Q3 2024 Earnings Summary
- Strong Pricing Power and Yield Growth: XPO continues to achieve above-market pricing growth, with yield excluding fuel up by 6.7% year-over-year in the third quarter, supported by service improvements and strategic initiatives. This pricing power underpins their margin expansion, with a 200 basis points improvement in adjusted operating ratio.
- Significant Opportunities for Revenue Growth: XPO identifies multiple avenues to continue growing revenue per shipment, including increasing accessorial charges, which have the potential to add approximately 5 points of pricing upside over the next five years. Additionally, growth in local accounts and premium services provides further revenue and margin accretion.
- Service Quality Driving Customer Satisfaction and Market Share Gains: XPO has significantly improved its damage claims ratio from 1.2% to 0.2%, aiming to become best-in-class. High service quality is leading to increased customer satisfaction and willingness to pay a premium, enabling XPO to gain market share, particularly among local customers where shipment counts grew by more than 10% in the quarter.
- XPO's tonnage is declining, with October tonnage estimated to be down 8% year-over-year, indicating ongoing softness in freight demand. This decline could impact revenue growth and profitability if the demand environment does not improve.
- The industrial sector, a significant part of XPO's customer base, is experiencing greater weakness than retail, with industrial shipments down at twice the rate of retail shipments. Continued weakness in industrial demand could further pressure XPO's volumes.
- Excess capacity in the LTL industry may lead competitors to lower rates to fill capacity, potentially resulting in pricing pressure and affecting XPO's ability to maintain its pricing strategy and margins.
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2025 Outlook Without Macro Improvement
Q: Is there room for improvement in 2025 without macro recovery?
A: Mario Harik expects a strong year in 2025, with earnings growth even in the current soft macro environment. They plan to continue improving margins through service enhancements, pricing, premium services, local customer growth, and insourcing line haul. Any demand recovery will further accelerate results. -
Normalized Pricing Expectations for 2025
Q: What is the expected normalized pricing in 2025?
A: XPO plans to continue outperforming the industry in pricing into 2025 and beyond. Typically, they price 100 to 200 basis points above cost inflation, adding around 1 point from accessorial revenue and 0.5 point from local account mix, aiming for pricing above the normal market rate of 4–5%. -
Impact of New Facilities on Margins
Q: How will new facilities impact profitability and margins?
A: The 21 out of 28 service centers opened are expected to be neutral in 2024 and accretive by next year. These sites improve pickup and delivery efficiency by low to mid-single digits and contribute incremental margins of over 40%. They position XPO for higher margins and efficiency in an eventual market recovery. -
Sale of European Business
Q: How would a sale of the European business affect capital allocation?
A: XPO aims to become a pure-play North American LTL carrier. Proceeds from a European sale would help reduce leverage and could accelerate efforts to achieve an investment-grade profile. They are patient to ensure the right value for the business. -
Revenue per Shipment Trends
Q: Is there more opportunity for increasing revenue per shipment?
A: XPO sees continued opportunity to increase revenue per shipment through strong renewals, accessorial charges, premium services, and improving mix. Accessorial revenue has potential to grow by about 5 points over five years, and local shipment counts grew over 10% in the quarter. -
Freight Shifting to Truckload
Q: Is freight still shifting to truckload, and will it return to LTL?
A: Some freight may have shifted to truckload, but XPO expects it to return to LTL as truckload rates rise. Shipments over 15,000 pounds—less than 0.3% of XPO's volume—are the most affected. The company estimates the impact to be less than 0.5 to 1 point. -
Risk of Peers Cutting Rates
Q: Is there risk of peers cutting rates to chase volume?
A: Mario Harik does not see a risk of peers cutting rates, as excess capacity costs are low relative to revenue. Carriers are unlikely to lower margins by onboarding lower-priced freight just to utilize excess capacity. -
Maintaining Service Levels in Upswing
Q: Can strong service levels be maintained during a market upswing?
A: XPO is confident in maintaining service levels during an upswing due to foundational service improvements, technology investments, and over 30% excess capacity. They successfully managed higher volumes last year while improving service metrics. -
Premium Services and Sales Force Investment
Q: Can you elaborate on premium services and sales force investment?
A: XPO launched services like retail store rollout, must-arrive-by-date shipping, expanded Mexico offerings, and trade show support. These meet customer needs and come at higher yields. The sales force grew by 25%, adding over 8,000 new local customers year-to-date. -
October Tonnage and Customer Outlook
Q: How did October tonnage and customer demand trend?
A: October tonnage was down about 8%, impacted by last year's cyber attack and a hurricane. Industrial shipments were down more than retail. Local customer shipments grew over 10%. Some industrial sectors are more optimistic than others. -
Demand Elasticity vs. Price Increases
Q: How does demand respond to price increases?
A: Customers recognize that better service comes with a premium, and XPO aligns pricing with added value. Yield improvements are achieved through pricing, premium services, and favorable mix, without significant customer pushback. -
Service Improvement Opportunities
Q: Where are remaining service improvement opportunities?
A: XPO continues to target reducing damage claims to 0.1%, improving on-time performance, and enhancing efficiency through in-sourcing line haul and network investments. -
Service Improvements and Mastio Survey
Q: Are there diminishing returns on service improvements?
A: XPO aims to become best-in-class in service, continually reducing damage claims (over 80% reduction so far) and improving customer satisfaction. Better service leads to more freight and higher willingness to pay among customers. -
Impact of Tonnage Decline on Pricing
Q: Is lower tonnage limiting pricing upside?
A: Despite lower tonnage, XPO sees a constructive pricing environment, outperforming on yield due to service improvements and growth in premium services and local accounts. Contract renewals were up high single digits in Q3, the fifth consecutive quarter at that level. -
Pricing Gap and Market Progression
Q: How is the pricing gap and market progressing?
A: XPO identified a mid-teens pricing gap with best-in-class competitors and has closed a couple of points through better service and premium offerings. Volume trends normalized in October, with sub-seasonal demand returning to normal seasonality.