XPO, Inc.

Welcome to the XBO Q2 2023 Earnings Conference Call and Webcast. My name is Sherry 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 in the queue. and 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 booking 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 booking 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 earning 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 on the company's website. I will now turn the call over to XBO's Chief Executive Officer, Mario Harwick. Mr. Harwick, you may begin.

Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Kyle Wismans, our incoming Chief Financial Officer, Carl Anderson, our outgoing CFO, and Ali Faghri, our Chief Strategy Officer. This morning, you saw us report a solid quarter despite a soft operating environment. Company-wide, we generated revenue of $1.9 billion and adjusted EPS of 71 cents. We also delivered adjusted EBITDA of $244 million, coming in above expectations. In our North American LTL segment, adjusted EBITDA was $208 million, also above expectation. 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 customer service. Last year, we implemented multiple initiatives to elevate our customer service levels, including a new incentive compensation structure for the field. We've made it clear to the team that customer service is our top priority, and we're seeing the impact of that in our key service metrics. In the second quarter, our claims ratio for damages was 0.7%, which is an improvement compared with 0.9% in 2022 and 1.2% at the end of 2021. And in the month of June, our damage claims per shipment came in at the best level in over seven years. Another key metric is on-time performance. We improved this by 10 percentage points in the quarter year over year. Going forward, we're keeping up the momentum as we begin to roll out new tools for the field, including higher quality straps, airbag systems, and new storage racks in our service centers. More recently, with the acceleration in July volumes, we've continued to improve key service metrics. During this period of industry disruption, we're protecting capacity for our existing customers and being disciplined in what freight we bring on into our network. While we've made considerable progress with service in a relatively short time, there's a lot more we can do. Our entire organization is laser focused on providing the best LTL service in the industry. The second pillar of our plan is to invest in our network for the long term. As you know, we anticipate allocating CapEx of 8% to 12% of revenue on average over the next several years. Now that we've completed our two spinoffs, we have more opportunities to invest in driving long-term growth in LTL, a business that generates a high return on invested capital. Most of our CapEx this year is being deployed to increase the capacity of our fleet. We've added more than 900 tractors, which has brought down the average age of our fleet to 5.1 years from 5.9 years at the end of 2022. We've also produced nearly 3,100 new trailers at our manufacturing facility in Arkansas. And we're on track to meet our targets for over 6,000 new trailers this year. In addition, we expanded capacity at our service centers in Norcross, Georgia and in Salt Lake City. This aligns with our plan to add new doors and markets where more capacity can sustain more growth over time. At this point, we've added more than half of the 900 net new doors contemplated in our plan, and we expect to open the remainder by early 2024, primarily by expanding existing terminals. These targeted expansions will help improve network density and fluidity over the long term. Given the recent market dynamics, we're evaluating the pace of our CapEx plan to see if we want to accelerate our investments in network capacity. There's a potential for our annual CapEx as a percent of revenue to exceed the high end of our target range in the near term. The third pillar of our plan is to accelerate yield growth. We grew yield, excluding fuel, by 1.4% year over year, in line with our outlook for the second quarter. 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 is our single biggest lever for margin improvement going forward, and we have multiple initiatives underway to leverage the gains we're making in service quality and operating excellence. We started to see the impact of these initiatives grow in the second quarter, and we expect this acceleration to continue. The fourth and final pillar of LTL 2.0 is to continue to drive cost efficiencies. The main opportunities here are in purchase transportation, our variable cost structure, and overhead expense. In the second quarter, we reduced our purchase transportation costs by 35 percent year-over-year by utilizing two levers. First, we continued to reprice contracts 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 400 basis points versus last year. This aligns with our plan to achieve a 50% reduction in purchase transportation costs as a percent of revenue by 2027. Labor is another opportunity to control variable costs in our field operation. We did that effectively in the second quarter. Our headcount and labor hours were down year over year, while our shipment count was up. We also made significant progress in reducing our corporate overhead as we continued to rationalize our cost structure after the latest spinoff. While we're committed to becoming continuously more cost-efficient, we're also careful to set the company up for long-term growth. This includes investments in new tools for the field to further improve service quality and the significant expansion of our local sales force. Turning to Europe, our business continues to perform well in a soft operating environment, with organic revenue largely unchanged. Despite the macro uncertainty in parts of Europe, we continue to see a strong pricing environment across the segment, and our sales pipeline is robust. I'll wrap up my remarks on the quarter by summarizing the progress we've made to date with our LTL 2.0 plan. We're continuing to generate some of our best service levels in years, and this is enabling us to gain profitable market share. This has put the business on a path to stronger yield growth as we're able to price based on the increasing value we're providing customers. We're also continuing to make strategic investments in our network to capitalize on upturns in demand. We have a long track record of delivering high returns on investments in this business. And we're becoming more cost-efficient by reducing our use of purchase transportation, managing variable labor costs effectively, and rationalizing our cost structure at the corporate level. With our operational momentum and investment in long-term growth, we remain on track to deliver on our outlook for at least 600 basis points of adjusted operating ratio improvement through 2027. In closing, I want to comment on the CFO transition we announced in July. Some of you already know Kyle, who will take over as our Chief Financial Officer next week. Kyle's been a senior finance leader with public companies for over 17 years, including a long career with General Electric. And he's been immersed in our business for the past four years, most recently as our Head of Revenue Management and Finance in LTL. This will be a seamless transition. I also want to thank Carl, our outgoing CFO, for his leadership of our finance team. Carl is rejoining a former colleague in an industry where he worked for over a decade, where I'm confident he'll have continued success. Now, I'm going to hand the call over to Kyle to discuss the second quarter results. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'm excited to step into the CFO role. We have a significant opportunity ahead of us to create even more shareholder value with a clear line of sight to our goals. And I'm looking forward to building on our momentum as we continue to execute on the LTL 2.0 plan. Now, turning to the second quarter. Revenue for the total company was $1.9 billion, down 6% year over year, and up 1% sequentially from the first quarter. In our LTL segment, revenue was down 8% year-over-year and up 1% sequentially. Almost all of the decline was related to fuel surcharge revenue. Excluding fuel, revenue was down just 1% year-over-year and up 4% sequentially. LTL salaries, wages, and benefits in total were 4.6% higher than a year ago, primarily due to wage increases. As Mario noted, we did a good job of managing our field labor costs in the quarter. We handled more shipments per day with lower headcount and fewer hours than in the second quarter a year ago. Purchase transportation expense was down year over year by 35% or $47 million as we insourced more line haul miles to reduce our use of third party carriers. We ended the quarter at 20.7% of line haul miles outsourced, which was a 400 basis point improvement from the same quarter last year. We also paid significantly lower contract rates in the quarter as our renegotiated contracts cycled in with the carriers. Depreciation expense in the quarter increased by 24%, or $12 million, driven by our investments in the LTL network. Our CapEx spend was primarily related to bringing in new tractors from the OEMs and manufacturing more trailers in-house. Next, I'll add some detail to adjusted EBITDA, starting with the company as a whole. We generated adjusted EBITDA of $244 million in the quarter, down 16% year-over-year. We reduced corporate expenses by 71% for a savings of $24 million which we achieved by rationalizing our corporate cost structure following the RxO spinoff. Our adjusted EBITDA margin was 12.7%, representing a year-over-year deterioration of 140 basis points. Looking at just the LTL segment, adjusted EBITDA was $208 million, down 24% from a year ago. Our gains in cost efficiency were offset by the aggregate impact of the current operating environment, namely lower fuel surcharge revenue, tonnage, wage inflation, and lower pension income. In our European transportation segment, adjusted EBITDA was $46 million, down $3 million year-over-year. Company-wide, we reported net income from continuing operations of $31 million in the quarter. representing diluted earnings per share of 27 cents. This compares to income of $96 million and earnings of 83 cents per diluted share a year ago. The year-over-year decline in income from continuing operations was partially due to higher transaction and integration costs and restructuring charges. We had $17 million of transaction and integration costs related to the RxO spinoff, and another $10 million of restructuring charges across the segments. We expect the costs in both categories will step down materially by the end of this year. On an adjusted basis, our EPS for the quarter was 71 cents, which is down 38% from a year ago. And lastly, we generated $131 million of cash flow from continuing operations and deployed $126 million of net CapEx. Reinvesting in the business remains our top priority for capital allocation. Moving to the balance sheet, we ended the quarter with $290 million of cash on hand. Combined with available capacity under committed borrowing facilities, this gave us $802 million of liquidity at quarter ends. We had no borrowings outstanding under our ABL facility at quarter end, and our net debt leverage was 2.3 times trailing 12 months adjusted EBITDA. In May, we completed the refinancing of our $2 billion term loan. This doubled our weighted average maturity timeline to approximately six years, while our interest expense is effectively unchanged this year. And notably, we received upgrades on our secured debt from Moody's and S&P. We also now have two investment grade ratings on our secured debt. Our capital structure gives us the financial flexibility to execute on the significant opportunities we have at XPO. Now, I'll turn it over to Ali, who will cover our operating results.