XPO, Inc.

Welcome to the XPO Q4 2020 Pay 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 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 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 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 will now turn the call over to XBO's Chief Executive Officer, Mario Herrick. Mr. Herrick, you may begin.

Mario Herrick 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. I'm pleased to report that we capped a strong year with a quarter that exceeded expectations, and we've carried that momentum into 2024. Company-wide, we reported fourth quarter revenue of $1.9 billion, which is 6% higher year over year. and we grew adjusted EBITDA to $264 billion for an increase of 28% excluding real estate gains in 2022. Our adjusted diluted EPS for the company was 77 cents, which was also better than expected. I want to thank our team for delivering these great results in a soft freight environment. Looking at our North American LTL segment, we reported our strongest progress since we launched our LTL 2.0 plan in 2021. We grew adjusted operating income year-over-year by 51% and improved our adjusted operating ratio by 380 basis points. We delivered the best damage claims ratio in our history at 0.3%, as well as a record level of employee satisfaction. And we significantly accelerated our year-over-year yield growth, excluding fuel, to 10.3%. We also improved cost efficiency for the fourth consecutive quarter, with further increases in labor productivity and line haul insourcing. And we continue to deploy capital efficiently as we reinvest back into the business. All of these are proof points that our plan has strong traction. And the 28 service centers we recently acquired from the Yellow Network will build on this momentum. This acquisition is a once-in-a-generation opportunity to integrate prime locations into our network to support yield growth and margin expansion. When the market recovers and industry capacity tightens, we'll be in a stronger position to serve our customers and drive profitable growth for years to come. Now I want to share some details of the quarter, starting with the first pillar of our LTL 2.0 plan, service improvements. We improved every major component of customer service quality in the quarter, including our customer satisfaction rating, which has risen by more than 40% since 2021. Our on-time performance was three percentage points better than in the prior fourth quarter. And I mentioned that our damage claims ratio of 0.3% is a new record for us. To put that in context, it's a vast improvement from 1.2% when we launched our plan. These are metrics our customers watch closely as an indicator of service quality. Our top priority is to become the customer service leader in our industry. And we're continuing to equip our team with the tools to make this a reality. One example is the new freight airbags I spoke about on our last call. The rollout has been going well, and this solution is now installed at over 50% of our doors. The airbags have reduced damages by more than 20% at those locations, and the benefit will spread across our network. We expect to finish the installations by the middle of this year. The second pillar of LTL 2.0 is to invest in our network to drive long-term growth. We added more tractors and trailers in 2023 than any year in XPO's history to both grow and refresh our fleet. This resulted in record network fluidity and supported our strategy to insource more line haul miles. On the tractor side, we purchased more than 1,400 units in 2023. This reduced our average fleet age to five years at year end compared with 5.9 years in 2022. On the trailer side, we manufactured over 6,400 units at our in-house facility in Arkansas, exceeding our production target. For 2024, we expect our LTL CapEx level to be in the low teens as a percent of revenue, and again, primarily allocated to our fleet. In terms of the 28 service centers we acquired from Yellow, the largest impact on our capital strategy is timing. We've pulled forward dozens of real estate investments that we plan to make over the next several years. I'll add some strategic color to my earlier comments on the acquisition. These service centers will deliver important benefits to the business for years to come. First, they'll get us closer to customers and give us larger facilities in major metro areas. This should drive substantial cost efficiencies across our line haul, pickup and delivery, and dock operations. Second, they'll enhance our yield growth by further improving our service with fewer freight re-handles, reduced damages, and better on-time performance. And third, they'll give us more capacity in key metros like Indianapolis, Columbus, and Las Vegas. These are markets where we're currently turning away profitable customers because we don't have enough door capacity. We plan to start bringing these locations online in April and have all of them operational within the next 12 to 18 months. We expect the transaction to be accretive to EPS and our LTL operating ratio in 2025. This assumes no underlying recovery in industry volumes. Any market rebound would represent an upside to our baseline forecast. The third pillar of our plan is to drive above market yield growth, which is our single biggest lever for margin improvement. You can see this dynamic in the fourth quarter when we drove yield excluding fuel higher year-over-year by 10.3 percent. This helped us deliver nearly 400 basis points of adjusted operating ratio improvement. We got there by executing on service improvements, accessorials, and volume growth within our local customer base. These are the three levers for our long-term pricing opportunity. The exciting trends in our service metrics translate to value for our customers. with a direct correlation to the price we earn. Increasingly, our customers see XPO as a high-value business partner with the resources to help them succeed. This was reflected in our contract renewal pricing, which was up year over year by 9% for the second consecutive quarter. Accessorials are another opportunity to grow our yield by delivering more value through premium services. We plan to expand our range of offerings this year. We saw an early impact in the fourth quarter with the introduction of our retail store rollout offering. We already have over a dozen customers using this service to distribute critical product launches for retailers. And with the third lever, our local channel, we grew shipment counts by double digits for the third consecutive quarter. Our local sales team at year end was over 20% larger than in 2022. reflecting the importance we place on this high-yielding margin accretive business. So we have a lot of avenues leading to yield growth, and each step forward helps to align our pricing with the value we deliver. The fourth and final pillar of LTL 2.0 is cost efficiency. The main opportunities here are with purchase transportation, variable costs, and overhead. In the fourth quarter, we reduced our purchase transportation costs by 22% year-over-year by insourcing more miles and paying lower contract rates to third-party providers. We ended the quarter with less than 20% of line haul miles outsourced for a year-over-year reduction of 290 basis points. On a sequential basis, we reduced our reliance on outsourcing by 190 basis points. We've come a long way since the beginning of 2022 when we were outsourcing about 25% of our line haul miles. Today, we're well on the way to bringing down that percentage to the low teens by 2027. Lastly, a quick update on our initiative to add driver teams and sleeper cab trucks for long hauls. The goal here is to increase the efficiency and flexibility of our line haul network. We started putting these teams in place last quarter and we currently have over 50 teams in operation. We expect to have a few hundred long-haul teams on the road by the end of this year. This should help to accelerate our insourcing plan. We're also continuing to manage our variable labor costs effectively, growing our volume by more than our headcount year over year for the fourth consecutive quarter. And the spread in the quarter was substantial. Our shipment count was up 5.7%, while our headcount was up just 1.7%. This is a credit to the team's operational discipline, supported by our proprietary technology for labor planning. In summary, in 2023, we made significant progress on our plan across the board, while laying a solid foundation for the future. We improved our operations in all four quarters of the year by generating record service levels making strategic investments in the network, further accelerating yield growth, and operating more cost-sufficiently. As a result, the business performed above expectations with robust margin expansion and earnings growth and strong forward momentum. Now I'm going to hand the call over to Kyle to discuss the fourth quarter financial 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. It was a strong fourth quarter overall. Revenue for the total company was $1.9 billion, up 6% year over year. This includes a 9% increase in our LTL segment. Excluding fuel, LTL revenue was up 14% year over year. Salary, wages, and benefits for LTL were 10% higher in the quarter than a year ago. This increase primarily reflects wage and benefit inflation, as well as incentive compensation aligned with our strong fourth quarter performance. These impacts were mitigated by our productivity gains. We've now improved our labor hours per shipment on a year-over-year basis for four straight quarters throughout 2023. We were also more cost efficient with purchase transportation through a combination of insourcing and rate negotiation. Our expense for third-party carriers was $83 million in the quarter, which was down year-over-year by 22%. Depreciation expense increased year-over-year by 23%, or $13 million, as we continued to reinvest in the business. This remains our top priority for capital allocation and LTL. In the fourth quarter, our CapEx was primarily allocated to our fleet. as we purchased new tractors from the manufacturers and built 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 $264 million in the quarter, up 28% from a year ago, and improved our adjusted EBITDA margin by 230 basis points. These metrics exclude the impact of real estate gains in the fourth quarter of 2022 to give you a like-to-like comparison. We had no real estate gains in the fourth quarter of 2023. Our fourth quarter corporate expense was $5 million for a year-over-year savings of 44%, or $4 million. We're continuing to rationalize our corporate structure for the standalone business and expect to report further reductions this year. Looking solely at the LTL segment, we grew our adjusted operating income by 51 percent year-over-year to $160 million, and we grew adjusted EBITDA to $233 million. The gains we achieved through revenue growth and cost efficiencies more than offset the non-operational headwinds from lower fuel surcharge revenue and pension income. In our European transportation segment, adjusted EBITDA was $36 million for the quarter. Company-wide, we reported operating income of $119 million for the quarter, compared to $4 million in the prior year. Our net income from continuing operations was $58 million for diluted earnings per share of 49 cents. compared with a loss of $36 million, or 31 cents, a year ago. This represents an improvement of 80 cents in diluted EPS from continuing operations, driven by significant year-over-year reductions in transaction and integration costs and restructuring charges. On an adjusted basis, our EPS for the quarter was 77 cents, which is down 21% from a year ago, This primarily reflects the impact of real estate gains in 2022, as well as lower pension income and higher interest expense in 2023. Our acquisition of the 28 service centers closed on December 20th and did not have a material impact on our operating results and the income statement. And lastly, we generated $251 million of cash flow from continuing operations in the quarter, and deployed $151 million of net capex, excluding spend related to the acquisition. Moving to the balance sheet, we ended the quarter with $412 million of cash on hand. Combined with available capacity under committed borrowing facilities, this gave us $920 million of liquidity. We had no borrowings outstanding under our ABL facility at quarter end. In December, we raised $985 million through a combination of $585 million of senior notes and $400 million of term loans. We used $870 million of proceeds to complete our acquisition of 28 LTL service centers, and we refinanced our existing senior notes due in 2025. We now have no funded debt maturities until 2028. we also maintained all corporate and issue-level credit ratings. Our net debt leverage at year-end was three times trailing 12 months adjusted EBITDA. The investments we're making in the business will enhance our earnings trajectory for a high return on capital, consistent with our long-term goal of achieving an investment-grade profile. Before I close, I'll summarize the full year 2024 assumptions we provided in our investor presentation to help you with your models. They are as follows. Gross capex of $700 to $800 million, interest expense of $240 to $260 million, pension income of approximately $25 million, an adjusted effective tax rate of 23 to 25 percent, and a diluted share count of 121 million shares. Now, I'll turn it over to Ali, who will cover our operating results.