Q3 2024 XPO Logistics Inc Earnings Call
The End
Speaker Change: Welcome to the XPO 3rd quarter 2020 for earnings conference call and webcast.
Paul: My name is Paul and I will be your operator for today's call. At this time, all participants are an illicit only mode. Later we will conduct a question and answer session. If you have a question, please dial star 1 on your telephone keypad.
Paul: 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.
Paul: Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-gap financial measures.
Paul: During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which by their nature involve a number of risks, uncertainties, and other factors that could cause extra results to differ materially from those projected in the forward-looking statements.
Paul: A discussion of factors that could cause actual results to differ materially, this contained in the company's SEC filings as well as its in its earnings release.
Paul: The forward-looking statements in the company's earnings release were 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 be extended required by law.
Paul: During this call, the company may also refer to certain non-gap financial measures as designed under applicable SEC rules. Reconciliation of such non-gap financial measures to the most comparable get measures are contained in the company's earnings release and in the related financial tables on its website.
Paul: You can find a copy of the company's Irons Release which contains additional important information regarding forward-looking statements and non-gap financial measures in the investor's section of the company's website.
Speaker Change: I will now turn the call over to ex-Bio's Chief Executive Officer, Mario Harik. Mr. Harik, you may be good.
Mario Harik: Good morning everyone. Thanks for joining our calls.
Mario Harik: I'm Yirin Greennish with Kyle Wismans, our Chief Financial Officer and I'll E-Fagre, our Chief Strategy Officer.
Mario Harik: This morning, we reported strong clear scorter results and it's off back drop for freight transportation.
Mario Harik: with above-market earnings growth and margin expansion.
Mario Harik: Company wide, we grew an revenue year over a year by 4% to 2.1 billion dollars.
Mario Harik: and we achieved significant operating leverage on that growth, delivering it 20% increase in adjusted EBTF to $333 million.
Mario Harik: I would have just said that U to EPS was $1.00 and $2.00, which is a 16% increase from a year ago.
Mario Harik: The send-out result of the quarter was his strong margin expansion, with the year-over-year improvement in LCL adjusted operating ratio of 200 basis points.
Mario Harik: This improvement was at the high end of our thought to change.
Mario Harik: With right our results, or the four levers of our strategy.
Mario Harik: Service Quality, Eal Growth, Investments in the Network, and Costsufficiency.
Mario Harik: These letters are close to a line and each one has a distinct rule in driving out performance.
Speaker Change: I'm Clark for Surface Quality.
Speaker Change: We delivered a damaged claims ratio of 0.2% which is an improvement from 0.4% last year.
Speaker Change: Importantly, damage frequency continues to improve each month in the quarter to record levels.
Speaker Change: We also improved our on-time performance year over year for the 10th consecutive quarter.
Speaker Change: The speed and reliability of our network are the primary reasons why our customers trust us with their freight and the experience these benefits on the daily basis.
Speaker Change: Our second letter is the targeted investments we're making in capacity ahead of the strong demand we anticipate in a freight market recovery.
Speaker Change: is ongoing investments are designed to deliver world-class service at every stage of the market cycle.
Speaker Change: Over the past three years, we've added nearly 15,000 traders and more than 4,000 tractors per fleet.
Speaker Change: We're using our rolling stock to accelerate our line-hold in sourcing with the broad benefit to service across our network.
Speaker Change: In addition, we've now opened up 21 of the 28 service centers we acquired at the Thunder.
Speaker Change: and we expect to open the last 7 sites by early next year.
Speaker Change: This is on track without plan.
Speaker Change: The majority of these sites are in markets where we want to build density and leverage our existing teams.
Speaker Change: Each new service center helps our network operate more efficiently.
Speaker Change: When they're all online, we'll have roughly 30% access door capacity in the network.
Speaker Change: So, it's usually, this position is of to capitalize quickly in an obstacle, providing substantial operating leverage and profitable market share games.
Speaker Change: Eels is our third letter and the primary driver of our Martian Improvement.
Speaker Change: We've been reporting about market heel growth throughout this year as we align our pricing with the value we deliver.
Speaker Change: In the third quarter, we grew yields excluding fuel by 6.7% year over year. This underthins the 200 basis points of all improvements were reported.
Speaker Change: We achieved this by executing a multiple initiatives that are yields and margin-acquisives.
Speaker Change: With our customers on their contracts, we increase renewal pricing by passing a digits year over year for the fifth consecutive quarter, supported by the service improvements we're making.
Speaker Change: and we're earning more market share from local customers due to the investments we made in our sales force.
Speaker Change: In the third quarter, being increased shipments from local customers by over 10% compared to the year ago.
Speaker Change: Our new premium services are another benefit to yield. We continue to increase our revenue mix from high margin as the sodium services, and we expect the revenue stream to grow substantially over time.
Speaker Change: The final level of our strategy is called deficiency, where we have three areas of focus, versus transportation, variable calls, and overhead.
Speaker Change: In the third quarter, we reduced our Persia's transportation cost by 40% year over the year, primarily driven by our line haul in sourcing initiative.
Speaker Change: We ended the quarter with 13.6% of lime-hall miles outsourced to third parties, which was a reduction of nearly 800 basis points year over year.
Speaker Change: This is the lowest level of outsourcing in our company's history, and we're on track to meet our 2027 target by year and 2024, three years ahead of plan.
Speaker Change: We now expect our outsourced miles to be below 10% next year.
Speaker Change: and the support of the trajectory were deploying more driver teams in steeper cat trucks for long distance line hold runs.
Speaker Change: and we're continuing to manage labor costs effectively using our proprietary technology.
Speaker Change: We can re-align labor hours quickly to address changes involved in and do that at the service center level.
Speaker Change: Turning to Europe, where transportation remains soft in most countries, we continue to outperform the industry.
Speaker Change: On a year over year basis, we increase third quarter segment revenue by 7%
Speaker Change: It was our strongest quarterly revenue growth since 2021, with volume accelerating for the fifth consecutive quarter.
Speaker Change: The strongest revenue performance was in the UK, but I would hear over the year organic revenue growth was up to mid-teens.
Speaker Change: Importantly, I would sales pipeline in Europe is growing at new record levels, as we close new business at the replenishing new leaves.
Speaker Change: This was support ongoing above market growth across our key geographies.
Speaker Change: In summary, the strong third quarter we delivered, highlights the effectiveness of our strategy and our company specific initiatives, regardless of the macro.
Speaker Change: The World-class service we provide is within our control. It creates that you for our customers and enables us to outpace the industry with youth growth and margin expansion.
Speaker Change: In addition, we've made significant progress in becoming more cost efficient with our operations.
Speaker Change: Even in the current environment, our strategy is driving robust financial and operational results And our investments in capacity will accelerate those results when the freight market free bounds
Speaker Change: We have a long run away for additional market share and earnings growth and we are well positioned to capture death of opportunity.
Speaker Change: Now I'm going to hand the call over to Kyle to discuss the financial results, 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.
Kyle Wismans: We reported a strong third quarter across the company with revenue up 4% year over year to $2.1 billion.
Kyle Wismans: This includes top line growth of 2% in our LTL segment. Excluding fuel, our LTL revenue is up 5% in your year.
Kyle Wismans: On the cross-eyed and LTL made another significant reduction in purchase transportation.
Kyle Wismans: Our expense for third party carriers was down year-vehre by 40% largely due to in-sourcing more of our line of runs.
Kyle Wismans: This equated to a savings of $39 million in the quarter.
Kyle Wismans: and we continue to manage labor effectively with our procurement, improving by 1% sequentially.
Kyle Wismans: This helped to mitigate the year of your increase in total salary wages and benefits of 4% primarily due to inflation.
Kyle Wismans: Additionally, we were more cost-efficient with fleet maintenance, which brought down our cost per mile by 12% you are rear.
Kyle Wismans: The appreciation expense increased by 21% or $14 million, reflecting the investments we're making in the business.
Kyle Wismans: This continues to be our top priority for capital allocation in LPL.
Kyle Wismans: Next, I'll cover Adjusted Yvita, starting with the company's hole.
Kyle Wismans: We generated a just a diva of $33 million in the quarter of 20% from a year ago.
Kyle Wismans: are adjusted even a margin of 16.2% with a year of improvement of 220 basis points.
Kyle Wismans: Looking at just the LTL segment, we grew a just a little bit of like 18% to $284 million, underpinned by increased of approximately 17% in adjusted operating income.
Kyle Wismans: In our European Transportation segment, adjusted EBITDA was unchanged from a year ago at $44 million.
Kyle Wismans: and our corporate justice EBITDA was $5 million compared to a loss of $7 million for a year ago.
Kyle Wismans: Excluding a $9 million game from a past investment in a private company which was sold in the quarter, corporate adjusted EBITDA was a loss of approximately $4 million.
Kyle Wismans: We're turning to the company as a whole, we reported 3rd quarter operating income of $176 million, up 14% of your year.
Kyle Wismans: and we grew net income from continuing operations by approximately 11% to 95 million dollars, representing the looted earnings per share of 79 cents.
Kyle Wismans: On an adjusted basis, the LUTO DPS increased by 16% year-rear to $1.02.
Kyle Wismans: And lastly, we generated $264 million of cash flow from operating activities in the quarter and deployed $123 million in that cap X.
Kyle Wismans: Moving to the balance sheet, we ended the quarter with $378 million cash on hand.
Kyle Wismans: Combined with available capacity under our committed borrowing facility, this gave us $934 million of liquidity.
Kyle Wismans: We had no borrowing outstanding under a deal of facility at Corder End.
Kyle Wismans: Our net debt leverage ratio at the end of the quarter was 2.5 times trailing 12 months adjusted EBITDA.
Kyle Wismans: This was an improvement from 2.7 times at the end of the second quarter and three times at the end of last year.
Kyle Wismans: We'll continue to make investments that enhance our earnings growth trajectory and support a long-term goal of an investment-grade profile.
Kyle Wismans: Now before I wrap up, I want to highlight some updates to our full year 2024 planning assumptions.
Kyle Wismans: We now expect intersex events will be in the range of 225 to $230,000.
Kyle Wismans: We're also narrowing our expected adjusted effective tax rate to the range of 24% to 25% for the full year.
Kyle Wismans: and we expect the Ludicier Count to be 120 million shares.
Kyle Wismans: Our other planning assumptions this year remain unchanged.
Ali: Now I'll turn over to Ali.
Ali: will cover operating results.
Ali: I'll start with LPL where we executed well in a soft freight market to deliver another quarter of margin improvement and earnings growth.
Ali: On a year over year basis, our third quarter shipments per day were down by 3.2% overall, but they were up in our local channel by double digits accelerating from the second quarter.
Ali: Local Accounts are a key part of our strategy and an opportunity to earn market share at a favorable margin.
Ali: Our wait for shipment continued to moderate this quarter and was down 0.7%.
Ali: Colleatively, the dynamics resulted in a 3.9% decline in punish per day, which largely tracked the seasonality and outperformed the industry as a whole.
Ali: On a monthly basis, Argyleye Tunnage per day with down 0.8% August was down 4.7% and September was down 6.1%.
Ali: Looking just that shipments per day July was up.1%, August was down 4.6% and September was down 4.9%.
Ali: For October, we estimate that punish will be down 8% from the prior year, tracking roughly inline with seasonality, excluding the impact of a cyber attack at a peer last year.
Ali: Our pricing trends remain strong as customers continue to recognize the value of our service quality and premium offerings.
Ali: This enabled us to deliver another quarter of the Bob Market pricing growth.
Ali: On a year of a year basis, we grew yields, ex-fuel by 6.7% and revenue per shipment by 6.6%.
Ali: and Patel. Importantly, both yields and revenue per shipment increase sequentially from the second quarter this year and also on a two-year stack basis.
Ali: We expect these trends to continue for the fourth quarter, reflecting ongoing momentum with our pricing initiative.
Ali: Turning to margin, we improved our third quarter of Justin operating ratio by 200 basis points year over year to 84.2%.
Ali: To quenchily, our adjusted OR increased by 100 basis points coming in at the top of our guided range.
Ali: Our robust margin performance was primarily driven by yields growth and bolstered by our cost initiative and productivity gains.
Ali: We've now delivered significant year-over-year O'R. improvement for four consecutive quarters, all in a historically soft freight environment.
Ali: and it's notable that we were the only public LCL carrier to expand margin in the third quarter.
Ali: Our four year outlook is for an adjusted OR improvement of 150 to 250 basis points and we expect to be at or above the high end of that range.
Ali: Moving to the European Business, we executed well in the quarter to outperform the industry and a challenging market for freight transportation. Our pricing outplace inflation and we manage cost to mitigate the impact on earnings.
Ali: 3rd quarter adjusted EBITDA for the segment was flat compared with last year and we generated double digit growth in the UK, which is the key market for us.
Ali: The improvements we've made in the business will accelerate results in Europe when the macro recovers.
Ali: I'll close with the summary of the major drivers behind the record margins we're reporting into trust of the freight cycle.
Ali: We're making significant progress with service quality and we expect this to propel margin expansion for years to come.
Ali: are pricing, is outpacing the market, and continues to gain traction. We believe we're just beginning to capture the massive yield opportunity ahead of us.
Ali: and we're operating far more productively by reducing third party line-haul miles to historic lows and effectively managing our variable cost.
Ali: These initiatives are all in the early innings with strong momentum and their impact will accelerate when demand begins to recover.
Ali: Now we'll take your questions operator, please open the line for Q&A.
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue.
Speaker Change: and may press star 2 if you'd like to remove your question from the Q. For participants, eating speaker equipment and may be necessary to pick up your hands set before pressing the star keys.
Speaker Change: Please let it yourself to one question when you come up in the queue. If you have additional questions, you welcome to get back in the queue and we'll take as many as we can.
Speaker Change: One moment please while we pull for questions.
Speaker Change: I'm going to be a little bit more nervous than I thought.
Speaker Change: i
Speaker Change: Thank you. Our first question is from Ken Haxter with Bank of America. Please pursue their question.
Ken Haxter: Hey, great good morning and nice job on the continued margin improvement. So Mario, sticking on that, where is the pricing gap now versus the margin? As you think about the path you started on with network 2.0, I guess ultimately the margin potential.
Ken Haxter: and then thinking about the volumes down 8% knocked over. If you normalize for ask, how is the underlying market progressing that?
Mario Harik: I think so, thanks Ken first if you look at the margin gap on the pricing side So when we thought out planned that was roughly product in this teens
Mario Harik: and the pricing gap between us and best in class on the pricing of opportunity. And so far this year we were able to claw a couple of points out of that given our performance in yield versus the market. And that was the combination of one of our service products.
Mario Harik: Continues to improve tremendously and we get great accolades from our customers who understand that we are investing more in our network, we are investing in rolling stock and that comes at a premium. But we are also seeing a great contribution from premium services that we are onboarding. We launched about the half a dozen either expanded or new premium services and these come at a higher yield than higher revenue.
Mario Harik: and we're also growing our local account segment here in the third quarter because we should have encountered that segment more than 10 percent and that also comes at a higher yield and a higher margin as well. And over the years to come, broccoli has that gap is driven by a premium price to service and we expect to keep on bridging that gap.
Mario Harik: and then the other half comes from both SS Audio Revenue or Premium Services as well as local accounts.
Mario Harik: in terms of volume trends, what we're seeing here in quarters. First of all, you look at the third quarter. August was the most subsiesinal month. It was a few points below seasonality compared to where we were in July.
Mario Harik: September was roughly around about 6.1% and that was roughly a point.
Mario Harik: Be a low seasonality versus August.
Mario Harik: but that starts with the beginning of the month was better than the end of the month that was impacted by the hurricane.
Mario Harik: and ultimately in October, we are down, there's a couple of days here to go, but roughly around 8% which is roughly in line with seasonality. So we're seeing the subsesinal demand normalized here in the month of October. And as you said, the portion of the year on year delta is the cyber attack that's happened at one of our peers and we estimate the impact.
Mario Harik: of the cyber attack that has been 2 points on the year on your calm. When you look at October of last year compared to October this year.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: but
Speaker Change: Our next question is from Scott Group with Wolf Research. Please proceed with your question.
Speaker Change: Hey, thanks for morning.
Speaker Change: So Mario with tonnage down a lot
Speaker Change: is it limiting the pricing upside in the near term? I don't know, maybe talk about pricing renewals. And then, if I just take the implied fourth quarter guide,
Speaker Change: It doesn't imply a lot of year over year margin improvement, I know it's early, but any early thoughts on how to think about LTL margin improvement in 25.
Speaker Change: I'll start on the overall pricing environment's card and I turn it over to Kyle's the design contractor in New Orleans and I can discuss all the other outlook.
Speaker Change: But if you look at pricing overall, you can then see a very constructive pricing environment out there.
Kyle Wismans: and if you take a step back, a year ago, a significant amount of capacity existed the market. And we continue to see that industry pricing backdrop be constructed. I mean, you heard that our peers report here last week and this week and all the commentary leads to a strong pricing environment.
Kyle Wismans: Now, specifically in our industry, we typically price one to 200 basis points ahead of cost inflation and we're seeing that play out here and we are outperforming on the pricing side, given what I mentioned earlier, from one perspective.
Kyle Wismans: We are being rewarded for the better service product from our customers But we also have these avenues in terms of local and cal�ge generating higher yielding and higher margin trade and incremental access to your revenue that is coming from the incremental services that we are launching the power customers are asking for. So it's the win-win where the customer gets the service from us, they get the experience the great service and obviously we get the yield that benefits from that as well. And it will key in the third quarter where we will be able to deliver a great yield outcome, I set everything on a quarter over quarter basis, accelerating on a two-year stack basis, the absolute number for revenue for shipping is up to yield for the 100th weight is up. So all of these KPIs are moving in the right direction for us here as we go towards the back half of the year.
Speaker Change: And Scott, when you think about renewals, so renewals were up high single-digit in Q3. So again, another strong performance driven by a lot of our service improvements.
Speaker Change: It's important to note it's our fifth consecutive quarter to be in that range. And the other thing I think is important here is it's flowing through. So we're seeing revenue per shipment in the quarter up 6.6%. That's our seventh consecutive quarter of sequential growth. So we're confident in our ability to deliver strong, above-market renewals both in Q4 and next year.
Speaker Change: And Scott, just on the OR side, we do expect a strong quarter here in the fourth quarter driven by continued strength in yield and cost management. Typically Q4, it is a more volatile quarter, which does give a wider range of outcomes and volume trends can be impacted by the holidays and weather. However, if you take a step back and you look at the five-year average for the sequential OR change from Q3 to Q4, it's been in that 250 basis points range and we would expect to do better than that normal seasonal trend as we roll into the fourth quarter. And I think more importantly, when you roll that into the full year for 2024, we expect to now be at or above the high end of our 150 to 250 basis points OR improvement range, which is very strong.
Speaker Change: Kyle Wismans has a very strong performance at the trough of the cycle.
Speaker Change: Thank you, guys.
Speaker Change: Thank you.
Speaker Change: Our next question is from Daniel Embro with Stevens Inc. Please proceed with your question.
Speaker Change: Hey guys, thanks for taking the question. This is Reed C on for Daniel.
Speaker Change: Mario, service has remained pretty solid, and I think you held on to gains in the MassGEO survey this year. Other than insourcing line haul, can you talk about where you see some remaining opportunities for service that could potentially still be pain points for customers?
Mario Harik: Yes, so overall we are on a great trajectory of service improvement. If you look at our damage claims ratio here in the third quarter, we were at a 0.2% damage claims. That's when we started our strategy a few years ago, we were at 1.2%. So a tremendous reduction of more than 80% of damages in our network and our customers appreciate that tremendously.
Mario Harik: Typically, when we move the freight on our equipment, we are more efficient at doing it. We get more space in the trailers, we have much better on-time performance. Here in the month of October, our road flex operation on-time performance was nearly 100%.
Mario Harik: in terms of being on time, and as we continue to insource more third-party line haul, we're going to continue to see our on-time get higher and higher, and obviously our goal is to be in the high 99% when all of these things are completed.
Mario Harik: Similarly, on the improving of damages...
Mario Harik: We are continuing to work as we expand the footprint of our network in some locations. We can build more pure trailers to destination, which reduces the re-handling in our network that will further take the damage performance even in a better place. And our goal is to get to a 0.1% damage claims ratio over the quarters and years to come here. So overall, again, the trajectory is very strong. We have a great plan that we're executing on, and I'm very proud of the team of the progress they're making.
Speaker Change: Awesome, thanks for the color.
Speaker Change: Thank you.
Speaker Change: Our next question is from Fadi Chamoun with BMO Capital Markets. Please proceed with your question.
Speaker Change: Thank you. Good morning.
Fadi Shamoon: I just wanted to see if you can give us some feedback on maybe 2025, just thinking about some of these levers that you have been able to use this year from the accessorial, the local channels, and ultimately what you're doing on the PT side, which seems like...
Fadi Shamoon: has a little bit more to go as we go into 2025. Like, you know, your tonnage per day or overall likely flat this year, like if we don't see material.
Fadi Shamoon: kind of macro cyclical improvement over the next few quarters. What does 2025 look like? Is there more room for kind of our improvement without the macro environment which can give us kind of any high level way to think about 2025?
Speaker Change: When you look at 2025, we expect a strong year, both from an all-improvement perspective and an earnings growth perspective. And this is valid even in the current soft macro environment.
Speaker Change: And obviously any improvement in the demand backdrop will only accelerate our results even further. You look at 2024, we're going to be at or above our guided range for all improvements. It's a very soft particulate matter market. And we'll talk more about the specifics of 2025 next quarter, once we close out the year. But that said, if you look at the levers...
Speaker Change: We are heading into next year with another great year of service under our belt.
Speaker Change: We also have launched a call of half a dozen or so premium services or expanded premium services here in year in 2024 and our sales team and customers are incredibly excited about those services. We're building momentum, we're building the pipeline, we're converting more of that revenue on our trucks and that comes at a higher margin and a higher yield and it's a service that our customers are asking for.
Speaker Change: new local customers. And here this last quarter, despite shipment count being down in the single digit range, our local customer shipments were up more than 10%. And that's going to continue to accelerate as we head into next year. And the 25% more local sellers we have added to the team will have effectively a longer runway.
Speaker Change: to build their book to be able to convert more of those customers into next year. Then you look at line haul insourcing, where we expect to reach our 2027 target by end of this year in terms of how many miles are outsourced to third parties.
Speaker Change: And we're going to get that down to single digits next year. And that's going to be a tailwind on the cost side. And ultimately, we opened up 21 of the 28 service centers so far. We're going to be adding another, the remaining of them by end of Q1 of next year. And these are making us more efficient. And there will be OR accretive and EPS accretive as we head into 2025. So that's tailwinds for margin improvement as well. So again, we expect a strong year in 2025. And we're not stopping there. When you think about the next up cycle with all the initiatives we have, investments and capacity, we're incredibly excited about the years to come and eventually driving our OR down to the 70s and beyond.
Speaker Change: I appreciate it, Mario. Thank you.
Mario Harik: Thank you.
Speaker Change: Thank you. Our next question is from Chris Weatherby with Wells Fargo. Please proceed with your question.
Chris Weatherby: Hey, thanks. Good morning, guys.
Chris Weatherby: Mary, I guess I wanted to pick up on that commentary, particularly around the new facilities. I guess 21 and 28 opened at this point. I guess I'm curious how you think about the relative profitability of the new centers. I know they're not necessarily for pure expansion. There's a lot of efficiency and density opportunity within these facilities.
Chris Weatherby: But how do you think about their performance relative to the sort of core network from an OR perspective? And I guess as you think about...
Chris Weatherby: the potential for incremental margins as you move forward, maybe in either a neutral environment to a potentially positive environment. How did those facilities play into that incremental profitability as you want to push that OR towards a 70s or better?
Speaker Change: Yes, so Chris, if you look at the service centers we opened up so far, so we opened up 21 out of the 28, and 8 of these were net ads.
Speaker Change: so they are in incremental sites we are adding to a market or a new market we are expanding into and 13 were relocations from a smaller location to a larger location. Now we do this we do expect these sites to be or are neutral here in 2024 and so far this has been playing out the way we expected.
Speaker Change: And we expect them to be more accretive by next year. Now keep in mind, with 21 service centers we opened up, we've only added 18 at headcount to our staff, so 80 people to support the opening of these sites.
Speaker Change: And we're gaining efficiency improvement from them. So when you look at these sites, we are we are seeing an improvement in pickup and delivery efficiency. So our city operations is, you know, call it.
Speaker Change: Low to mid single digit more efficient on a percentage basis in those in those markets given the larger size
Speaker Change: And similarly, our line haul efficiency has increased in that low to mid-single digit as well, which is what gives us the efficiency improvement here in the near term, and that's going to ramp as we head into next year. When you look at the incremental margins we're seeing from these sites, it's 40 percent plus, and all of the sites are operating at or above our expectations so far since we have opened them up. So again, when you roll that forward into next year...
Speaker Change: Very helpful. Thanks, Meagher, appreciate it.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question is from John Chappell with Evercore ISI. Please proceed with your question.
John Chappell: Thank you, good morning. I want to focus on revenue per shipment trends. Not only were they up sequentially, but it actually accelerated biggest sequential improvement over 3% in the last several quarters. I know you talked about some of the accessorials.
John Chappell: and some of the volume challenges as well. But as we think about going forward,
Speaker Change: Do you feel like a lot of that, I don't know if you want to call it low-hanging fruit, but a lot of the opportunity in this downturn has been plucked, or do we think about that kind of re-accelerating at some point next year when you do get straight tailwind behind you?
Speaker Change: Hey Jonathan, what do you think about...
Speaker Change: The Revenue Pursuant Opportunity, I still think there's a lot of opportunity here. I mentioned the renewals already, so renewals have been strong and continue to be strong. I think the other thing to think about there is some of the accessorial pieces. So even though we have made some progress, and as Mario mentioned, the goal there is to get to 15% of revenue. We're north of 10% now. But there's still a lot more we can do there. So that's about five points of pricing upside that's still in front of us, which we can capitalize on. And again, some of the services are starting to gain traction. We're building a backlog.
Speaker Change: Some of the premium offerings, including the retail store rollouts, must arrive by day trade show.
Speaker Change: recently expanded Mexico cross-border services. So a lot we can do there and I think on top of that we're continuing to improve mix. Mario mentioned the growth in the local shipping accounts. As that moves and that continues to grow, that's going to be a tailwind to yield. So I think we're still early innings here and a lot more to do and just one more last framing on assessorials.
Speaker Change: You know, to get to 15% of revenue, it's probably a five-year path to get there, and we're about one point through it, so still a lot more to go there.
Speaker Change: Okay. Thanks, Kyle.
Speaker Change: Thank you. Our next question is from Tom Wadowitz with UBS. Please proceed with your question.
Speaker Change: Bye.
Tom Wadowitz: Yeah, good morning. Let's see, and you know it's nice to see the continuing momentum and the results of pricing in the margin.
Tom Wadowitz: I'm wondering, you've had quite a few questions on price. I think, Mar, you've been very clear on the levers for that to continue. What do you think is kind of a, I guess,
Tom Wadowitz: 2025, I think, you know, maybe for the better players, 4 or 5 percent.
Tom Wadowitz: would be, you know, a thought on normal LTL pricing.
Tom Wadowitz: I don't know if you agree with that. I know it depends a little on freight backdrop And then is it appropriate to expect you to be higher than that given everything you're mentioning? You know so if normal is four to five you're you stay in that six or seven range Just wanted to see if you could give it a little bit more of kind of
Tom Wadowitz: bringing it toward numbers, not obviously looking for guidance, but just kind of how to frame it and think about it in terms of what you get on pricing and what's normal. Thanks.
Speaker Change: We're going to continue outperforming the industry from a pricing standpoint, as you've seen us do over the last year. We have a lot of pricing initiatives that we're executing on, and we would expect that momentum to continue here into the fourth quarter and into 2025 as well.
Speaker Change: And if you look at it from a versus market perspective, I mean, we expect to continue to outperform the market into 25 and beyond. And as Kyle and Ali mentioned earlier on, when you look at these incremental opportunities, typically in LTL, we price, you know, call it 1 to 200 basis points above concentration.
Speaker Change: And you add on top of that roughly a point from assessorial revenue and a half a point from that local account next.
Speaker Change: is what would give us the incremental, effectively, outperformance versus market. We saw that here play out in 2024, as Avi mentioned.
Speaker Change: and we expect that to continue in 2025 and 2026 and beyond. Now the actual number could depend on the macro recovery, we can see pricing being higher than the numbers you gave, but it depends on the macro as well, on what concentration is doing as well.
Speaker Change: So do you agree with the characterization on market though that kind of normal market might be four to five especially if you look at kind of the you know the better players in LTL?
Speaker Change: That looks like a reasonable assumption for next year.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Our next question is from Brian Ostenbach with JP Morgan. Please proceed with your question.
Brian Ostenbach: Hey, good morning. Thanks for taking the question. So, just a quick follow-up first on October. Obviously, the hurricane impacted a lot of the freight markets in the quarter, but maybe all the way through the month. Just wanted to see if there's any weakness from that. Maybe seeing in the down 8% that you called out the fiber attack is.
Brian Ostenbach: Part of the noise there.
Brian Ostenbach: And then just, Mario, I think it'd be helpful going into the fourth quarter and as next year if you just give us a sense of some of the customer conversations you're getting in terms of the different types of customers, local and national, and then also across the industrial and retail and markets as you look into the end of this year and next year.
Mario Harik: As you said, Brian, when you look at the month of October, we have seen that impact, the year-on-year impact from the cyber attack last year at one of our peers.
Mario Harik: So, when you look at it, the back half of the month on a year-on-year basis was obviously much better than the first half of the month that was impacted by the cyber attack. But when you look at it, this is what we said last year, the impact of the cyber attack for last October was called roughly around 1,000 shipments of incremental shipments per day when you average the entire month, which is roughly around a 2% impact on tonnage. So, when you normalize for that, you know, obviously you've got to take that out of the 8%.
Mario Harik: We did see also the impact both at the end of September and at the beginning of October that impacted overall the volume trend, given some of the markets, when you go to the southeast of the country, they were obviously impacted by not being able to ship product in and out of those regions for a few weeks, although we were up and running very quickly and I was very proud of the team, all of our employees were safe and we were able to support our customers within 24 hours where needed, but at the same time obviously the market was impacted.
Mario Harik: Now, when you look at customer demand trends...
Mario Harik: It has been, when you look at the, over the summer, it has been softer, sub-seasonal. When you look at the month of August, as I mentioned earlier on, it was roughly around a few points lower than seasonality, normalized to a point lower than seasonality in September, normalized to roughly in line with seasonality in October.
Mario Harik: Now, what we saw in the quarter was the industrials being more impacted than retail. We saw industrial shipments be down at twice the rate.
Mario Harik: And what we've heard from customers is some subsectors of the industrial economy, so electrical equipment manufacturing or machinery, are much more bullish about the outlook when they look forward. But if you look at construction or industrial for agriculture, they are more bearish. They are seeing more softness in demand looking forward.
Mario Harik: On the retail side, they were down still, but down less than their corresponding industrial side. Inventories are mostly normalized. Consumer demand is holding. So we're seeing, we saw a retail sector that was constructive, but still down on a year-on-year basis, but less than the industrial counterparts.
Mario Harik: Here today we have onboarded more than 8,000 new logos in that channel and we saw shipment count in that segment grow more than 10% here in the third quarter, but that's more company specific and given the improvements in service and the execution of our sales force, we are able to deliver on those outcomes. But again, if you look forward, it's tough to predict where things will go from here through the rest of Q4 or early next year. I mean, there's a scenario where we start seeing an inflection at the end of the first quarter or first half of next year if rates continue to come down and the overhang of the election is behind us. But we'll see. It's very tough to predict. There's a lot of mixed signals.
Mario Harik: in terms of how the outlook would do here in the near term.
Speaker Change: Okay, thank you Mario
Speaker Change: Our next question is from Scott Schneeberger with Oppenheimer & Company. Please proceed with your question.
Scott Schneeberger: Thanks very much. Mario, could you please elaborate on the half-dozen premium services you rolled out? Are there more to come and maybe a little anecdote about what you've done there so far? And then just on top of that, how is the investment in the sales force? Is that something that you're continuing to build or is that at a pause right here? Thanks.
Mario Harik: Yes, so something with the premium services, I'll give you a few examples, Scott. For example, in the retail side, we launched a new service called the Retail Store Rollouts. So you can imagine whenever you have a consumer packaged good company that wants to, for a certain holiday, like Halloween year coming up this week, they want to send a lot of product to a lot of stores simultaneously. So we effectively have a desk for them that can support
Mario Harik: getting a consolidated bill at the end of it and making sure that all of that freight is being tracked in conjunction as one as one unit.
Mario Harik: Similarly, we launched a product called Retail Solutions, or must-arrive by date.
Mario Harik: So when you think of a company shipping into a large retailer, typically they have chargeback programs. So if you don't deliver the product within a certain time window, then obviously as a shipper or supplier to that retailer, you get a chargeback as a percent of the value of the goods.
Mario Harik: In terms of moving forward, we are looking to launch a number of incremental services as well. A security divider is one of them. Today we do, for example, exclusive use of trailers, so where we ship, where you can as a customer book an entire trailer, but in the future you can also do washer trailers if you have high value products you want to protect.
Mario Harik: We are looking at services like expedited services within the network and intranetwork and a number of others as well That we're working with our with our customers on to
Mario Harik: So, we had a plan to grow the local sales force by 25% and we reached that plan effectively where we are now. We are still adding incremental headcount to our sales force.
Mario Harik: But we still have to define going into next year whether we want to further grow our local sales force or whether we feel Good about where we are at this point. We're feeling good about the size of the sales force We're still incrementally adding new and new roles including business development roles on the team But we'll see if we're going to expand the local sales force beyond that as we finalize here budgets for 2025
Speaker Change: Great, thanks for the call.
Speaker Change: Our next question is from Bruce Chan with Stiefel. Please proceed with your question.
Bruce Chan: Hey, good morning, gents. Thanks for the question. Kyle, you talked about your top priority for capital allocation here. And I'm wondering, you know, if you think about the potential for a sale of the European business.
Kyle Wismans: Kyle Wismans
Kyle Wismans: Sure, so when you think about it, you know, let me start first over with overall capital allocation. Obviously, our priority is to continue to reinvest in the business now. And outside of that, we want to achieve an investment-grade profile. But that said, what we're looking at our leverage now at two and a half times. Obviously, a European transaction can help meaningfully reduce that. But I would say we've made meaningful progress.
Kyle Wismans: on our leverage so far this year. You think about the end of last year, we were at three times. We were 2.7 times last quarter and 2.5 times this quarter.
Kyle Wismans: So we're making a lot of progress, and again, we're committed to maintaining or pursuing an investment-grade profile for the business. And I think we can achieve that both through the increase in EBITDA as well as cash flow generation. And again, a European transaction can obviously accelerate some of those efforts. And the one other piece I'd like to mention as well is just when you think about leverage and how it progresses, it's really CapEx.
Kyle Wismans: Because for us
Kyle Wismans: Catholics this year on a percent of revenue for LTL is somewhere in the 13.5% to 14%. And if you think about the future, that's going to come down. So if you think about 2025, we'll have the ability.
Kyle Wismans: to ratchet that down. You think about bringing the server centers online. Those 28 server centers were about 2 million of CapEx per site. So that comes down next year. That'll help us drop that number probably a point.
Kyle Wismans: And then outside of that, with all the insourcing we've been doing to Lion Hall, the need to increase the fleet next year is also likely to come down. So when you think about that 13.5%, 14%, it probably comes down to a couple points. So I think the outlook from a capital allocation standpoint is going to give us a lot more flexibility moving forward, with or without the sale of Europe. But then I'll turn to Mario to talk about Europe.
Speaker Change: What do you make of the high scarcity value of LTLs, dedicated solutions, warehousing, supply trucking, brokerage in the Western European geographies, including the UK, France, Spain, Portugal and many other countries?
Mario Harik: And again, we're going to be patient to make sure we are getting the right value for it. Meanwhile, when you look at it, Bruce, we are performing really well in Europe. I mean, you look at the third quarter here, we grew revenue 7% on a year-on-year basis. It's the strongest quarterly volume and revenue growth since 2021 post-pandemic.
Mario Harik: It's the fifth consecutive quarter of accelerating year-on-year volume growth And we're well positioned to capitalize on the on the market over there and again long term We're going to be a pure plain old American LTL carrier
Speaker Change: Now, when you look at what Kyle just mentioned, that's another avenue for value creation for our shareholders, because when you think about it, overall, our earnings are compounding. As I mentioned earlier on, we expect to be either at or above the target range of margin improvement for us here in LTL in 2024, and there's only upside from here. At some point, whether it's the next couple of quarters, whether it's next year, we're going to see the trade market cycle starting to inflect.
Speaker Change: And when that starts happening, we're going to compound our results, our growth, our earnings growth faster.
Speaker Change: And when you look at CapEx normalizing what Kyle just mentioned, call it a point or so a year for 2027, that's only going to expand our free cash flow conversion. You couple that with proceeds from Europe.
Speaker Change: Okay, very good. Thanks for the color, gents.
Speaker Change: Thank you.
Speaker Change: Our next question is from Robbie Shanker with Morgan Stanley. Please proceed with your question.
Robbie Shanker: Thanks, good morning guys. A two-parter on service, if I may. You mentioned on the top of the call that, you know, damage claims are getting much better to 0.2 from 0.4. Does that start running into diminishing returns here? And also, maybe part two, kind of on the Matthews survey, you guys made progress in the overall ranking and have held your place in the national ranking. Does that take time for that service to kind of penetrate into the national ranking and kind of, you know, what's your target on that ranking in maybe three years from now? Thanks.
Speaker Change: When I was first looking at damage claims, our goal is to be best in class when it comes to no damages in our network. And over the last few years, again, we reduced damages by more than 80% here in quarter. We reach a new company record every month of the quarter, and we're going to keep on improving there. Our view is very simple. When we take care of the customer, they give us more freight, and they're also willing to pay a higher price for the freight because that causes less disruption in their supply chain. So we're going to keep on working that until we become best in class when it comes to service.
Speaker Change: Now, when it comes to the MAPS SEO service, as you said, we were the most improved on a two-year stack in terms of MPS scores. If there's one data point we look at in terms of overall our performance, but more importantly, Ravi, we measure satisfaction of our customers on a weekly basis.
Speaker Change: Over the last few years, it's up by more than 40% over that period of time. And ultimately, customers vote with their wallet, and we're seeing effectively growth in our numbers, in yield, we're seeing growth in margin, and all of that's driven, rooted by the improvements in services we are making.
Speaker Change: Great, thank you.
Speaker Change: Our next question is from Jason Seidel with TD Cowan. Please proceed with your question.
Jason Seidel: Thank you, Arthur. Hey, Mary and team, good morning. You know, really nice job on the operational improvements in the quarter. I wanted to ask a question, you know, some of your peers have talked about, you know, freight continuing to shift to truckload with the weakness in the truckload market place.
Jason Seidel: with that multi-stop LTL or LTL consolidation, whatever you'd like to call it. I guess two parts. One, are you guys still seeing a lot of that out there? And two, how quickly do you think that could jump back to the LTL market in 25 once the TL market recovers?
Speaker Change: And in that particular case, if you look at our network, last quarter our average length of haul was about 855 miles.
Speaker Change: When you apply in the trough of the market a $2 truckload rate to that, the corresponding truckload shipment would be about $1,700 to move that. You compare that to an average revenue per shipment for us was $380. So there's a big dislocation between $380 and $1,700 revenue per shipment in truckload versus MTL. Now, sometimes I get the question, well, Mario, what about heavy shipments?
Speaker Change: So I had the team run the break-even point, and that break-even point is for shipments over 15,000 pounds, and today less than 0.3% of our shipments are that heavy. So there is a small conversion there. We estimated it to be half a point, maybe less than a point, but again, once stockholding rates go up, we'll come back to LTL as well.
Speaker Change: That's fantastic color. Appreciate it, Mario.
Speaker Change: You got it.
Speaker Change: Our next question is from Stephanie Moore with Jeffries. Please proceed with your question.
Stephanie Moore: Hi, good morning. Thank you.
Stephanie Moore: Maybe sticking on some of these last couple questions on the service side, can you talk a bit about your level of confidence of keeping these strong service levels even in an upswing as the environment tightens and there's a bit more strain on your network?
Speaker Change: Now, I'll give you a couple of proof points. When you look at last year, when Yellow went bankrupt,
Speaker Change: So think about a macro-recovery, think of a cycle-recovery. A 7 points higher than seasonality increase in volume is massive.
Speaker Change: And during that period of time in the summer of last year, we saw our service product, our damages, and our on-time improve every month in Q3 of last year, Q4 of last year, and that trend continues through 2024 here. So effectively, we already have done it once in an up-cycle through the bankruptcy of one of our peers.
Speaker Change: Now, when you look at moving forward, a lot of it goes also to having capacity.
Speaker Change: All of that capacity is going to put us in a prime position to provide great service for the customers and be able to capitalize on the upswing of demand when it comes.
Speaker Change: Great, appreciate the color. Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question is from Ari Rosa with Citi. Please proceed with your question.
Ari Rosa: Hi, good morning. Congrats here on the strong results, guys. So, Mario, I wanted to stay on that line of thinking. Talking about the 30% excess capacity, it seems like a lot of your peers also are sitting on quite a bit of excess capacity. From an industry structure perspective, what gives you confidence, you know, if the market doesn't tighten?
Ari Rosa: I guess, how long are you willing to sit on that excess capacity and what gives you confidence that some of your peers don't also start to maybe chase a little bit of volume by kind of cutting rates? Is there any risk of that or what gives you confidence that that doesn't start to happen? Thanks.
Speaker Change: is a low to mid-single digit as a percent of revenue. So in other terms, as an LTL carrier...
Speaker Change: And they're going to work harder to move that freight for a cost category that is very low on the P&L.
Speaker Change: So if you think about it as a capacity though from the industry as a whole, as I mentioned earlier on when you look at all the publicly traded LTL carriers, shipment counts when you look at pre-COVID 2018-19 or 2021 which was post-COVID, it was still slightly lower than 18-19.
Speaker Change: Compared to where we are in 2024, shipment demand in our industry on the low end is down in the low teens and on the high end is down in the high teens.
Speaker Change: Now, when Yellow went bankrupt last year, it was at a time where demand was depressed. So you took out 10% of the industry capacity through them ceasing operation.
Speaker Change: Since then, they've sold about, you know, call it roughly half of their service centers. About 90% of these service centers went back into the hands of LTL carrier.
Speaker Change: So even in a year from now, you're going to have 94-95% of the industry capacity that existed a year ago.
Speaker Change: So that's what gives us a lot of confidence in the next up cycle. And I'll give you just some anecdotal examples. Here last week, I was actually visiting some of our customers in the Minneapolis area.
Speaker Change: Kyle Wismans, CEO Alphabet and Google
Speaker Change: Very helpful, thank you.
Speaker Change: For more information visit www.FEMA.gov
Kyle Wismans: Thank you.
Speaker Change: Our next question is from Jordan Allinger with Goldman Sachs. Please proceed with your question.
Speaker Change: Yeah, hi.
Jordan Allinger: So just a couple quick things, um, you know first I'm just sort of curious, you know with the it's great All that, you know the talking about price and you know, five points left left of price, etc I'm just sort of curious how does the elasticity of demand work versus price? Do you find customers?
Jordan Allinger: Do they balk at it or do they say, you know what, your service is better, so we're going to stick even though you guys are pushing price. I'm just sort of curious how that interplay works on elasticity. And then just as a quick follow-up, I know you mentioned October was about in line with normal seasonality.
Jordan Allinger: Is the expectation November and December will track normal seasonality, and if so, what does that mean for tonnage for the quarter? Thanks.
Speaker Change: Market Contract Renewals and Pricing Growth. I'd also point out that there's other ways for us to improve our yield just beyond price. You think about growing the revenue mix of premium services in the local channel, both of which are both yield and margin accretive for us and go beyond just raising prices to the end customer. And so we're going to continue to take a disciplined approach to grow our market share. As Mario noted, in the local channel, for example, we're growing shipments by more than 10% and that accelerated from the second quarter. So overall, our top priority is to continue to drive OR improvement. For us, yield is going to be the main lever for that margin expansion. You look here in the third quarter and likely for the full year as well, we're going to be the only public LTL carrier to expand margin.
Speaker Change: Digital Digit Decline Range.
Speaker Change: Thank you.
Speaker Change: For more information visit www.FEMA.gov
Speaker Change: Thank you. That is all the time we have for questions today. I would like to hand the floor back over to Mario Harik, CEO, for any closing comments.
Mario Harik: Thank you, operator. Thanks everyone for joining us today.
Mario Harik: As you saw from our results, we are able to deliver a strong margin improvement in a soft market for freight transportation.
Mario Harik: And our strategy is working and we have the right team behind it, executing on it.
Mario Harik: Our service has never been better and keeps on improving. Our yield is above market in terms of growth, and our customers are seeing those service improvements we're launching. Our premium services are gaining momentum. Our local accounts are growing. We've added more than 8,000 local accounts so far year-to-date.
Mario Harik: And on the cost side, our technology is enabling us to run the business very efficiently and insourcing line calls at a pace of three years ahead of plan.
Mario Harik: And importantly, all the investments we're making in capacity are positioning us to be able to do really well in the eventual freight market recovery and getting fantastic incremental margins as we grow the business. We look forward to updating you over the next quarter. And operator, you can now end the call.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.