XPO Logistics last reported quarterly earnings as a transportation conglomerate that provides short-haul, truck brokerage and other services under one roof.
Production of its brokerage segment, RXO, is emerging scheduled for Tuesday. The remaining XPO entity will become a pure LTL provider after the liquidation of its European transportation division at a later date.
XPO separated its contract logistics business, GXO (NYSE: GXO), last year.
Before the market opened on Monday, XPO reported adjusted earnings per share for the third quarter of $1.45, 10 cents above the consensus estimate and 51 cents better than a year ago. Revenue, margin and operating figures were in line ranges announced two weeks ago.
Consolidated revenue increased by 3% year-on-year (y/y) excluding the results of the intermodal business, which was sold at the beginning of the year.
LTL is taking share, costs are rising
LTL segment revenue rose 12% year-over-year to $1.2 billion. Tonnage was down 3%, but profit per hundredweight, or yield, was up 16% (7% higher excluding the impact of fuel).
Management said tonnage improved year-on-year over the quarter, turning positive in September, with an even stronger growth rate in October. Changes in tonnage exceeded normal seasonality and increased moderating trends seen across the industry.
Management said XPO was gaining market share as it added or expanded terminals in some markets and increased sales by 7% year-to-date.
“As an example, we opened a terminal in Atlanta six months ago, and in September we saw tonnage in the Atlanta market grow by 38% compared to last year,” said Mario Haric, who currently manages the LTL segment and will become CEO XPO after the separation on Tuesday during a call with analysts.
Harrick said the company added several new customers in the quarter that could potentially move into the top 10 accounts over time. LTL tonnage was projected to increase again by an undisclosed percentage year-over-year in the fourth quarter, with yields increasing by a low- to mid-single-digit percentage year-over-year. “Fierce competition” (up 11% y/y in the fourth quarter of 2021 excluding fuel) and the later implementation of the annual general rate increase were cited as reasons for the slowdown in yield growth.
“Overall, we continue to see a very rational pricing environment,” Harrick said. “Our contract renewals, for example in the third quarter, were still in the high single digits. … Again, we see a rational environment, but that’s what the trend looks like as we head into Q4.”
The adjusted operating ratio of 82.8% in Q3 was 160 basis points better than the same period last year, when the gain on property sales is calculated. The OR was 85% excluding pension income and other items.
Management forecasts an OR improvement of 120 bps in Q4, however, compared to the 87.5% mark recorded in Q4 2021. The estimated unfavorable margin change from the third quarter to the fourth quarter reflects higher costs in areas such as wages, maintenance, parts and equipment.
The LTL segment is expected to generate at least $1 billion in annual adjusted earnings before interest, taxes, depreciation and amortization, which includes real estate gains of up to $50 million during the fourth quarter.
XPO is in the process of reducing the capacity of third-party routes by using its own assets, which provide savings of 30% to 40% per mile. The company previously doubled its 2022 capex budget to a range of 9% to 10% of revenues. At the end of the quarter, the average age of the LTL fleet was almost 6 years. The goal is to drop to 5 years over time to reduce maintenance costs and improve fuel economy.
The capital expenditure budget is expected to increase again next year.
The brokerage remains in growth mode
Brokerage and other services revenues fell 15% YoY to $1.92 billion. The main reason for the drop was the sale of the intermodal business. Truck brokerage revenue was down 2% YoY to $686 million. Volumes were up 9% year-over-year, and September saw an all-time high in average daily loads. However, lower spot rates led to an undisclosed decline in download revenue.
The mobile app was downloaded 850,000 times and 10,000 operators were added to the platform in the third quarter. The division created or covered 81% of brokered digital truckloads during the period.
The brokerage had a 73%-27% mix of contracts and spots in the quarter.
“This is exactly where we wanted to be during this market. This has allowed us to operate at high margins while continuing to capture market share and do so profitably,” said Drew Wilkerson, head of XPO’s North American transportation division and soon-to-be CEO of RXO.
Gross profit margin increased by 490 bps. y/y to 19%, and gross profit in dollars increased by 31% y/y.
Wilkerson said that volume will pick up again in the fourth quarter, despite a “subdued peak season.” However, gross margin could decline from the third quarter, given the softness in the TL spot market and “very strong” contract bid activity, which “slightly depressed” contract prices.
Adjusted EBITDA is expected to be flat in the fourth quarter, but that number does not include costs related to the standalone entity.
“I thank our shareholders for their long-standing support of the company we began building in 2011 and the new public companies we have created,” said Brad Jacobs, who will assume the role of executive chairman of XPO and become non-executive chairman of RXO. . “XPO has been the seventh best-performing Fortune 500 stock over the past decade, and I am proud that our growth in XPO, RXO and GXO serves the interests of our shareholders.”
Shares of XPO were up 2.2% at 1:03 p.m. EDT, compared with the S&P 500, which was down 0.8%.
Prior to the report, the stock had fallen 17.3% after XPO reported its second-quarter results on Aug. 4. By comparison, the MerQube FreightWaves Supply Chain Technology Index ( SCTI ) is down 12.2% over the same time. SCTI measures the price performance of stocks of technology-enabled supply chain services providers such as XPO.
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