XPO, Inc.

Welcome to the XPO Logistics second quarter 2021 earnings conference call and webcast. My name is Rob, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer session. If you have a question, please dial star 1 on your telephone keypad. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which by their nature involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements except to the extent required by law. During this call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and related financial tables or on its website. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the Investors section on the company's webcast. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

Thank you, operator. Good morning, everybody. Thanks for joining our call. With me today in Greenwich are David Weissner, our CFO, Matt Fassler, our Chief Strategy Officer, and Mark Manduka, the Chief Investment Officer of GXO, our planned logistics spinoff. As you saw yesterday, we delivered the highest revenue and adjusted EBITDA in our history. It was the highest company-wide, and in each of our transportation and logistics segments. We generated over $5 billion of revenue and over half a billion dollars of adjusted EBITDA. It was the third consecutive quarter we reported record revenue and adjusted EBITDA. Not only did we solidly beat all expectations, we surpassed a great first quarter with an even better second quarter. It gives both our segments a powerful springboard for profitable growth as separate public companies. Customer activity has more than come back from 2020, and we're executing extremely well across the business. Yesterday, we raised the midpoint of our 2021 EBITDA guidance for the combined company by more than the second quarter beat, and we raised the pro forma EBITDA guidance for both XPO and GXO. Every area of the business is showing strength. In North American LTL, we're continuing to expand our operating margin, primarily through company-specific technology initiatives. As a result, our second quarter adjusted operating ratio, ex-real estate gains, was our best operating ratio yet. In truck brokerage, we're continuing to outperform the industry. This is due in no small part to the rapid adoption of our XPO Connect digital platform by customers and carriers. Our logistics segment delivered the second consecutive quarter of double-digit organic revenue growth. The new contracts we talked about on our last earnings call have been followed by more wins in the second quarter and a constant inflow of new opportunities. I'm confident that the spinoff of this business will unlock the full potential of both GXO and XPO. After we ring the opening bell at the New York Stock Exchange on Monday, GXO will start trading as the largest pure play contract logistics company in the world. This is a business with a rare combination of attributes. GXO is an industry leader with massive revenue tailwinds, double-digit EBITDA growth, long-term contractual relationships with blue chip customers and importantly a 28 return on invested capital xpo will be a pure play transportation company with an ltl business that's on track to generate at least a billion dollars of adjusted ebitda in 2022 and a booming truck brokerage business with a fast-growing digital platform I want to take this opportunity to thank David for his service as Chief Financial Officer. As we announced yesterday, David will be leaving in September after a seamless handoff to Ravi Tulsian, our Deputy CFO. David has made many significant contributions to XPO's success as a member of our executive team. I particularly want to thank him for his strong leadership during COVID and throughout the spinoff process. I have no doubt David will continue to be successful in this next step of his career. And now he'll take you through the numbers.

David? Thank you for those comments, Brad, and good morning, everyone. Today I'd like to discuss our second quarter results, our balance sheet and liquidity, and our updated outlook for 2021. I'll be presenting most numbers on a status quo pre-spin basis with post-spin spin breakouts between XPO and GXO where appropriate, as we anticipate the completion of this spinoff on Monday. In the second quarter, we generated revenue of $5 billion and adjusted EBITDA of $507 million. The revenue number reflects a year-over-year increase of more than 40%. Adjusted EBITDA nearly tripled compared to our Q2 results last year, when COVID was at its worst. and both revenue and adjusted EBITDA are higher than we expected at the beginning of the quarter. Our record adjusted EBITDA reflects strong growth and continued execution across our business. In this case, it's also useful to compare our results to the second quarter of 2019, which takes COVID out of the base period. On a two-year stacked basis, our revenue and our adjusted EBITDA are both up double digits. Breaking down our 44% year-over-year revenue growth in the quarter, our UK logistics acquisition in January contributed four points of growth, foreign exchange contributed five points, and fuel prices contributed four points. As a result, our organic revenue growth in the quarter was 31%. This top-line growth translated into even stronger adjusted EBITDA growth of 195%. and our EBITDA margin rebounded to 10%. COVID had a much more limited impact this year compared to last. As a consequence, our second quarter results this year with half a billion dollars of adjusted EBITDA in the quarter are much more representative of our earnings power. As Brad mentioned, both of our segments made a strong contribution to our growth and achieved record levels of quarterly adjusted EBITDA. In our logistics segment, adjusted EBITDA doubled in the second quarter. And in our transportation segment, adjusted EBITDA was up year over year by 168%. Operating conditions in the quarter were favorable, with robust consumer demand and a rebound in industrial activity. The global microchip shortage did impact our transportation operations. We estimate that it reduced our EBITDA by around $10 million in the second quarter. On the other hand, our results benefited from the operating leverage inherent in our business and the cost reduction actions we took last year. Matt and Mark will review our segment detail in a few minutes. Our adjusted earnings were $1.86 per diluted share, which is a quarterly record for us. We generated $366 million of cash flow from operations in the second quarter, spent $110 million on gross capex, and received $26 million of proceeds from asset sales. As a result, we generated free cash flow of $282 million. This exceeded our expectations for the quarter, driven by our strong earnings, as well as some capex and working capital timing that worked in our favor. Maintaining strong liquidity continues to be a top priority for us as an organization. Our cash balance at June 30 was $801 million. This cash, combined with available debt capacity under committed borrowing facilities, gave us nearly $2 billion of liquidity at quarter end. We had no borrowings outstanding under our ABL facility. We used $128 million of cash in the quarter to repurchase the remaining 3% of our European operations held by public shareholders. While this transaction wasn't required for the GXO spinoff, it's an economical, simplifying, cost-saving cleanup of our capital structure that we've wanted to do for some time. Our net leverage at June 30 was 2.4 times LTM-adjusted EBITDA, down from 3.1 times in March. Our free cash flow and our EBITDA growth are helping us achieve meaningful deleveraging. Our steady progress on this metric is important in the context of our commitment to move XPO toward an investment-grade rating following the spinoff of GXO. We've stood up GXO with an investment-grade capital structure. Earlier this month, GXO completed an offering of $800 million of long-term debt with a weighted average interest rate of 2.2%. We've also put in place an undrawn $800 million revolving credit facility for GXO. Most of the proceeds from the GXO debt offering will be sent to XPO, and GXO will retain about $100 million of cash post-spin. Shortly after the spin, XPO will use the cash it receives from GXO, as well as the nearly $400 million from our recent equity offering and cash on hand to repay all of our outstanding 6-1-8% notes due 2023 and the 6-3-4% notes due 2024, a total redemption of $1.5 billion that should reduce our annual interest expense by $100 million. Following this spin, XPO's net leverage will be roughly 2.8 times 2021 pro forma adjusted EBITDA, and we will have no significant debt maturities until 2025. We believe our debt paydown will move XPO closer to investment grade. From a housekeeping perspective, let me clarify the financial information that is and will be available about GXO and post-spin XPO. GXO's historical and pro forma results are available in the Form 10. In addition, in August, GXO will file its own 10-Q and will also provide supplementary detail on its historical pro forma EBITDA by quarter. XPO will file an 8K next week with pro forma financial information reflecting the spinoff as required. In addition, in the third quarter, we intend to provide additional details about XPO's historical results with logistics classified as a discontinued operation. And for modeling purposes, Since the spin-off is of the logistics segment, a high-level way to understand XPO's historical results adjusted for the spin is to look at the combination of our transportation segment and corporate results. Turning to the outlook we issued yesterday, we updated our full-year guidance in light of our strong second quarter results and the favorable economic trends we see today. Our outlook assumes these trends will continue and the market impacts of COVID will remain muted. On a combined basis, we've increased our full-year adjusted EBITDA guidance by $45 million at the midpoint since early May. We now expect that we would generate $1.875 to $1.915 billion of adjusted EBITDA this year if there was no spin. With year-over-year growth revised upward to 29 to 33% in our logistics segment, and 35 to 37% in transportation. On a pro forma basis, as if this spin had happened on January 1st, our outlook translates into $605 to $635 million of pro forma 2021 EBITDA for GXO and $1.195 to $1.235 billion of pro forma EBITDA for XPO. These figures take into account the separate corporate costs of each company. In the third quarter, our year-over-year growth metrics will normalize compared to the outsized growth we reported for Q2. We expect that GXOs and XPOs adjusted EBITDA in the third quarter will both be in the mid-20s as a percentage of their respective full-year pro forma EBITDA outlooks. We expect about $5 million of gains from LTL real estate sales in Q3 versus $26 million in last year's third quarter. LTL real estate gains in Q4 will be higher than they were last year, so our back half seasonality will look a little different this year compared to last. In total, we expect $55 to $60 million of gains from LTL real estate sales this year versus $77 million last year. On the cash flow front, on a combined basis, our outlook is for a full year free cash flow of $650 to $725 million excluding spin-related outlays. We also continue to target approximately $675 million of gross capital expenditures and $525 million of net CapEx for the combined company. Of these amounts, we estimate that GXO will have roughly $245 million of CapEx, and standalone XPO will have about $430 million of gross CapEx and $280 million of net CapEx. Our depreciation and amortization, interest expense, and tax expense will be split among GXO and XPO as a result of the spin. We've provided the details in our earnings release. And as a result of our recent primary equity offering of 2.9 million shares, we now forecast having roughly 114 million diluted common shares outstanding on average this year and roughly 116 million diluted common shares on average in the second half. We said in May that we were proceeding toward the spinoff of our logistics business with the wind at our back. Our record second quarter results have borne that out. We've continued to grow our revenue and execute against our business plan while we've readied our businesses for the spin transaction. And we've continued to serve our customers without missing a beat. As a result, GXO and XPO remain strategically well-positioned to meet customer needs and capture profitable growth opportunities in logistics, LTL, and brokerage. We remain enthusiastic about our prospects as a leader in the markets we serve, and we look forward to completing the GXO spinoff on Monday. Lastly, on a personal note, I'm incredibly grateful to have had the opportunity to work with Brad and everyone at XPO as a member of the company's senior leadership team. Helping to shepherd XPOs through the pandemic and prepare for the GXO spinoff has been very gratifying. I know that Ravi, Baris, and their finance teams are well positioned to drive XPOs and GXOs future progress, and I wish them every success. I'll now turn things over to Matt.