XPO, Inc.

Welcome to the XPO Third Quarter 2024 Earnings Conference Call and Webcast. My name is Paul 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 signed 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 in the related financial tables on its website. You can find a copy of the company's earnings release which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section of the company's website. I will now turn the call over to XBO's Chief Executive Officer Mario Harak. Mr. Harak, you may begin.

Good morning everyone. Thanks for joining our call. I'm Yerin Greenish with Kyle Wissmans, our Chief Financial Officer, and Ali Fagri, our Chief Strategy Officer. This morning we reported strong third quarter results and a soft backdrop for freight transportation with above market earnings growth and margin expansion. Companywide, we grew revenue year over year by 4% to $2.1 billion and we achieved significant operating leverage on that growth delivering a 20% increase in adjusted EBITDA to $333 million. Our adjusted diluted EPS was $1.02 which is a 16% increase from a year ago. The send-out result of the quarter was a strong margin expansion with a -over-year improvement in LTL adjusted operating ratio of 200 basis points. This improvement was at the high end of our target range. What drives our results are the four levers of our strategy, service quality, yield growth, investments in the network, and cost efficiency. These levers are closely aligned and each one has a distinct role in driving our performance. I'll start with service quality. We delivered a damage claims ratio of .2% which is an improvement from .4% last year. Importantly, damage frequency continued to improve each month in the quarter to record levels. We also improved our on-time performance year over year for the 10th consecutive quarter. The speed and reliability of our network are the primary reasons why our customers trust us with their freight and they experience these benefits on a daily basis. Our second lever is the targeted investments we're making in capacity ahead of the strong demand we anticipate in a freight market recovery. These ongoing investments are designed to deliver world-class service at every stage of the freight market cycle. Over the past three years, we've added nearly 15,000 trailers and more than 4,000 tractors to our fleet. We're using our rolling stock to accelerate our line haul insourcing with a broad benefit to service across our network. In addition, we've now opened up 21 of the 28 service centers we acquired last December and we expect to open the last seven sites by early next year. This is on track with our plan. The majority of these sites are in markets where we want to build density and leverage our existing teams. Each new service center helps our network operate more efficiently. When they're all online, we'll have roughly 30% excess door capacity in the network. Strategically, this positions us to capitalize quickly in an up-cycle, driving substantial operating leverage and profitable market share gains. Yield is our third lever and the primary driver of our margin improvement. We've been reporting above-market yield growth throughout this year as we align our pricing with the value we deliver. In the third quarter, we grew yield, excluding fuel, by .7% -over-year. This underpinned the 200 basis points of our improvement we reported. We achieved this by executing on multiple initiatives that are yield and margin-accretive. With our customers under contract, we increased renewal pricing by half-single digits -over-year for the fifth consecutive quarter, supported by the service improvements we're making. And we're earning more market share from local customers due to the investments we made in our sales force. In the third quarter, we increased shipments from local customers by over 10% compared with a year ago. Our new premium services are another benefit to yield. We've continued to increase our revenue mix from high-margin accessorial services, and we expect this revenue stream to grow substantially over time. The final lever of our strategy is cost efficiency, where we have three areas of focus, purchase transportation, variable costs, and overhead. In the third quarter, we reduced our purchase transportation costs by 40% -over-year, primarily driven by our Linehaul insourcing initiative. We ended the quarter with .6% of Linehaul miles outsourced to third parties, which was a reduction of nearly 800 basis points -over-year. This is the lowest level of outsourcing in our company's history, and we're on track to meet our 2027 target by year-end 2024, three years ahead of plan. We now expect our outsourced miles to be below 10% next year. And to support this trajectory, we're deploying more driver teams and steeper cab trucks for long-distance Linehaul runs. And we're continuing to manage labor costs effectively using our proprietary technology. We can re-align labor hours quickly to address changes in volume and do that at the service center level. Turning to Europe, where transportation remains soft in most countries, we continue to outperform the industry. On a -over-year basis, we increased third quarter segment revenue by 7%. It was our strongest quarterly revenue growth since 2021, with volume accelerating for the fifth consecutive quarter. The strongest revenue performance was in the UK, where our -over-year organic revenue growth was up mid-teens. Importantly, our sales pipeline in Europe is growing at near record levels as we close new business and replenish new leads. This should support ongoing above-market growth across our key geographies. In summary, the strong third quarter we delivered highlights the effectiveness of our strategy and our company-specific initiatives, regardless of the macro. The world-class service we provide is within our control. It creates value for our customers and enables us to outpace the industry with yield growth and margin expansion. In addition, we've made significant progress in becoming more cost-efficient with our operations. Even in the current environment, our strategy is driving robust financial and operational results, and our investments in capacity will accelerate those results when the freight market rebounds. We have a long runway for additional market share and earnings growth, and we're well positioned to capture that opportunity. Now, I'm going to hand the call over to Kyle to discuss the 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. We reported a strong third quarter across the company, with revenue up 4% year over year to $2.1 billion. This includes top-line growth of 2% in our LTL segment. Excluding fuel, our LTL revenue was up 5% year over year. On the cost side in LTL, we made another significant reduction in purchase transportation. Our expense for third-party carriers was down year over year by 40%, largely due to insourcing more of our line-haul runs. This equated to a savings of $39 million in the quarter. And we continue to manage labor effectively, with hours per shipment improving by 1% sequentially. This helped to mitigate the year over year increase in total salary, wages, and benefits of 4%, primarily due to inflation. Additionally, we were more cost-efficient with fleet maintenance, which brought down our cost per mile by 12% year over year. Depreciation expense increased by 21%, or $14 million, reflecting the investments we're making in the business. This continues to be our top priority for capital allocation in LTL. Next, I'll cover adjusted EBITDA, starting with the company as a whole. We generated adjusted EBITDA of $333 million in the quarter, up 20% from a year ago. Our adjusted EBITDA margin of .2% was a -over-year improvement of 220 basis points. Looking at just the LTL segment, we grew adjusted EBITDA by 18% to $284 million, underpinned by an increase of approximately 17% in adjusted operating income. In our European transportation segment, adjusted EBITDA was unchanged from a year ago at $44 million. And our corporate adjusted EBITDA was $5 million, compared to a loss of $7 million a year ago. Excluding a $9 million gain from a past investment in a private company which was sold in the quarter, corporate adjusted EBITDA was a loss of approximately $4 million. Returning to the company as a whole, we reported third quarter operating income of $176 million, up 14% -over-year. And we grew net income from continuing operations by approximately 11% to $95 million, representing diluted earnings per share of 79 cents. On an adjusted basis, diluted EPS increased by 16% -over-year to $1.02. And lastly, we generated $264 million of cash flow from operating activities in the quarter, and deployed $123 million of net capex. Moving to the balance sheet, we ended the quarter with $378 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $934 million of liquidity. We had no borrowings outstanding under our ABL facility at quarter end. Our net debt leverage ratio at the end of the quarter was 2.5 times trailing 12 months adjusted EBITDA. This was an improvement from 2.7 times at the end of the second quarter, and 3 times at the end of last year. We'll continue to make investments that enhance our earnings growth trajectory and support our long-term goal of an investment-grade profile. Now before I wrap up, I want to highlight some updates to our full-year 2024 planning assumptions. We now expect interest expense will be in the range of $225 to $230 million. We're also narrowing our expected adjusted effective tax rate to the range of 24% to 25% for the full year. And we expect diluted share count to be 120 million shares. Our other planning assumptions this year remain unchanged. Now I'll turn over to Ali, who will cover operating results. Thank you, Kyle.

I'll start with LTL, where we executed well in a soft freight market to deliver another quarter of margin improvement and earnings growth. On a -over-year basis, our third quarter shipments per day were down by .2% overall, but they were up in our local channel by double digits, accelerating from the second quarter. Local accounts are a key part of our strategy and an opportunity to earn market share at a favorable margin. Our weight per shipment continued to moderate this quarter and was down 0.7%. Collectively, these dynamics resulted in a .9% decline in tonnage per day, which largely tracked the seasonality and outperformed the industry as a whole. On a monthly basis, our July tonnage per day was down 0.8%. August was down 4.7%. And September was down 6.1%. Looking just at shipments per day, July was up 0.1%. August was down 4.6%. And September was down 4.9%. For October, we estimate that tonnage will be down 8% from the prior year, tracking roughly in line with seasonality, excluding the impact of a cyber attack at a pier last year. Our pricing trends remain strong as customers continue to recognize the value of our service quality and premium offerings. This enabled us to deliver another quarter of above-market pricing growth. On a -over-year basis, we grew yield ex-fuel by .7% and revenue per shipment by 6.6%. Importantly, both yield and revenue per shipment increased sequentially from the second quarter this year and also on a two-year stack basis. We expect these trends to continue for the fourth quarter, reflecting ongoing momentum with our pricing initiatives. Turning to margin, we improved our third quarter adjusted operating ratio by 200 basis points -over-year to 84.2%. Sequentially, our adjusted OR increased by 100 basis points, coming in at the top of our guided range. Our robust margin performance was primarily driven by yield growth and bolstered by our cost initiatives and productivity gains. We've now delivered significant -over-year OR improvement for four consecutive quarters, all in a historically soft freight environment. And it's notable that we were the only public LTL carrier to expand margin in the third quarter. Our four-year outlook is for an adjusted OR improvement of 150 to 250 basis points, and we expect to be at or above the high end of that range. Moving to the European business, we executed well in the quarter to outperform the industry in a challenging market for freight transportation. Our pricing outplaced inflation, and we managed costs to mitigate the impact on earnings. Third quarter adjusted EBITDA for the segment was flat compared with last year, and we generated double-digit growth in the UK, which is a key market for us. The improvements we've made in the business will accelerate results in Europe when the macro recovers. I'll close with a summary of the major drivers behind the record margins we're reporting in the trough of the freight cycle. We're making significant progress with service quality, and we expect this to propel margin expansion for years to come. Our pricing is outpacing the market and continues to gain traction. We believe we're just beginning to capture the massive yield opportunity ahead of us, and we're operating far more productively by reducing third-party line haul miles to historic lows and effectively managing our variable costs. These initiatives are all in the early innings with strong momentum, and their impact will accelerate when demand begins to recover. Now, we'll take your questions. Operator, please open the line for Q&A.

We will now be conducting a question and answer session. If you'd 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 if you'd like to remove your question from the queue. For participants eating speaker equipment, it may be necessary to pick up your handstep 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, and we'll take as many as we can. One moment, please,

while we pull for questions. Thank you. Our first question is from Ken Hexter with Bank

of America. Please proceed with your question.

Hey, great. Good morning and nice job on the continued margin improvement. So Mario, sticking on that, where is the pricing gap now versus the margin as you think about the path you started on with Network 2.0, I guess ultimately the margin potential? And then thinking about the volume is down 8% in October. If you normalize for STs, how is the underlying market progressing then?

Thanks, Ken. First, if you look at the margin gap on the pricing side, so when we started our plan that was roughly probably in mid-teens, pricing gap between us investing class on the pricing opportunity. And so far this year, we were able to claw a couple of points out of that given our outperformance in yield versus the market. And that was a combination of one, our service product continues to improve tremendously and we get great accolades from our customers who understand that we are investing more in our network. We are investing in rolling stock and that comes at a premium. But we're also seeing great contributions from premium services that we are onboarding. We launched about a half a dozen either expanded or new premium services and these come at a higher yield and higher revenue. And we're also growing our local account segment here in the third quarter because we shift in count in that segment more than 10% and that also comes at a higher yield and a higher margin as well. And over the years to come, roughly half that gap is driven by premium price to service and we expect to keep on bridging that gap. And then the other half comes from both assessorial revenue or premium services as well as local accounts. In terms of volume trends, what we're seeing here in quarters, first if you look at the third quarter, August was the most sub-seasonal month. It was a few points below seasonality compared to where we were in July. September was roughly around, we were down about .1% and that was roughly a point below seasonality versus October versus August. But that started with the beginning of the month was better than the end of the month that was impacted by the hurricane. And ultimately in October, we are down, there's still a couple of days here to go, but roughly around 8%, which is roughly in line with seasonality. So we're seeing the sub-seasonal demand normalized here in the month of October. And as you said, a portion of the -on-year delta is the cyber attack that happened at one of our peers. And we estimate the impact of the cyber attack to have been two points on the -on-year calm when you look at October of last year compared to October this year.

Great. Thank you. Thank you.

Our next question is from Scott Group with Wolf Research. Please proceed with your question.

Hey, thanks. Good morning. So Mario, with tonnage down a lot, is it limiting the pricing upside in the near term? I don't know, maybe talk about pricing renewals. And then Ali, if I just take the implied fourth quarter guide, it doesn't imply a lot of -over-year margin improvement. I know it's early, but any early thoughts on how to think about LTL margin improvement in 2025?

Yeah, I'll start on the overall pricing environment, Scott, and I'll turn it over to Kyle to discuss contract renewal, and Ali can discuss our outlook. But if you look at pricing overall, we continue to see a very constructive pricing environment out there. And if you take a step back, a year ago, a significant amount of capacity existed in the market, and we continue to see that industry pricing backdrop be constructive. I mean, you heard our peers report here last week and this week, and all the commentary leans toward a strong pricing environment. Now, typically in our industry, we typically price one to 200 basis points ahead of cost inflation, and we're seeing that play out here. And we are outperforming on the pricing side, given what I mentioned earlier on. So from one perspective, we are being rewarded for the better service product from our customers, but we also have these avenues in terms of local accounts generating higher yielding and higher margin phrase and incremental accessorial revenue that is coming from the incremental services that we are launching that our customers are asking for. So it's a win-win where the customer gets a new service from us. They get to experience the great service, and obviously we get the yield benefit from that as well. And look here in the third quarter, we were able to deliver a great yield outcome, accelerating on a -over-quarter basis, accelerating on a two-year stack basis. The absolute number for revenue per shipment is up. The yield for 100 weight is up. So all of these KPIs are moving in the right direction for us here as we go towards the back half of the year.

And Scott, when you think about renewals, renewals were up high single-digit in Q3. So again, another strong performance driven by a lot of our service improvements. It's important to note it's our fifth consecutive quarter to be in that range. And the other thing I think is important here is it's flowing through. So we're seeing revenue per shipment in the quarter up 6.6%. That's our seventh consecutive quarter sequential growth. So we're confident in our ability to deliver strong above-market renewals both in Q4 and next year.

And Scott, just on the OR side, we do expect a strong quarter here in the fourth quarter, driven by continued strength in yield and cost management. Typically Q4 is a more volatile quarter, which does give a wider range of outcomes, and volume trends can be impacted by the holidays and weather. However, if you take a step back and you look at the five-year average for the sequential OR change from Q3 to Q4, it's been in that 250 basis points range. And we would expect to do better than that normal seasonal trend as we roll into the fourth quarter. And I think more importantly, when you roll that into the full year for 2024, we expect to now be at or above the high end of our 150 to 250 basis points OR improvement range, which is very strong performance at

the trough of the cycle. Thank you, guys. Thank

you.

Our next

question is from Daniel Embro with Stevens, Inc. Please proceed with your question.

Hey, guys. Thanks for taking the question. This is Reid C. on for Daniel. Mario, service has remained pretty solid. I think you held on to gains in the MassDio survey this year. Other than in-sourcing line haul, can you talk about where you see some remaining opportunities for service that could potentially still be pain points for customers?

Yes. So overall, we are on a great trajectory of service improvement. If you look at our damage claims ratio here in the third quarter, we were at a .2% damage claims. Compared to that, when we started our strategy a few years ago, we were at 1.2%. So a tremendous reduction of more than 80% of damages in our network. And our customers appreciate that tremendously. On the on-time side, we are – this is the 10th consecutive quarter of improvement. We get a ton of accolades from customers on the speed and reliability of our network when it comes to picking up the freight and delivering the freight on time as well. Now, a lot of the initiatives that we have so far implemented were all around changing incentive comp plans, launching airbags, having more capacity, having technology that enables us to track damages down to the person level, to the shift level. And all of that has enabled us to completely change how we load the freight and the trailers here over the last few years. And we only see upside. I mentioned this in my opening remarks. In the quarter, we saw every month of the quarter reach a new record of better damage frequency than the prior month. And we continue that trend to continue here over the quarters and years to come. Our teams in the field operation, we are just doing a fantastic job executing on all of that. Now, when you look forward, we have a number of initiatives that will continue to improve service. As you said, first starting with our insourcing of third-party line haul, typically when we move the freight on our equipment, we are more efficient at doing it. We get more space in the trailers. We have much better on-time performance. And we are doing a great job in terms of being on-time. And as we continue to insource more third-party line haul, we are going to continue to see our on-time get higher and higher. And obviously, our goal is to be in the high 99% when all of these things are completed. Similarly, on the improving of damages, we are continuing to work as we expand the footprint of our network in some locations, we can build more pure trailers to destination, which reduces the re-handling in our network that will further take the damage performance even in a better place. And our goal is to get to the .1% damage claims ratio over the quarters and years to come here. So overall, again, the trajectory is very strong. We have a great plan that we are executing on. And I'm very proud of the team of the progress they're making.

Awesome. Thanks for the color.

Thank you. Our next question is from Fadi Shamoon with BMO Capital Markets. Please proceed with your question.

Thank you. Good morning. I just wanted to see if you can give us some feedback on maybe 2025. Just thinking about some of these levers that you have been able to use this year from the accessorial, the local channels, and ultimately what you're doing on the PT side, which seems like has a little bit more to go as we go into 2025. Like, you know, your tonnage per day or overall likely flat this year. Like if we don't see material kind of macro cyclical improvement over the next few quarters, what does 2025 look like? Is there more room for kind of our improvement without the macro environment that you can give us any high level way to think about 2025?

When you look at 2025, we expect a strong year, both from an o-or improvement perspective and an earnings growth perspective. And this is very even in the current soft macro environment. And obviously any improvement in the demand backdrop will only accelerate our results even further. You look at 2024, we're going to be at or above our guided range for o-or improvement. It's a very soft freight market. We'll talk more about the specifics of 2025 next quarter once we close out the year. But this said, if you look at the levers, we are heading into next year with another great year of service on our belt. And that leads to us having being able to price the freight accordingly. We also have launched a half a dozen or so premium services or expanded premium services here in 2024. And our sales team and customers are incredibly excited about those services. We're building momentum. We're building the pipeline. We're converting more of that revenue on our trucks. And that comes at a higher margin and a higher yield. And it's a service that our customers are asking for. When you look at our local customers, we have added so far year to date more than 8,000 new local customers. And here this last quarter, despite shipment count being down to the middle to single digits range, our local customer shipments were up more than 10 percent. And that's going to continue to accelerate as we head into next year. And the 25 percent more local sellers we have added to the team will have effectively a longer runway to build that book to be able to convert more of those customers into next year. Then you look at line haul insourcing, where we expect to reach our 2027 target by end of this year in terms of how many miles are outsourced to third parties. And we're going to get that down to single digits next year. And that's going to be a tailwind on the cost side. And ultimately, we opened up 21 of the 28 service centers so far. We're going to be adding another the remaining of them by end of Q1 of next year. And these are making us more efficient. And there will be OR accretive and EPS accretive as we head into 2025. So that's tailwinds for margin improvement as well. So again, we expect a strong year in 2025. And we're not stopping there. When you think about the next upcycle with all the initiatives we have, the investments and capacity, we're going to be excited about the years to come and eventually driving our OR down to the 70s and beyond.

Appreciate it, Mario. Thank you.

Thank you. Thank you. Our next question is from Chris Weatherby with Wells Fargo. Please proceed with your question.

Thanks. Good morning, guys. Mario, I guess I wanted to pick up on that commentary, particularly around the new facilities. I guess 21 of the 28 opened at this point. I guess I'm curious how you think about the relative profitability of the new centers. I know they're not necessarily for pure expansion. There's a lot of efficiency and density opportunity within these facilities. But how do you think about their performance relative to the sort of core network from an OR perspective? And I guess as you think about the potential for incremental margins as you move forward, maybe in either a neutral environment to a potentially positive environment, how did those facilities play into that incremental profitability? Do you want to push that OR towards the 70s or better?

Yes. So, Chris, if you look at the service centers we opened up so far, so we opened up 21 out of the 28. And eight of these were net ads. So they are in incremental sites we are adding to a market or a new market we are expanding into. And 13 were relocations from a smaller location to a larger location. Now, we do expect these sites to be OR neutral here in 2024. And so far, this has been playing out the way we expected. And we expect them to be OR accretive by next year. Now, keep in mind with 21 service centers we opened up, we've only added 18 that had come to our staff, so 80 people to support the opening of these sites. And we're gaining efficiency improvement from them. So when you look at these sites, we are seeing an improvement in pickup and delivery efficiency. So our city operations is, you know, call it low to mid single digits more efficient on a percentage basis in those markets given the larger sites. And similarly, our line haul efficiency has increased in that low to mid single digits as well, which is what gives us the efficiency improvement here in the near term. And that's going to ramp as we head into next year. When you look at the incremental margins we're seeing from these sites, it's 40% plus. And all of the sites are operating at or above our expectations so far since we have opened them up. So again, when you roll that forward into next year, in the near term, we're going to continue to see that efficiency improvement help us from an overall cost standpoint to drive higher margins. And whenever the freight market turns, this is what gets us really excited. I mean, today, LPL demand is down, call it anywhere between the low teens on the low end to the high teens on the high end compared as an industry when you compare either pre-COVID or 2021 to current volume levels. So we are in a prime position when that market starts turning to be able to use that incremental capacity to get more freight with high incremental margins as we move forward as well.

Very helpful. Thanks,

Mara. Appreciate it. Thank you.

Thank you. Our next question is from John Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good morning. I want to focus on revenue per shipment trends. Not only will they up sequentially, but it actually accelerates the biggest sequential improvement over 3% in the last several quarters. I know you talked about some of the accessorials and some of the volume challenges as well. But as we think about going forward, do you feel like a lot of that, I don't know if you want to call it low hanging fruit, but a lot of the opportunity at this downturn has been plucked? Or do we think about that kind of re-accelerating at some point next year when you do get freight tail and find it?

Hey, John. When you think about the revenue per shipment opportunities, I still think there's a lot of opportunity here. I mentioned the renewals already. So renewals have been strong and continue to be strong. I think the other thing to think about there is some of the accessorial pieces. So even though we have made some progress, and as Mario mentioned, the goal there is to get to 15% of revenue. We're north of 10 now, but there's still a lot more we can do there. So that's about five points of pricing upside that's still in front of us, which we can capitalize on. And again, some of the services are starting to gain traction. We're building a backlog. So that includes some of the premium offerings, including the retail store rollouts, -by-day trade show, our recently expanded Mexico cross-border services. So a lot we can do there. And I think on top of that, we're continuing to improve mix. Mario mentioned the growth in the local shipment accounts. As that moves and that continues to grow, that's going to be a tailwind to yield. So I think we're still early innings here and a lot more to do. And just one more last bringing on accessorials. You know, to get to 15% of revenue, it's probably a five-year path to get there. And Mario, about one point through it. So still a lot more to go there.

Okay. Thanks, Grav. Thank you. Our next question is from Tom Wadowitz

with UBS. Please proceed with your question.

Yeah. Good morning. Let's see. And, you know, it's nice to see the continuing momentum in the results of pricing and the margin. I'm wondering, you've had quite a few questions on price. I think, Mario, you've been very clear on the levers for that to continue. What do you think is kind of a, I guess, normalized pricing we should expect if we look at like 2025? I think, you know, maybe for the better players, four or five percent would be, you know, a thought on normal LTO pricing. I don't know if you agree with that. I know it depends on the lunch rate backdrop. And then is it appropriate to expect you to be higher than that given everything you're mentioning? You know, so if normal is four to five, you stay in that six or seven range. Just wanted to see if you could give a little bit more of kind of bringing it toward numbers, not obviously looking for guidance, but just kind of how to frame it and think about it in terms of what you get on pricing and what's normal. Thanks.

Sure, Tom. This is Ali. So you've seen us deliver very strong yield growth over the last several quarters. And as Kyle noted, many of our yield initiatives are still in the very early innings. You think about our ongoing service improvements that's going to continue to earn us a higher price with our customers. We're also growing the mix of our local business and premium services, which are both accretive to both yield and margin. In the case of premium services, these are services that our customers are asking for. And we also expect the favorable industry pricing trends to continue as well. You've seen a significant amount of capacity that's exited the market over the last 12 to 18 months. And the overall industry backdrop, pricing backdrop remains very constructive. And our expectation is, Tom, we're going to continue outperforming the industry from a pricing standpoint, as you've seen us do over the last year. We have a lot of pricing initiatives that we're executing on, and we would expect that momentum to continue here into the fourth quarter and into 2025 as well.

And I believe you look at it from a versus market perspective. I mean, we expect to continue to outperform the market into 25 and beyond. And as Kyle and Ali mentioned earlier on, when you look at these incremental opportunities, typically in LTI, I would be priced, you know, call it one to 200 basis points above cost inflation. And you add on top of that roughly a point from accessorial revenue and a half a point from that local account mix is what would give us the incremental effectively outperformance versus market. We saw that here play out in 2024, as Ali mentioned, and we expect that to continue 25 and 26 and beyond. Now, the actual number could depend on the macro. In the macro recovery, we can see pricing being higher than the numbers you gave, but it depends on the, you know, obviously what the macro does as well and what cost inflation is doing as well.

So do you agree with the characterization on market though that kind of normal market might be four to five, especially if you look at kind of the, you know, the better players in LTL?

That looks like an easy assumption for next year.

Okay, great. Thanks for the time.

Our next question is from Brian Awesomeback with JP Morgan. Please proceed with your question.

Hey, good morning. Thanks for taking the question. So just a quick follow up first on October. Obviously the hurricane impacted a lot of free markets in the quarter, but maybe all the way through the month. Just wanted to see if there's any weakness from that. You're seeing it down 8 percent. Now you call it out the cyber attack is part of the noise there. And then just Mario, I think it'd be helpful going into the fourth quarter and this next year if you just give us a sense of some of the customer conversations you're getting in terms of the different kinds of things that you're seeing. Types of customers, local and national, and then also across the industrial and retail and markets as you look into the end of this year and next year.

Yeah, as you said, when you look at the month of October, we have seen that impact, the year on year impact from the cyber attack last year. That's one of our peers. So when you look at it, the back half of the month on a year on year basis was obviously much better than the first half of the month that was impacted by the cyber attack. But when you look at it, this is what we said last year, the impact of the cyber attack for last October was roughly around a thousand shipments of incremental shipments per day when you average the entire month, which is roughly around a 2 percent impact on tonnage. So when you normalize for that, obviously you've got to take that out of the 8 percent. Now in the hurricane impact, we did see also the impact both at the end of September and at the beginning of October that impacted overall the volume trend. Given some of the markets when you go to the southeast of the country, they were obviously impacted by not being able to ship product in and out of those regions for a few weeks. Although we were up and running very quickly and I was very proud of the team. All of our employees were safe and we were able to support our customers within 24 hours where needed. But at the same time, obviously the market was impacted. Now when you look at customer demand trends, it has been when you look at over the summer, it has been softer, sub-seasonal. When you look at the month of August, as I mentioned earlier on, it was roughly around a few points lower than seasonality, normalized to a point lower than seasonality in September, normalized to roughly in line with seasonality in October. Now what we saw in the quarter was the industrials being more impacted than retail. We saw industrial shipments be down at twice the rate of that corresponding retail customers through the course of the quarter. And you see that in the ISM index, obviously hovered at 46, 47 in the quarter, which was a deceleration from earlier in the year. As you know, I spent a lot of time with customers in the field. And what we've heard from customers is some sub-sectors of the industrial economy. So electrical equipment manufacturing or machinery are much more bullish about the outlook when they look forward. But if you look at construction or industrial for agriculture, they are more bearish. They are seeing more softness and demand looking forward. On the retail side, they were down still, but down less than that corresponding industrial side. Inventories are mostly normalized. Consumer demand is holding. So we're seeing a we saw a retail sector that was constructed, but still down on a year on a year basis, but less than the industrial counterpart. In terms of local versus large customers, for us, local is growing. Our local sales team is doing an impeccable job onboarding new customers. Year to date, we have onboarded more than 8,000 new logos in that channel. And we saw shipment count in that segment grow more than 10 percent here in the third quarter. But that's more company-specific and given the improvements in service and the execution of our sales force, we are able to deliver on those outcomes. But again, if you look forward, it's tough to predict where things will go from here through the rest of Q4 or early next year. I mean, there's a scenario where we start seeing an infection at the end of the first quarter or first half of next year if rates continue to come down and the overhang of the election is behind us. But we'll see. It's very tough to predict. There's a lot of mixed signals in terms of what the outlook would do here in the near term.

Okay. Thank you, Mario. Our next question is from Scott Schneeberger with Oppenheimer & Company.

Please proceed with your question.

Thanks very much. Mario, could you please elaborate on the half-dozen premium services you rolled out? Are there more to come and maybe a little anecdote about what you've done there so far? And then just on top of that, how is the investment in the sales force? Is that something that you're continuing to build or is that at a pause right here? Thanks.

Yeah, so something with the premium services, I'll give you a few examples, Scott. For example, in the retail side, we launched a new service called the Retail Store Rollout. So you can imagine whenever you have a consumer packaged goods company that wants to, for a certain holiday like Halloween, you're coming up this week, they want to send a lot of product to a lot of stores simultaneously. So we effectively have a desk for them that can support dealing with a project where they are shipping 500 shipments or 1,000 shipments to all different locations, getting a consolidated bill at the end of it and making sure that all of that freight is being tracked in conjunction as one unit. Similarly, we launched a product called Retail Solutions or Must Arrive By Date. So when you think of a company shipping into a large retailer, typically they have chargeback programs, deliver the product within a certain time window, then obviously as a shipper or supplier to that retailer, you get a chargeback as a percent of the value of the goods. So given the tremendous improvement in service product, we actually now offer that service for our customers where we can again make sure that we're tracking the freight all the way through destination and if it needs to be stored at destination for the period of time before it gets delivered in a certain time window, we can make all of that happen for the customer. Similarly on freight shows, when you look, we opened up here over the last few quarters a new service center in Las Vegas that is massive, one of the largest in the city. And you can imagine when people want to ship things into a freight show, they get it to our location. We offer five days of free storage. We offer again a service desk to coordinate the product getting delivered to the freight show floor and picked up from the freight show floor. So we handle all of these things for our customers. And finally on Mexico, we expanded our Mexico offering. We've been doing Mexico for more than 30 years. We're one of the oldest carriers in doing that service, but we've added more border crossing locations and expanded our reach within Mexico. And that's resonating with customers as well. So all of these are extra services that we are offering to the customer. They come at a cost on our side, but usually a smaller cost, but more importantly, that's very important for our customers in terms of getting the freight picked up and delivered with these extra requirements along with it. In terms of moving forward, we are looking to launch a number of incremental services as well. Security divider is one of them. Today we do, for example, exclusive use of trailers where we ship, where you can as a customer book an entire trailer. But in the future, you can also do washer trailers if you have high value products you want to protect. We are looking at services like expedited services within the network and intranetwork and a number of others as well that we're working with our customers on too. In terms of the local investment in sales or our local sales team, so we had a plan to grow the local sales force by 25 percent and we reached that plan effectively where we are now. We are still adding incremental headcount to our sales force, but we still have to define going into next year whether we want to further grow our local sales force or whether we feel good about where we are. At this point, we're feeling good about the size of the sales force. We're still incrementally adding new roles, including business development roles on the team. But we'll see if we're going to expand the local sales force beyond that as we finalize here, but just for 2025.

Great. Thanks for the call.

Our

next

question is from Bruce Chan with Stiefel. Please proceed with your question.

Hey, good morning, gents. Thanks for the question. Kyle, you talked about your top priority for capital allocation here. And I'm wondering, you know, if you think about the potential for sale of the European business, how would that maybe alter those priorities and what would be the planned use of those proceeds? And, you know, if you have one, any update on that process would be great.

Sure. So when you think about it, you know, let me start first over with overall capital allocation. Obviously, our priority is to continue to reinvest in the business now. And outside of that, we want to achieve an investment grade profile. But that said, what we're looking at our leverage now at two and a half times, obviously, a European transaction can help meaningfully reduce that. But I would say we've made meaningful progress on our leverage so far this year. You think about the end of last year, we were three times, we were 2.7 times last quarter and 2.5 times this quarter. So we're making a lot of progress. And again, we're committed to maintaining or pursuing an investment grade profile for the business. And I think we can achieve that both through the increase in EBITDA as well as cash flow generation. And again, a European transaction can obviously accelerate some of those efforts. And the one other piece I'd like to mention as well is just when you think about leverage and how it progresses, really capex. Because for us, capex is here on a percent of revenue for LTL, somewhere in the 13 and a half to 14 percent. And if you think about the future, that's going to come down. So if you think about 25, we'll have the ability to ratchet that down. You think about bringing the service centers online. Those 28 service centers were about two million of capex per site. So that comes down next year. That'll help us drop that number, probably a point. And then outside of that, with all the insourcing we've been doing the line haul, the need to increase the fleet next year is also likely to come down. So when you think about that 13 and a half, 14 percent, probably comes down a couple points. So I think the outlook from a capital allocation standpoint is going to give us a lot more flexibility moving forward with or without the sale of Europe. But then I'll turn to Mario to talk about Europe.

Yeah. So if you look at the European sale, our strategy continues to be we want to be a North American LTL carrier over time. And we're patient on the sale of Europe because we want to make sure we're getting the right value for it. It is a business that has high scarcity value. When you look at it, we're either number one, two or three in LTL and dedicated solutions and warehousing and supply trucking and brokerage in the Western European geographies, including the UK, France, Spain, Portugal and many other countries. And again, we're going to be patient to make sure we are getting the right value for it. Meanwhile, when you look at it, Bruce, we are performing really well in Europe. I mean, you look at the third quarter here, we grew revenue seven percent on a year on a year basis. It's the strongest quarterly volume and revenue growth since twenty twenty one post pandemic. It's the fifth consecutive quarter of accelerating year on year volume growth. And we're well positioned to capitalize on the on the market over there. And again, long term, we're going to be a pure plain North American LTL carrier. Now, when you look at what Kyle just mentioned, that's another avenue for value creation for our shareholders. Because when you think about it, overall, our earnings are compounding. As I mentioned earlier on, we expect to be either at or above the target range of margin improvement for us here in LTL in twenty twenty four. And that is only upside from here. At some point, whether it's the next couple of quarters, whether it's next year, we're going to see a great market cycle starting to reflect. And when that starts happening, we're going to get a compound compound. I would resolve our growth, our earnings growth faster. And when you look at capex normalizing what Kyle just mentioned, call it the point or so a year for twenty twenty seven. That's only going to expand our free cash flow conversion. You couple that with proceeds from Europe at some point in time. We're going to start returning that larger cash flow conversion that can go back to shareholders, which is going to be another avenue of value creation for shareholders as well.

OK, very good. Thanks for the color, gents.

Thank

you. Our next question is from Robbie Schenker with Morgan Stanley. Please proceed with your question.

Thanks. Morning, guys. A two part run service, if I may. You mentioned the top of the call that damage claims getting much better to point two from point four. Does that start running into diminishing returns here? And also maybe part two kind of on the Matthew survey, you guys made progress in the overall ranking and have held your place in the national ranking. Does that take time for that service to kind of penetrate into the national ranking and kind of know what's your target on that ranking and maybe three years now?

Thanks. When I first looking at damage claims, our goal is to be best in class when it comes to no damages in our network. And over the last few years, again, we reduce damages by more than 80 percent here in quarter with each and you company records every month of the quarter. And we're going to keep on improving there. Our view is very simple. When we take care of the customer, they give us more freight and they're also willing to pay a higher price for the freight because that causes less disruption in their supply chain. So we're going to keep on working that until we become best in class when it comes to service. Now, when it comes to the Matthew service, as you said, we were the most improved on a three year stack in terms of NPS scores. If there's one data point we look at in terms of overall our performance, but more importantly, Robbie, we measure satisfaction of our customers on a weekly basis. We effectively get to do a survey for customers who are actually shipping with us and we get to see that satisfaction and how it performs over the last few years by more than 40 percent over that period of time. And ultimately, customers vote with their wallets and we're seeing effectively growth in our numbers and yield. We're seeing growth in margin and all that's driven by the improvements in service that we are making.

Thank you. Our next question is from Jason Seidel with TD Cowan. Please proceed with your question.

Thank you, Robert. Hey, Mary and Tim. Good morning. You know, really nice job in the operational improvements in the quarter. I wanted to ask a question. You know, some of your peers have talked about, you know, freight continuing to shift to truckload with the weakness in the truckload market, and I'm wondering if you could talk about the truckload release with that multi-stop LTL or, you know, LTL consolidation, whatever you like to call it. I guess two parts. One, are you guys still seeing a lot of that out there? And two, how quickly do you think that could jump back to the LTL market in 25 once the TL market recovers?

First, Jason, it's tough to estimate how much of the freight has moved to truckload in terms of consolidation because that portion of it typically we don't have as much visibility into it. But generally, TMS systems have been around for a long time, and usually what most shippers do, they automatically look at the service requirement for shipment that they have, and they compare rates between truckload and LTL, and they compare it also based on the service requirement to move that freight. But that's not something new that we're seeing here. I mean, customers who have TMS systems are usually moved fairly quickly on whether they want to consolidate or not based on what they're seeing in the environment. So we expect whenever truckload rates go back up again, you get to see effectively the TMS system will do the computation and figure out that it's better to actually move a shipment with LTL. But that percentage is tough to estimate. Now, there is also what we call direct mode conversion between LTL to TL, which is where it's more cost efficient just for one shipment. And in that particular case, if you look at our network, last quarter our average length of haul was about 855 miles. When you apply in the trough of the market a $2 truckload rate to that, the corresponding truckload shipment would be about $1,700 to move that. You compare that to an average revenue for shipment for us was $380. So that's a big dislocation between $380 and a $1,700 revenue for shipment in truckload versus LTL. Now, sometimes I get the question, well, Mario, what about heavy shipments? So I had the team run the breakeven point and that breakeven point is for shipments over 15,000 pounds. And today less than .3% of our shipments are that heavy. So there is a small conversion there. We estimate it to be half a point, maybe less than a point. But again, once truckload rates go up, we'll come back to LTL as well.

That's fantastic color. Appreciate it, Mario.

You got it.

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

Hi, good morning. Thank you. Maybe sticking on to these last couple of questions on the service side, can you talk a bit about your level of confidence of keeping these strong service levels even in an upswing as the environment tightens and there's a bit more strain on your network?

Yeah, well, Stephanie, if you look at it from our perspective, all of these service improvements were done were not driven by lower volumes. They were driven by action plans to specifically improve service between incentive compensation for our employees that incentivizes on improving service, between adding effectively technology that enables us to track damages down to the person level and the shift level and the supervisor level by doing a big cultural change and training and holding people accountable. And our employees holding each other accountable to provide great service for the customer. So all of these are foundational changes in what we've done to improve service. Now I'll give you a couple of proof points. When you look at last year when Yellow went bankrupt, we saw a above seasonality increase in shipment count from Q2 to Q3 of plus 7%. So think about the macro recovery, think of the cycle recovery. Seven points higher than seasonality increase in volume is massive. And during that period of time in the summer of last year, we saw our service product, our damages, and our on time improve every month in Q3 of last year, Q4 of last year, and that trend continued through 2024 here. So effectively we already have done it once in an up cycle through the bankruptcy of one of our peers. Now when you look at moving forward, a lot of it goes also to having capacity. So far we are loving the position we are in because we have invested a lot in real estate, a lot in rolling stock. By Q1 of next year, we're going to have more than 30% excess capacity in our network to be able to handle that incremental freight for the customer. And similarly on the rolling stock side, we've added more than 15,000 traders and more than 4,000 trucks. So all of that capacity is going to put us in a prime position to provide great service for the customers and be able to capitalize on

the up swing of demand when it comes.

Great, appreciate the color. Thank you.

Our next question is from Ari Rosa with Citi. Please proceed with your question.

Hi, good morning. Congrats here on the strong results, guys. So Mario, I wanted to stay on that line of thinking. Talking about the 30% excess capacity, it seems like a lot of your peers also are sitting on quite a bit of excess capacity. From an industry structure perspective, what gives you confidence, you know, if the market doesn't tighten, I guess how long are you willing to sit on that excess capacity, and what gives you confidence that some of your peers don't also start to maybe chase a little bit of volume by kind of cutting rates? Is there any risk of that or what gives you confidence that that doesn't start to happen? Thanks.

Thanks, Ari. I don't see a risk in that for a simple reason, which is usually a real estate as a cost footprint in an LPL network is a low to mid single digit as a percent of revenue. So in other terms, as an LPL carrier, you're not going to use that cost to justify onboarding freight that doesn't operate at or better or a profile than the rest of your network, because otherwise you're going to take down your margins, you're going to take down your earnings, and you're going to work harder to move that freight for a cost category that is very low on the P&L. So if you think about it as a capacity, though, from the industry as a whole, as I mentioned earlier on, when you look at all the publicly traded LPL carriers, shipment counts when you look at three COVID 2018-19 or 2021, which was post COVID, it was still slightly lower than 18-19 compared to where we are in 2024. Shipment demand in our industry on the low end is down in the low teens and on the high end is down in the high teens. Now, when yellow went bankrupt last year, it was at a time where demand was depressed. So you took out 10 percent of the industry capacity through them seizing operation. Since then, they've sold about, you know, call it roughly half of their service centers. About 90 percent of these service centers went back into the hands of LPL carrier. So even in a year from now, you're going to have 94, 95 percent of the industry capacity that existed a year ago. So that's what gives us a lot of confidence in the next upcycle. And I'll give you just some anecdotal examples. Here last week, I was actually visiting some of our customers in the Minneapolis area. And based on those meetings I was with them, their main concern was what's going to happen in the next upcycle. And they wanted to make sure that we have enough capacity to be able to grow with them during that period of time. So currently on our customers' mind, they see the fact that capacity has gone out. They see that some of it came back. But they also do understand that demand is very depressed. And when you start seeing that demand come back into LPL, it's going to be the cycle of all cycles for LPL companies.

Very helpful. Thank you.

Thank you. Our next question is from Jordan Allinger with Goldman Sachs. Please proceed with your question.

Yeah, hi. So just a couple quick things. First, I'm just sort of curious. It's great, all the talking about price and five points left of price, etc. I'm just sort of curious, how's the elasticity of demand work versus price? Do you find customers, do they balk at it or do they say, you know what, your service is better, so we're going to stick even though you guys are pushing price? I'm just sort of curious how that interplay works on elasticity. And then just as a quick follow-up, I know you mentioned October was about in line with normal seasonality. Is the expectation November and December will track normal seasonality? And if so, what does that mean for tonnage for the quarter? Thanks.

Jordan, I'll start here. So if you looked at our pricing strategy, what we're doing is we're aligning our price with the increased value we're providing our customers. And our customers understand that for us to provide better service, we need to invest in our business. And there's a premium associated with that. And a better service product means a total lower cost for them as well to move goods through their supply chain. And as Mario noted, we've seen significant improvements in our service over the last few years. You think about our damage claims ratio improving from 1.2 percent a few years ago to 0.2 percent. On time performance has improved for 10 consecutive quarters on a year over year basis. And those service improvements are earning us a higher price with our customers. And that's translating to above market contract renewals and pricing growth. I'd also point out that there's other ways for us to improve our yield just beyond price. You think about growing the revenue mix of premium services in the local channel, both of which are both yield and margin accretive for us and go beyond just raising prices to the end customer. And so we're going to continue to take a disciplined approach to grow our market share. As Mario noted in the local channel, for example, we're growing shipments by more than 10 percent. And that accelerated from the second quarter. So overall, our top priority is to continue to drive OR improvement. For us, yield is going to be the main lever for that margin expansion. You look here in the third quarter and likely for the full year as well, we're going to be the only public LTL carrier to expand margin. And we're going to continue to optimize revenue quality to continue to drive that margin expansion going forward. And as you think about the outlook from a tonnage perspective, as Mario noted, if you roll forward seasonality from October, that would imply tonnage for the full quarter, being down somewhere in that mid-single digit plus range year over year for the fourth quarter overall. Now, macro will be the biggest swing factor. But if you just roll forward that normal seasonality into November and December, you'll get to somewhere in that mid-single digit decline range.

Thank you. Thank you. That is all the time we have for questions today. I would like to hand the floor back over to Mario Harik, CEO, for any closing comments.

Thank you, operators, and thanks everyone for joining us today. As you saw from our results, we are able to deliver strong margin improvement in a soft market for freight transportation. And our strategy is working, and we have the right team behind it executing on it. Our service has never been better and keeps on improving. Our yield is above market in terms of growth, and our customers are seeing those service improvements where we're launching. Our premium services are gaining momentum. Our local accounts are growing. Today, we've added more than 8,000 local accounts so far year to date. And on the cost side, our technology is enabling us to run the business very efficiently and insourcing line haul at a pace of three years ahead of plan. And importantly, all the investments we're making in capacity are positioning us to be able to do really well in the eventual freight market recovery and getting fantastic incremental margins as we grow the business. We look forward to updating you over the next quarter. And operator,

you can now end the call. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.