Despite lower demand, XPO reports solid Q1 earnings results

Even though lower demand levels are impacting motor carrier volumes and profitability, Greenwich, Conn.-based less-than-truckload (LTL) services provider XPO Logistics said today that first quarter earnings pointed to growth.

Quarterly revenue—at $1.91 billion—was up 1% annually, and adjusted earnings per share—at $0.56—rose $0.22 annually, topping Wall Street estimates, at $0.46. Operating income came in at $58 million, down from $63 million a year ago, which XPO said reflected higher transaction costs related to its previous spin-off of RXO. Adjusted EBITA—at $210 million—was up 12%.

XPO’s North American LTL segment revenue—at $1.12 billion—was up 0.9%. Shipments per day—at 49,107—rose 1.5% annually, with tonnage per day—at 68,889 pounds—fell 1.8%. And yield for gross revenue per hundredweight, including fuel surcharges—at $25.99—was up 2.4%, with yield for gross revenue per hundredweight, excluding fuel surcharges—at $21.06—rose 1.4%.

Quarterly revenue per shipment—at $356.06—was down 0.2%, and average length of haul—at 831.3 miles—was off 0.5%.

“In North American LTL, we grew year-over-year shipments per day in the quarter, and achieved more growth in April versus March, outperforming seasonality,” said XPO Chief Executive Officer Mario Harik in a statement. “Demand remains soft, with a negative impact on tonnage, but we’re actively reducing our operating costs, while continuing to invest capital to meet the long-term needs of our customers. Importantly, we’re gaining profitable market share, propelled by our highest service quality in over a decade. By elevating service and operational excellence, we’re creating more opportunity for yield growth over time. This is a key pillar of our LTL 2.0 plan.” 

XPO’s European Transportation segment revenue—at $787 million was flat annually. The segment had a $3 million operating loss compared to $1 million in operating income for the same period a year ago, with the $1 million first quarter loss attributed to $7 million worth of restructuring expense related to cost reduction actions.

In an interview with LM, XPO Chief Strategy Officer Ali Faghri explained that the tonnage environment remains soft for the overall freight transportation sector and was evident throughout the quarter.

“Our tonnage was down on a year-over-year basis, really, where we outperformed was on a shipment count basis,” he said. “We were one of the few LTLs that was able to grow our shipment count in this environment. And those are being driven by profitable market share gains that are tied to service improvements. If you look at, for example, our damaged claims ratio, which we recently started disclosing, it has gone from 1.2% on the back half of 2021, when we launched our LTL 2.0 plan, to 0.7% in the most recent quarters. We almost cut that ratio in half over the last four-to-six quarters, and our customers are noticing that service improvement. That is resulting in that awarding of new business, and winning new customers as well.”

When asked what steps XPO is taking to reduce operating costs, Faghri said that as the demand environment remains softer, XPO has made some moves to better align its cost structure, from a headcount perspective, to current volume trends across all of its business units, representing about $50 million in annualized savings.

“The majority of that $50 million is going to accrue to our LTL segments typically, and you are going to see the full run rate benefit of that starting in the third quarter of this year,” he said. “On top of that, we have done a great job of lowering purchased transportation expenses, which was down $37 million year-over-year, or 27%, driven by a combination of two factors. One is we proactively pulled forward the bid cycle on our third-party rates to February from April so that we could capitalize on favorable market conditions, with a reduction in our HSS [highway subservice] rates. We also have made progress on our linehaul insourcing initiative.”

And he added that XPO has a plan intact to reduce its reliance on third-party carriers from a linehaul perspective, with the company reducing its mix of third-party linehaul by about 300 basis points in the quarter. Those two drivers, he said, are expected to continue to be a tailwind in the second quarter and into the second half of 2023.

Looking at the yield gains seen in the first quarter, Faghri observed that in a weaker macro environment, XPO expects yield to be up in the low single-digit range. And, in stronger macro periods, he said that the expectation is for high single-digits or even better.

The 1.4% increase in yield, for the quarter, excluding fuel surcharges, was in line with XPO’s expectations heading into the quarter.

“Underlying pricing trends remain really strong,” he said. “Our contract renewal pricing in the quarter was up 4.5% year-over-year, so we are really happy with our progress on the pricing side. And we are very focused on accelerating growth and yield over time.

On the service side, in addition to the aforementioned damaged claims ratio, which was its best in more than a decade, XPO’s first quarter on-time performance saw a strong 11% annual gain, returning back to pre-pandemic levels. Both of these metrics, he said, are at multi-year best levels.

“Our goal is to be best-in-class when it comes to service, and we are confident we are going to get there with our plan,” he said.