On a conference call with analysts on Thursday, less-than-truckload carrier XPO stated that it will not sacrifice yield to gain market share.
During the fourth quarter, the company reported a 1% year-over-year (y/y) increase in tonnage compared to LTL peers who saw volumes decline by the mid- to high-single digits. XPO (NYSE: XPO), on the other hand, saw an opposite trend in revenue per hundredweight, or yield. The company’s yield increased by only 1% year on year, excluding fuel surcharges, compared to the group, which increased by mid- to high-single digits.
“We are not sacrificing price to buy volume,” CEO Mario Harik stated during the conference call.
Several factors, according to Harik, weighed on the yield metric in the quarter.
The company implemented a general rate increase (GRI) in the 2021 fourth quarter, which created a headwind in the y/y comparison in the ’22 fourth quarter. The most recent GRI was taken in January 2023, which corresponds to the carrier’s annual rate increase.
Furthermore, recent contract wins within large, national accounts have contributed to increased freight density on major lanes, but those customers have leaner yield profiles.
Shipments from small, local shippers, which are higher-yielding accounts, increased by a mid-single-digit percentage for XPO, but shipment weights decreased by a similar percentage. The lower weights aided the yield metric but were detrimental to profitability.
Finally, as XPO added freight to next- and two-day lanes, the length of haul decreased by 1% year on year.
Annual contracts renewed during the quarter increased by 7% year on year.
Recently, the company has focused on smaller accounts with better pricing. However, it admitted that it requires more freight from national players to keep the network full.
XPO is now employing a broad-net strategy, which includes more freight on larger pallets moving from dock to dock and business to business, as well as local freight from smaller shippers closer to the terminals. The hope is that as the freight market improves throughout 2023, shipment weights from small shippers, which are more sensitive to broader economic inflections, will rise.
XPO reported above-average seasonality in January, with tonnage up an unspecified percentage year on year. It anticipates a similar y/y increase in revenue per hundredweight (excluding fuel) in the first quarter as it did in the fourth.
“We expect yield to remain positive and dividends to be paid as the macro recovers and the freight environment improves,” Harik said.
XPO reported adjusted earnings per share of 98 cents for the fourth quarter after the market closed on Wednesday, which was 14 cents higher than the consensus and 34 cents higher year over year.
The figure did not include several acquisition, integration, and restructuring costs associated with the spinoff of its brokerage unit (NYSE: RXO) and the decision to abandon the sale of its European business.
In the fourth quarter, the LTL unit had an adjusted OR of 87.1%, which was 60 basis points higher year on year. However, the result fell short of the target of 120 basis points. The shortfall was caused by severe winter weather in December as well as excessive labor and maintenance costs.
XPO will begin reporting ORs in line with its peers in the first quarter of 2023. The figure will exclude pension income and include approximately $20 million in previously unallocated corporate expenses from its former transportation conglomerate model.
The all-in adjusted OR for the fourth quarter was 90.3%, and the full-year 2022 OR was 86.8%. The company’s long-term guidance for at least 600 basis points (bps) of OR improvement by 2027 began with an all-in 2021 OR of 87.6%.
XPO’s LTL OR typically declines by 50 basis points between the fourth and first quarters. In Q1, management expects to outperform that rate of change.
Adjusted earnings before interest, taxes, depreciation, and amortization in the segment were $252 million in the fourth quarter and more than $1 billion in 2022, in line with management’s guidance.
Adjusted EBITDA in LTL is expected to be slightly higher or lower than the new all-in figure of $186 million in the first quarter.
At 11:49 a.m. EST Thursday, XPO shares were down 8.8% compared to the S&P 500, which was up 0.1%.
