Welcome to the XPO Fourth Quarter 2022 Earnings Conference Call and Webcast. My name is Melissa, and I will be your operator for today's call. 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 this 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 in the 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 on the company's website. I'll now turn the call over to XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone. Thanks for joining our call. We're excited to talk about our simplified business model following the spin-off of RXO and how it focuses our resources on growing the value of our LTL network. I am here in Greenwich with Carl Anderson, our CFO, who will cover the fourth quarter and full year results. And we also have Ali Faghri with us for Q&A. Ali is our new Chief Strategy Officer, and he's a great addition to the executive team. Yesterday, you saw us report a solid quarter of growth in a soft macro environment. That statement is true for the company as a whole and also for our two reportable segments, North American LTL and European Transportation. Company-wide, we generated revenue of $1.8 billion, reflecting year-over-year growth of 3% and we grew adjusted EBITDA year-over-year by 38%, which far outpaced our revenue growth and beat consensus for the 11th straight quarter. For the full year, we generated over $1 billion of adjusted EBITDA in our LTL business. This exceeded a major target we had set for 2022. Looking at the business by segment, I want to focus on LTL and some key results that tie directly to our growth plan. In the fourth quarter, the LTL industry in North America saw a year-over-year decline in shipment volumes due to macro pressure. But at XPO, we grew our shipment count and tonnage. Our positive tonnage growth ties back to the plan we call LTL 2.0, which is to invest in capacity ahead of demand and earn profitable market share by providing best-in-class service. We continue to have great success onboarding new business, including volumes from blue-chip customers who are either signing up with us for the first time or giving us more of their business. This drove a strategic change in our mix in the quarter, and our tonnage ended up more than typical seasonality. We also had a high-margin local base, and these customers give us more shipments per day. However, the weight per shipment declined in the softer macro. As a result, our yield came in at the lower end of our outlook. Our mix should become a tailwind for us to both volume and yield as the macro recovers. The second reason we're outperforming is service, and I'll give you an example. In the fourth quarter, we improved our damage frequency by 66% year-over-year to the lowest damage frequency in six years. There's no doubt that our intense focus on service is helping us secure more tonnage, especially as we're hearing from new customers that we rank as one of their top LTL carriers for quality of service. Customer feedback like this has a ripple effect on our entire organization. Employee satisfaction is up sharply, which is an indication of the pride our team is taking in our service standards. In our year-end survey, employee satisfaction, including drivers and dock workers, was the highest in more than a decade. For the full year 2022, from an operating ratio perspective, there were a lot of puts and takes, including the softer macro. We improved our adjusted operating ratio excluding real estate gains, by 40 basis points for the year, which was short of our target range. Strategically, we made good progress in setting up the network to capitalize when volumes rebound, and we like our positioning. We're executing on the growth levels in our plan, like the 369 net new doors we added with six new terminal openings. In the next 90 days, we expect to open another 167 net new doors in Salt Lake City, Atlanta, and Dallas. We're also following the unique levers we have within our company to help drive our expansion. In 2022, we increased our line haul fleet by over 10% by manufacturing more than 4,700 trailers in-house. We also trained over 1,700 truck drivers last year at our driver training schools. These are tangible advantages we have in the execution of our long-term plan for LTL 2.0 and they're gaining ground. Turning to Europe. This business continues to perform ahead of expectations with solid organic growth, particularly in the U.K. and Spain. In constant currency, fourth quarter revenue in Europe increased year-over-year by 9%. Our pricing in Europe was up year-over-year in Q4, and we're continuing to win business with new and existing customers. Despite the macro uncertainty there, our sales pipeline continues to be very robust. I want to wrap up my remarks by summarizing the exciting trajectory going into 2023. We successfully completed the spin-off of RXO in November, which simplified our business model. We now have two highly focused business segments with strong value propositions in the customer market they know best. In North America, we drove above-industry tonnage growth in LTL in Q4, and we ended the year with over $1 billion of adjusted EBITDA, making good on the targets we set five years earlier. We're winning LTL market share with our service quality and also through our investment in network capacity. We're on track to open the remainder of the 900 net new doors we projected in our growth plan. And in Europe, our business is performing above expectations. This is the momentum we're carrying into 2023, and we intend to continue to invest in growth. We're confident that we'll deliver on the three targets we set for our LTL business; a revenue CAGR of 6% to 8%, an adjusted EBITDA CAGR of 11% to 13%, and an adjusted operating ratio improvement of at least 600 basis points. These targets cover the period from 2021 through 2027. And as we move toward them, we'll focus on being world-class in every aspect of our business. We know that this combination of financial and operational excellence is the most sustainable way to deliver outsized shareholder value. Now I'm going to hand it over to Carl to discuss our results and our balance sheet.

Thank you, Mario, and good morning, everyone. Today, I'll discuss our fourth quarter and full year results, balance sheet and liquidity. I'll start with the fourth quarter, where we delivered strong year-over-year growth in adjusted EBITDA and adjusted diluted earnings per share. Revenue in the quarter was $1.8 billion, up 3% year-over-year. Organic revenue growth for the quarter was 2%, and the net impact of fuel prices and FX contributed an additional point of growth. We grew adjusted EBITDA by 38% year-over-year to $262 million. This was primarily driven by our North American LTL business, which increased adjusted EBITDA by $42 million or 20% year-over-year. This includes a real estate gain of $55 million, which was up $20 million from a year ago. Additionally, we had a $30 million reduction in corporate expense as we continue to rationalize our overhead after the spin-off. Our adjusted EBITDA margin was 14.3%, representing a year-over-year improvement of 350 basis points. In the LTL segment, our fourth quarter operating ratio was 84.2%. Our adjusted operating ratio, excluding gains on real estate sales, was 87.1%, which is a 60-basis point improvement from a year ago. Our European business also continued its solid performance with revenue up year-over-year 9% on a constant currency basis. Please note that we won't be addressing a potential sale of our European business on this call. We reported a net loss from continuing operations of $36 million in the fourth quarter, representing a diluted loss per share of $0.31. This compares to income of $47 million and earnings of $0.40 per share a year ago. The fourth quarter 2022 net loss includes three impacts primarily incurred in connection with the RXO spin-off completed in November. First, we had a $64 million non-cash goodwill impairment charge related to a change in our segment structure following the spin-off. Prior to that, the European Transportation business was a single reporting unit and goodwill was evaluated for impairment at that level. Following the spin, the European Transportation business is comprised of four reporting units and impairment testing is required to be performed on a disaggregated basis for each of the new units, resulting in the charge this quarter. The second impact related to the spin was the $42 million of transaction and integration costs. And finally, we had $35 million of restructuring charges, mostly due to the planned step-down in corporate costs. On an adjusted basis, our adjusted earnings per diluted share for the quarter was $0.98, which was up 53% from a year ago. This increase was primarily driven by higher adjusted EBITDA and a lower effective tax rate. We generated $196 million of cash flow from continuing operations, spent $167 million on gross CapEx and received $78 million of proceeds from asset sales. Gross CapEx was up $77 million year-over-year driven by our planned investments in expanding our LTL network. This resulted in strong free cash flow of $107 million. Turning to the full year 2022. We delivered revenue of $7.7 billion, reflecting a year-over-year increase of 7%. Adjusted EBITDA was $997 million in 2022, up from $812 million a year ago. This was primarily driven by a 12% increase in adjusted EBITDA in our LTL business and a $75 million reduction in corporate expense. Adjusted diluted earnings per share from continuing operations increased by 82%, coming in at $3.53 per share this year. We generated cash flow from operating activities of $824 million for 2022 and free cash flow of $391 million, which was up 11% from the prior year. Our CapEx investments of $521 million almost doubled from a year ago as we accelerated our investments in the business to support our long-term growth targets. Our LTL adjusted operating ratio, excluding real estate, improved by 40 basis points from the prior year to 83.9%. Moving to the balance sheet. We ended the quarter with $460 million of cash. This cash, combined with available borrowing capacity under committed borrowing facilities gave us $930 million of liquidity at year-end. We had no borrowings outstanding under our ABL facility and our net debt leverage at year-end was 2.1x adjusted EBITDA, down from 2.7x a year ago on a previously reported basis prior to the RXO spin-off. This week, we extended our ABL maturity to 2026. And we recently received a credit upgrade from S&P from BB to BB+. Turning to the first quarter 2023. We expect the company to generate year-over-year growth in adjusted EBITDA in the low double digits. This anticipates $5 million to $10 million of unallocated corporate costs in the quarter. We expect to wind down these costs over the course of the year. And finally, a reminder that starting with the current quarter, our adjusted operating ratio will include the allocation of incremental corporate costs and exclude pension income. You'll find a historical reconciliation for this in our investor presentation. In addition, we're providing assumptions for the full year 2023 to help with your planning. These are gross CapEx of $500 million to $600 million, interest expense of $185 million to $195 million, pension income of approximately $20 million, an effective tax rate of 24% to 26% and a diluted share count of 117 million shares. Overall, we're pleased with our results in 2022 and are excited about our growth prospects as we move forward. We'll now take your questions.

Our first question comes from Stephanie Moore with Jefferies.

To start out, could you provide a little more insight into your expectations for the first quarter in LTL? Specifically, how are you approaching pricing, which currently seems to be in the low single-digit range while many of your peers are in the mid to high range? Any insight you can share would be appreciated.

We expect company-wide adjusted EBITDA for the first quarter to increase in the low double digits, as Carl mentioned earlier. For LTL specifically, we anticipate adjusted EBITDA to be either slightly down or slightly up, depending on the demand environment in March, which is a significant factor for us in the first quarter. From an operating ratio perspective, we expect it to perform better than typical seasonality in the first quarter. Normally, we see a deterioration of 50 basis points from the fourth quarter to the first quarter. That said, we have had a strong start in January, with tonnage performing better than typical seasonality and our yield ex-fuel aligning with the fourth quarter on a year-over-year basis. We are cautiously optimistic about the demand environment. As we look towards the latter half of the quarter, our current results show an uptick in volume strength. However, we will need to see how the rest of the quarter unfolds. I hope this provides you with insight into our overall expectations for the fourth quarter.

And maybe just on the pricing side of it as well, if you can.

Yes, sure. In the first quarter, we expect yield to be in line with the fourth quarter, here in the month of January, that was the case. We did take a GRI for our local accounts in the month of January as opposed to what we did last year in the fourth quarter. But we will continue to be impacted by some of the mix dynamics we mentioned in some of our prepared remarks in the first quarter, but we continue to see the pricing environment being rational.

Understood. And then just kind of more on the modeling question. Could you provide a bit more color on corporate expenses in the fourth quarter and what it should look like, again, kind of in the first quarter and then moving forward throughout the year?

Stephanie, it's Carl Anderson. I can take that. In the fourth quarter, our corporate expense was $29 million. As we start 2023, $20 million of that will be allocated to LTL beginning in the first quarter, leaving about $9 million for pure corporate expenses. As I mentioned in the prepared remarks, we expect our corporate expense in the first quarter to be around $5 million to $10 million, consistent with that adjustment. Importantly, we anticipate that expense will decrease throughout the year.

Our next question comes from Scott Schneeberger with Oppenheimer.

Could you talk to tonnage trends in the quarter, just kind of puts and takes versus your internal expectations of what occurred? And then I'll follow up on that.

Sure, Scott. In the fourth quarter, our tonnage came in on the lower end of our outlook, but we outperformed industry trends with an increase in our tonnage and higher shipment counts. Our tonnage grew by approximately 1% for the quarter. December was the weakest month of the quarter, affected by weather in the latter half of the month, creating more softness than we experienced during the rest of the quarter. However, I mentioned earlier that January's performance has been better than the fourth quarter and exceeds typical seasonal expectations. We've also experienced strong demand from our customers, especially the new ones we onboarded throughout 2022.

I appreciate that. And then with regard to the operating ratio in the fourth quarter, sounds like weather was an impact there. Could you kind of hit on the main items that were impactful in the fourth quarter versus your internal expectations? And thanks for the guidance just provided. I appreciate that. So just kind of focusing on fourth quarter and what occurred tax?

Yes, you got it. So predominantly for the fourth quarter came in short of our expectation, driven by the tonnage outcome in the month of December. So if you take out the impact of weather in the back half of December, we would have exceeded our expectation on operating ratio improvement for the fourth quarter.

It was purely the weather, were there any other headwind impacts in the quarter that were worth calling out?

Yes. Not outside what we had discussed on the last call, which was more driven by elevated cost inflation. When you think about labor expenses and maintenance costs were higher than expected but we already had factors for that when we got together on the last earnings call.

Got it. It seems mostly limited to the fourth quarter, what was causing that. Are the other factors, like cost inflation, in good condition as you move into 2023 with your pricing and other strategies?

As we move into 2023, we are beginning to see inflation ease in terms of overall costs. In the fourth quarter, our primary cost categories were labor and purchase transportation. Our wages increased by 10% year-over-year during this period, with approximately two-thirds attributed to wage inflation and the remaining third supporting our 1.5% shipment growth. Purchase transportation costs decreased by 10% in the fourth quarter, largely influenced by fuel costs for third-party providers, meaning that rates actually dropped even further. Looking ahead to 2023, the intense cost inflation we experienced in 2022 is starting to diminish, particularly concerning purchase transportation, which will provide a favorable trend throughout the year. We anticipate wages will rise, but not at the same rate as they did in 2022.

Our next question comes from the line of Chris Wetherbee with Citigroup.

Could you elaborate on the strategy concerning local customers compared to national accounts on the LTL side? I’d like to understand this better. Additionally, following the Con-way integration, there seemed to be significant efforts to evaluate the customer base and focus on the most profitable clients, which improved the operating ratio over that time. I'm curious about how much work remains in this area and what the strategy involves. Ultimately, what do you believe the potential impact on your operating ratio and overall profitability could be?

If you take a step back and examine the channel mix in the fourth quarter, I'll walk you through that before discussing 2023 and beyond. In the fourth quarter, we experienced an impact on our yield due to channel mix, which was influenced by the onboarding of larger strategic national accounts in the latter half of 2022. We have mentioned this in previous calls as it was crucial for building density in our lanes. On the local channel side, we are typically dealing with smaller accounts that provide higher yielding freight. We've also gained market share in that segment, reflected by a mid-single digit increase in our shipment count in the fourth quarter, although tonnage decreased. This reduction is mainly due to macroeconomic conditions affecting our customers, who are shipping less weight per shipment. As the macro environment improves, those local accounts are expected to ship more weight per shipment, leading to an increase in tonnage that aligns with the volume of shipments we're observing in our network. This change will serve as a tailwind for both tonnage and yield moving forward. This highlights the dynamics between national and local channels.

How do you think this will affect the operating ratio, and can you clarify what's different now compared to your previous efforts to optimize the customer mix over the last few years?

Overall, our strategy remains largely the same, but as we transition to LTL 2.0, we are also focusing on increasing our market share. When assessing national accounts from a mix perspective within our LTL network, they enhance density on a lane-by-lane basis, which is crucial. We track a metric internally known as the lane balance factor, and achieving a stronger lane balance positively impacts our margins. When we bring national accounts on board that align well with our network, they help improve the lane balance and utilize the available capacity we have. Currently, while freight demand is softer, we anticipate that as it recovers and we see an uptick in both local channels and the nationals we've integrated, it will benefit our volume and yield. The effect on our operating ratio will depend on various factors, such as volume, yield, and cost management. Our objective is to enhance our operating ratio by at least 600 basis points by 2027, and we are confident in our ability to achieve this goal.

Okay. That's helpful. And then just a real quick clarification. For the first quarter, adjusted EBITDA up double digits. Can you give us a clean number of what you're comparing that to, obviously, given the breakup of the business, I want to make sure I understand what the base is for that. And then your guidance around the LTL adjusted EBITDA as well. That includes $5 million to $10 million of unallocated costs when you're thinking about being flat or up or down a little bit.

Yes. So Chris, if you compare it to the first quarter of last year, the base is $184 million. Regarding the corporate cost, as I mentioned, it will be in the range of $5 million to $10 million, and that will remain within the corporate category. It will not be included in LTL. LTL is expected to have an additional approximately $20 million that we previously stated would be allocated.

Our next question comes from Jordan Alliger with Goldman Sachs.

At your Analyst Day, you talked about technology and implementation to help with dynamic pricing, line haul, reducing other costs like PT. Can you maybe give an update on that? And how it's shaping up versus your expectations?

Thanks, Jordan. We're making great progress on the rollout of our proprietary technology. As we have discussed in our Investor Day, there are a number of initiatives and proprietary pieces of tech that help us drive results. Starting with pricing. This year, we made great progress in upgrading our discussions on the last call, our cost modeling and how we allocate cost of shipments and how we price more efficiently. So in this environment, we are investing more than our sales force, and we've had record numbers of RFPs that we are driving through the system, and having a platform that makes it very easy for our pricing analysts to price that business and have a quick turnaround with the sales team is essential and our technology is enabling these things. A similar thing, as you mentioned on dynamic pricing, our platform is enabling us on the spot business side to be able to onboard more business and be able to react more quickly to the environment. On the cost management side, we've made great progress in our linehaul technology platform and how we optimize linehaul runs similarly on the pickup and delivery platform for both our planners and dispatchers. And then finally, for dock efficiency, our solutions with the smart labor platform enable us to improve how we operate our dock ships and make them commensurate with the volume we are getting. So great progress across the board with our tech.

Our next question comes from Brandon Oglenski with Barclays.

That may be helpful. We're trying to understand the impact of allocation on adjusted EBITDA. Could you provide us with comparable margins between 2021 and 2022 for the LTL network?

Brandon, you're coming in very choppy. We couldn't hear you well. But let me try to ask your question, that you're asking about the baseline of 2021, 2022 and how corporate expenses are layering and moving forward as well?

Yes. I think, Brandon, as you look, we did include in the investor presentation, a pretty detailed historical reconciliation on Page 27, specifically for the LTL segment that kind of walks the differences on a year-over-year basis and by quarter for all of '22 as well as full year '21.

Yes, I believe you mentioned that LTL adjusted EBITDA is down slightly for the first quarter, is that correct?

That's correct. For LTL EBITDA, we expect it to either be down slightly or up slightly, depending on the demand environment in the month of March.

Our next question comes from Scott Group with Wolfe Research.

So considering the newly adjusted operating ratio of 89% for the first quarter last year, what are your thoughts on the operating ratio for this first quarter? Additionally, do you have any insights on the full year operating ratio for LTL?

Yes. I'll start with the full year. Last year's operating ratio was 83.9%, but when you factor in corporate allocations and the removal of pension income, it would have been about 86%. For 2023, we aren't providing full year guidance due to current conditions, but we believe there's a potential for improvement in operating ratio this year, depending on the macroeconomic environment. We're cautiously optimistic about demand, with increased volume and stronger customer demand relative to seasonality. Customers are expressing optimism as we approach spring and the latter half of the year, but we are monitoring the macro situation closely. Regarding demand, the retail segment experienced sequential declines in the fourth quarter, but we anticipate more normal buying patterns in 2023 as retailers work through their inventories. In the industrial segment, although there's short-term softness, areas like automotive and machinery are showing signs of strength for a robust 2023. The future performance of operating ratio will depend on the evolving environment throughout the year. We are also implementing company-specific initiatives to manage costs, which will influence the operating ratio for 2023. While we see a potential for improvement in 2023, these various variables will ultimately determine the outcome. For the first quarter, we expect the operating ratio to perform better than the typical seasonal decline we usually see from the fourth quarter to the first; typically, we observe a 50-basis points drop from Q4 to Q1, but we expect to exceed that.

I think there's some confusion because of the new numbers, so we’re not quite sure about the seasonality. Just to clarify, with the new methodology, you reported a 90.3% operating ratio in Q4 and 83.9% in Q1 of '22. You're indicating that typically there's a 50 basis points decline from Q4 to Q1, but it might be better than that this time?

Correct. And on the high end of the range, if you think of an EBITDA improvement for the first quarter, that would be an operating ratio improvement for the quarter.

OR improvement sequentially or year-over-year?

Year-over-year, on the low end of the range in terms of EBITDA being slightly down, that would be a year-on-year deterioration but better than seasonality on the high end of the range where EBITDA improved slightly in the first quarter, that would be an OR improvement on a year-on-year basis.

Okay. Looking at the bigger picture, it seems like you're significantly outperforming others in terms of tonnage, but falling short in yield. It appears that you might be sacrificing some pricing to achieve higher volume. Is that the case based on the model?

No, we're not sacrificing price to buy volume with price. There were a few dynamics in the fourth quarter that impacted us. The first one, Scott, is that we were lapping an early GRI we took in Q4 of last year, while this year, we took that in the month of January, which is usually our customary timeline. And I mentioned the yield dynamic on the mix channel earlier on. So we onboarded those national accounts that are strategic for our network, yet the higher-yielding local accounts, again, their shipment count is up mid-single digits, so we're taking market share. However, we've seen a weight per shipment decline in that channel that caused the overall weight to be down. So that dynamic is what effectively impacted yield. And then finally, life of haul was down 1.3% for the quarter, where we onboarded more next-day and two-day lanes shipments to our network. And we also saw less outbound California freight coming through lesser imports in the fourth quarter, which has a direct correlation to yield. Now if you take a step back, our contract renewals in the quarter were up roughly 7%. That's for existing business. And we continue to see from us in the overall industry, very rational pricing in how we price the business.

Our next question comes from the line of Allison Poliniak with Wells Fargo.

Just wanted to talk about the CapEx for the year. If you can maybe break that down a little bit more. And then in terms of the new door adds, maybe talk to, I would say, relative capacity available today with how you're thinking about the investment as we go through the year in terms of discipline around that?

Thank you, Allison. In 2022, our total capital expenditures were approximately $521 million, with about 85% of that associated with the LTL business. Looking ahead to 2023, we anticipate that capital expenditures at the midpoint will increase compared to last year. I believe you should maintain the same percentage distribution between LTL and Europe in your considerations.

When we initiated the LTL 2.0 plan, our objective was to open 900 new locations, targeting areas where we anticipate customer demand. Many of the markets we are pursuing already indicate a need for capacity, and we are witnessing that demand from customers. In the next 90 days, we plan to open an additional 167 new locations in Salt Lake City, Atlanta, and Dallas, Texas. Throughout the year, we will continue to open more locations in these markets where capacity is required. For instance, Houston and Florida are both strong markets for us that require additional capacity. We are approaching the opening of these stores with discipline, and all the terminals we've opened so far have performed better than expected.

Got it. And then just a follow-up on the shipment cost inflation. Should we be assuming sort of up mid-single digit for this year? Or is it lower or higher than that? Just any color.

It would likely be in the mid-single digit range, but this will depend on our truckload operations since approximately a quarter of our linehaul miles are outsourced. The truckload rates for the rest of the year will play a significant role. We anticipate a favorable impact in the first half of the year, but the situation will depend on demand conditions in the latter half and how that affects our operations. Regarding weight, we expect it to be below mid-single digits, but still within that range.

Our next question comes from the line of Tom Wadewitz with UBS.

Mario, I understand you have some questions regarding pricing. Can you provide more insight into the overall strategy and the type of freight you're looking to bring on? What is the balance between focusing on pricing and tonnage, and how does that align with your goals for pricing mix and the importance of tonnage?

Sure. So first, starting with the type of freight that we look for. We look for freight that can build density in our network. So effectively, these are 48x48 skids that fit well in an LTL network, typically going dock-to-dock in terms of B2B-type shipments is the primary type of freight that we're going after. We also look to go after freight that creates density around our terminals. So we think about pickups that are in proximity to our terminals is another way we think about the quality of the freight and how it relates to our network as well. Now in terms of channel mix, we are looking to build density, both international channel and the local channel. As I mentioned earlier, in the local channel, we're making great strides and onboarding new customers. This year, we ended the year with 27,000 customers, which was up 2,000 from our prior number of 25,000 customers, and a lot of these were new local accounts we are onboarding. And with having that success in sales, it's driven by two main areas of focus. One, our service is up and to the right, and we're hearing great feedback from customers on the quality of service; and two, is the investments we are making in capacity to be able to handle that business. And we want to grow in both of these channels with the type of freight and the type of profile I just mentioned.

I wonder if the primary factor behind the slower growth in revenue per hundredweight compared to competitors is the focus on or the increased growth from national accounts. Looking ahead, do you anticipate that your revenue per hundredweight will increase slightly, or do you think it will stay in the low single digits due to the mix effect with the national account volume?

So Tom, it's a combination of various factors I mentioned earlier. The mix of channels is one aspect, and while the local weight is down, shipments are increasing, which will be beneficial. Additionally, our GRI and length of haul also play a role. Many of these factors are expected to improve as freight demand recovers throughout 2023. Regarding the local channel, as shipments rise with the recovery, we anticipate an increase in shipment weight and overall tonnage in that channel, which will positively impact yield. For our national accounts, we view these as long-term strategic relationships. For instance, our top ten customers have an average relationship of 60 years. We’ll be refining our business interactions with them over time. Overall, we expect yield to stay positive and believe our strategy will yield benefits as the market and freight environment strengthen. We are confident in our positioning.

Our next question comes from the line of Ken Hoexter with Bank of America.

I'll just throw it out there. I think a lot of discussion here. I think I've rebuilt this model four times this year alone and it sounds like with another reallocation and other ones coming next year. So looking forward to the consistency, they're going forward. But just the base level understand this, you're now at a 90% OR in the fourth quarter at LTL, I think full year just about 87%. You were at, what, 93% at Con-way before you bought it and you're talking about another 600 basis points in a few years. Maybe talk about how you get there? And it sounds like the strategy is shifting a little bit to now re-adding national accounts, which I know you've talked a little bit about, but it sounded like that was a key move to get away from because that was a key driver of improving OR. So maybe to start with that. And then, Carl, just a clarification on EBITDA. I know you've included in the adjustments to the $20 million and $15 million on OR. But did you leave the $15 million out of EBITDA? Is that the way we should think about that to get to that $185 million?

Yes. On the $20 million, I kind of walked you through that, Ken. On the $15 million, I guess, I'm not understanding the question.

To arrive at the adjusted operating income, you need to subtract the $20 million and then add back the $15 million from pension income. However, for EBITDA, you only subtract the $20 million in corporate costs.

No, as we move forward, we'll exclude pension from income. However, overall EBITDA does include pension income. As we mentioned in our planning assumptions, we indicated that pension income is expected to be around $20 million for the entire year of 2023.

Ken, regarding your question about the operating ratio definition, we ended last year with an operating ratio of 83.9%. Con-way had multiple lines of business and a corporate structure, including warehousing, truckload, and LTL. We haven't changed that definition since we acquired the business in 2015, and based on that reporting, the operating ratio was 83.9% at the end of 2022. Moving forward, as we transition to a stand-alone LTL company, we are reallocating the corporate costs into LTL. As mentioned earlier, there are unallocated costs of $5 million to $10 million in the third quarter that will decrease as we streamline the corporate structure. This is where the new definition will come into effect. With the new definition in 2022, the operating ratio improved to 86.8%. Looking ahead, I expect it to improve by at least 600 basis points by the time we reach 2027.

Okay. Great. I appreciate it. I guess, maybe kind of going back to an earlier line of questioning on just sort of the network and network investments. I mean, Mario, when I kind of think about the last three years, your EBIT and LTL is up 25% or so. Your peers in LTL are up on average about 200% over that time frame. So I guess, conceptually and strategically, why does the network deserve to be able to invest more capital into expansion when you haven't sort of been able to justify the capital that's already in place? I would think the idea would be to really improve the performance of the existing network, improve price, improve lane balance. Why are we adding capacity when we're not getting an appropriate return on the capacity already in place?

Yes, Jack, it's Carl. From a return on invested capital perspective, we are actually achieving a substantial return. It's likely around 34% regarding return on investment capital. Thus, reinvesting in the network is clearly a significant advantage in relation to the benefits from those investments.

Yes. When we look overall I mean and we discussed this quite a bit Jack in the past. A lot of it went back to capacity we had into the network. So on pre-COVID all the way through end of 2021, the amount of capital we invested into the business was based on a maintenance amount of CapEx to refresh equipment but not to add capacity so we can handle more volume. And obviously, we have discussed quite a bit what happened back in 2021. And these were the dynamics. Now moving forward, we're solving for all of these things. So we are investing capital in capacity so we can say yes more often to the customer and ahead of demand. We are very focused on continuous improvements in service to be best in class in the service we offer our customers. And these over time, will pay dividends both in terms of margin expansion and higher returns through our plans to 2027.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Harik for any final comments.

Thank you, everyone, for joining us this morning, and I'm proud that we delivered solid results across the business, and I want to thank our 38,000 team members not just for the progress we've made, but also for the momentum they've created. In North America, this will be our first full year as a pure-play LTL carrier, and we have a strong organization who's bringing high energy to all three parts of our growth strategy, investing in network capacity ahead of demand, providing best-in-class service to earn market share and optimizing pricing and operations through our technology. We're confident that we'll make more progress this year with all three of these objectives, and we look forward to seeing you at the upcoming conferences. Operator, please close the line.

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