'll turn it over to Kyle for for the renewal side. But in terms of the backdrop, Jason, we're seeing a, again, stable macro, but soft demand, a continuous soft demand. So what we're getting from customers, we usually survey our large customers.

Kyle Wismans: Unknown Executive, Kyle Wismans

Mario Harik: And the other half was split equally between folks who expected some pick up versus folks who were expecting a bit of decline as well. So, on a net basis, we are expecting a flatish type demand and vitamin in the back half of the year.

Kyle Wismans: We are expecting a flourish-type demand environment in the back half of the year. Now, in terms of green shoots, there are certain scenarios. If you look at the retail side,

Mario Harik: Now, in terms of green shoots, there are certain scenarios where, if you look at the retail side, the fact that retailers have largely done with these talking and their inventories are in a good place. You could see with easier calms compared to last year; peak season would be slightly stronger on the retail side. And same thing on the industrial side, we are seeing some sub-sectors who potentially could see strength heading into the back half of the year as well. But I think currently we're not seeing a lot of green shoots that are showing a meaningful inflection point of demand, but we'll see where things go from here.

Speaker Change: The fact that retailers have...

Speaker Change: are largely done with de-stocking and their inventories are in a good place. You could see with easier comps compared to last year, peak season be slightly stronger on the retail side.

Mario Harik: I do think that the said lower engraves could be similar consumer confidence increasing, retail and similar spending on the industrial side as well.

Kyle Wismans: But we'll see what that materializes like in the fourth quarter. And then Jason from the 8%, that covers about a quarter of our contractual book and just a little more color on renewals. You know renewals have been strong now for four consecutive quarters in that high single-digit range. Our expectation for 2-3 should come in at a similar range; it will seem so far in the first half.

Jason Seidl: Perfect.

Jason Seidl: Appreciate the time, guys. Thank you.

Jordan Allegher: The next question is from Jordan Allegher from Goldman Sachs. Please go ahead.

Jordan Allegher: Hi, morning. Just obviously done a real good job with LTL 2.0. I'm just curious longer term. You know, the next several years, you know, you're several quarters into this. If not more at this point, new terminal openings. How do you think about the benefits you've derived and when we get back to, you know, better demand footing, manufacturing and otherwise.

Mario Harik: Can you maybe talk to what you're thinking in terms of incremental margin potential over the next several years? Thanks. If you think a step back in terms of where we are now, persons' overall demand and vitamin. If you look in our industry at all the publicly traded LTL carriers, shipment count is down from 2021 to 2023 by roughly about 12%. Now, a lot of times I hear the feedback that if this was the post-COVID runoff in 2021, but in LTL specifically, 2021 was softer than pre-COVID. So when you compare 2018, 2019 to 2023 as a full year, shipment count in our industry was down in the mid-teens.

Mario Harik: And this is an industry that has historically grown and below the mid single digit range, commensurate with the IP a bit higher than the IP. So when you think of the cycle inflection, that's going to be a massive tailwind both in terms of punish and volumes and in terms of pricing as well because you won't have enough capacity in our industry. Now, you see a lot of those capacity additions, but yellow was about 10% of the industry capacity, and only half of that capacity is coming back into the market by next year. So the next cycle is shaping up to be a very strong cycle for LTLs across the board.

Mario Harik: Now, when you think about our execution, we've been able to execute very well on the plan, and we're going to continue to execute very well on the plan. And you look over the last three quarters, we delivered at the 400 basis points of our improvement quarter after quarter. And you look at the next cycle, we expect also very strong performance over the years to come. Now, in terms of incremental margins, we do expect them to change depending on what quarter it is and how much of the revenue growth is coming from yield versus volume and how well we do on the cost side.

Mario Harik: But just to give you an example, here in the third quarter, we are expecting incremental margin of more than 60% in what is a very soft freight environment. So again, we see massive upside here, and we're going to get to the low 80s from an all perspective that we're going to get to the 70s and go from there. So that's how we think about the trajectory we're going to be on over the years to come.

Mario Harik: Thanks.

Eric Morgan: The next question is from Eric Morgan from Barclays.

Eric Morgan: Please go ahead. Hey, good morning. Thanks for taking my question.

Speaker Change: Yeah.

Speaker Change: Hey, good morning, Thanks for taking my question.

Eric Morgan: I wanted to ask on CapEx; you know, your average fleet age is down to four years. I think in the past, you mentioned the target of four to five years.

Speaker Change: I wanted to ask on Capex. Your average fleet age is down to four years I think in the past you've mentioned a target of four to five years, maybe you could.

Kyle Wismans: Maybe you could just clarify that and then just, you know, given the fleet age, is wondering, next year, you would expect to come back into that 8 to 12 percent range. And maybe what some of the priorities might be, I know it's kind of early, but, you know, just given that the fleet's in better shape at this point. Yeah, Eric, so long-term target on fleet age is still four and a half years. And when you think about CapEx this year as a percent of revenue, from an LTL standpoint, we're looking around 13 percent. I think next year, you're going to normalize and come down.

Speaker Change: Just clarify that and then just given the fleet age was wondering next year, you would expect to come back into that 8% to 12% range.

Speaker Change: And maybe what some of the priorities might be I know, it's kind of early but I'm.

Speaker Change: Just given that the fleets in better shape at this point.

Speaker Change: Yeah, Eric it's a long term target on fleet age is still four five years and when you think about Capex. This year as a percent of revenue from <unk> standpoint, we're looking around 13% I think next year youre going to normalize and come down. So certainly as we bring the yellow service centers online that will help us reduce that number a bit and then when you think about some of the in sourcing efforts as those.

Kyle Wismans: So certainly, as we bring the yellow service centers online, that'll help us reduce that number a bit. And then when you think about some of the in-sourcing efforts, as those slow a bit, as we get through our goals there, that'll help reduce the numbers as well. So I think you're probably down a point or two when you think on a percent of revenue basis.

Speaker Change: Slow a bit as we get through our goals there that will help reduce the number as well so I think it probably down a point or two when you think on a percentage of revenue basis from a prioritization standpoint, when you think about our Capex. Obviously the majority of cross company goes to LTM and then within LCL will prioritize continued fleet investments.

Kyle Wismans: From a prioritization standpoint, when you think about our CapEx, obviously the majority across the company goes to LTL, and then with an LTL, we'll prioritize continued fleet investments and then continue investments in real estate. All right, thank you.

Speaker Change: And then continued investments in real estate.

Speaker Change: Alright, thank you.

Speaker Change: Yeah.

Kevin Gainey: The next question is from Kevin Gainey from Thompson Davis and Company. Please go ahead.

Speaker Change: The next question is from Kevin Guinea from Thompson Davis <unk> Company. Please go ahead.

Kevin Gainey: Hey, gentlemen. Good morning. Congrats on the great quarter.

Kevin Guinea: Hey, gentlemen, good morning, congrats on the great quarter, maybe to take a different approach here I was wondering if we could maybe talk through some of the kind of internal initiatives that you guys have done from a wage perspective and employee management and I know previously you've talked about like employee satisfaction.

Mario Harik: Maybe to take a different approach here. I was wondering if we could maybe talk through some of the kind of internal initiatives that you guys have done from a wage perspective and employee management. And I know more; previously, you've talked about like employee satisfaction and stuff like that. How is that affecting like retention, labor, outlooks?

Speaker Change: And and stuff like that how is that affecting like retention and labor outlook and.

Mario Harik: And as another point, maybe if you could break out kind of the bonus compensation or at least percentage-wise, maybe of what salaries and wages was for the quarter. So starting with wages, I would always, always make sure that our employees are very well compensated. And we have given about market wage increases here this year that were effective at the beginning of the second quarter, which were in the mid single-digit territory for our employees, for dog worker drivers, et cetera.

Speaker Change: And that's.

Speaker Change: The other point, maybe if you could break out kind of.

Speaker Change: Bonus compensation or at least percentage wise, maybe of what salaries and wages was for the quarter.

Mario Harik: And in terms of employee satisfaction, if I think about the foundation of our plan of our strategy, a lot of it goes back to two foundational elements. One is that our customers and making sure we are providing the best customer satisfaction possible. And the second one is that we are making sure that we have the most satisfied employees in the industry, that they know we support them. We listen to them, you know, whether it's myself or Dave or our operators in the field or Dimentoni or Kyle. The whole company was spent a lot of time in the field where we are in service centers sitting in break rooms, talking to drivers, talking to dog workers.

Mario Harik: Because they are the folks who keep the freight moving for our customers, and we take that very seriously. Now, over the last two years, our employee satisfaction has gone up in the similar trajectory as we've seen our customer satisfaction and our service improvements. And it's been hitting company records quarter after quarter, and we're very proud of the progress we're making in overall employee engagement across the board.

Mario Harik: In terms of incentive compensation, the way we look at it is based on a combination of things depending on where you are in the business. But it's a combination of all our improvement, a combination of revenue growth and a combination of service improvements and hitting stretch goals. And we also have localized incentive plans; we call it the Gladiator program, that whenever a service center hits a stretch goal of improving quality or reducing damages, also we give monthly incentive, and we do a whole cookout for all the employees at the location to celebrate the fact that we're taking care very well of customer's freight.

Speaker Change: And of all our improvements the combination of revenue growth and a combination of service improvements and hitting stretch goals and we also have localized incentive plans, we called it the Gladiator program. That's when I go to a service center it hits, our stretch goal of improving quality of reducing damages and also we give monthly <unk>.

Speaker Change: And we do a whole cookouts put all the employees at the location to celebrate the fact that we're taking care 30, well of customer's freight. So that's another foundational element of our strategy. We usually don't talk about it we're very proud of the progress, we're making there as well.

Mario Harik: So that's another foundational element of our strategy; we usually don't talk about it. We're very proud of the progress we're making there as well. Thank you.

Speaker Change: Okay.

Speaker Change: Appreciate the color.

Speaker Change: Thank you.

Operator: This concludes the question and answer session.

Mario Harik: I would like to turn the floor back over to Mario Harik for closing comments. Thank you, Operator, and thanks all for joining us today. We're continuing to move forward from a position of strength following the strong first half of the year, and we'll be sharing more progress with you each quarter, operator.

Speaker Change: Thank you operator, and thanks, all for joining US today, we're continuing to move forward from a position of strength. Following a strong first half of the year and we'll be sharing more progress with you each quarter. Operator, you can now end the call. Thank you.

Operator: You can now end the call. Thank you.

Speaker Change: Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.

Operator: This concludes today's teleconference. You made its connector lines at this time. Thank you for your participation. Thank you.

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