XPO, Inc. Q2 FY2022 Earnings Call

Welcome to the XPO Logistics Second Quarter 2022 Earnings Conference Call and Webcast. My name is Paul, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the Company regarding forward-looking statements and the use of non-GAAP financial measures. During the call, the company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company’s SEC filings as well as in its earnings release. The forward-looking statements in the company’s earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements except to the extent required by law. During this call, the company may also refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company’s earnings release and related financial tables or on its website. You can find a copy of the company’s earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section of the company’s website. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin.

Good morning, everybody, and thanks for joining our call. With me today in Greenwich are Ravi Tulsyan, our CFO; Matt Fassler, our Chief Strategy Officer; Mario Harik, President of LTL; and Drew Wilkerson, President of North American Transportation. Before we get into earnings, I want to comment on the succession plan we announced yesterday. Once we complete the spinoff, Mario will succeed me as CEO of XPO, and I’ll remain with the company as Executive Chairman. I’ll be the Non-Executive Chairman of the spin-off, RXO. Appointing Mario as my successor was an easy decision for the Board and me. Mario has a deep understanding of the nuts and bolts of our LTL operations. He’s been hands-on with LTL as CIO for 7 years, because as soon as we acquired the network, we started developing technology for it. He also worked closely with the LTL sales team in his role as Chief Customer Officer, and he’s been running the entire LTL business since last year. Mario is mission-critical to XPO. He was the third person I hired back in 2011, and we’ve worked side-by-side on every major initiative since then. He’s been instrumental in the successful integration of 18 acquisitions, and he spearheaded countless innovations that have given us a tremendous commercial advantage. Now Mario and his management team will take the reins of our growth strategy for LTL and lead XPO into its next chapter as a pure-play LTL carrier. I’m proud to report a very strong second quarter. All of our reported metrics were ahead of guidance and consensus. We had our ninth straight beat on adjusted EBITDA, and in fact, we generated more adjusted EBITDA in the second quarter than in any quarter in our history. Like adjusted EBITDA, our adjusted diluted EPS was a new record for any quarter. In our North American LTL business, we’re continuing to build tremendous momentum. What a difference 9 months make. Kudos to Mario and the team for delivering LTL revenue and adjusted EBITDA that were records for any quarter. Our adjusted operating ratio ex-real estate inflected positive in the quarter by 70 basis points to 80.4%. That’s another company record for any quarter, and it puts us right on track for an improvement of more than 100 basis points this year compared with 2021. Also in the second quarter, we maintained our highest level of LTL network fluidity since 2020. So it’s not surprising that we’ve seen a significant increase in our customer satisfaction scores as measured both internally and by third parties. The LTL team has increased its focus on customer service over the last 9 months now, and it’s gratifying to see us continue to build high satisfaction levels after a V-shaped recovery in our service metrics. In North American truck brokerage, we continue to sharply outperform the industry. Our gross profit was a record for any quarter at 20.8%, up year-over-year by 610 basis points. And it’s not just a price play. We grew volume year-over-year in the quarter by 16% in truck brokerage. This is a best-in-class business that’s both highly profitable and taking share quarter after quarter. In Europe, our operations continue to perform well despite the war in Ukraine. Our organic revenue growth in Europe was 7% year-over-year, which was a sequential improvement from the 5% we reported in the first quarter. And in constant currency, we grew adjusted EBITDA year-over-year by a robust 14%. Company-wide, a key part of our success has been to pay rigorous attention to return on invested capital and free cash flow. And I’m pleased to report that as of the end of the second quarter, our trailing 12-month company-wide ROIC was 38% and significantly higher in our North American LTL and truck brokerage businesses. It’s worth noting that since we bought the LTL business in October 2015, the business has generated net cash of over $3.8 billion. And lastly, over the first 6 months of the year, we brought our net leverage ratio down from 2.7x to 1.8x. It’s gratifying to see XPO perform so well across the board and our strategic actions on track. This includes the planned spin-off of our tech-enabled brokered transportation platform, RXO, in the fourth quarter. Finally, I’d like to profoundly thank all of our 43,000 XPO employees for delivering a phenomenal quarter en route to a record year. Now I’ll pass the call over to Ravi to go through the financials.

Thank you, Brad, and good morning, everyone. Today, I will discuss our second quarter results, our balance sheet and liquidity and our outlook for the balance of 2022. I’ll start with our results. We delivered strong year-over-year growth with record second quarter revenue and the highest adjusted EBITDA and adjusted diluted EPS of any quarter in our history. Revenue in the quarter was $3.2 billion. Adjusting for the sale of our intermodal business, our year-over-year revenue increased 11%. We grew adjusted EBITDA year-over-year by 23% to $405 million or 29%, excluding intermodal and gains from real estate sales. This reflects the strong earnings growth across all our businesses. FX negatively impacted EBITDA by $6 million in the quarter. Our adjusted EBITDA margin was a record 12.5%, and this was a year-over-year improvement of 210 basis points. Operating conditions in the quarter were favorable, and the firm pricing environment more than offset inflationary pressures for labor and purchased transportation. Our corporate costs in the quarter, excluding one-time expenses related to strategic initiatives, were down year-over-year by 29%. This reflects continued rationalization of our corporate cost structure. Our interest expense for the second quarter was $31 million compared to $58 million in the year-ago period. This reflects the paydown of approximately $3 billion of debt last year and over $600 million of debt during the second quarter. The effective tax rate for adjusted EPS for the quarter was 24%. Our adjusted earnings per diluted share was $1.81, which was up from $1.22 a year ago, an increase of 48%. The increase was primarily driven by higher adjusted EBITDA and lower interest expense. We generated $199 million of cash flow from continuing operations; spent $130 million on gross CapEx; and received $4 million of proceeds from asset sales. Gross CapEx was up $69 million year-over-year, primarily allocated to growing our LTL network. Our free cash flow was $73 million. This includes $28 million of cash outflows related to transaction costs that were not contemplated in our free cash flow guidance. Excluding these transaction costs, our free cash flow was $101 million for the quarter. Looking at the balance sheet, we ended the quarter with $436 million of cash. This cash, combined with available debt capacity under committed borrowing facilities gave us $1.4 billion of liquidity at quarter end. We had no borrowings outstanding under our ABL facility. Our net leverage at quarter end was 1.8x adjusted EBITDA. We are ahead of schedule on our deleveraging plan and are well within our target leverage range of 1 to 2x adjusted EBITDA. In light of our strong results in the first half and our expectations for the second half, we updated our guidance after market close yesterday. Our new full-year guidance for adjusted EBITDA is $1.4 billion to $1.43 billion. This increase primarily reflects our second quarter outperformance and does not include the impacts of our planned spin-off or the divestment of our European operations. We still expect to have up to $50 million of gains from real estate sales and we currently expect all of these gains to be realized in the fourth quarter. We also issued guidance for the third quarter adjusted EBITDA of $330 million to $345 million. Pro forma for the Intermodal sales, the midpoint of this range implies the third quarter adjusted EBITDA growth rate of 18% over the prior year. Our outlook for full-year 2022 adjusted EPS anticipates a range of $5.55 to $5.90. This reflects our higher EBITDA outlook and slightly lower interest expense. The midpoint of our new full-year guidance for adjusted EPS implies year-over-year growth of 33%. On the cash flow front, our outlook for full-year cash flow is now $425 million to $475 million, up $25 million versus our previous outlook. As a reminder, this excludes all transaction-related cash outflows. We expect interest expense of $145 million to $150 million, which is down from our prior target of $150 million to $160 million. There is no change to our previous guidance for depreciation and amortization expense, CapEx and the tax rate. In conclusion, we had a very strong first half of 2022 and we are entering the second half with good momentum. The execution of our strategic plan remains on track, and we are excited about creating two pure-play transportation powerhouses. I will now turn things over to Matt.

Thanks, Ravi. I’ll review our second quarter operating results by segment, starting with North American LTL. We grew LTL revenue 15% year-over-year to $1.2 billion, the highest revenue of any quarter in our history. LTL adjusted EBITDA grew by 14% year-over-year, or 16% excluding real estate. We had a 5.5% decline in tonnage per day from the second quarter of 2021. Demand from our major verticals was mixed. The year-over-year trend in agricultural verticals, which are seasonally significant in Q2, decelerated while automotive accelerated. Industrial, by far, our largest vertical, tracked the overall trend as did our second largest vertical, retail and e-commerce. Year-over-year growth in tonnage per day improved through the quarter. Yield, excluding fuel, accelerated to an 11% improvement year-over-year from 9% in Q1, reflecting a solid pricing backdrop to the industry and the benefit of our proprietary pricing tools. Pricing is a major focus of our technology development in LTL, and we’ve added top talent to our pricing team. We increased pricing on contract renewals year-over-year by 12%. Our LTL adjusted operating ratio of 80.4% was 70 basis points better than the second quarter a year ago. It’s also a 530 basis point improvement sequentially from Q1. On our last earnings call, we said we expected to achieve at least 400 basis points of sequential improvement, so we outperformed that expectation. I’ll note that these adjusted operating ratios exclude gains from real estate sales. Our success in improving network fluidity is driving improvement in our cost trends. As we procured third-party line haul capacity more effectively, the year-over-year headwind from purchased transportation, measured as a percent of revenue, moderated from 250 basis points in Q1 to just 10 basis points in Q2. Those are the financial highlights of a solid second quarter performance in North American LTL. Our other segment is brokerage and other services, and I’ll remind you that intermodal was reported in this segment until we sold the business late in Q1 of this year. Segment revenue, as reported, declined in Q2 by 4% year-over-year, but excluding intermodal, revenue increased by 9% to $2.1 billion. In addition, FX weighed on revenue growth by 3 percentage points. Adjusted EBITDA increased 17% or 29% excluding intermodal to $152 million. Adjusted EBITDA margin for this segment expanded by 140 basis points to 7.4% from 6% a year ago. The largest revenue and profit driver in the segment is our North American truck brokerage business, which had another outstanding quarter. This will be the core business of our planned spin-off of RXO in the fourth quarter of this year. We increased our brokerage loads per day by 16% versus a year ago and by 61% from 2 years ago. Second quarter truck brokerage revenue rose 24% year-over-year. Our truck brokerage growth reflects our strong execution in a dynamic market. Drew will speak more about the specific drivers in a minute. As Brad mentioned, organic revenue in Europe grew 7%, accelerating by 2 percentage points from the first quarter. We saw acceleration in organic revenue growth in all 3 of our major regions: France, U.K. and Iberia, and the platform continues to deliver results, both top line and profits despite the geopolitical backdrop. And lastly, we’re grateful for some external recognition we received during the quarter. XPO was named a top 100 3PL by Inbound Logistics magazine for the ninth year. Forbes named XPO a best place to work in Spain for the fourth consecutive year. We were named a Best Place to Work for Disability Inclusion on the Disability Equality Index for the second consecutive year. And we served as the official transport partner for the Tour de France for the 42nd year and expanded our partnership as the official transport partner for the women’s edition of the tour. Now I’ll turn it over to Mario for his comments on North American LTL.

Thanks, Matt, and good morning, everyone. Before I begin, I want to thank Brad and the Board for placing their trust in me. XPO has an enormous opportunity ahead and it will be a privilege to lead the company and continue working with Brad as Executive Chairman. It’s also humbling to be entrusted with continuing the transformation we’re executing in LTL. I’ve run the business for almost a year now, and I’m constantly inspired by our best-in-class team, and we’re going to accomplish a lot more together. As Brad said, we continue to see tremendous momentum in our LTL business. This has accelerated over the last quarter with the actions we’re taking to drive improvements in network fluidity and service and grow our network capacity. In the second quarter, we gained significant traction in all these areas with measurable results. We achieved the highest level of network fluidity since before the pandemic. We also reached a new high for customer satisfaction, according to Mastio, a third-party industry consultant that tracks our Net Promoter Score on a quarterly basis. In addition, our investments in capacity are on track. The 5 terminals we added since October are fully operational. Now we’re evaluating sites in Salt Lake City, Houston, Atlanta, Kansas City, Dallas, and Philadelphia. We’re being very disciplined about the network expansion. We’ve done the analysis, and we’re adding new terminals or new doors to existing terminals in markets with growing demand for LTL service. We expect these markets to continue to grow over the long term. The 345 net new doors we’ve added to date bring us over 1/3 of the way to our goal of adding 900 net new doors by the end of next year. Looking beyond our footprint, we’re investing in capacity where we have a competitive advantage. For example, last quarter, we announced that we added a second production line at our trailer manufacturing facility in Arkansas. That investment had an immediate impact. And in the second quarter, we produced a record number of trailers for our fleet. Our target is to manufacture more than 4,700 trailers this year. This will expand our in-house linehaul trailer capacity by over 10% to an all-time high. We’ve reaffirmed our plan for LTL CapEx at 8% to 9% of revenue this year. On the driver side, we’ve been ramping up our hiring with targeted recruitment efforts and training more drivers in-house at our 130 training locations. These 2 channels are working well as solutions to the ongoing driver shortage. June was a particularly strong month for recruitment. The hiring environment overall is still tight, but it loosened significantly in the second quarter. We had a 44% average increase in the number of applications for each job we posted in the quarter. Now I want to switch gears for a minute and talk about our record Q2 adjusted operating ratio of 80.4%. That’s a year-over-year improvement of 70 basis points ex real estate. We had promised a second quarter inflection to year-over-year improvement, and we delivered that. I’m also pleased that we overachieved on sequential improvement which, as Matt noted, was 530 basis points from Q1 to Q2. We’re on track for our target of more than 100 basis points of year-over-year improvement this year. Looking at the underlying drivers, we expect yield to remain strong throughout the balance of the year. Our pricing technology is mission-critical in getting us fair value for our services. In the second quarter, we saw the early impact of our pricing tools with strong yield on contract renewals. From a sales standpoint, we won a record amount of new business in Q2. And our sales sustained a positive trajectory each month in the quarter. Last week, I met with a large shipper at our new Atlanta terminal. They just signed on with XPO and they’re our newest top 10 customer. They’re very happy with their onboarding experience, and they’ve already committed to incremental volume with us. In addition, we’re in discussions with 2 more brands this quarter, both of these would be top 10 LTL customers for XPO. This would set us up well for 2023. As we onboard more revenue, we’ll also focus on cost management. This is another area where our technology excels. In the second quarter, we introduced proprietary cost models to enhance the team’s visibility into cost management levers. We also have a new piece-level tracking capability that has the potential to significantly improve customer service and visibility. One of our largest costs and a large opportunity is purchased transportation. We’ll continue to moderate purchased transportation costs as we move through the back half of the year driven by more efficient network operations and newly negotiated carrier rates. There are times when third-party line haul is the optimal solution. But as we continue to add drivers and equipment, we expect to, over time, insource more third-party line haul miles. This should drive material cost savings. We have a lot of initiatives underway. And to sum it up, our goal is pretty simple. We want to be the best. We’re creating a world-class LTL carrier by maintaining an intense focus on every part of the business. We have a highly engaged team that’s determined to delight our customers. This year, we expect to generate at least $1 billion of LTL adjusted EBITDA and more than 100 basis points of year-over-year improvement in adjusted operating ratio ex real estate. Going forward, we have company-specific levers that can expand our margin and improve our operating ratio well into the 70s. We’ll take more volume share for our investments in fleet, doors and people and capture a high return on those investments over time. Over the last 9 months, we’ve made major advances in positioning XPO to become a world-class LTL carrier from every perspective. And we know exactly where we’re going from here. We’ll provide more details on our growth plan at our LTL Investor Day as we get closer to the spinoff. We’ll also announce our long-term outlook for XPO as a stand-alone company. Now I’ll hand it over to Drew to cover Truck brokerage.

Thanks, Mario. North American truck brokerage had another strong quarter as we continued to sharply outpace the industry. I’ll start by giving you 4 metrics from the quarter that highlight the stellar performance the team delivered. Then I’ll talk about what’s driving these results. First is volume. We grew loads by 16% in the quarter, and it was the seventh consecutive quarter of double-digit load growth for our business. Second, we delivered a gross profit margin of 20.8%, up year-over-year by 610 basis points. This is a record performance for us in any quarter. Third is gross profit dollars, which we grew year-over-year by 76%. We have a long track record of growing gross profit through economic cycles, and we’re confident we’ll continue to do that. And the fourth metric is an adjusted EBITDA margin of 10.6%, that’s 420 basis points higher than Q2 last year, and it’s our first double-digit adjusted EBITDA margin. We achieved these 4 metrics through a powerful combination we’ve built over many years: scale, cutting-edge technology, and deep customer relationships. Scale refers to our access to massive capacity of 98,000 independent carriers in North America that allow us to serve more than 5,500 customers including nearly half of the Fortune 100 companies. These are carriers who have registered to do business with us on our XPO Connect digital platform and come back week after week because of the immense volume that flows through our network. To a carrier, these are income opportunities. Truck brokerage is a highly fragmented industry, and there’s a lot of competition for carriers, especially with the driver shortage. We make it more efficient for carriers to do business with us. Our digital platform is easy to use, and we have a national carrier rewards program that saves them money on things like fuel, tires, and roadside assistance. And to shippers, our scale means reliable capacity on demand. The automation and machine learning we’ve built into the platform allow our people to focus on being more productive for our customers. We’re known as dependable problem solvers who have a strong understanding of market dynamics. We work with our customers to make sure we have the appropriate amount of spot versus contract business based on the current market conditions. For instance, we made a deliberate shift in the second quarter to operate at a favorable revenue mix of 73% contract and 27% spot. A year earlier, that mix was 66% contract and 34% spot. Our technology gives us the agility to manage that change. In the early days of XPO in 2011, we had the vision to develop a fully automated brokerage system, and we’ve been building on our first-mover advantage ever since. I’m privileged to lead the team that made this vision a reality over the last 11 years, and I’m even more excited about the next decade because of the opportunity to leverage our platform to continue to serve more customers and outpace the market. Every dollar we put in our digital platform continues to pay off. Even now years after we introduced XPO Connect, it’s still growing at a rapid clip. Our mobile app has been downloaded more than 800,000 times. The number of weekly average carrier users on the platform increased year-over-year by 74%. And 80% of our truck brokerage loads were created or covered digitally, up from 74% in the first quarter. It’s exciting to see the tremendous demand for our platform drive additional share gains for us. Soon, we expect to spin off as RXO. And once that happens, I’ll continue to work closely with Yoav Amiel, who will be our Chief Information Officer. Yoav currently leads the ongoing development of XPO’s digital brokerage platform, which will be called RXO Connect and will be the technology backbone of the new company. For us, the strategy of becoming a brokerage pure play makes sense on every level. We’re a high-growth platform with a long runway for value creation. As a new public company with a sole focus on asset-light transportation, we’ll continue to deliver best-in-class results for our employees, customers, carriers and investors. I look forward to meeting many of you at our Investor Day this fall, where we’ll be sharing our long-term outlook. That concludes our prepared remarks. I’ll turn it over to the operator, and we’ll go to Q&A.

Brad, first, can you give an update on the process with Europe? And then Mario, I wanted to ask you about some of the LTL items. So nice sequential margin improvement. But if I look at the implied guidance for the third quarter, it implies a bigger sort of step back in margin than some of the other LTLs. So any thoughts on the sequential margin into the third quarter? And any way to quantify the savings you think you’ll get from more insourcing?

Scott. The sales process in Europe remains very lively, very buoyant. It’s a great opportunity for a buyer to buy an asset that’s got scale and has pan-European strategic value. It’s a very attractive platform. The base case scenario is we’d be signing a deal to sell it in the fourth quarter and probably wouldn’t close by the time of the spin. It could, but probably not. In that case, we’ll just have it as discontinued operations, and we’ll show the numbers with and without it. Mario?

Scott, on the sequential margins and overall LTLs you said, the second quarter, we delivered a great sequential improvement of 530 basis points, an 80.4% adjusted OR. When we look at the third quarter, we expect an improvement of at least 150 basis points on a year-on-year basis, which is in the neighborhood of our typical seasonality going from the second to the third quarter.

Is there something you think you could do to sort of lessen that seasonality going forward to be more consistent with some of the other LTLs? And then I also just asked about the insourcing in any way to quantify.

Yes. So let’s start with insourcing. We do expect purchased transportation costs to continue to moderate through the course of the year. When you look at the second quarter, our linehaul miles that were outsourced were roughly 24.7%, which was up 80 basis points from last year, which is what we said we would do, where we’re going to lean a bit more on purchased transportation this year. Now we don’t expect to insource purchased transportation as much in 2022. That’s more of a longer-term strategic initiative for us and how we expect to drive that. However, we do expect the rates on a per mile basis to continue to moderate through the course of the year. As we improve network fluidity, we can be much more predictive in how we purchase transportation. And just to give you a few stats, the cost per mile for us in linehaul was up on a year-on-year basis by 33% in the first quarter, and it was up 14% in the second quarter with newly negotiated rates with carriers that went into effect in the month of May. So as we head into the back half of the year, we would expect that to continue to moderate and give us a portion of the cost tailwinds we expect in the back half. Now going back to your question on if we can accelerate further the OR improvement. Obviously, OR goes back to volume, to price, and all the cost improvements that we are doing. And there are multiple paths for us to get to our guidance of at least $1 billion of EBITDA and at least 100 basis points of OR improvement.

So Mario, maybe I could stick with you on the operating ratio sort of implied for particularly the third quarter. I get last year, you had a step up, I think, in the neighborhood of 300 basis points from 2Q to 3Q, and that was when we had some challenges in the network. I think the implied guide is maybe in the 200-ish type of range in terms of increase in the OR sequentially. So I still want to make sure I understand sort of the moving parts around cost and some of the progress you’ve made in terms of efficiency in the business. Because it seems like the second quarter was a big step forward. I’m just wondering if there are some dynamics that maybe changed from 2Q to 3Q and maybe there’s some tonnage discussion that needs to be had within that comment. But I just want to maybe get a little bit more color on what’s happening from 2Q to 3Q from a cost perspective.

Certainly, Chris. Looking at our performance, we made favorable progress in the second quarter, with a 70 basis points improvement year-on-year from an operating ratio perspective. As we approach the third quarter, we believe the pricing environment will remain strong. Our yield increased by 11% in the second quarter compared to 8.7% in the first quarter, and we expect this strength to continue throughout the year, although we anticipate tougher comparisons in the latter half. Contract renewals have risen by 12% in the second quarter and continue to show double-digit growth in July. Volume was down 5.5% in the second quarter, and we expect a decline in the low to mid-single digits for tonnage in the third quarter. However, we are optimistic about our sales momentum. We achieved record new business wins in the second quarter, and this trend has been enhancing. We secured a new top 10 customer in the second quarter, and after a recent meeting, they expressed their satisfaction with the onboarding process and plan to increase business with us. We're currently experiencing strong momentum in the early stages of the third quarter with two potential top 10 customers as well, which should positively impact our volumes. Regarding costs, I mentioned that we expect a moderation in third-party linehaul costs and overall linehaul expenses throughout the year. Additionally, we have implemented several efficiency initiatives, resulting in the best network fluidity we’ve seen since before the pandemic, which will contribute to improved outcomes.

Okay. And just to clarify, is around 200 basis points you think the right sort of seasonal transition from 2Q to 3Q in the business? There’s been a lot of volatility. So kind of just curious about what the right number is as we think about that going forward.

Yes. The typical seasonality is in the, call it, 200 to 250 range in terms of OR change from the second quarter to the third quarter.

Great. Just to round that out, Mario, you mentioned 3 new top 10 customers potentially coming online. That’s a lot of new business coming or leaving. Can you maybe talk about the process, the risk to your routing structure or service levels or how you prepare for that? And then just to clarify that your EBITDA is up. I think you raised your target about $50 million with the $40 million, $41 million beat this quarter. or about $45 million overall. So are you just saying the back half is kind of no change to that despite the large beat in the second quarter? I just want to understand your vision on that guidance raising outlook.

Yes. First, I’ll take the customer question and then I’ll turn it over to Matt for the guidance piece. I mentioned also earlier that we launched new costing technology in the second quarter. It’s a proprietary costing model. So we have a very deep understanding about how a customer, as we onboard them, how they would impact the network as a whole, and we price according to where we have excess capacity or imbalanced lanes, where we need to get more volume and lanes that we want to be able to fill the backhaul for and better balance our network. So this is how we look at these large relationships in terms of, one, how we price them but, two, how we analyze that data for fit with the network. And we have a new technology that helps us make these determinations easier and better. And these will be accretive both in terms of volume and profits as well.

And then as it relates to the guidance, Ken, you’re right. We beat the midpoint of our guidance by $40 million. We raised the midpoint of our new guidance for 2022 by an additional $5 million beyond that. You can think about that as relating to strong visibility in both LTL and in brokerage services. And you asked about LTL in particular, in the first half of the year, in LTL, excluding real estate, we had an adjusted EBITDA increase of about 11%, and we’re more like mid- to high teens in the second half of the year. So we have very good visibility on first half to second half acceleration for LTL.

And then I think you mentioned earlier, 70% OR moving forward. Is that your near-term target? Was that just a throw-out number? And what levers do you need to get there?

When we think overall about getting to the 70s from an OR perspective, that’s our goal. So if we think about our strategy that we started in Q4 of last year, we expect to improve our OR by hundreds of basis points to get well into the 70s over the years to come, and the strategy is focused on the customer where we want to delight our customers by providing outstanding service in on-time, damage performance and all the aspects of service. We want to continue to grow volume by adding capacity. Historically, we’ve spent maintenance CapEx to expand margins. Now we’re pivoting to a strategy where we’re investing in more doors, more people, and more equipment, leveraging our trailer manufacturing facility there. Obviously, pricing will continue to be firm in our industry moving forward. And then finally, we want to leverage our proprietary technology to keep on optimizing our cost structure. And in-sourcing linehaul miles where it makes sense. Over the years to come, we expect to improve our OR hundreds of basis points to get well into the 70s. And we’ll give more color on that in our Investor Day later in the early fall and how the model looks like over the years to come.

Mario, in line with that, should we see this accelerated industrial softening into next year, a lot of investment into that proprietary technology. Can you maybe walk through how we should think of the competitive advantage that proprietary technology would bring you to better manage the downturn this cycle, whether through market share gains or even the agility on the cost side? And then secondly, just I guess this is more on the brokerage side, expansion of loads covered digitally, was that expansion weighted more towards new customers attracted to XPO Connect or existing customers moving more into digital capabilities? Just any thoughts there.

You got it, Allison. I’ll take the first one, then I’ll turn it over to Drew. But first, starting with the macro and the industrial. So today, 2/3 of our customers are industrial companies. And we hear mixed feedback from these customers. When we look at many of these companies, they have had pent-up demand from their customers where they couldn’t produce enough parts to fulfill open POs that they have from their customers. And as things are easing up in their supply chain, they’re actually being able to move product faster, which is leading to strong demand. Others aren’t seeing that; others are actually seeing softness in demand that is impacting overall how much they’re shipping. But generally, we see the industrial economy very much in recovery, and that’s going to become a tailwind as we get through where things are today. Now in terms of technology and how we use technology. For us, technology has a number of components. Number one is the focus on pricing where we launch proprietary pricing technology. As I mentioned earlier, we just launched a new proprietary costing model that allows us to better understand the cost structure of a given shipment and how we can price the freight for the customer so we can get the highest yield possible. And also bridging the yield gap we have with some of our competition as well. It also helps with automation technology like dynamic pricing and reducing manual processing as well. And then we have a slew of technologies around cost efficiency and overall operational excellence, and these start with linehaul, and this is where doing things like better balancing the network and our algorithms that operate linehaul to optimize how much headhauls to be built in the network will improve the more than $1.1 billion of spend we spend on line haul over time. And then similarly with pickup and delivery to increase route density and on the docks to optimize labor efficiency. And finally, from a customer-facing perspective, we believe in technology to help with our service to the customer. And case in point, we just launched new technology called piece-level tracking, where we can give customers visibility to the pallet level of where every pallet is moving through the network and then giving them better visibility on it in terms of when they’re going to see their shipments.

Allison, this is Drew. On the second part of your question, it was both new and existing customers, but it was also both new and existing carriers that we’re working with. When you look at the carrier side, last quarter, we talked about having 88,000 carriers in our network. This quarter, we have 98,000 carriers, but all of our stats on both the carrier side and customer side are up and to the right. Our year-over-year registered carriers on XPO Connect are up 47%. The registered customers are up 29%, and the carrier usage is up 74%. So when you look at the outperformance that we’ve had for the past several quarters, technology is the main reason that we’ve been able to do that, and that’s because we began investing in it in 2011.

Mario, congratulations on your future role as the leader of LTL and potential CEO of XPO, and congratulations on your transition as well, Brad. I wanted to discuss the volume aspect of LTL. The 5.5% decline in the second quarter was a bit larger than I anticipated. I'm curious if this is due to a time lag between improvements in network performance and volume. It appears you've seen a rapid recovery in the network and improvements in customer satisfaction scores. Do you believe the decline in volume during the second quarter is merely a time lag, or how should we interpret that? Additionally, how does this impact the second half of the year? Is it possible to achieve volume growth in the fourth quarter? I'm trying to reconcile the positive outlook with the weak volume in LTL during the second quarter.

Thank you for the well wishes. As you mentioned, Q2 tonnage was down 5.5%, which was in line with our guidance. However, when we look at the sequential tonnage trends from Q1 to Q2, they were favorable compared to our peers. The factors influencing this included mixed feedback from customers. When we analyze our existing customer base, there was a slight decline compared to last year, attributable to the current environment. On a positive note, we are enthusiastic about the sales momentum we have observed. We've seen significant improvement in our performance, and network fluidity has returned to pre-pandemic levels. Our salesforce has achieved record business wins in the second quarter, and this momentum has accelerated throughout the quarter. As we look ahead, we anticipate onboarding new customers and volumes during the latter half of 2023, adding more volume to our network.

First of all, Mario, congratulations on the CEO role going forward. I wanted to stick with you here on the LTL side. You talked a little bit about the cost savings from in-housing a lot of the linehaul. Can you talk about the differential between in-house linehaul and an outsourced linehaul? In terms of operational performance, is in-house linehaul more reliable? And should we expect, as you in-house more, that your performance numbers will go up?

Thank you, Jason. To start with costs, there is approximately a 30% to 40% difference in cost per mile between outsourced and in-sourced linehaul. Regarding service, in the latter part of last year, on-time service for carriers was generally more challenging, creating a significant gap between internal and external on-time service. However, that gap has since narrowed significantly, and carriers are now providing much better on-time service. Still, internal performance remains superior due to the control over our drivers, employees, and equipment. While internal service is consistently reliable, the difference has reduced considerably since the latter part of last year. Yes. On the terminal openings, we have a plan to add 900 net new doors that we initiated in October of last year. And so far, we’ve added a net 345 doors. And these are all in markets where we are either seeing demand from our customers where we don’t have enough capacity to handle that demand or improving the operation of our line haul network. When you think about the freight moving through our network, if we have certain docks where we’re seeing that are already tapped out of capacity or running close to capacity, this is where we’re looking to expand those. To give you an example, the Atlanta market is a market where we were seeing both demand in the local market as well as demand for market to flow in the south of the country, for example, down to Florida. So by us adding the new terminal there, that gives us more capacity to handle that local volume as well as move more freight through the linehaul network. This is what’s driving our strategy.

Great. And I’ll echo others’ comments in terms of extending congrats to Mario on the promotion or the anticipated promotion to CEO. Mario, I wanted to stick on that topic of kind of negative tonnage growth versus adding door capacity. It seems like those 2 things are in conflict. So I guess my question is, as we think about 2023, is the expectation that tonnage can be up year-over-year as you start to bring on board some of these new customers? And maybe you can talk about that logic. Is it really just filling out the network and improving service capacity? And do you anticipate maybe idle capacity, a bit more elevated than what it has been relative to history?

Thanks, Ari, on the best wishes. But when we think about capacity, we think of it as being a long-term investment for us to be able to drive market share and growing volumes. Historically, since we first acquired Con-way, our CapEx investment strategy in LTL was to actually keep volume steady but expand margins and case in point, we generated $3.8 billion of cash since we acquired Con-way, and the goal was not to expand volume. That said moving forward, when we think about these investments, in the short term, again, we’re seeing that mixed feedback from customers and softer demand than what we saw last year. But generally, over the years to come, that demand is going to pick up, and we’re going to have the investments in capacity to be able to capture that demand, both from a network perspective, from a real estate doors perspective as well, as adding more fleet to be able to handle that as well. For 2023 guidance, we’ll obviously give more of that later in the year. And I definitely encourage you to attend the Investor Day, we’re going to be holding in the fall.

I reflect on the past 11 years with a great sense of pride for our team and their achievements. We began by acquiring a relatively small company in 2011, Express-1, which had around $170 million in revenue and less than $10 million in EBITDA. Now, look at the growth we've achieved. We've been diligent in managing the resources provided by our shareholders and lenders, maintaining a strong focus on return on capital and generating free cash flow, which is essential for creating long-term value. I'm satisfied with the company's current position and the strong leadership we've developed over the past decade, allowing us to feel comfortable in restructuring the company into three segments. We've successfully separated the warehousing business, which has an outstanding CEO at the helm, and we're spinning off brokerage with another excellent CEO leading that. Mario Harik will manage the RemainCo, and our LTL business is poised for strength. Regarding the future of the LTL business and truck brokerage, I see promising prospects for both. In truck brokerage, Mario and I envisioned automation from the start in 2011, aiming to replace human tasks with technology. We've heavily invested in developing what was initially Freight Optimizer, which evolved into XPO Connect, now seeing remarkable adoption rates. Technology is a key factor in our strong brokerage business, allowing us to meet the needs of shippers and carriers. Therefore, I have confidence in the brokerage sector. On the LTL side, we have a different strategy that is closely tied to the industrial economy. Our emphasis in the current phase has been on cash management rather than expanding revenues, tonnage, workforce, or fleet size. We have made it a priority to operate more intelligently, efficiently, and productively. When we acquired the LTL operation, it generated about $300 million in EBITDA, and we are now on track to approach $1 billion. We've improved margins significantly and generated $3.8 billion in cash. I want to stress that it is not just about increasing capital expenditures; it is about generating cash and achieving profit growth without heavy investments. I'm proud of what the team has accomplished. In the next phase of LTL, we will maintain our focus on margin growth, waste elimination, enhancing efficiency, and providing exceptional service to our customers while also investing in our fleet and growing revenues. We are at a crucial turning point, transitioning from a phase focused on asset optimization to one where we also invest for growth. I believe the future is very bright for LTL, and I'm confident that Mario will elevate the platform significantly in the coming years.

Great. Thanks for all the color and congrats on the strong results.

Well, we’ve got a lot of record results to talk about on this call, including our highest adjusted EBITDA of any quarter. In LTL, we reported our best adjusted operating ratio ever. Truck brokerage is continuing its phenomenal run with another quarter of double-digit volume growth. The process with Europe is going well and a sale there should help us to continue to delever. The spin remains on track for the fourth quarter. After the spin, each company will have a rock-solid CEO: Mario for LTL, Drew for brokerage, and will have a long runway for earnings growth for both of them. So thank you, everyone. It’s been a pleasure, and we’ll talk again soon.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.