XPO, Inc.

Welcome to the XPO Q1 2023 Earnings Conference Call and Webcast. My name is John. 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 cell phone keypad. Please limit yourself to one question when you come up in the queue. If you have any 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. 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 certain 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 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 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 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 Investors section of the company's website. I will now turn the call over to XBO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Carl Anderson, our CFO, and Ali Faghri, our Chief Strategy Officer. This morning, you saw us report a solid quarter despite a challenging macro environment. Company-wide, we generated revenue of $1.9 billion, reflecting year-over-year growth in a soft market. And we grew adjusted EPS by 22%. We also delivered adjusted EBITDA growth of 14%, which was better than our outlook for low double-digit growth. In our North American LTL segment, adjusted EBITDA was down 2% within our guided range. This was primarily driven by weaker tonnage trends in the industry in March. I want to focus my comments this morning on the progress we're making with the four pillars of our plan for LTL 2.0. The first pillar is to provide industry-leading service. In early 2022, we changed the incentive plan for thousands of LTL employees to tie their compensation to service quality in addition to profits. This was one of multiple initiatives we implemented to elevate our customer service levels. Our focus on service excellence is having a tangible impact on the metrics our customers track. In the first quarter, our claims ratio for damages was 0.7%. which was an improvement from 1.1% last year. This is one of our best claims ratios in more than a decade, and our on-time performance in the quarter was back to pre-COVID levels. We've made considerable progress in a relatively short time, and there's a lot more we can do. Our entire organization is laser-focused on providing the industry's best service. The second pillar of our plan is to invest in our network for the long term. Now that the spin-offs are complete, we have more opportunity to invest in driving long-term growth in LTL, a business that generates a high return on invested capital. Our business model is more streamlined now, with higher visibility into opportunities to optimize our network. We plan to continue to invest in all parts of the cycle, Our LTL capex as a percentage of revenue was typically in the mid-single digits each year. That changed in 2022 when we launched our plan for LTL 2.0. And going forward, we anticipate capex of 8% to 12% of revenue on average over the next several years. The investments we're making are largely tied to our fleet. In the first quarter, we added more than 700 tractors, which brought the average age of the fleet down to 5.2 years from 5.9 years at year end. We also produced nearly 1,800 new trailers at our in-house manufacturing facility in Arkansas, and we're on track to meet our target for over 6,000 trailers produced this year. Our plan calls for adding new doors in a market that can use more capacity and sustain growth over time. These are targeted additions that help improve network density and fluidity over the long term. In 2023, we expect to grow our total door count by a percentage in the low single digits. When industry volumes rebound, we'll capitalize on these high return investments. The third pillar of our plan is to accelerate yield growth. In the first quarter, we grew yield excluding fuel by 1.4% year over year. That was in line with our outlook. We still had a headwind from mix, as we described last quarter. However, our underlying pricing trends remain solid, with contract renewal pricing up by mid-single digits. Yield remains a key area of focus for us, and we have multiple new initiatives underway to leverage the gains we're making in service quality and operating excellence. These will lead to stronger yield growth over time. The fourth and final pillar of LTL 2.0 is to continue to drive cost efficiencies. The main opportunities here are in purchase transportation, the cost structure in the field, and overhead expense. In the first quarter, we reduced our purchase transportation costs by 27% versus last year by utilizing two levers, First, we proactively pulled forward the bid cycle with third-party carriers to capitalize on favorable market conditions. At the same time, we reduced third-party line haul miles in the quarter by nearly three percentage points versus last year. And we're accelerating this to capitalize on the weak macro when we have more capacity available. we're targeting a 50% reduction in purchase transportation as a percent of revenue by 2027. On the labor side, we're executing on a plan to align our field cost structure more closely with the current demand environment and reduce some of our salaried headcount. You'll see the full run rate benefit of these actions starting in the third quarter. Turning to Europe, our business continues to perform ahead of expectations in the quarter. delivering mid-single digit organic revenue growth. Despite the macro uncertainty in parts of Europe, we're seeing a strong pricing environment overall, and our sales pipeline continues to be robust. I'll wrap up my remarks by summarizing the progress we've made to date on our LTL 2.0 plan. We're continuing to elevate service as a top priority, and it's generating some of our best service levels in years, Customers like what they're seeing, and it's allowing us to gain profitable market share and grow share of wallet. This will translate to stronger yield growth over time. We're being proactive on this by executing multiple initiatives to accelerate yield over the long term. We're also continuing to make strategic investments in our network to capitalize when demand recovers. We have a long track record of delivering high returns on investments in this business. And we're executing on cost efficiencies by reducing our use of purchase transportation and rationalizing our cost structure at the corporate level and in the field. While we expect the near-term operating conditions to be challenging for the industry, at XPO we remain on track to deliver on our long-term outlook for at least 600 basis points of adjusted operating ratio improvement through 2027. We're confident in our ability to deliver superior shareholder value as we increasingly drive financial and operational excellence in the business. Before I close, I want to thank our thousands of dedicated employees for helping XPO be world-class in every aspect of our business. Our people at every level are our great differentiator, and we continue to attract the best talent. This includes two top talents who see the significant potential in XPO Wes Fry is now a member of our board, and Dave Bates is our new chief operating officer. These LTL veterans will help accelerate the execution of our plan. Now, I'm going to hand the call over to Carl to discuss the first quarter results.

Carl, over to you. Thank you, Mario, and good morning, everyone. I'll take you through our first quarter results, balance sheet, and liquidity. Revenue in the quarter for the total company was $1.9 billion, up 1% year-over-year and up 4% sequentially from the fourth quarter. In our North American LTL business, revenue was up 1% year-over-year and 2% sequentially. Revenue per hundredweight, excluding fuel, was up 1.4%, while higher shipments per day were offset by lower tonnage. LTL salaries, wages, and employee benefits were 6.7% higher than a year ago due primarily to wage increases granted to employees last year. We are taking action to reduce labor costs and drive productivity as we move through the year. Purchase transportation expense was down 27% or $37 million in the quarter as we insource more third-party line halls. We ended the quarter at approximately 22% of line haul miles outsourced, which was also a 270 basis point improvement from the same quarter last year. We also benefited from implementing significantly lower contract rates with carriers in the quarter. In addition, we brought down our costs for insurance and claims compared with the first quarter last year. We're continuing to make great progress in reducing damage claims expense as we elevate our service levels. As part of our LTL 2.0 plan, we are continuing to reinvest back in the business as we bring on new tractors and trailers. The increased level investment in 2022 and through the first quarter of this year resulted in a 12 million or 21% increase in depreciation expense this quarter. Now I'll turn to adjusted EBITDA, starting with the company as a whole. We grew adjusted EBITDA by 14% year-over-year to $210 million. This was primarily driven by a year-over-year reduction of $31 million in corporate expense as we rationalized our corporate cost structure following the RxO spinoff. Our adjusted EBITDA margin was 11%. representing a year-over-year improvement of 130 basis points. For our LTL segment, adjusted EBITDA was $182 million, down 2% from a year ago, as our revenue growth and cost efficiencies were offset by the aggregate impact of lower tonnage, wage inflation, and lower pension income. LTL adjusted EBITDA excludes $6 million of restructuring costs relating to the downsizing of administrative office. Excluding the impact from pension income, LTL adjusted EBITDA would have been up 4% versus last year. And finally, in our European transportation segment, adjusted EBITDA was $37 million, roughly in line with last year. Company-wide, we reported net income from continuing operations of $17 million in the quarter. representing diluted earnings per share of 15 cents. This compares to income of $32 million and earnings of 28 cents per share a year ago. The year-over-year decline in income from continuing operations is primarily attributable to higher restructuring and transaction and integration costs. In the first quarter, we had $24 million of restructuring charges that impacted all of our segments. In addition, we had $22 million of transaction and integration costs related to the spinoff last year. We expect that these costs will materially step down as we move forward in the year. Our adjusted tax rate was approximately 19% due to the benefit of some discrete tax items this quarter. And on an adjusted basis, our earnings per diluted share for the quarter was $0.56, which is up 22% from a year ago. and we generated $76 million of cash flow from continuing operations and deployed $224 million of CapEx. Moving to the balance sheet, we ended the quarter with $309 million of cash on hand. This cash, combined with available capacity under committed borrowing facilities, gave us $811 million of liquidity at quarter end. We had no borrowings outstanding under our ABL facility, and our net debt leverage at the end of the quarter was 2.2 times trailing 12-month adjusted EBITDA. Earlier this week, we extended our €200 million securitization facility in Europe to July of 2026, and we're currently evaluating opportunities to refinance our term loan maturing in 2025 with new secured and or unsecured debt. Now I'll turn it over to Ali, who will provide an overview of our operating results.