XPO, Inc.

Welcome to the XPO third quarter 2023 earnings conference call and webcast. My name is Rob and I will be your operator for today's call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session. If you have a question, please dial star one 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 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 meeting 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 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 investor section of the company's website. I'll now turn the call over to XPO's Chief Executive Officer, Mario Harrick. Mr. Harrick, you may begin.

Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Kyle Wismans, our Chief Financial Officer, and Ali Faghri, our Chief Strategy Officer. This morning, we reported financial results that were well above expectations for growth and profitability, despite a soft market for freight transportation. It was a strong third quarter for us company-wide, We grew revenue year-over-year to $2 billion and improved our adjusted EBITDA to $278 million, an increase of 6% year-over-year. Both segments of the business grew adjusted EBITDA in the quarter. Adjusted diluted EPS for the company was $0.88, which was also higher than expected. I want to use my comments this morning to give you a progress report on the four pillars of our plan for LTL 2.0, starting with customer service, where we've made great progress this quarter. Our claims ratio for damages was 0.4%, an improvement from 0.7% in the prior quarter. To put that in context, when we launched LTL 2.0 nearly two years ago, our claims ratio was 1.2%. So we've been steadily making good on our promise to elevate service. Our third quarter claims ratio is our best result ever. And in the month of September, we exited the quarter with the best damage frequency level in our history. Another key service metric is on-time performance. This was eight percentage points better in the quarter. compared with last year. We're very focused on ensuring that our service standards remain high as we grow. In the third quarter, our shipment count was significantly higher as we took more volume into our network, while at the same time, we delivered meaningful service improvements. And we're already taking the next steps forward with our investments in service. This includes enhancing our training programs and loading procedures and equipping our field operations with new service tools. The high caliber straps and airbag systems we're rolling out are generating positive returns in a short period of time. For example, in the service centers with the new airbag systems, we're already seeing a 20% improvement in damage frequency. Our strong commitment to service is critical for our customers. And while we've made significant progress, we can clearly see the runway we have for further improvement. Our top priority is to be the best in class LTL service provider in the coming years. The second pillar of LTL 2.0 is to invest in our network. Our business has historically generated a high return on invested capital. Since the launch of LTL 2.0, we've added 10,000 trailers, 2,000 tractors, and over 500 net new doors. This has allowed us to take on more freight for our customers while maintaining strong network fluidity. More than two-thirds of our 2023 CAPEX is being deployed to increase the capacity of our fleet. Year-to-date, we've added more than 1,000 tractors, which brought down the average tractor age to 5.2 years from 5.9 years at the end of 2022. and we're on track to exceed our production target of 6,000 new traders this year. Year-to-date, we've manufactured over 4,900 traders at our in-house facility in Arkansas. In addition, we expanded our service center doors in the Atlanta and Dallas metro areas in July, and we broke ground on a new facility in Central Florida, which is a key growth market for us. This is consistent with the plan we outlined that we're adding new doors and markets where our investments in capacity can sustain more growth over time. To date, we've added 531 net new doors against a target of 900, and we expect to open the remainder by early 2024, primarily at existing terminals. These targeted expansions are performing well and exceeding our return hurdles. I want to touch on one of the long-term targets we introduced with LTL 2.0, which was for CapEx allocation of 8% to 12% of revenue on average through 2027. Given the recent market dynamics and the opportunity at hand, we're accelerating the pace of that spend. As a result, our CapEx this year will be 12% to 13% of revenue and will likely continue to exceed our target range in the near term. The third pillar of our plan is to accelerate yield growth. In the third quarter, we focused on strengthening our underlying pricing trends, such as contract renewal pricing, and executed a number of other initiatives to align the price we receive with the value we deliver. Yield is our single biggest opportunity for margin improvement, and you saw this impact in our earnings release this morning. We grew yield, excluding fuel, by 6.4% year over year, representing a significant acceleration from the first half of the year. We see a double-digit pricing opportunity that we expect to capture over the coming years through three primary levers. First, as we continue to improve our service, customers are willing to pay a premium price for the value we deliver. We're seeing this with both contract renewals and new business. We also see a significant opportunity to grow our accessorial revenue, including a range of value-added services such as retail store rollouts and grocery consolidations. These are services that our customers are asking for. And lastly, we're focused on growing our local customer base, which is a higher margin business for us. In the third quarter, we achieved double-digit shipment growth in our local sales channel. and we're expanding our log sales force to reflect the scale of this opportunity. So while we had strong yield growth in the quarter, the key point is the momentum it indicates going forward. We're confident that we'll continue to improve our yield in the coming years. The final pillar of LTL 2.0 is cost efficiency, specifically with purchase transportation, variable costs, and overhead. In the third quarter, we reduced our purchase transportation costs by 21% year-over-year by covering more line haul miles in-house, while also paying lower contract rates for the miles we outsourced. We ended the quarter with 21.5% of line haul miles outsourced to third parties, which was a 200 basis points reduction year-over-year. Even though we purchased more transportation on a short-term basis, to cover the recent inflection in volume. Our plan is to accelerate bringing more miles in-house with initiatives tailored to our line haul network. For example, we're in the process of adding more driver teams and sleeper trucks for long-distance hauls. We're targeting a few hundreds of these teams to be in operation by the end of 2024, which will increase the efficiency and flexibility of our service. we're targeting at least a 50% reduction in third-party line haul miles as a percent of total by 2027 compared with 2021. Another margin opportunity we have with variable costs is labor. We managed this effectively in the third quarter. Our headcount and labor hours per day were roughly flat year over year, while our shipment count was up by high single digits. Our ability to realize these productivity gains while also improving our service metrics reflects the strong execution of our operational teams and the strength of our proprietary technology. That touches on the key points of our plan and the progress we made in the third quarter with more to follow. We're generating record service levels, gaining profitable market share, and driving yield higher. These are the critical levers of margin expansion in our LTL business. We're continuing to make strategic investments in our network, and we have the agility to capitalize on changes in market conditions. At the same time, we're becoming more cost-efficient with our operations, so we can translate revenue growth into earnings at a higher rate. We remain solidly on track to deliver on our outlook of at least 600 basis points of adjusted operating ratio improvement through 2027. Before I close, I want to mention that this week marks our one-year anniversary as a standalone LTL provider in North America. I couldn't be more proud of the progress we've made and will continue to make as we work to realize the full potential of XPO. We're well underway in executing on the strategy we initiated at the end of 2021. We're a focused, high-energy, customer-loving organization, and we'll continue to build on our momentum. I want to take this opportunity to thank our thousands of dedicated employees for their world-class support of XPO. We have a phenomenal team driving our strategy to be the best in the industry. Now, I'm going to head the call over to Kyle to discuss the third quarter results. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet, and liquidity. Revenue for the total company was $2 billion, up 2% year-over-year and up 3% sequentially from the second quarter. In our LTL segment, revenue was up 2% year-over-year and up 8% sequentially. Excluding fuel, LTL revenue was up 8% year-over-year and up 7% sequentially. Salary, wages, and benefits for LTL were 10% higher in the quarter than a year ago. The increase was primarily related to higher incentive compensation to account for the team's strong third quarter performance, as well as the impact of wage inflation. Our improvements in productivity partially offset these costs. We handled more shipments with lower headcount and fewer labor hours than in the third quarter a year ago. Importantly, it was the third consecutive quarter that shipment count grew at a faster pace than labor hours, and the spread has widened sequentially with each period. In the third quarter, our shipment count per day grew by 8% year over year, while labor hours increased by less than 1%. We were also more cost efficient with purchase transportation through a combination of insourcing and rate negotiation. Our expense for third party carriers was $97 million in the quarter, which was down year over year by 21%. Depreciation expense in the quarter increased by 29%, or $15 million, reflecting our commitment to reinvesting in the business. This remains our top priority for capital allocation. In the third quarter, our CapEx was primarily allocated to purchasing 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 $278 million in the quarter. which was up 6% from a year ago, reflecting a year-over-year increase in both North American LTL and the European business. Our adjusted EBITDA margin was 14%, representing a year-over-year improvement of 50 basis points company-wide. And we reduced third quarter corporate expense to $7 million, as we continue to rationalize our corporate cost structure for the standalone business. This was a year-over-year savings of 67%, or $14 million. Looking at just the LTL segment, we grew adjusted EBITDA year-over-year to $241 million. Our revenue growth and cost efficiencies more than offset non-operational headwinds from lower fuel surcharge revenue and pension income. In our European transportation segment, adjusted EBITDA increased to $44 million for the quarter. Company-wide, we reported operating income of $154 million for the quarter, up 11% year over year. Our net income from continuing operations was $86 million in a quarter, representing diluted earnings per share of 72 cents. This compares to income of $92 million and diluted EPS of 79 cents a year ago. The year-over-year decline in third quarter net income was primarily due to an $11 million decrease in pension income and a $6 million increase in interest expense this year. We also had $8 million of transaction and integration costs related to the RxO spinoff, and another $1 million of restructuring charges across our segments. These costs stepped down materially from the first half of the year. On an adjusted basis, our EPS for the quarter was $0.88, which is down 7% from a year ago, also reflecting the impact of lower pension income and higher interest expense. And lastly, we generated $236 million cash flow from continuing operations in the quarter and deployed $133 million of net CapEx. Moving to the balance sheet, we ended the quarter with $355 million of cash on hand. Combined with available capacity under committed borrowing facilities This gave us $944 million of liquidity. We had no borrowings outstanding under our ABL facility at quarter end. And our net debt leverage was 2.2 times trailing 12 months adjusted EBITDA. Our capital structure gives us the financial flexibility to execute on the significant growth opportunities we have at XPO. Before I wrap up, I want to highlight some updates to our full year 2023 planning assumptions. We now expect that gross CapEx will be in the range of $675 to $725 million this year, given the opportunities we have to invest in network capacity to drive long-term growth. We're also projecting interest expense of $170 to $175 million pension income of $15 to $20 million, and an effective tax rate of 23 to 24%. Our assumption for diluted share count remains unchanged at 118 million shares for the full year. Now, I'll turn it over to Ali, who will cover our operating results.