XPO, Inc. Q3 FY2024 Earnings Call

Welcome to the XPO Third Quarter 2024 Earnings Conference Call and Webcast. My name is Paul, and I will be your operator for today's call. Please note that this conference is being recorded. Before we begin, I would like to share 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 make some forward-looking statements that involve various risks and uncertainties, which could lead to actual outcomes differing significantly from those anticipated. A discussion of these factors is available in the company's SEC filings and in its earnings release. The forward-looking statements made in the earnings release or during this call are only valid as of today, and the company has no obligation to update them unless legally required. Additionally, the company may refer to certain non-GAAP financial measures during this call, with reconciliations to the closest GAAP measures included in the earnings release and related financial tables on the company's website. You can find a copy of the earnings release with further important details about 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 XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone. Thanks for joining our call. I'm here in Greenwich with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. This morning, we reported strong third quarter results and a soft backdrop for freight transportation with above-market earnings growth and margin expansion. Company-wide, we grew revenue year-over-year by 4% to $2.1 billion, and we achieved significant operating leverage on that growth, delivering a 20% increase in adjusted EBITDA to $333 million. Our adjusted diluted EPS was $1.02, which is a 16% increase from a year ago. The standout result of the quarter was strong margin expansion with a year-over-year improvement in LTL adjusted operating ratio of 200 basis points. This improvement was at the high end of our target range. What drives our results are the four levers of our strategy: service quality, yield growth, investments in the network and cost efficiency. These levers are closely aligned, and each one has a distinct role in driving outperformance. I'll start with service quality. We delivered a damage claims ratio of 0.2%, which is an improvement from 0.4% last year. Importantly, damage frequency continued to improve each month in the quarter to record levels. We also improved our on-time performance year-over-year for the 10th consecutive quarter. The speed and reliability of our network are the primary reasons why our customers trust us with their freight, and they experience these benefits on a daily basis. Our second lever is the targeted investments we're making in capacity ahead of the strong demand we anticipate in a freight market recovery. These ongoing investments are designed to deliver world-class service at every stage of the freight market cycle. Over the past three years, we've added nearly 15,000 trailers and more than 4,000 tractors to our fleet. We're using our rolling stock to accelerate our linehaul in-sourcing with a broad benefit to service across our network. In addition, we've now opened up 21 of the 28 service centers we acquired last December, and we expect to open the last seven sites by early next year. This is on track with our plan. The majority of these sites are in markets where we want to build density and leverage our existing teams. Each new service center helps our network operate more efficiently. When they're all online, we'll have roughly 30% excess door capacity in the network. Strategically, this positions us to capitalize quickly in an upcycle, driving substantial operating leverage and profitable market share gains. Yield is our third lever and the primary driver of our margin improvement. We've been reporting above-market yield growth throughout this year, as we align our pricing with the value we deliver. In the third quarter, we grew yield excluding fuel by 6.7% year-over-year. This underpinned the 200 basis points of OR improvement we reported. We achieved this by executing on multiple initiatives that are yield and margin-accretive. With our customers under contract, we increased renewal pricing by high-single digits year-over-year for the fifth consecutive quarter, supported by the service improvements we're making. And we're earning more market share from local customers due to the investments we made in our sales force. In the third quarter, we increased shipments from local customers by over 10% compared with a year ago. Our new premium services are another benefit to yield. We've continued to increase our revenue mix from high-margin accessorial services, and we expect this revenue stream to grow substantially over time. The final lever of our strategy is cost efficiency, where we have three areas of focus: purchased transportation, variable costs, and overhead. In the third quarter, we reduced our purchased transportation costs by 40% year-over-year, primarily driven by our linehaul insourcing initiative. We ended the quarter with 13.6% of linehaul miles outsourced to third parties, which was a reduction of nearly 800 basis points year-over-year. This is the lowest level of outsourcing in our company's history, and we are on track to meet our 2027 target by year-end 2024, three years ahead of plan. We now expect our outsourced miles to be below 10% next year. And to support this trajectory, we're deploying more driver teams and sleeper cab trucks for long-distance linehaul runs. We are continuing to manage labor costs effectively using our proprietary technology. We can realign labor hours quickly to address changes in volume and do that at the service center levels. Turning to Europe, where transportation remains soft in most countries, we continue to outperform the industry. On a year-over-year basis, we increased third quarter segment revenue by 7%. It was our strongest quarterly revenue growth since 2021 with volume accelerating for the fifth consecutive quarter. The strongest revenue performance was in the U.K., where our year-over-year organic revenue growth was up mid-teens. Importantly, our sales pipeline in Europe is growing at near-record levels as we close new business and replenish new leads. This should support ongoing above-market growth across our key geographies. In summary, the strong third quarter we delivered highlights the effectiveness of our strategy and our company-specific initiatives regardless of the macro. The world-class service we provide is within our control. It creates value for our customers and enables us to outpace the industry with yield growth and margin expansion. In addition, we've made significant progress in becoming more cost-efficient with our operations. Even in the current environment, our strategy is driving robust financial and operational results, and our investments in capacity will accelerate those results when the freight market rebounds. We have a long runway for additional market share and earnings growth, and we're well-positioned to capture that opportunity. Now, I'm going to hand the call over to Kyle to discuss the financial results. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet, and liquidity. We reported a strong third quarter across the company with revenue up 4% year-over-year to $2.1 billion. This includes top line growth of 2% in our LTL segment. Excluding fuel, our LTL revenue was up 5% year-over-year. On the cost side in LTL, we made another significant reduction in purchased transportation. Our expense for third-party carriers was down year-over-year by 40%, largely due to insourcing more of our linehaul runs. This equated to a savings of $39 million in the quarter. We continue to manage labor effectively, with hours per shipment improving by 1% sequentially. This helped to mitigate the year-over-year increase in total salary, wages, and benefits of 4%, primarily due to inflation. Additionally, we were more cost-efficient with fleet maintenance, which brought down our cost per mile by 12% year-over-year. Depreciation expense increased by 21% or $14 million, reflecting the investments we're making in the business. This continues to be our top priority for capital allocation in LTL. Next, I'll cover adjusted EBITDA, starting with the company as a whole. We generated adjusted EBITDA of $333 million in the quarter, up 20% from a year ago. Our adjusted EBITDA margin of 16.2% was a year-over-year improvement of 220 basis points. Looking at just the LTL segment, we grew adjusted EBITDA by 18% to $284 million, underpinned by an increase of approximately 17% in adjusted operating income. In our European Transportation segment, adjusted EBITDA was unchanged from a year ago at $44 million. Our corporate adjusted EBITDA was $5 million compared to a loss of $7 million a year ago. Excluding a $9 million gain from a past investment in a private company, which was sold in the quarter, corporate adjusted EBITDA was a loss of approximately $4 million. Returning to the company as a whole, we reported third quarter operating income of $176 million, up 14% year-over-year. We grew net income from continuing operations by approximately 11% to $95 million, representing diluted earnings per share of $0.79. On an adjusted basis, diluted EPS increased by 16% year-over-year to $1.02. Lastly, we generated $264 million of cash flow from operating activities in the quarter and deployed $123 million of net CapEx. Moving to the balance sheet, we ended the quarter with $378 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $934 million of liquidity. We had no borrowings outstanding under our ABL facility at quarter-end. Our net debt leverage ratio at the end of the quarter was 2.5 times trailing 12 months adjusted EBITDA. This was an improvement from 2.7 times at the end of the second quarter and 3 times at the end of last year. We'll continue to make investments that enhance our earnings growth trajectory and support our long-term goal of an investment-grade profile. Now before I wrap up, I want to highlight some updates to our full year 2024 planning assumptions. We now expect interest expense will be in the range of $225 million to $230 million. We're narrowing our expected adjusted effective tax rate to the range of 24% to 25% for the full year. We expect diluted share count to be 120 million shares. Our other planning assumptions this year remain unchanged. Now, I'll turn it over to Ali, who will cover operating results.

Thank you, Kyle. I'll start with LTL, where we executed well in a soft freight market to deliver another quarter of margin improvement and earnings growth. On a year-over-year basis, our third quarter shipments per day were down by 3.2% overall, but they were up in our local channel by double digits, accelerating from the second quarter. Local accounts are a key part of our strategy and an opportunity to earn market share at a favorable margin. Our weight per shipment continued to moderate this quarter and was down 0.7%. Collectively, these dynamics resulted in a 3.9% decline in tonnage per day, which largely tracks the seasonality and outperformed the industry as a whole. On a monthly basis, our July tonnage per day was down 0.8%, August was down 4.7%, and September was down 6.1%. Looking just at shipments per day, July was up 0.1%, August was down 4.6%, and September was down 4.9%. For October, we estimate that tonnage will be down 8% from the prior year, tracking roughly in line with seasonality, excluding the impact of a cyberattack at a peer last year. Our pricing trends remain strong as customers continue to recognize the value of our service quality and premium offerings. This enabled us to deliver another quarter of above-market pricing growth. On a year-over-year basis, we grew yield ex fuel by 6.7% and revenue per shipment by 6.6%. Importantly, both yields and revenue per shipment increased sequentially from the second quarter this year and also on a two-year stack basis. We expect these trends to continue for the fourth quarter, reflecting ongoing momentum with our pricing initiatives. Turning to margin, we improved our third quarter adjusted operating ratio by 200 basis points year-over-year to 84.2%. Sequentially, our adjusted OR increased by 100 basis points, coming in at the top of our guided range. Our robust margin performance was primarily driven by yield growth and bolstered by our cost initiatives and productivity gains. We've now delivered significant year-over-year OR improvement for four consecutive quarters, all in a historically soft freight environment. It's notable that we were the only public LTL carrier to expand margin in the third quarter. Our full year outlook is for an adjusted OR improvement of 150 to 250 basis points, and we expect to be at or above the high end of that range. Moving to the European business, we executed well in the quarter to outperform the industry in a challenging market for freight transportation. Our pricing outpaced inflation, and we managed cost to mitigate the impact on earnings. Third quarter adjusted EBITDA for the segment was flat compared with last year, and we generated double-digit growth in the U.K., which is a key market for us. The improvements we've made in the business will accelerate results in Europe when the macro recovers. I'll close with a summary of the major drivers behind the record margins we're reporting in the trough of the freight cycle. We're making significant progress with service quality, and we expect this to propel margin expansion for years to come. Our pricing is outpacing the market and continues to gain traction. We believe we're just beginning to capture the massive yield opportunity ahead of us. We're operating far more productively by reducing third-party linehaul miles to historic lows and effectively managing our variable costs. These initiatives are all in the early innings with strong momentum, and their impact will accelerate when demand begins to recover. Now, we'll take your questions. Operator, please open the line for Q&A.

Our first question is from Ken Hoexter with Bank of America. Please go ahead with your question.

Hi, great. Good morning and nice job on the continued margin improvement. So Mario, sticking on that, where is the pricing gap now versus the margin as you think about the path you started on with Network 2.0, I guess, ultimately the margin potential? And then thinking about the volumes down 8% in October, if you normalize for SDs, how is the underlying market progressing there?

Thanks, Ken. To start, we initially had a mid-teens pricing gap between our offerings and the best-in-class in terms of pricing opportunity. This year, we’ve managed to improve that gap by a few points due to our better yield performance compared to the market. This improvement stems from our service product significantly enhancing, receiving commendations from customers who recognize our investments in the network and premium rolling stock. We’re also benefiting from the high-yielding premium services we’ve recently introduced, launching about half a dozen expanded or new premium services that generate higher revenue. Additionally, our local account segment grew over 10% in shipment count during the third quarter, contributing to higher yields and margin. Going forward, we anticipate that roughly half of the pricing gap will be filled by premium service pricing, while the other half will come from accessorial revenue from these services and local accounts. Regarding volume trends, in the third quarter, August was particularly below seasonal norms, while September saw a decline of about 6.1%, a point below seasonal expectations. October is showing a decline of roughly 8%, which aligns with seasonality, and we're observing demand beginning to normalize this month. Part of the year-on-year difference is due to a cyberattack that impacted one of our peers, which we estimate affected our year-on-year comparison by about 2 points when looking at October of this year versus last year.

Great. Thank you.

Our next question is from Scott Group with Wolfe Research. Please proceed with your question.

Hi, thanks. Good morning. So Mario, with tonnage down a lot, is it limiting the pricing upside in the near term? I don't know, maybe talk about pricing renewals. And then Ali, if I just take the implied fourth quarter guide, it doesn't imply a lot of year-over-year margin improvement. I know it's early, but any early thoughts on how to think about LTL margin improvement in '25?

Yes, I'll start on the overall pricing environment, Scott, and I'll turn it over to Kyle to discuss contract renewal and Ali can discuss our outlook. If you look at pricing overall, we continue to see a very constructive pricing environment out there. A year ago, a significant amount of capacity exited the market, and we continue to see that industry pricing backdrop be constructive. You heard our peers report here last week and this week, and all the commentary leans toward a strong pricing environment. Typically in our industry, we typically price 100 to 200 basis points ahead of cost inflation, and we're seeing that play out here. We are outperforming on the pricing side, given what I mentioned earlier on. So from one perspective, we are being rewarded for the better service product from our customers, but we also have avenues in terms of local accounts generating higher-yielding and higher-margin freight and incremental accessorial revenue coming from the incremental services that we are launching. So it's a win-win, where the customer gets a new service from us, they get to experience the great service, and we get the yield benefit from that as well. In the third quarter, we were able to deliver a great yield outcome, accelerating on a quarter-over-quarter basis and accelerating on a two-year stack basis. The absolute number for revenue per shipment is up; the yield for 100 weight is up. So all of these KPIs are moving in the right direction for us here as we go toward the back half of the year.

And Scott, when you think about renewals, our renewals were up high-single digits in Q3, another strong performance driven by a lot of our service improvements. It's important to note this is our fifth consecutive quarter to be in that range. It's flowing through, so we're seeing revenue per shipment in the quarter up 6.6%. That's our seventh consecutive quarter of sequential growth, and we're confident in our ability to deliver strong above-market renewals, both in Q4 and next year.

And Scott, just on the OR side, we do expect a strong quarter here in the fourth quarter driven by continued strength in yield and cost management. Typically, Q4 is a more volatile quarter, giving a wider range of outcomes, and volume trends can be impacted by the holidays and weather. However, if you take a step back and look at the five-year average for the sequential OR change from Q3 to Q4, it's been in that 250 basis points range, and we would expect to do better than that normal seasonal trend as we roll into the fourth quarter. Importantly, when you roll that into the full year for 2024, we expect to now be at or above the high end of our 150 to 250 basis points OR improvement range, which is strong performance at the trough of the cycle.

Our next question is from Daniel Imbro with Stephens, Inc. Please proceed with your question.

Hi, guys. Thanks for taking the question. This is Reed Seay on for Daniel. Mario, services remained pretty solid. I think you held on to the gains in the Mastio survey this year. Other than in-sourcing linehaul, can you talk about where you see some remaining opportunities for service that could potentially still be pain points for customers?

Yes. Overall, we're on a great trajectory of service improvement. If you look at our damage claims ratio here in the third quarter, we reached 0.2% damage claims. Comparatively, when we started our strategy a few years ago, we were at 1.2%. So that's a tremendous reduction of more than 80% of damages in our network, and our customers appreciate that tremendously. On-time performance has improved for 10 consecutive quarters. We receive a lot of accolades from customers on the speed and reliability of our network for picking up and delivering freight on time. Many of the initiatives we have implemented revolve around changing incentive compensation plans, launching airbags, having more capacity, having technology that enables us to track damages down to the person level, shift level, and all of that has enabled us to change how we load freight. We only see upside. I mentioned in my opening remarks, we saw every month of the quarter reach a record low for damage frequency. Our operational teams are doing an excellent job executing this plan. In terms of future initiatives, we have several measures to continue improving service. This is particularly relevant with our insourcing of third-party linehaul. When freight is moved on our equipment, we see better efficiency, which translates into improved on-time performance. Our goal is to reach a high 99% for on-time delivery when all these actions are finalized. Additionally, as we expand our network footprint in certain areas, we can build trailers directly to destination, minimizing rehandling within our network, which further enhances our damage performance. Our goal here is to decrease our damage claims ratio to 0.1% over the coming quarters and years. Overall, we have a robust plan and I'm very proud of our team's progress.

Thank you.

Our next question is from Fadi Chamoun with BMO Capital Markets. Please proceed with your question.

Thank you. Good morning. I just wanted to see if you can give us some feedback on maybe 2025, just thinking about some of these levers that you have been able to use this year from the accessorial, the local channels and ultimately what you're doing on the PT side, which seems like has a little bit more to go as we go into 2025. Your tonnage per day or overall likely flat this year. If we don't see a material kind of macro cyclical improvement over the next few quarters, what does 2025 look like? Is there more room for OR improvement without the macro environment? If you can give us any high-level way to think about 2025, that would be great.

Yes, when you look at 2025, we expect a strong year, both from an OR improvement perspective and an earnings growth perspective, even in the current soft macro environment. Any improvement in the demand backdrop will only accelerate our results even further. If you look at 2024, we expect to be at or above our guided range for OR improvement in a soft freight market. We're going to provide more details about 2025 next quarter when we close out the year. That said, we're heading into next year with another strong year of service under our belt which leads us to be able to price freight accordingly. We have plans to launch several new premium services in 2024, and our sales team and customers are very excited. This will create more momentum and allow us to convert more revenue on our trucks, coming at a higher margin. We've added more than 8,000 new local customers year-to-date, and despite shipment count being down in the low-to-mid-single-digit range, local customer shipments were up over 10%, and that will continue to accelerate into next year. The 25% growth in our local centers also gives us a longer runway to build that business into next year. Looking at linehaul insourcing, we expect to reach our 2027 targets by the end of this year regarding how many miles are outsourced to third parties. We're going to reduce that below single digits next year, which will be a cost tailwind. We've opened up 21 of the 28 service centers so far and expect the rest by the end of Q1 next year, all designed to make us more efficient and yield-accretive as we count into the future. Again, we anticipate a robust year in 2025, and we are already gearing up for the next up-cycle with numerous initiatives and investments along the way. We're excited about our future and expect to drive our OR down into the 70s and beyond.

Our next question is from Chris Wetherbee with Wells Fargo. Please proceed with your question.

Hi, thanks. Good morning, guys. Mario, I guess I wanted to pick up on that commentary, particularly around the new facilities. So I guess 21 of 28 opened at this point. I'm curious how you think about the relative profitability of the new centers. I know they're not necessarily for pure expansion. There's a lot of efficiency and density opportunities within these facilities. But how do you think about their performance relative to the core network from an OR perspective? As you think about the potential for incremental margins as you move forward, maybe in either a neutral environment to a potentially positive environment, how do those facilities play into that incremental profitability as you want to push that OR towards the 70s or better?

Yes. If you look at the service centers we opened, we opened 21 out of the 28, with eight of these being net adds. These are incremental sites we are adding to a market or are new markets we are expanding into, and 13 were relocations from a smaller to a larger location. We expect these sites to be OR-neutral in 2024, and so far this aligns with our expectations as we continue to gain operational efficiencies through these centers. Overall, our pickup and delivery efficiency have improved by low-to-mid-single digits in percentage terms, which translates into better linehaul efficiency as well. We also expect these sites to contribute to our OR by next year. For the 21 service centers we opened, we've only added 80 net heads to our staff, so gaining efficiency improvement from them. The incremental margins from these sites are expected to be above 40%, and all the sites are performing at or above our expectations so far since they've opened. As we implement these efficiencies, we're positioned well to benefit from increased volumes when demand rises again. Current LTL demand is down significantly, and as this improves, we are in an optimal position to leverage that increased capacity and get more freight at high margins.

Thank you. Our next question is from Jon Chappell with Evercore ISI. Please proceed with your question.

Thank you. Good morning. I want to focus on the trends in revenue per shipment. Not only did they increase sequentially, but the rate of improvement actually accelerated, with the largest sequential gain of over 3% in the last several quarters. I know you mentioned some of the accessorials and volume challenges as well. However, as we look ahead, do you believe much of the opportunity in this downturn has already been captured, or do you anticipate a resurgence in that area next year when the freight conditions improve?

Hi, Jonathan. When you think about the revenue per shipment opportunities, I still think there's a lot of opportunity here. I mentioned the renewals already. So renewals have been strong and continue to be strong. The other thing to think about is some of the accessorial pieces. While we've made progress, as mentioned, our goal is to reach 15% of revenue; we're currently above 10%. That represents about 5 points of pricing upside that's still in front of us. We're also expanding our services, such as the retail store rollouts and enhanced cross-border services, which are gaining traction. As those initiatives gain momentum, they will bolster our revenue further. Additionally, we're continuing to optimize our mix with local customers, and their continued growth will be a tailwind for yield. I think we are still in the early innings here with plenty of opportunities ahead.

Thank you. Our next question is from Tom Wadewitz with UBS. Please proceed with your question.

Yes, good morning. It's great to see the ongoing momentum in our pricing and margin results. I've noticed there have been several inquiries about pricing. Mario, you've been quite clear about the factors that will help us maintain this trend. Looking ahead to 2025, what do you believe is a reasonable expectation for normalized pricing? My thought is that established players might see around 4% to 5% for normal LTL pricing. I'm curious if you agree with that perspective, considering it may depend on the freight environment. Additionally, should we anticipate higher numbers based on what you've mentioned? For a typical four to five-year perspective, would you say we could expect to stay in that 6 to 7 range? I'd appreciate any additional insights you can provide regarding these figures.

Sure, Tom. As you've seen us deliver very strong yield growth over the last several quarters, and as Kyle noted, many of our yield initiatives are still in the very early innings, you think about ongoing service improvements, that's going to continue to earn us a higher price with our customers. We also expect favorable industry pricing trends to continue as well; a significant amount of capacity exited the market over the last 12 to 18 months, and our expectation is that we'll continue to outperform the industry from a pricing standpoint. We have many pricing initiatives we're executing on, and we would expect that momentum to continue into the fourth quarter and into 2025.

To add to that, Tom, I think you have made a reasonable assumption when looking at the market; we expect to continue outperforming in pricing into '25 and beyond. Typically, in LTL we are priced about 100 to 200 basis points above cost inflation, and adding on top of that roughly a point from accessorial revenue and half a point from the local account mix gives us the incremental, effectively, outperformance versus market. We see this pattern playing out in '24, and we expect it to continue in '25 and '26. The actual numbers will depend on the macro, but we can see pricing being higher than the numbers you provided depending on that recovery.

So do you agree with the characterization on the market that kind of normal market might be 4 to 5, especially if you look at the better players in LTL?

That looks like a reasonable assumption for next year.

Okay. Great. Thanks for the time. Our next question is from Brian Ossenbeck with JPMorgan. Please proceed with your question.

Hi, good morning. Thanks for taking the question. So just a quick follow-up first on October. Obviously, the hurricane impacted a lot of the freight markets in the quarter, but maybe all the way through the month. Just wanted to see if there's any weakness from that, maybe you're seeing it down 8%. Now you called out the cyberattack as part of the noise there. And then just, Mario, I think it would be helpful going into the fourth quarter and this next year if you can just give us a sense of some of the customer conversations you're getting in terms of the different types of customers, local, national, and then also across the industrial and retail end-markets as you look into the end of this year and next year?

Yes. As you mentioned, Brian, in October we experienced the effects of last year's cyberattack affecting one of our competitors. The second half of the month showed significant improvement compared to the first half, which was influenced by the cyberattack. We previously stated that the impact from last October's attack resulted in approximately a thousand fewer shipments per day when averaged over the month, translating to around a 2% decrease in tonnage. When adjusting for that, we need to remove it from the reported 8% decline. We also faced disruptions from a hurricane at the end of September and the start of October, which affected shipping capabilities in certain regions for a few weeks. Fortunately, we resumed operations quickly, and I commend the team's efforts; all employees remained safe. Demand trends from customers have been weaker than usual. In August, demand was a few points below seasonal averages compared to July, while September saw a decrease of roughly 6.1%, just below the seasonal expectations. In October, we experienced an 8% decline, which aligns with seasonal trends. The industrial sector has been more adversely affected than retail, with industrial shipments declining at twice the rate of retail throughout the quarter. The ISM index during this quarter was around 46 to 47, signaling a slowdown from earlier in the year. However, from my discussions with customers in the field, certain areas of the industrial economy, like electrical equipment manufacturing and machinery, have a more optimistic outlook. On the other hand, construction and agriculture are experiencing weaker demand. In retail, while demand is still down, it is not as severe as in the industrial sector, with inventories mostly back to normal and consumer spending remaining stable. Regarding our customer segments, we are pleased with our growth in the local market. Our local sales team has performed admirably, acquiring over 8,000 new customers and increasing shipment volumes by over 10%. Looking ahead, it is difficult to forecast how the remainder of Q4 and early next year will unfold, but there is potential for positive change if rates keep declining and the uncertainties surrounding the election are resolved.

Okay. Thank you, Mario.

Our next question is from Scott Schneeberger with Oppenheimer & Company. Please proceed with your question.

Thanks very much. Mario, could you please elaborate on the half dozen premium services you rolled out? Are there more to come and maybe a little anecdote about what you've done there so far? And just on top of that, how is the investment in the sales force? Is that something that you're continuing to build or is that at a pause right here? Thanks.

Yes. Starting with the premium services, I'll give you a few examples, Scott. In retail, we launched a new service called retail store rollouts. Imagine a consumer packaged goods company wanting to deliver products to stores simultaneously for an event. We have a dedicated service desk that assists with these projects. We also introduced Retail Solutions or Must Arrive By Date. This caters to suppliers needing to meet tight delivery windows to avoid charge-backs. Considering our service improvements, we can effectively track freight to ensure timely delivery at large retail destinations. We also opened a service center in Las Vegas, one of the largest in the city, which is integral for trade shows, offering five days of free storage and coordinated delivery to and from the show floor. Lastly, expanding our services to Mexico, we've added more border locations and expanded reach, benefiting our customers there. We are looking to launch additional services, like expedited services within our network and partial trailer services for high-value products. As for the local sales force, we aimed to grow by 25%, and we achieved that. We're still onboarding new roles, but we will define next year whether further expansion is needed. For now, we're satisfied with our local sales force size.

Thank you.

Our next question is from Bruce Chan with Stifel. Please proceed with your question.

Hi, good morning, gents. Thanks for the question. Kyle, you talked about your top priority for capital allocation here. I'm wondering if you think about the potential for a sale of the European business, how would that maybe alter those priorities and what would be the planned use of those proceeds? And if you have any update on that process, that would be great.

Sure. When you think about it, we prioritize reinvestment in the business as our top goal. Achieving an investment-grade profile is also pivotal. A European transaction could help us achieve that faster with regards to leverage. However, we've made meaningful progress reducing leverage this year. At the end of last year, we were around 3 times, reduced to 2.7 times last quarter, and are now at 2.5 times. We're committed to pursuing an investment-grade profile for the business through both EBITDA increases and cash generation. A sale of Europe could accelerate those efforts. In terms of CapEx, for us, it's around 13.5% to 14% of our revenue for LTL this year, and we expect that to come down over the next few years as the service centers open up and the need to expand the fleet modulates, which will help us reallocate capital. Leverage is being affected by CapEx, and we could see an even better outlook from a capital allocation standpoint moving forward, regardless of whether Europe is sold.

Yes. Our strategy remains focused on becoming a North American LTL carrier over time. We're patient with the sale of Europe to ensure we get the right value for it. It's a business with high scarcity value as we are among the top LTL providers in key European markets. We're patient to extract the full value, though, as we're currently performing well in Europe, with a 7% year-over-year revenue growth this quarter, our strongest revenue growth since 2021. We're well positioned to capitalize on the opportunities in Europe while we continue talking about eventual plans to be a pure-play North American LTL carrier. Our earnings are compounding nicely, and we expect to be either at or above our guided margin improvement for the upcoming year. As our cash flow conversion improves and the substantial growth opportunities unfold, we're prepared to return that value to shareholders when the time is right.

Okay, very good. Thanks for the color, gents.

Our next question is from Ravi Shanker with Morgan Stanley. Please proceed with your question.

Thanks. Morning, guys. A two-parter on service, if I may. You mentioned at the top of the call that damage claims are getting much better at 0.2 from 0.4. Does that start to run into diminishing returns here? And also, part two, kind of on the Mastio survey; you guys made progress in the overall ranking and have held your place in the national ranking. Does it take time for that service to kind of penetrate into the national ranking, and what's your target for that ranking three years from now? Thanks.

So, Ravi, looking at damage claims, our goal is to be best-in-class when it comes to minimizing damages. Over the last few years, we reduced damage claims by more than 80%. This quarter, we reached a new company record with each month showing a lower damage frequency than the previous month. We're committed to continual improvement until we achieve best-in-class service, which in turn garners more trust from customers and allows us to charge a premium for that service. Regarding the Mastio surveys, we were the most improved over a two-year period. Importantly, we measure customer satisfaction on a weekly basis, and we've seen satisfaction increase by over 40% over this period. Ultimately, customer satisfaction translates into growth in numbers, yield, and margin, all of which derive from improved service delivery.

Our next question is from Jason Seidl with TD Cowen. Please proceed with your question.

Thank you, operator. Hi, Mario and team. Good morning. Really nice job in the operational improvements in the quarter. I wanted to ask a question. Some of your peers have talked about freight continuing to shift to truckload with the weakness in the truckload marketplace with that multi-stop LTL or LTL consolidation, whatever you like to call it. I guess, two parts: one, are you guys still seeing a lot of that out there? And two, how quickly do you think that could jump back to the LTL market in '25, once the TL market recovers?

First, Jason, difficult to quantify how much freight has shifted to truckload with consolidation; that's not something we typically analyze closely. Customers utilizing TMS systems usually make comparisons between service requirements and rates for truckload versus LTL. Customers adapt swiftly based on market conditions. However, should truckload rates increase, it's reasonable to expect that freight will revert to LTL. About 0.5% of our shipments involve heavy weight over 15,000 pounds which impacts this shift minimally; under current conditions, we feel confident there will be a shift back to LTL when truckload rates increase.

Our next question is from Stephanie Moore with Jefferies. Please proceed with your question.

Hi, good morning. Thank you. Maybe sticking on some of these last couple of questions on the service side. Can you talk a bit about your level of confidence in keeping these strong service levels even in an upswing as the environment tightens?

Absolutely, Stephanie. All these service improvements are driven by our actions, not merely due to reduced volumes. We've made foundational changes focused on service delivery by adjusting incentive compensation plans and introducing technology for damage tracking. Our teams in the field have done a fantastic job with these implementations. In fact, when Yellow went bankrupt, we experienced a higher than seasonal increase in shipment count from Q2 to Q3 last year. In challenging conditions, we improved service metrics, including damages and on-time performance. We've added substantial capacity to our network, expecting to exceed 30% excess capacity by Q1, positioning us effectively to manage growing consumer demand.

Our next question is from Ari Rosa with Citi. Please proceed with your question.

Hi, good morning. Congrats here on the strong results, guys. So Mario, I wanted to stay on that line of thinking. Talking about the 30% excess capacity, it seems like a lot of your peers also are sitting on quite a bit of excess capacity. From an industry structure perspective, what gives you confidence? If the market doesn't tighten, how long are you willing to sit on that excess capacity? What gives you confidence that some of your peers don’t also start to kind of chase volume by cutting rates? Is there any risk of that or what gives you confidence that doesn't start to happen?

Thanks, Ari. I don't foresee a risk in that due to the fact that real estate as a cost in an LTL network is a small percentage of revenue. LTL carriers are unlikely to onboard freight that doesn't align with their network already, as this would hurt margins and earnings since the associated costs are minimal. If you look at industry capacity, as I previously emphasized, overall shipment count has slowed. Following Yellow's bankruptcy, nearly 10% of industry capacity was removed. In the subsequent recovery, a majority of that capacity returned, yielding us a solid position to capitalize on that growth. The recent discussions with customers indicate their main concerns center around ensuring capacity to grow together in the next upswing.

Our next question is from Jordan Alliger with Goldman Sachs. Please proceed with your question.

Yes, hi. So just a couple quick things. First, I'm just sort of curious; it's great talking about price and five points left on price, etc. I'm just curious about how the elasticity of demand works versus price. Do you find customers balking at increased pricing or do they say, your service is better, so we're going to stick with you? I'm just curious how that interplay works on elasticity. Just as a quick follow-up, I know you mentioned October was about in line with normal seasonality. Is the expectation for November and December to also track normal seasonality, and if so, what does that mean for tonnage for the quarter?

When you evaluate our pricing strategy, it is critical to align the price with the enhanced value provided to customers. They recognize that in order for us to deliver superior service, continued investment is necessary, which comes with a premium. Higher service levels also lead to lower overall costs for them in moving their goods. Customers have responded positively in recognizing our service improvements and this translates directly to above-market contract renewals and pricing growth. The ongoing premium service expansion supports this view as well. Regarding tonnage, if you roll normal seasonality from October, you can expect a mid-single-digit decline overall for Q4.

Thank you. That is all the time we have for questions today. I would like to hand the floor back over to Mario Harik, CEO, for any closing comments.

Thank you, operator, and thanks everyone for joining us today. As you saw from our results, we are able to deliver strong margin improvement in a soft market for freight transportation. Our strategy is working, and we have the right team behind it executing on it. Our service has never been better and keeps on improving. Our yield is above market in terms of growth, and our customers are seeing those service improvements where we're launching. Our premium services are gaining momentum. Our local accounts are growing. We've added more than 8,000 local accounts year to date. On the cost side, our technology is enabling us to run the business very efficiently while insourcing linehaul at a pace of three years ahead of plan. Importantly, all the investments we're making in capacity are positioning us to do really well in the eventual freight market recovery and will drive fantastic incremental margins as we grow the business. We look forward to updating you over the next quarter. Operator, you can now end the call. Thank you.

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