XPO, Inc.

Welcome to the XPO fourth quarter 2022 earnings conference call and webcast. My name is Melissa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you have a question, please dial star 1 on your telephone keypad. Please limit yourself to one question when you come up in the queue. If you have additional questions, you're welcome to get back into the queue, and we will take as many as we can. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the 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 as well as in its earnings release. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements except to the extent required by law. During this call, the company may also 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 in the related financial tables or on its website. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the investor section on the company's website. I'll now turn the call over to XVR's Chief Executive Officer, Mario Harick. Mr. Harick, you may begin.

Good morning, everyone. Thanks for joining our call. We're excited to talk about our simplified business model following the spinoff of RxO, and how it focuses our resources on growing the value of our LTL network. I'm here in Greenwich with Carl Anderson, our CFO, who will cover the fourth quarter and full year results. And we also have Ali Faghri with us for Q&A. Ali is our new chief strategy officer, and he's a great addition to the executive team. Yesterday, you saw us report a solid quarter of growth in a soft macro environment. That statement is true for the company as a whole and also for our two reportable segments of North American LTL and European transportation. Company-wide, we generated revenue of $1.8 billion, reflecting year-over-year growth of 3%. And we grew adjusted EBITDA year-over-year by 38%. which far outpaced our revenue growth and beat consensus for the 11th straight quarter. For the full year, we generated over $1 billion of adjusted EBITDA in our LTL business. This exceeded a major target we had set for 2022. Looking at the business by segment, I want to focus on LTL and some key results that tie directly to our growth plan. In the fourth quarter, the LTL industry in North America saw a year-over-year decline in shipment volumes due to macro pressure. But at XPO, we grew our shipment count and tonnage. Our positive tonnage growth ties back to the plan we call LTL 2.0, which is to invest in capacity ahead of demand and earn profitable market share by providing best-in-class service. We continue to have great success onboarding new business, including volumes from blue-chip customers who are either signing up with us for the first time or giving us more of their business. This drove a strategic change in our mix in the quarter, and our tonnage trended up more than typical seasonality. We also had a high margin local base, and these customers gave us more shipments per day. However, the weight per shipment declined in the softer macro. As a result, our yield came in at the lower end of our outlook. our mix should become a tailwind for us to both volume and yield as the macro recovers. The second reason we're outperforming is service, and I'll give you an example. In the fourth quarter, we improved our damage frequency by 66% year over year to the lowest damage frequency in six years. There's no doubt that our intense focus on service is helping us secure more tonnage, especially as we're hearing from new customers that we rank as one of their top LTL carriers for quality of service. Customer feedback like this has a ripple effect on our entire organization. Employee satisfaction is up sharply, which is an indication of the pride our team is taking in our service standards. In our year-end survey, employee satisfaction, including drivers and dock workers, was the highest in more than a decade. For the full year 2022, from an operating ratio perspective, there were a lot of puts and takes, including the softer macro. we improved our adjusted operating ratio, excluding real estate gains, by 40 basis points for the year, which was short of our target range. Strategically, we made good progress in setting up the network to capitalize when volumes rebound, and we like our positioning. With executing on the growth levers in our plan, like the 369 net new doors we added, with six new terminal openings, In the next 90 days, we expect to open another 167 net new doors in Salt Lake City, Atlanta, and Dallas. We're also pulling the unique levers we have within our company to help drive our expansion. In 2022, we increased our line haul fleet by over 10% by manufacturing more than 4,700 trailers in-house. We also trained over 1,700 truck drivers last year at our driver training schools. These are tangible advantages we have in the execution of our long-term plan for LTL 2.0, and they're gaining ground. Turning to Europe, this business continues to perform ahead of expectations with solid organic growth, particularly in the UK and Spain. In constant currency, fourth quarter revenue in Europe increased year over year by 9%. Our pricing in Europe was up year over year in Q4, and we're continuing to win business with new and existing customers. Despite the macro uncertainty there, our sales pipeline continues to be very robust. I want to wrap up my remarks by summarizing the exciting trajectory we've created going into 2023. We successfully completed the spinoff of RxO in November, which simplified our business model. We now have two highly focused business segments with strong value propositions in the customer markets they know best. In North America, we drove above industry tonnage growth in LTL in Q4, and we ended the year with over a billion dollars of adjusted EBITDA, making good on the target we set five years earlier. We're winning LTL market share with our service quality and also through our investment in network capacity. We're on track to open the remainder of the 900 net new doors we projected in our growth plan. And in Europe, our business is performing above expectations. This is the momentum we're carrying into 2023, and we intend to continue to invest in growth. We're confident that we'll deliver on the three targets we set for our LTL business, a revenue CAGR of 6% to 8%, an adjusted EBITDA CAGR of 11% to 13%, and an adjusted operating ratio improvement of at least 600 basis points. These targets cover the period from 2021 through 2027. And as we move toward them, we're focused on being world-class in every aspect of our business. We know that this combination of financial and operational excellence is the most sustainable way to deliver outsized shareholder value. Now I'm going to hand it over to Carl to discuss our results and our balance sheet. Carl, over to you.

Thank you, Mario, and good morning, everyone. Today I'll discuss our fourth quarter and full year results, balance sheet, and liquidity. I'll start with the fourth quarter, where we delivered strong year-over-year growth in adjusted EBITDA and adjusted diluted earnings per share. Revenue in the quarter was $1.8 billion, up 3% year-over-year. Organic revenue growth for the quarter was 2%, and the net impact of fuel prices and FX contributed an additional point of growth. We grew adjusted EBITDA by 38% year-over-year to $262 million. This was primarily driven by our North American LTL business, which increased adjusted EBITDA by $42 million, or 20% year-over-year. This includes a real estate gain of $55 million, which was up $20 million from a year ago. Additionally, we had a $30 million reduction in corporate expense as we continue to rationalize our overhead after the spinoff. Our adjusted EBITDA margin was 14.3%, representing a year-over-year improvement of 350 basis points. In the LTL segment, our fourth quarter operating ratio was 84.2%. Our adjusted operating ratio, excluding gains on real estate sales, was 87.1%, which is a 60 basis point improvement from a year ago. Our European business also continued its solid performance, with revenue up year over year 9% on a constant currency basis. Please note that we won't be addressing a potential sale of our European business on this call. We reported a net loss from continuing operations of $36 million in the fourth quarter, representing a diluted loss per share of 31 cents. This compares the income of $47 million in earnings of 40 cents per share a year ago. The fourth quarter 2022 net loss includes three impacts primarily incurred in connection with the RXL spinoff completed in November. First, we had a $64 million non-cash goodwill impairment charge related to a change in our segment structure following the spinoff. Prior to that, the European Transportation Business was a single reporting unit and Goodwill was evaluated for impairment at that level. Following the spin, the European transportation business is comprised of four reporting units, and impairment testing is required to be performed on a disaggregated basis for each of the new units, resulting in the charge this quarter. The second impact related to the spin was the $42 million of transaction and integration costs. And finally, we had $35 million of restructuring charges mostly due to the planned step-down in corporate costs. On an adjusted basis, our adjusted earnings per diluted share for the quarter was 98 cents, which was up 53% from a year ago. This increase was primarily driven by higher adjusted EBITDA and a lower effective tax rate. We generated $196 million of cash flow from continuing operations, spent $167 million on gross capex, and received $78 million of proceeds from asset sales. Gross CapEx was up $77 million year-over-year, driven by our planned investments in expanding our LTL network. This resulted in strong free cash flow of $107 million. Turning to the full year 2022, we delivered revenue of $7.7 billion, reflecting a year-over-year increase of 7%. Adjusted EBITDA was $997 million in 2022, up from $812 million a year ago. This was primarily driven by a 12% increase in adjusted EBITDA in our LTL business and a $75 million reduction in corporate expense. Adjusted diluted earnings per share from continuing operations increased by 82%, coming in at $3.53 per share this year. We generated cash flow from operating activities of $824 million for 2022 and free cash flow of $391 million, which was up 11% from the prior year. Our CapEx investments of $521 million almost doubled from a year ago as we accelerated our investments in the business to support our long-term growth targets. Our LTL adjusted operating ratio, excluding real estate, improved by 40 basis points from the prior year to 83.9%. Moving to the balance sheet, we ended the quarter with $460 million of cash. This cash combined with available borrowing capacity under committed borrowing facilities gave us $930 million of liquidity at year end. We had no borrowings outstanding under our ABL facility, and our net debt leverage at year end was 2.1 times adjusted EBITDA, down from 2.7 times a year ago on a previously reported basis prior to the RXL spinoff. This week, we extended our ABL maturity to 2026, and we recently received a credit upgrade from S&P from BB to BB+. Turning to the first quarter 2023, We expect the company to generate year-over-year growth in adjusted EBITDA in the low double digits. This anticipates $5 to $10 million of unallocated corporate costs in the quarter. We expect to wind down these costs over the course of the year. And finally, a reminder that, starting with the current quarter, our adjusted operating ratio will include the allocation of incremental corporate costs and exclude pension incomes. You'll find a historical reconciliation for this in our investor presentation. In addition, we're providing assumptions for the full year 2023 to help with your planning. These are gross capex of $500 to $600 million, interest expense of $185 to $195 million, pension income of approximately $20 million, an effective tax rate of 24% to 26%, and a diluted share count of 117 million shares. Overall, we're pleased with our results in 2022 and are excited about our growth prospects as we move forward. We'll now take your questions. Operator, please open the line.