Less-than-truckload carrier XPO reported another earnings beat as revenue and margins stepped higher again in the second quarter.
Adjusted earnings per share of $1.12 came in 11 cents better than the consensus estimate and 41 cents higher year over year. The adjusted result excluded transaction and restructuring costs of 22 cents per share as well as a $41 million one-time tax benefit (34 cents) tied to the restructuring of its European operations.
XPO’s (NYSE: XPO) LTL segment reported a 12% y/y increase in revenue to $1.27 billion. Tonnage per day was up 3% and revenue per hundredweight, or yield, was up 8% (9% higher excluding fuel surcharges). The tonnage increase was driven by a 5% increase in daily shipments, which was partially offset by a 1% decline in weight per shipment.
Management told analysts on a Thursday call that tonnage is likely to be ‘flattish’ (both sequentially and y/y) in the third quarter. The comparisons to last year get more difficult for the industry as it laps the windfall of freight that hit the market when Yellow Corp. (OTC: YELLQ) shut down (July 30, 2023). XPO said half of its customers are expecting no changes in shipment counts in the back half of the year while the other half are split, with some expecting increases and others expecting declines.
Both yields and revenue per shipment, which was up 7% y/y excluding fuel surcharges in the second quarter, are expected to increase sequentially through the back half of the year. XPO expects to outperform the market on pricing as efficiency initiatives throughout the network have allowed it to close the service gap to peers.
New terminal additions have provided it with incremental space to operate and are expected to further bolster service metrics (XPO reported a company-best claims ratio of 0.2% in the second quarter). Also, it plans to increase its percentage of revenue tied to premium, or accessorial, services and add more freight from local accounts, which have better margins.
It has opened 14 of the 28 terminals acquired from bankrupt Yellow. Six of the sites represent new markets for XPO while the other eight are relocations. It expects to open another 10 sites this year, with the last four coming on line in early 2025. The additions are expected to boost door count by 10% to 15%.
Accessorial charges accounted for a low-teen percentage of total LTL revenue in the quarter. XPO wants to push that into the mid- to high-teens. It continues to add new services and believes it can increase the revenue contribution from accessorials by one percentage point each year over the next five years.
XPO recorded an 8% average increase on contract rate renewals across approximately 25% of its customer book in the second quarter. It expects a similar increase in the third quarter.
Table: XPO’s key performance indicators
The LTL unit reported an 83.2% adjusted operating ratio (inverse of operating margin), 440 basis points better y/y and 250 bps better than the first quarter. The result was at the upper end of management’s forecast of 200 to 250 bps of sequential OR improvement.
Purchased transportation expense as a percentage of revenue declined 230 bps y/y as the carrier continues to reduce third-party linehaul miles. Outsourced linehaul miles stood at 15.9% in the quarter, which was 480 bps lower y/y. Longer term, it plans to reduce outsourced miles to a single-digit percentage.
The company has added 1,900 tractors this year bringing down the average age of the fleet to 4 years from 5 years at the end of 2023. That helped push maintenance expenses 12% lower y/y in the quarter.
Salaries, wages and benefits expenses (as a percentage of revenue) were down 20 bps y/y given labor productivity initiatives. The company reduced head count in the quarter even as shipments increased. It expects head count to increase by a smaller percentage than shipment count in the third quarter.
Insurance and claims expenses were 130 bps lower y/y.
The adjusted OR is expected to deteriorate 100 to 150 bps sequentially in the third quarter. The typical seasonal change is 200 to 250 bps of deterioration when excluding years with abnormal positive impacts like Covid and Yellow’s shutdown. XPO expects to end the year at the high-end of its full-year margin guidance of 150 to 250 bps of improvement.
Adjusted earnings before interest, taxes, depreciation and amortization in the unit was $297 million, a 43% y/y increase.
XPO’s European transportation segment saw revenue increase 4% y/y to $808 million. It recorded an adjusted EBITDA margin of 6.1%, which was 10 bps higher y/y.
Shares of XPO were down 0.2% at 11:35 a.m. EDT on Thursday compared to the S&P 500, which was down 0.9%.
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