XPO, Inc.

Welcome to the XTO Q4 2020 FAY Earnings Conference call and webcast. My name is Sheri 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 underapplicable 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.

Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Kyle Wismans, our Chief Financial Officer, and Ali Fagri, our Chief Strategy Officer. I'm pleased to report that we kept a strong gear with a quarter that exceeded expectations and we've carried that momentum into 2024. Companywide, 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 the 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. We also improved our capital flow and we continued 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 .3% is a new record for us. To put that in context, it's a vast improvement from .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 XBO'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 -over-year by 10.3%. 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 customer CXPO is a high-value business partner with the resources to help them succeed. This was reflected in our contract renewal pricing, which was up -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 cost by 22% -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 -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 -over-year for the fourth consecutive quarter. And the spread in quarter was substantial. Our shipment count was up .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 quarters of the year by generating record service levels, making strategic investments in the network, further accelerating yield growth, and operating more cost efficiently. 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% -over-year. This includes a 9% increase in our LTL segment. Excluding fuel, LTL revenue was up 14% -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 -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 -over-year by 22%. Depreciation expense increased -over-year by 23%, or $13 million, as we continued to reinvest in the business. This remains our top priority for capital allocation in 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 -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 -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% -over-year to $160 million, and we grew adjusted EBITDA to $233 million. The gains we achieve 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 -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%, and a diluted share account of 121 million shares. Now, I'll turn it over to Ali, who will cover our operating results.

Thank you, Kyle. I'll start with our LTL segment, which reported another quarter of profitable growth. On a year over year basis, we increased our shipments per day by .7% in the quarter, led by 12% growth in our local sales channel. This resulted in growth in tonnage per day of 2%. Our weight per shipment was down .4% year over year, which was notably less of a decline for the second consecutive quarter. On a monthly basis, our October tonnage per day was up .5% year over year. November was down .5% and December was up 3.6%. Looking just at shipments per day, October was up .2% year over year. November was up .7% and December was up 6.6%. In January, our tonnage per day was down .1% year over year, while shipment count was up 1.4%. The transportation industry was disrupted by weather events in January, but we saw a rebound more recently and ended the month with stronger volumes. And sequentially, both our tonnage and shipment count increased from December to January, outperforming seasonality. We also outperformed on yield in the fourth quarter, delivering a second consecutive quarter of acceleration. We grew yield excluding fuel by a strong .3% compared with the prior year. Importantly, our underlying pricing trends are strong as we continue to align our pricing with the better service we're providing. Our contract renewal pricing was up 9% in the quarter compared with a year ago. Turning to margin, our fourth quarter adjusted operating ratio was 86.5%, which was an improvement of 380 basis points year over year. Our strong margin performance was primarily driven by yield growth and underpinned by our cost initiatives and productivity gains. Sequentially, our adjusted OR increased by 30 basis points, which outperformed seasonality. By 280 basis points. Moving to our European business, we delivered revenue growth of 2% year over year, despite ongoing challenges in the macro environment. This growth was supported by strong pricing, which outpaced inflation. And in some regions like the UK, we grew adjusted EBITDA versus the prior year, reflecting discipline cost control. While our volume declined slightly year over year, we outperformed the industry and we mitigated the decline with new customer wins as the quarter progressed. And this trend improved in January. The team is executing well and earning new business from high caliber customers. This momentum, together with the growth of our sales pipeline, should continue to strengthen our position in key European regions. I'll close with a summary of the three main achievements you heard from us this morning as they relate to our expectations for a strong 2024. First, we're continuing to deliver more value for customers in the form of service quality with our metrics at record levels. And we're on an excellent trajectory. Second, we accelerated yield growth to double digits as we exited 2023. And we expect to deliver another robust yield performance this year with a direct benefit to profitability. And third, we're showing that we can operate more productively by leveraging our technology and improving our cost to serve. In short, we've taken major strides with our performance and significantly improving our operating ratio. Now we'll take your questions. Operator, please open the line for Q&A.

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. 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. We will take as many as we can. One moment while we pull for questions. Our first question is from Scott Group with Wolf Research. Please proceed.

Hey, thanks. Good morning. Any thoughts on how to think about the OR from Q4 to Q1 and maybe your margin improvement? And then, I don't know, bigger picture. Mario, you made a comment that all this terminal growth is additive to yield and margin. I get why it should be good for volume, but maybe some thoughts on how it actually helps yield and margin as well.

Sure. Thanks, Scott. First, starting with the first quarter outlook, we typically give tonnage, yield, and what OR would look like. Starting with tonnage, following the gains we had in the fourth quarter, we do expect to outperform seasonality in Q1. Typically, an OR seasonality for us is called a flattish tonnage sequentially from Q4 to Q1, and we expect to do better than that. So we expect Q1 tonnage to be up low single digits, somewhat in the same zip code as where we were in the fourth quarter on -on-year basis. Now, when you look at January tonnage specifically, it did do better, as Ali mentioned earlier, compared to seasonality when you roll forward December into January, and we had a strong end of the month as well, despite the weather earlier in the month. On the yield front, we expect a strong performance for yield across the board this year. We do expect yield to be up on a -on-year basis in the first quarter, somewhere in the same zip code as we were in the fourth quarter -on-year. And ultimately, from an OR standpoint, usually the typical seasonality for us, Q4 to Q1, we see OR deteriorate about 40 basis points, and we expect to do better than that. Now, how much better will depend on how the rest of the quarter plays out. Usually, Q1, as you know, March is the big month of the quarter, but that implies roughly 300 basis points of OR improvement -on-year. For the full year 2024, we also expect a strong year for us in terms of OR improvement, given all the things we're doing in yield and tonnage and cost and efficiency improvement and service improvement. We expect OR to be up in the 150 to 250 basis points range for the full year, and that's the path for us to do better than the top end of the range, depending here on how the year plays out. Now, taking a step back on your question on the service centers and how they impact yield, so we see a big cost benefit first, and that cost benefit comes from higher efficiency and having bigger break-bulks that lead to cost savings and line haul, having service centers closer to the customer that leads to lower C&D costs and also lowering doc re-handling costs associated with that. Now, the way they help yield is because larger service centers help improve your service product, and service product can provide yield. But also, we mentioned premium services, and when you think about premium services in some markets like Las Vegas, we're tapped on capacity, and by having now the largest service center in the Vegas market, we're going to be able to launch new offerings like trade shows, as an example, and these come also at a higher yield and higher margin as well.

Thank you,

guys. Thank

you. Our next question is from Ken Hoekster with Bank of America. Please proceed.

Hey, great. Good morning. Grads on some solid performance here on the OR. Maybe just digging into that, though, you know, talk about the ramp of the 28 facilities. How should we anticipate the drag versus your forecast? And I guess with that, you know, it seems like you're bumping up against your kind of long-term targets now of the 600 basis point improvement. You know, does that shift or the speed with which you can get there start changing in your thought process?

Thanks, Ken. Well, starting with the ramp of the service centers, well, in terms of getting them up and running, we do expect to get them up and running in the first dozen or so service centers over the next three to six months, the next dozen over the next six to 12 months, and then the remaining four or five will go live the next year, you know, call it 12 to 18 months. Now, we don't anticipate an OR drag from them that would be material to our numbers, and the reason why, because the majority of these service centers are in markets where we already operate. So if you think about it, there is one case where we move our team, our existing team, from a smaller service center to a larger service center. The carrying cost of real estate is fairly low on a per-door basis, but we get the immediate benefit of cost efficiencies and cost savings associated with having a larger facility to operate from. In markets where we are adding a service center and keeping the existing one, in that particular case, we split the team between the two service centers based on volume, and we only staff up if there is an inflection in volume and we have incremental volumes. So we don't anticipate these service centers to have a drag on OR this year. We do expect them to be accretive for EBITDA. We do expect a drag on EPS driven by the incremental debt there, and we expect them to be accretive on all these KPIs in 2025 and beyond. In terms of the long-term targets, we've always set 600 basis points, I mean, at least 600 basis points. And there's nothing magical about 600 basis points. There's nothing magical about 2027. With all the momentum that we have here and with all the new service centers, the pricing, the service improvements, we do expect to outperform, and our goal is to get to the 70s and well into the 70s over time from an OR perspective.

Thanks, Mario.

Our next question is from John Chappelle with Evercore ISI. Please proceed.

Thank you. Good morning. I'm not sure if Mario or Ali wants to take this, but this is the second straight quarter now with contract renewal pricing up 9%. Where do you stand on the book of business as it relates to kind of marketing to market for the new service? Do you still have a couple more orders where you think that kind of high single digit contract renewal is on the agenda, or are you kind of close to kind of marking it to market, and you think maybe that moderates a little bit to maybe mid single digits kind of in line more with the GRI levels?

Hey, John, it's Kyle. So if you think about contract renewals right now, we did accelerate heavily in the back half from 5% to 9%, and so far in the year, or in the back half, we renegotiated 50% of the book. So there's still some more to work through. I still think we're in a favorable market for renewals, and we should expect Podlmentum to carry forward here in 2024.

Just to be clear, though, it's kind of like if you're done with 50%, is this the first half higher under that range, reacceleration similar to the back half of 23, and then kind of more of a normalized level in the back half, or do you think that what you've done over the last six months as you continue to improve service kind of leads you more towards what you've done in the last six months or so as a percentage

basis? I think renewals are probably going to follow where we see yield for the first half. So we're expecting strong yields to continue. If you think of our Q1 yield guide, we think Q1 yield is going to be up high single digit in line with what we saw in Q4. That should carry forward into our contract renewals at the start of the year.

Our next question is from Chris Weatherby with City Group. Please proceed.

Yeah, hey, thanks everyone, guys. I guess I want to talk a little bit about some of the initiatives that maybe you guys are thinking about for 2024. So we've talked about sort of the team drivers, you've talked about sort of the insourcing of line haul. I'm curious, kind of, as you start to think about adding those up in the context of the 150 to 250 basis points of OR improvement, how much you get from that versus maybe what would be kind of core pricing above cost inflation, or maybe a little bit of leverage on the volume. I don't know if you can unpack that, any details you can give us would be great.

Yeah, I've thought on the initiatives. And Chris, the way we look at it, I mean, our plan involves substantial yield improvement. It does involve continuing our great service momentum or service product improvement momentum. Tonnage improvement, we do see tonnage going up for the full year, but we do expect it to be up, you know, call it in the same zip code of where we were in the fourth quarter. So low single digit, because our goal is to drive more yield than it is to drive volume. Similarly, our goal is to drive cost efficiencies, as you mentioned. So I'll give a quick update on the initiatives. As part of our plan is to insource more to the third party line haul miles, because that comes both at a cost benefit, but it also comes as a service benefit. When we go from using a third party carrier with a 53 feet trailer versus having two 28 feet pups, which gives us more space, gives us safe stack in the trailers where we can separate the freight physically and our drivers show up on time 100% of the time, we can continue to improve that service product. Now that will come with cost savings here in 2024, but the longer term cost savings also come when you think of an inflection and truckload rates at some point, that's going to be obviously material savings for us from what we would be spending internally on a per mile basis versus what we're spending for third party carriers. So our expectation is to continue to, we insource to 90 basis points here in the fourth quarter, year on year, we are sub 20% at this point, we're at 19 and change. Now we're going to drive that and it first phase down to the low teens and beyond that as we pump those teams as well.

Okay, that's helpful. Appreciate it. Thank you.

Thanks, Chris. Our next question is from Saadi Shimon with BMO Capital Markets. Please proceed.

Yeah, good morning, team. So my question is, you mentioned the double digit growth that you're seeing in the local account, I guess. I'm thinking this is obviously been a pretty decent tailwind for density and cost per shipment and ultimately the yield. Where are you in this kind of trajectory of improving local account penetration? Are we in the first inning of that? Is there an opportunity that is of significant size still in front of you?

When we look at the local account strategy, it is a segment that we are planning on growing over the years to come here. Now, if you look back at 2023, we were run rating at roughly 20% of our volume and revenue is generated from that channel. Now, what we have done through the course of the year is that we increased the size of our local accounts. We hired more than 20% more local sellers through the course of 2023. And the goal here through 2024 is to add roughly another 10%. So all in to be 30% higher on the overall Salesforce size that is selling to that channel. Now, as you can imagine, whenever we onboard new people, it does take a ramp, usually about six months for them to be fully productive and fully up and running. Now, if you look at the full year, we did improve our local accounts on a higher run rate than the rest of our book. Here in the fourth quarter, we grew our local shipments in that channel by 12% on a -on-year basis. And we do expect to continue to see those really strong gains in that channel since we onboarded 20% more sellers. Now, in terms of the innings, I would say we're still in the early innings in terms of results, but we are very well underway in terms of having the team and having them seen a couple of quarters of ramp here, being pretty productive in 2024 and beyond.

Appreciate that. Thank you and congrats on the strong results. Thank you, Fadi.

Our next question is from Stephanie Moore with Jeffreys. Please proceed.

Hi, good morning. Thank you. I wanted to maybe touch a bit on the, I guess, continue on the pricing discussion here. I think it's pricing accelerated over 10% here in the quarter. I think you've guided to more high field digits. Can you maybe walk through the drivers of the upside, what you're seeing, and kind of your thoughts as we think about 2024 for further pricing acceleration, especially your view of what could happen if the macro does actually turn?

Thanks. Sure, Stephanie. This is Ali. So we're seeing very strong pricing trends as we enter 2024. For the first quarter in particular, we would expect our yield on an ex-fuel basis to be up somewhere in the similar range as we just delivered here in the fourth quarter. So call it roughly about 10% growth. Now, on a full year basis, we would expect yield to be up somewhere in that mid to high single digit range. I would add that there's certainly a path to do better than that. It's still very early in the year. So we'll update you as the year progresses. A lot of that yield growth and that outperformance versus the industry is being driven by our internal initiatives. You think about our service improvement. We're at record levels here in the fourth quarter. We're continuing to lean more into premium services. We rolled out retail store rollouts here in the fourth quarter. We have a lot of traction there. And as Mario just noted, a lot of momentum on the local side as well, too. And this is higher yielding and margin of creative business. So overall, we feel very good about the outlook here in 2024 and expect it to be a strong year for us overall.

Great. Thank you. Maybe just as a follow up to that, but a little bit bigger picture. As you think about incentive comp across the organizations, maybe talk a little bit about what metrics that have been possibly realigned just to align interest across the organization, yield, margins, EBIT, what's the major metrics we should be focused on based on incentive comp changes in 2024?

Thanks. This is Mario. I'll take that. So in 2023 first and 2022, we used to compensate predominantly our field based on EBITDA growth and EBITDA performance. But we have added a good portion of the comp plan to be focused on service quality. So as service centers and group service quality and on-time service, they effectively, they have a good chunk of their incentive comp is based on that. Now in 2024 will be the first year where we are switching from compensating our field from EBITDA and EBITDA growth and have it be focused on OR improvement. So it's now focused on how can we expand our margins over time? Because as you know, we want to incentivize effectively driving that better service product that yields a higher yield while managing cost effectively, which would lead to OR expansion at the service center level and ultimately at the network level as well.

Our next question is from Tom Widewitz with UBS. Please proceed.

Yeah, I just said, I guess one kind of quick one on DNA and maybe how we think about the ramp up in that given, you know, you are spending a good level of capex. So on that, I guess the broader question would be on how you think about the terminal network. And I guess, you know, what's as you bring on terminals, you know, like where you sit today, what's your access capacity from a, you know, a door and a terminal perspective. And as you bring on more terminal capacity kind of where do you want to get to, right? Like the, you know, I think we've seen that, you know, a high service model, you do have some, a decent access capacity, but kind of wanted to see where you're at today, where you'd like to get to on access capacity and then this specific one just on kind of DNA modeling. Thank you.

Thanks. Thanks, Tom. I'll start with the network and the capacity side and turn it over to Kyle for DNA. When you look at our network today, before the 28th service center acquisition, we were done rating, you know, call it in the mid to high teens in terms of excess capacity in the current environment. And if we, if we roll forward, we are adding 28 service centers. Out of these, roughly half of them would be additive and the other half would be ones where we are relocating from a smaller service center to a larger service center. And we are roughly acquired about 3000 doors and we would be adding in that after we're all set and done with the integration in at 2000 doors, which is called a 10, 15% expansion in capacity. So once we get service centers online, we will be in that 25 to 30% excess capacity in our network. And that's a great place to be as an LTL network, especially in a soft freight market. So this way, whenever there's a freight market recovery and you see higher demand, it's sort of the, our industry has been capacity constrained. Real estate comes with a very low carrying cost and this would enable us to flex up whenever that demand comes back. So this is how we look at currently where we are. And as we open up those service centers, where we'll be at in a capacity perspective.

Yeah, Tom, and if you think about the DNA ramp, so we are going to see increased capex within the LTL segment. So we'd expect about 74 to 75 million a quarter for LTL reflecting the increased cap expense.

Okay, great. Thank you. Our next question is from Bruce Chan with Stifo. Please proceed.

Yeah, thanks operator and good morning everyone. Maybe just to start, Kyle, can you remind us of what your target leverage range is? And then, you know, I know in previous quarters, you'd pull back on some of the commentary around the sale of the European business, but you know, with the need for more debt pay down potentially with these new facilities, is there any more urgency to sell that business now?

Hey, Bruce, it's Kyle. I'm going to start and then I'll hand it over to Mario. So when you think about our long-term leverage outlook, our intention is one to two times trailing 12 months EBITDA. And we think we're in a great spot with the investments we made and the EBITDA we can generate to really make a lot of progress on that here in the next couple years.

And on the European sale, Bruce, our long-term plan remains to be a pure play North American LTL carrier, and selling the European business is one of our strategic priorities. But we're going to be patient. Our goal is to maximize the return we get on that business. It is a business that has scarcity value with either number one, two or three and less than truckload, truckload, asset-light brokerage, and many geographies in Western Europe, think UK, France, Spain, Portugal. And it's not a matter of if, but a matter of when. And meanwhile, if you take a step back, the business is performing well, despite a soft economy in Europe, but outperforming the tiers. Our revenue was up in the quarter. We've improved volume every month of the quarter and further improved in the month of January. And it's a credit to the team, strong execution. So again, if you take a step back, it's a matter of time and some point together.

Okay. Appreciate it.

Our next question is from Jason Steidl with TD Cowan. Please proceed.

Thank you, operator. Mary, I think you talked about accessorials and that there's about 12 different things that XBO was doing to sort of drive them higher. Can you help us understand the timing and sort of the ability, your ability to implement these accessorials and the impact we should expect?

So when you take a step back on these accessorials, they are predominantly what we call premium services. So these are services that our customers are asking for that go beyond your typical pick up a few skips of freight and get them delivered to a destination. So examples are, Kyle mentioned earlier, the retail store rollouts offering, where in that particular case, you can imagine if you have some sort of a holiday or a new product launch, a customer needs us to many, many shipments, typically hundreds of shipments in a short time window, and they need somebody to coordinate all of those offerings. And that beats obviously to a higher price and the customer is happier because they're getting a service that they need. We do have a number of other offerings. Trade shows is a good example of that. Working with retailers, they must arrive by date type offering and many others that we are launching through the course of the year here. We do expect to get them launched. They won't all be launched within a few quarters. Some of them will take a bit longer, like an expedited service as an example. As we launch these, we expect them to be accretive to yield over time. In terms of magnitude, roughly today, our accessorial as a percent of revenue is roughly, you know, call it the low double digits. And our goal is to grow that to the mid teens as we launch these programs over the years to come.

That's great, Tyler. I wanted to also follow up on the overall pricing discussion. LTL pricing this quarter has been very strong. Your renewals are at 9%. SIA is almost at 9%. ARKBest is the best they've reported since quarter in 2022. And this is all in a very sluggish demand backdrop and super cheap TL pricing. As the economy recovers and capacity tightens overall, is it crazy to think about double digit pricing going forward for you guys?

We have the double digit pricing up here in the fourth quarter and we do expect a very strong first half of the year as well. There is an environment, if you look at our industry, it's been historically capacity constrained. When you go back before yellow seeds operations, we didn't have enough capacity versus the demand that was out there. We are currently in a sluggish freight environment where demand is down, roughly call it double digit low teens. And this is when that capacity went away from the market. So whenever there is any sort, even with some of that capacity coming back into LTL, whenever there's any form of inflection in demand, there wouldn't be enough doors and service centers in our industry. So you would see pricing accelerate accordingly. For us specifically, we also have all the company specific initiatives we're driving between driving better service, which comes at a premium, between driving premium services, between driving also expansion of our local channel. All of these would be accretive to yield as well. So double digit pricing is not out of the question.

Fantastic. Appreciate the time.

Thank you. Our next question is from Bascom majors with Susquehanna. Please proceed.

Thanks for taking my questions. I wanted to go back to the incentives focused from earlier. Can you talk more specifically about how you're tactically incentivizing your salespeople specifically and if that has changed at all as the business has evolved and your priorities have evolved over the last 10 months? Separately from a long-term senior executive management incentive approach, how might those look different this year than they have over the last few years? Thank you.

Thanks, Bascom. First, starting with the sales compensation. So it depends on what type of seller you are in the organization. We change the comp plan accordingly. So if you're in the example, if you're in the different type of accounts, you're going to have to focus on profitability more. But generally the theme is that if you look at a service center, they are compensated based on the OR improvement for that specific service center. If you're a local account executive, you're incentivized to grow your book and a component of your compensation is driven by operating ratio as well. If you're handling larger accounts, then the lion's share of your compensation is around OR and profit improvement as well associated with that. So this is how typically sales are compensated, but it is more driven by your book of business as opposed to your region or the network as a whole. Now in terms of senior exec compensation, that's typically part of our proxy, but we incentivize our senior executives based on a combination of OR growth, EB tag growth, and the TSR, so shareholder value creation as well.

And you don't expect the long-term incentive formula to really change other than the targets for this three-year period?

The framework would be very similar to what we had in the past.

Our next question is from Jordan Allager with Goldman Sachs. Please proceed.

Yeah, hi, morning. Just sort of curious, thanks for the layout in terms of the door opening timing, etc. In the context of your thoughts on the economy and the new door openings, is there a way to think about tonnage or volume trajectory as we go through the year? Sort of like -over-year growth potential or how you expect it to sort of ramp up? That would be the first question, thanks.

Sure, Jordan, this is all. I'll start then pass it to Mario. So for the full year, as we noted, we expect a much higher contribution from yield and volume. We're being very disciplined on the type of volume we're onboarding onto the network, and you should expect that to continue through this year. So overall, for the full year, we'd expect tonnage to be up somewhere in that low single-digit range for the full year and then yield somewhere in that -to-high single digits or better. Now keep in mind, we do have tougher comps in the second half of the year. It is still early in the year, and obviously the macro can be a swing factor. In terms of the new service centers, we don't expect any sort of meaningful contribution from volume this year. We would expect contribution from volume to be sub a percent of incremental volume, so not a meaningful number overall.

And Jordan, when we think about the service centers in the near term, ahead of any type of macro inflection whenever it comes, there is a big benefit we're going to get from cost savings, as I mentioned earlier on, by having larger facilities. And if we think about what we bought from the yellow network, we bought some of the largest service centers. You look at a site like Carlisle, you can't get any more than 120 acres of land right off I-76 and I-81, where we have a 300-door service center now in that market. Same thing with Nashville. We got a 40, 50-acre facility west of Nashville with more than 200 doors in it. So when you think about those larger facilities that enable you to run more efficiently, your line haul, your P&D, your dock operations, that's going to lead to cost savings as soon as we start moving into them. The other benefit is some markets, when you look at a market like Brooklyn, New York, or Columbus, or Indianapolis, or Las Vegas, we're tapped out on capacity today. So we don't have enough doors in those markets. And by having this incremental capacity, we already have customers that are ready to go where we can onboard them as we open up those service centers. And we have two small service centers. One is in Eau Claire, Wisconsin, one is Nogales, Arizona, where these are net ads or new markets. But these are small service centers where we already have demand lined up based on existing customer relationships we have as well.

Got it. And then just sort of curious, how are you going to manage the terminal opening? So in other words, is there some economic dependency on it, how good the economy is, or is there going to be a terminal opening no matter what, strategically or otherwise?

When we think about the rollout timing, we prioritize those service centers, those markets where we are capacity constrained today. So in a softer freight environment where we see that we don't have enough capacity. And the second priority is based on cost efficiency, so the service centers that will create the most amount of cost efficiency. And when we think about the opening schedule, I'll call it over the next three to 18 months, it will be, we're going to drive through it regardless of the freight the markets are doing. This would be a reasonable timeframe in terms of bringing those terminals up to our standards and doing the rebranding and these kind of things to get them up and running. And then for us, I mentioned this earlier on, if you think about the headcount, there's no need for us to hire people ahead of volume. So what we do is we either relocate the existing team into a larger facility or we add a facility to an existing market where we split a team from an existing facility into two different service centers so there is no incremental cost associated with that. If we do see an infection in volume where the markets are getting better, then we step up to be able to support that volume. And importantly, Jordan, if you look at our year in 2023, we were able to improve efficiency every single quarter of the year. So we have a great ability between operational discipline that Dave and the team are bringing to the table, supported by our proprietary technology to be able to run our network very efficiently from a labor standpoint.

Our next question is from Brandon Oglinski with Barclays. Please proceed. Hey,

thanks for taking my question. Mario, maybe we can follow up on that one there. I know you're talking about cost efficiencies of opening new terminals in the network and it sounds like potentially you're going to move staff from one to the other. But I guess just covering transports for 20 years now, when you open new nodes in the network, especially a scheduled network, isn't there like a spool-up time on capacity efficiency, especially on like line haul and local pickup and delivery that we should be anticipating? Because it sounds like what you're guiding to that you can instantly match efficiency if not even get better with these new facilities.

Whenever you open up those sites, you do have a small headwind in cost. But that for us would be a very short-lived. I mean, you're talking 30 to 90 days of cost headwind as you move into a larger facility. And predominantly it comes from the carrying costs of the incremental doors. But Brandon, keep in mind that the cost of a door in our P&L is sub 5% as a percent of total. So it's a small incremental cost associated with that. But when you think about the immediate efficiency you gain in pickup and delivery and line haul and all of those pieces, this is where we see that this again drag that is short-lived doesn't have a meaningful impact on the network as a whole. And to give you an example, over the last couple of years here we've opened up a dozen service centers. And each one of them was accretive within 30 to 60 days. Each one of them is exceeding our return hurdles as well. So we feel very good about our ability to get those onboarded with very minimal drag. And that's the reason why we don't expect any drag from an OR perspective from the service center. And finally, I'd say also with having Dave on the team, he has an incredible amount of experience in terms of adding capacity to a network and making sure it's accretive pretty quickly.

I appreciate it. Congrats on the core.

Thank you. Our next question is from James Sponigan with Wells Fargo. Please proceed.

Hey guys, thanks. I just wanted to come back to pricing a little bit. And of the pricing gap to peers, how much of that pricing gap is sort of attributable to service level differences? And you've improved service a good bit here. So of that gap, how much sort of is accessible to you given where service is today?

Sure, James, this is Ali. So overall, we see roughly about a mid-teens pricing upside opportunity in the years to come. And it's primarily driven by three levers. First and foremost, it's driven by service. So as we continue to improve our service quality, we're going to be able to better align the price with the value we're delivering. We quantify that about half of that mid-teens pricing gap. So call it 7, 800 basis points of pricing opportunity as we continue to improve service. And we're realizing that right now. In the third quarter, we delivered a company record damage claims ratio and our yield growth accelerated to double digits. So we're in the early innings of realizing that opportunity. Then you have another about 500 basis points or 5% of pricing upside that's tied to accessorials and more specifically, premium services. As Mario noted earlier, we want to grow our accessorials a percentage of overall revenue from roughly that 10% range right now to 15 plus percent over time. And that's about five points of pricing upside. And then lastly, the local channel is also an opportunity for us from a pricing perspective. That's higher yielding and higher margin business for us. Currently, that's roughly about 20% of our revenue. And we want to grow that to 30 plus percent over time. And that's roughly about another two to 300 basis points of pricing upside. So there's multiple different levers we can pull to grow pricing. And as we move through 2024, we would expect those to translate to very strong yield growth for us.

Got it. But given where service is today, the full 700, 800 of price that is tied to service, is that fully accessible to you or does service need to improve further in order for you to get that 700 to 800 basis points as you move through the contract repricing?

It does take time. I mean, it's not like a switch where as you improve your service product, your customers will give you that premium immediately. But we're seeing, we already have been seeing it play out here in the course of 2023. When you look at the improvement, we've seen in yield quarter after quarter and having those very strong contract renewals. So currently, if you look at it, I mean, you go back to years ago, we had a damage claims ratio of 1.2%. We're down to 0.3%, which is a company record. But our goal continues to keep on improving that. We're a customer loving organization. We want to take care of our customers, pick up the freight on time, deliver it on time, deliver damage free every single time. And if you think about it from that perspective, that over time earns you a premium. So when we think of that seven to eight point differential, it's going to take us a number of years to claw through it. But that's why when we look forward, we think of our ability to get this above market pricing is going to be driven by discontinued improvement and continued focus on taking care of our customers.

Awesome. Back with JP Morgan, please proceed.

Hey, good morning. Thanks for taking the questions here. So Mario, just to come back to the additional terminals and door counts, can you give us a sense of what incremental margins overall you're assuming and it sounds like they're reasonably high for not expecting any real OR dilution. And on that point as well, it's obviously a big purchase price. Purchase price accounting takes a while to settle out, but isn't there a big DNA component from this as well? I know Kyle talked about the component before, but it sounded like that was primarily for capex. So it would be helpful to hear a little bit about that. And if you can maybe just finish up with what you're seeing on the demand environment, have we talked too much about that, seeing a little bit of improvement in PMIs, maybe some restocking ahead, but we'll be curious to see what you're hearing from your customers to start the year. Thanks.

Thanks, Brian. So I'll start first with the return on the service centers, and we expect that to be on the long run to be in the 30 to 40 percent range. And I'll turn it over to Kyle shortly here to discuss the details of that. Now, when you think about the customer demand environment, it is a fluid environment. It is tough to call what the macro is going to do through the balance of the year. From one perspective, you see the rates where they are from a set perspective. And we're seeing different mixed signals. Now, we do survey our customers on a regular basis. And for the first half of the year, roughly two thirds of the customers are expecting either flat or slightly improving demand. So there is a bit more optimism in the first half than what we've seen in the back half of last year. But there's even more optimism for the back half, where the majority of the customers did say that they expect a pickup in demand in the back half of 2024. So we're cautiously optimistic, but it's tough to call the macro at this point. Now, when you look at it more near term, you look at we do watch the ISM manufacturing index, given two thirds of our customers are industrial companies. And when you look through the course here of the fourth quarter, the trough was in October, November. We saw it get better in December. And here in January, even further improved that the ISM posted 49 and change, which is very close to 50, which is typically your point where you start seeing an inflationary environment. So again, we're seeing demand hold. We're seeing demand slightly improve and with more optimism towards the back half of the year.

And then just to address the capex question, especially with the yellow, when you think about the 28 service centers, we're expecting incremental capex about one to two million per site. So about 50 to 60 million in total. Now that's not spread evenly across all 28 service centers. And that's really largely tied to refreshing and refurbishing the sites, bring up to standards. So it's going to cover construction, paving, painting, rebranding. And that capex for those sites is included in our overall guide for the year. You know, and some of these, some of these sites have already started to work on some locations. So going back to Mars earlier comments, we expect some needs to come online here in Q2.

We have reached the end of our question and answer session. I would like to turn the call back over to Mario Herrick for closing remarks.

Thank you, operator. And thanks all for joining our call today. As you can see from our results, our plan is working and our service improvements are delivering revenue growth, margin expansion, and earnings growth. Soon we're going to start integrating the acquired service centers into our network, which is now more productive and more cost efficient. We have a lot of strong momentum here as we start 2024. And we look forward to updating you on the next quarter. Operator, you can now end the call. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your