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XPO says it’s ‘not sacrificing price to buy volume’

Less-than-truckload carrier XPO said it isn’t sacrificing yield to win market share on a Thursday call with analysts.

The company reported a 1% year-over-year (y/y) increase in tonnage during the fourth quarter compared to LTL peers that saw volumes decline by mid- to high-single digits. However, XPO (NYSE: XPO) saw an opposite trend in revenue per hundredweight, or yield. The company’s yield was up just 1% y/y excluding fuel surcharges, compared to the group, which reported mid- to high-single-digit increases.

“We’re not sacrificing price to buy volume,” CEO Mario Harik said on the call.

Harik said several factors weighed on the yield metric in the quarter.

The company took a general rate increase (GRI) early a year ago, during the 2021 fourth quarter, which created a headwind to the y/y comparison in the ’22 fourth quarter. The most recent GRI was taken in January 2023, which is in line with the traditional timing of the carrier’s annual rate bump.

Also, recent contract wins within large, national accounts have helped build freight density on major lanes, but those customers come with leaner yield profiles.

XPO saw a mid-single-digit-percentage increase in shipments from small, local shippers, which are higher-yielding accounts, but those shipment weights were down by a similar percentage. The lower weights were supportive of the yield metric but provided a drag on profitability.

Lastly, length of haul was down 1% y/y as XPO added freight into next- and two-day lanes.

Annual contracts renewed during the quarter came in 7% higher y/y.

More recently, the company had been pursuing smaller accounts with better pricing. However, it acknowledged it needs more freight from the national players to keep the network full.

XPO is using a wide-net approach now, which includes more freight on larger pallets moving from dock to dock and business to business, in addition to local freight, closer to the terminals from smaller shippers. The hope is shipment weights from small shippers, which tend to be more sensitive to broader economic inflections, will increase as the freight market improves throughout 2023.

XPO said it saw better than normal seasonality in January and that tonnage was up y/y by an undisclosed percentage. It is forecasting revenue per hundredweight (excluding fuel) to have a similar y/y increase in the first quarter as it did in the fourth.

“We expect yield to remain positive and we expect our strategy to pay dividends as the macro recovers and the freight environment gets stronger,” Harik said.

Table: XPO’s key performance indicators

XPO reported adjusted earnings per share of 98 cents for the fourth quarter Wednesday after the market closed, which was 14 cents better than consensus and 34 cents higher y/y.

The number excluded several acquisition, integration and restructuring costs tied to the spinoff of its brokerage unit (NYSE: RXO) and the decision to pull the divestiture of its European business.

The LTL unit recorded an adjusted OR of 87.1% in the fourth quarter, 60 basis points better y/y. However, the result was below guidance calling for 120 bps of improvement. Severe winter weather in December and outsize labor and maintenance expenses were the reasons for the shortfall.

Beginning in the first quarter of 2023, XPO will report ORs in line with that of its peers. The number will exclude pension income and include roughly $20 million per quarter in previously unallocated corporate expenses that were part of its former transportation conglomerate model.

The all-in adjusted OR for Q4 was 90.3% and 86.8% for full-year 2022. The company’s long-term guidance for at least 600 bps of OR improvement by 2027 started at the all-in 2021 OR of 87.6%.

XPO’s LTL OR normally deteriorates by 50 bps between the fourth and first quarters. Management expects to outperform that rate of change in Q1.

Adjusted earnings before interest, taxes, depreciation and amortization was $252 million in the segment during the fourth quarter and more than $1 billion in 2022, which was in line with management’s guidance.

Adjusted EBITDA in LTL is forecast to be up or down slightly during the first quarter from the new all-in number of $186 million.

Shares of XPO were off 8.8% at 11:49 a.m. EST Thursday compared to the S&P 500, which was up 0.1%.

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