Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- XPO Inc (XPO, Financial) reported a 9% year-over-year revenue growth to $2.1 billion in a soft market for freight transportation.
- Adjusted EBITDA increased by 41% to $343 million, and adjusted diluted EPS was up 58% year-over-year at $1.12.
- The company achieved a record low damage claims ratio of 0.2%, significantly improving from 0.7% last year.
- XPO Inc (XPO) opened 14 new service centers and plans to open 10 more in the back half of the year, enhancing network capacity and operational efficiency.
- The company reduced purchased transportation costs by 22% year-over-year through insourcing linehaul and paying lower contract rates to third-party carriers.
Negative Points
- Despite the positive financial results, the overall market for freight transportation remains soft and stable, with no significant growth expected in the near term.
- Labor costs increased by 11.5% year-over-year, primarily due to wage and benefit inflation as well as incentive compensation.
- Depreciation expense rose by 24% year-over-year, reflecting the company's ongoing investments in fleet and infrastructure.
- The company faces a challenging macroeconomic environment, with industrial demand remaining relatively stable but not showing significant growth.
- XPO Inc (XPO) expects a sequential increase in operating ratio (OR) by 100 to 150 basis points in the third quarter, which is in line with seasonality but indicates potential cost pressures.
Q & A Highlights
Q: Your tonnage and shipments accelerated in June. What are your thoughts on the market here? Is it share gains, benefits in new facilities? And what are your thoughts on the sequential move in the operating ratio as we go into the third and fourth quarter?
A: We're continuing to see a soft but stable freight market. In June, industrial demand picked up slightly, and retail sales improved. For July, tonnage is about flat, outperforming seasonality by 1-2 points. We expect similar outperformance in Q3. We anticipate strong yield growth, excluding fuel, in the mid- to high-single-digit range year-over-year. For OR, we expect a sequential increase of 100-150 basis points, better than typical seasonality.
Q: How are you now thinking about the full year guide in terms of full year OR? And how does this set up from an OR perspective heading into 2025?
A: We expect a strong year of margin improvement, landing towards the high end of our initial 150-250 basis point improvement range. For 2025, we anticipate strong OR improvement and earnings growth, driven by above-market yield growth, premium services, and insourcing initiatives. We'll provide more details on 2025 expectations after Q4 results.
Q: How much of the accessorial pricing gap do you think you've captured so far? And how long do you think it would take to close that gap fully?
A: There's roughly a 5-point difference in accessorial revenue as a percent of total compared to best-in-class. We've grown accessorial revenue double digits year-over-year and aim to gain an incremental point of yield from accessorials annually over the next few years. We have more services to launch, but we've made significant progress with existing ones like trade shows and retail solutions.
Q: Can you describe how the service improvements over the last six to eight quarters have changed your revenue mix and customer profile?
A: Customers want great service to avoid supply chain disruptions. We've reduced our damage claims ratio significantly, leading to more profitable market share. We're selective about the freight we take on, focusing on profitable, conforming freight. Our local sales channel has grown faster, adding over 5,000 new customers year-to-date.
Q: Is there a way to think about the relative profitability of the new facilities this year compared to older ones?
A: The new service centers are expected to be OR neutral this year and OR accretive in 2025. The 14 sites opened so far confirm our view that they will contribute meaningfully to the bottom line next year.
Q: Is mix starting to stabilize, and is this just core pricing and accessorials driving revenue per hundredweight increases?
A: Weight per shipment was down about 1% year-over-year in Q2 and is expected to be similarly stable in the second half. We expect revenue per shipment to increase sequentially in Q3 and Q4, driven by company-specific pricing initiatives.
Q: How are you able to mitigate cost headwinds from new terminal openings?
A: We've opened 14 service centers, with six being net adds and eight relocations. These openings have had minimal impact on costs, adding only 15 net headcount. The new centers improve efficiency and service, with examples like Brooklyn and Nashville showing significant productivity gains.
Q: What might cause deviation from normal seasonality in Q3, and are you seeing any changes in the competitive dynamic?
A: We expect to perform better than typical seasonality, driven by volume, yield growth, and cost efficiencies. We're not seeing changes in the competitive dynamic and continue to see a favorable pricing environment.
Q: What gives you confidence in the yield story at XPO, and can you provide more details on cost buckets driving OR progression?
A: Confidence in yield growth comes from service improvements, premium services, and growth in the local channel. From a cost standpoint, we expect headcount to grow less than shipment growth and continued improvements in linehaul insourcing.
Q: Can you remind us of your target for outsourced linehaul percentage and factors influencing the pace of reductions?
A: We aim to reduce third-party linehaul miles to the low teens by 2027 but expect to get there much quicker. We plan to continue insourcing beyond that into the single digits, driven by initiatives like team drivers and sleeper cab trucks.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
