XPO, Inc. Q4 FY2024 Earnings Call

Welcome to XPO Q4 2024 Earnings Conference Call and Webcast. My name is Latanya, 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 this call, the company will make 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 also may 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 the related financial tables 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 XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone. Thanks for joining our call. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. This morning, we reported a strong fourth quarter with year-over-year earnings growth and LTL margin expansion that outperformed the industry. I'm pleased with the substantial progress we've made in the trough of the freight market cycle. For the full year, we grew revenue by 4% to a record $8.1 billion company-wide. We also generated $1.3 billion of adjusted EBITDA, a 27% increase from the prior year, reflecting significant operating leverage and we delivered a 31% increase in adjusted diluted EPS at $3.83 for the year. Turning to our LTL segment. We're making great strides in executing our plan and optimizing all parts of the business. The results we've delivered so far are just the beginning of our potential. You can see that in the 260 basis point improvement in our adjusted operating ratio, which was better than our targeted range. This was underpinned by record customer service levels, which translated to profitable market share gains and above-market yield growth for the year. And we have a well-defined plan to keep driving our OR towards becoming industry best. We also seamlessly integrated 25 new service centers into our network, establishing a major competitive advantage for customer service capacity. And we operated more cost-efficiently across the board including our linehaul operations where we reduced outsourced miles to the best level in our history. Now I'll summarize the highlights of 2024 in each of these areas, starting with world-class service. This is our most important lever for growth and profitability. In the fourth quarter, we delivered a damage claims ratio of 0.2%, which is an improvement from 0.3% last year. Importantly, we reduced damage frequency each quarter to a new company record. This metric is a real-time indicator of the service quality that our customers experience. To put it in perspective, we've improved damage frequency by over 80% since 2021, and we have significant room to make further progress over time. We also improved our on-time performance year-over-year for the 11th consecutive quarter. This is a testament to the speed and reliability that our customers value in our network. Next, I want to talk about a lever that touches every part of our plan, our network investments. On the real estate side, I mentioned that we brought 25 new service centers online last year, and we'll integrate the remaining acquired sites over the next few months. When we expand our network capacity, we create more opportunity to improve service because it balances our network, adds density in strategic markets and helps us run the business more efficiently. We're also adding rolling stock to serve our customers and support our ongoing in-sourcing of linehaul transportation. Since 2021, we've produced over 15,000 trailers at our in-house manufacturing facility, and we're the only LTL carrier in North America with this capability. This is a major advantage because trailers are the backbone of efficient LTL operations. We rely on this capacity to consolidate and move freight across our network. We've also purchased nearly 5,000 tractors during the same period. We ended 2024 with an average fleet age of 4.1 years, giving us one of the youngest tractor fleets in the industry. As a result, we're operating our fleet at a lower cost per mile. Because we made strategic investments throughout 2023 and 2024, we currently have nearly 30% excess door capacity and a robust fleet in the trough of the cycle. That's a major improvement from a few years ago when our excess capacity was about half of what it is today. We're one of only a few LTL carriers in North America with this kind of capacity in hand. It allows us to respond quickly to surges in demand, and it puts us in a strong position to accelerate operating leverage and profitable growth in a freight market up cycle. Yield is another key lever for us and the most impactful metric underlying margin improvement. For the full year, we grew yield, excluding fuel, by 7.8% year-over-year, directly contributing to our 260 basis points of OR improvement. Both yield and margin are being driven by our internal initiatives and proprietary technology. Here again, we see a long runway for further gains, including a double-digit pricing opportunity in the coming years propelled by three dynamics: First, by aligning price with the service value we deliver, we've been consistently outperforming the market in yield growth, and we expect this to continue. Second, we're committed to evolving our service offering to meet our customers' needs. The premium services we introduced last year contributed to above-market yield growth and account for an increasing share of our revenue mix. And third, investments in our sales force are generating market share gains with local customers. This is a strategic lever for margin expansion. The final component of our strategy is cost efficiency with our primary focus being linehaul in-sourcing and variable costs. In 2024, we reduced our purchase transportation cost by 32%, driven by a reduction of more than 600 basis points in linehaul miles outsourced to third-parties. We accelerated this initiative in the fourth quarter when we reduced our outsourced miles to 10.7% of total miles. That's nearly 900 basis points lower than a year ago, primarily due to the expansion of our Road Flex Operation. And we expect this metric to drop into the single digits this year, which would be a new historic low. Our reduced reliance on third-party truckload carriers will help insulate our cost structure when demand returns and truckload rates rise, generating higher incremental margins versus prior up-cycles. Importantly, we're also managing our labor costs more effectively with our proprietary technology. Our systems can forecast volume trends using predictive AI, so we can quickly align labor hours at the service center level. In 2024, this resulted in consistent productivity improvements in a changing volume environment. And we expect our technology to continue to deliver incremental benefits to our cost structure as we grow. Turning to Europe, we increased full year segment revenue by 3%, which outperformed the industry in a soft macro. Our most robust performance was in the U.K., where we grew year-over-year organic revenue by double digits. In summary, we delivered our strongest year of LTL margin improvement since 2016, and we achieved that in a historically soft freight environment. We also cemented our foundation for future growth, validated the opportunity ahead of us, and positioned the business to capitalize quickly in the freight market recovery. We're now at our strongest position yet to unlock the potential within our network, and we expect to deliver significant margin expansion and earnings growth this year. Now, I'm going to hand the call over to Kyle to discuss the financial results.

Thank you, Mario, and good morning everyone. I'll take you through our fourth quarter financial results, balance sheet and liquidity, as well as our planning assumptions for 2025. We reported a strong fourth quarter, reflecting the continued execution of our plan. Our total revenue for the quarter was $1.9 billion, which is 1% lower than the prior year on a company-wide basis. In our LTL segment, revenue was down 3% year-over-year, reflecting a 23% decline in fuel surcharge revenue tied to the price of diesel. Excluding fuel, we increased segment revenue by 2%. We're continuing to realize cost efficiencies in our LTL operations, including a significant reduction in purchase transportation costs due largely to in-sourcing more linehaul miles. Our first transportation expense in the fourth quarter was 47% lower than a year ago, equating to a savings of $39 million. We also managed LTL labor effectively with hours per shipment improving year-over-year by 1%. This helped mitigate a fourth quarter increase of 3% in total salary and wage benefits, primarily due to inflation. And we've realized continued cost efficiencies in our fleet operations. With our investments in new equipment, we brought down our maintenance cost per mile by 10% year-over-year. Depreciation expense increased by 16% or $11 million, reflecting the investments we're making in the business. This continues to be a key priority for capital allocation in LTL. Next, I'll add some details to adjusted EBITDA, starting with the company as a whole. We generated adjusted EBITDA of $303 million in the quarter, an increase of 15% from a year ago. Our adjusted EBITDA margin of 15.8% shows a year-over-year improvement of 220 basis points. Looking at just the LTL segment, we grew adjusted EBITDA by 20% to $280 million. LTL adjusted EBITDA includes the impact of a $34 million real estate gain in the fourth quarter. This primarily stemmed from the planned sale of the service center in Brooklyn as we open a larger site we acquired in the same market. Excluding real estate, we grew LTL adjusted EBITDA by 6% year-over-year to $246 million. The increase is driven by yield growth and cost efficiencies, which more than offset the non-operational headwind from lower fuel surcharge revenue. In our European transportation segment, adjusted EBITDA was $27 million, and corporate adjusted EBITDA was a loss of $4 million for the quarter. Looking at the fourth quarter company-wide, we reported operating income of $148 million, up 24% year-over-year, and we grew net income from continuing operations by 31% to $76 million, representing diluted EPS from continuing operations of $0.63. On an adjusted basis, diluted EPS increased by 16% year-over-year to $0.89. Lastly, we generated $189 million of cash flow from operating activities in the quarter and deployed $108 million of net CapEx. Moving to the balance sheet, we ended the quarter with $246 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $757 million of liquidity. Our net debt leverage ratio at year-end was 2.5 times trailing 12 months adjusted EBITDA. This is an improvement from 3 times at the end of 2023. While we remain committed to investing in our long-term growth initiatives, we expect LTL CapEx to moderate as a percentage of revenue from the past two years of significant network expansion and additions to our fleet. With a lower CapEx profile and sustained earnings growth, we can generate higher levels of free cash flow, giving us greater flexibility to return capital to shareholders over time. Before I close, I'll summarize this year's planning assumptions to help you with your models. For 2025, we expect total company gross CapEx of $600 million to $700 million, interest expense of $220 million to $230 million, pension income of approximately $6 million, an adjusted effective tax rate of 24% to 25%, and a diluted share count of 120 million shares. These assumptions are included in our fourth quarter investor presentation. Now I'll turn it over to Ali, who will cover our operating results.

Thank you, Kyle. I'll start with our LTL segment, which delivered another quarter of margin improvement and earnings growth. Our results were characterized by strong underlying trends and our volume outperformed the industry as a whole. On a year-over-year basis, our shipments per day were down 4.4%, and our weight per shipment was down 1.3%, resulting in a 5.7% decline in tonnage per day. Within shipments per day, we grew volume from our local customer base year-over-year by high single digits. This is our highest margin business and an important part of our strategy. We expect to accelerate market share gains in our local channel this year. On a monthly basis, our October tonnage per day was down 8%, November was down 4.1% and December was down 4%. Looking just at shipments per day, October was down 6.5%, November was down 4.3% and December was down 2%. For January, tonnage was down 8.5% from the prior year with a 3-point impact from weather disruptions throughout the month. Excluding this impact, January tonnage per day was largely in line with seasonality. Our pricing trends remained strong throughout the quarter, reflecting our progress in aligning price with the value of our services and our growing range of premium offerings. This is one of our most promising underlying trends. This enabled us to deliver another quarter of above-market pricing growth. On a year-over-year basis, we grew fourth quarter yield excluding fuel by 6.3% and revenue per shipment by 5.8%. Importantly, we achieved sequential improvements in both yield growth and revenue per shipment from the third quarter as well as on a two-year stack basis. We've now increased revenue per shipment sequentially in every quarter for two consecutive years, and we expect to accelerate yield growth in the current quarter, reflecting the ongoing momentum of our pricing initiatives. Turning to margin, we improved our fourth quarter adjusted operating ratio by 30 basis points year-over-year to 86.2%. Over the past two years, we've improved adjusted OR by a total of 410 basis points. Sequentially, our fourth quarter adjusted OR increased by 200 basis points, outperforming normal seasonal trends. We're driving this outsized margin expansion through a combination of yield growth, cost initiatives and productivity gains all facilitated by our proprietary technology. We've now delivered year-over-year OR improvement for five consecutive quarters in a historically soft rate environment. And not only did margin come in above our target range, we were the only public LTL carrier to expand margin in 2024 in the trough of the cycle. Moving to the European business, we made meaningful gains in the quarter against the soft macro backdrop. We increased segment revenue on a year-over-year basis for the sixth consecutive quarter, supported by strong pricing. In some key geographies like the U.K., we increased adjusted EBITDA by double digits versus the prior year, reflecting disciplined cost control. And we grew our fourth quarter sales pipeline sequentially by high single digits, positioning our European business to accelerate results when the macro recovers. Before we go to Q&A, I want to summarize the key drivers behind the considerable outperformance we achieved in 2024 and how that enhances our market position. Our service quality is at record levels, and we expect our pricing initiatives to continue to drive above-market yield growth. We're just beginning to capture the massive pricing opportunity ahead of us. We're also optimizing our cost structure by reducing line-haul outsourcing to historic lows and leveraging our technology to become more productive and cost-efficient. And we remain intently focused on margin supported by our operational initiatives, investment in network capacity and compelling value proposition for customers. We've created a solid foundation for years of ongoing margin expansion with meaningful upside in a freight market recovery. Now, we'll take your questions. Operator, please open the line for Q&A.

Thank you. We will now conduct the question-and-answer session. Our first question comes from Ken Hoexter with Bank of America. Please proceed.

Great. Good morning. Great job on the continued performance. You mentioned going to single digits on the in-sourcing. Maybe can you talk about where you are in that network 2.0, right? What other opportunities you can still see to continue to improve that cost base? Ali, you mentioned still room to go? And then Mario, you've talked about the different service level improvements that lead you to get that pricing long-term. Can you talk about what you still see as the opportunity there to close that margin gap versus the industry leader that you talked about in terms of using that price and what's left on that margin gain? Thanks.

Thank you, Ken. To address the second part of your question, the opportunity we have ahead largely revolves around improving yields. When we initiated our plan in 2021, there was a 15-point yield gap between us and the best-in-class competitors. Over the past few years, we have narrowed that gap to the low-teens regarding margin or pricing opportunities. This margin potential is driven by three main factors. First, we will continue improving our services to our customers, who are eager to conduct more business with us. Approximately half of the gap we have closed is due to enhanced services over a longer timeframe, and we plan to continue bridging this gap over the next five to ten years. The second area is premium services. Last year, we introduced several premium offerings requested by our customers, like shipping to retail store rollouts and moving goods in and out of trade shows. Initially, our store revenue as a percentage of total revenue was around 10%, while top competitors were at 15%. In 2024, we made progress by gaining one point of that gap and expect to close another point over the next four years. Lastly, we have local accounts that have not been fully tapped yet, which account for about 20% of our business and generally yield higher margins. We have made significant strides in 2024 by adding over 10,000 new local accounts, thanks to hiring 25% more local centers. Overall, consider our potential for incremental yield improvement in the low-teens over the next five to ten years, exceeding market yield growth. Regarding linehaul in-sourcing, we achieved our 2027 target three years ahead of schedule, as previously stated. By the fourth quarter, we had reduced outsourced operations to 10.7%, marking nearly 900 basis points of in-sourcing year-over-year. We anticipate this figure will fall into the single-digit range by 2025. While we will continue to in-source, we expect to maintain a small percentage of our operations as outsourced in the mid-single-digit range as we approach next year’s end. Importantly, we are optimistic about the outlook here because typically, when the cycle turns, truckload rates will increase, which should positively impact our P&L and margin performance during the next up-cycle due to decreased reliance on third-party truckload options.

Great stuff. Thanks.

Our next question comes from Jon Chappell with Evercore ISI. Please proceed.

Thank you. Good morning. Ali, if I heard you correctly, you said you expect yield to accelerate in the current quarter. So I just want to be clear, that 6.3% someone pointed out to me today is probably the best pricing in any industrial company, let alone transport company in this environment. Do you expect that to be better than 6.3% in the first quarter? And if so, what does that translate to as far as sequential OR guide is concerned?

So Jon, we do expect our yield growth to accelerate here in the first quarter relative to the 6.3% growth that we delivered in the fourth quarter; we would also expect our contract renewals to accelerate as well. This is being driven by the initiatives that Mario just outlined as our service continues to improve, allowing us to earn a higher price. We're also making continued progress on improving our mix of premium services and local customers. All of that is translating to that acceleration we're seeing in the first quarter. Now in terms of OR, we expect a strong quarter from a margin performance standpoint in the first quarter. Normal seasonality for us is for OR to deteriorate about 50 basis points from the fourth quarter to the first quarter, and we expect to outperform seasonality. We also expect for OR to improve sequentially from Q4 to Q1, and that's going to be driven by the continued strength we are seeing from both the yield side and the cost side as well. Our baseline expectation is for yield to accelerate in the first quarter. However, from a volume perspective, Q1 does tend to be a tougher quarter to predict given the weather impact and also the fact that the quarter tends to be more heavily weighted toward the month of March. The magnitude of how much we improve our OR sequentially into the first quarter will ultimately depend on how tonnage plays out through the rest of the quarter. However, we do expect to outperform seasonality, even with the weather impact that we saw earlier in the quarter.

That's great. Thanks, Ali.

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

Hey, thanks. Good morning, guys. Just want to follow up there. Rather than looking sequentially, do you guys think you'll see margin improvement in the first quarter year-over-year? And then I know last year, you gave some full year guidance on the LTL operating ratio. I'm just curious if you have any thoughts in terms of how much improvement we can expect this year? Thank you.

Scott, for the first quarter, as Ali said, we typically see deterioration from Q4 to Q1 of about 50 basis points. We expect to outperform that. We expect to also see improvement on a sequential basis. Now getting on a year-on-year basis, there's a path for that, but we'll see what the rest of the quarter has in store for us as we execute in February and March. In terms of full year OR expectations, we expect to have another strong year from both an OR improvement and earnings growth perspective, despite continuing to be in a soft macro environment. Our baseline expectation is for OR to improve 150 basis points for the full year. High level, all the things I mentioned earlier on are contributors from a yield perspective. We continue to do a great job in terms of the service product being excellent for our customers and being able to get yield flow through on that. We are ramping our premium services. A lot of these things we launched through the course of the year. We are building the pipeline and converting that pipeline. Of the local channel, we have our 24-25% more local sellers fully ramped up, and we've onboarded more than 10,000 new local accounts. On the cost side, the team has been executing very well. We keep doing a great job at managing labor to the volume we're seeing in the environment. We are in-sourcing line haul faster than we've ever done before with our Road Flex operation. And ultimately, we have larger locations in many markets. We will end the quarter with 30% excess capacity, which is also going to help us. So if you look at all of these things, 150 basis points is the baseline that we expect for the improvement for the full year. And if we do see an inflection in demand and demand improves through the course of the year and we start seeing the up-cycle, there is upside to that number as well.

Appreciate it. Thank you, guys.

The next question comes from Chris Wetherbee with Wells Fargo. Please proceed.

Hi. Thanks. Good morning, guys. I wanted to pick up on the pricing. So obviously, you guys have initiatives that are driving upside relative to what we're seeing in the market. But I guess, could you maybe walk us through kind of how these conversations are going? And kind of how you think you are realizing this relative outperformance? I guess volume obviously has been on the softer side, but pricing accelerating. I guess as you break that down and think about the conversations with customers, what are the key points that are sort of allowing you to continue to outperform? And maybe how do you think about the sustainability of that through 2025?

So when you look, Chris, at the conversation with customers, not all of our pricing is coming from price increases to customers. A lot of it is coming from the mix dynamic of having more local business, and we are able to onboard that business and grow it. It's also coming from giving the customers incremental services that they are asking for. These incremental services obviously come with a cost for us but also higher yield and higher margin. They appreciate that tremendously when you think about areas like shipping into retail stores and being able to have 1,000 shipments going to multiple retailers all at the same time and meeting those expectations. All of that is really constructive for customers. And similarly, on the service product, keep in mind that we still have a big gap between us and the best-in-class provider. We are bridging that difference in that gap. So the way we think at a high level about pricing is that you want to price incrementally typically higher than cost inflation by 100 to 200 basis points, and there's always upside to that through all the things I just mentioned.

Okay. That's helpful. One quick follow-up. I think you noted first quarter tonnage being in line with normal seasonality. What do you guys see as normal seasonality for first-quarter tonnage?

So Chris, typically, what you'll see is that tonnage is about flattish sequentially from Q4 to Q1. So if you roll forward normal seasonality here, that would imply tonnage down somewhere in that mid single-digit range on a year-over-year basis. So a few points better on a year-over-year basis relative to what we saw in the month of January. As we noted earlier, March does have an outsized impact on the quarter overall, so we'll see how the rest of the quarter plays out. As normal, we'll give another update on our February volume trends in early March.

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

Hi. Yes, good morning and great to see the continued strong execution. Wanted to see if you could give a couple of thoughts on just maybe competitive dynamics in local. I guess I'm kind of thinking about what's going on with FedEx Freight, and you're going to invest in a couple of hundred salespeople. Maybe that's just been offset to a selling before. But I wonder, are you seeing other LTLs invest more in local? Is there any change in competitive dynamics? Or is that kind of a clean runway for you to keep leveraging that investment you made and continuing to see that mix improve in terms of just high single-digit growth in that area?

Well, first, starting with the spin of a competitor. I mean, they are a competitor today, they'll be a competitor tomorrow. We do believe high level being a standalone NPL carrier only reinforces the great dynamics in our industry because one of our most important scorecards as a carrier is margin improvement over time, which predominantly LTL carrier is driven by yield performance. We don't expect things to change drastically there. When you look at the competitiveness for the local business, we compete today with all the carriers out there. I would go to supervise the best service possible. I always tell the team, with a customer-loving organization, and every interaction we have with the customer, we want it to be an interaction of delight. When you think of a local mom-and-pop shop, this is what they want. They want a great relationship with their local seller. They want to make sure that we're going to go through anything we can to make sure they are getting a great experience with us, and that pays dividends over time. Similarly, we have added more salespeople to the team. It's a combination of, again, more boots on the ground, and thus, the create service product is what is enabling us to grow in that channel.

Hey, Tom, it's Kyle. So when you think about incremental margins, we would expect 2025 to be another strong year of incremental margins, comfortably above 40%. That's really where we've been tracking more recently. If you think about why we can drive that, it's really, as we've talked about earlier on the call, it's a lot of the yield strength that can contribute to the top line growth. Obviously, if you're driving top line with higher yield, that will have strong flow-through. As Mario mentioned, the yield initiatives are still in the early innings, whether it's growing local or driving more premium services with strong renewals. That will really help us drive strong incremental margins here in 2025. The other point, too, when you think about us is as the demand network recovers right now. We're in a great position to really pull in more of that volume. We're going to have up to 30% of additional capacity right now, that's really going to help us capture more of that volume. That volume, coupled with strong pricing, will help drive strong incremental margins in 2025.

Thank you. Our next question comes from Jordan Alliger with Goldman Sachs. Please proceed.

Can you provide some insights on the recent discussions around yield as we transition into this year? Are there any positive indications from ISM or customer sentiment regarding demand and potential optimism? Additionally, regarding the 150 basis points improvement in operating rate, what would be your baseline volume expectations to achieve that?

Yeah, I'll first start with the customer demand outlook and then turn it over to Kyle to discuss some of the outlook through the course of the year. But on the customer side, we are hearing more possibility from customers than we have in the past. For us, the 150 basis points does not imply a recovery through the course of 2025, but that could be potential upside. We typically survey customers on a quarterly basis, asking our top customers what they are seeing in the overall macro. The majority expect a gradual improvement in demand this year. For example, we saw a 10-point increase in the percentage of customers that expect an acceleration in demand in 2025 compared to what the survey showed three months ago. For the first half of the year, half the customers responded that they expect an acceleration in demand, while only 15% expect a deceleration. Three months ago, there was a bigger portion of flat customers, and the acceleration versus deceleration would about even. We are seeing much more optimism. We all see it in the ISM. Today, two-thirds of our customers are industrial companies, and we've seen the ISM here pop over 50 in January. Importantly, we have seen the new orders part of that ISM index reach 55, and all of these are very good leading indicators for higher industrial demand over time. We can't control the macro, but we are hearing more optimism from customers.

And Jordan, if you think about tonnage and how we think about that for 2025, our baseline expectation that we're contemplating in the OR improvement is really flattish tonnage in 2025. Any improvement in the underlying demand backdrop should be upside to that. Again, when you think about tonnage, our expectation is to outperform thinking about our service improvements, getting the damage claim to 0.2% reflects that. We're also continuing to make gains in local channels as we talked about on the call. When you think about that, coupled with the 30% excess capacity, we're in a great position to capitalize on the demand recovery when that happens. Our baseline expectation for 2025 in the outlook is a flattish tonnage expectation.

Thank you. The next question comes from Brian Ossenbeck with JPMorgan. Please proceed.

Good morning. I appreciate the opportunity to ask a question. I would like to follow up on the incremental margins. Can you give some details about the progress of the new facilities? I noticed you sold one in Brooklyn, but is that still performing well? Additionally, regarding the changes that NMSDA is implementing for class organization and categorization, I presume you are already managing many aspects of this. Given your significant involvement with SMBs, I’m curious if they are prepared for these changes. Can you explain what this means for your shipper base and whether there might be any potential disruptions or confusion?

Thanks for the question, Brian. I'll start with the latter half of the question and then turn it over to Kyle to talk about the real estate side. The changes coming in July from the NMSDA are implementing effectively changes in freight classification based on subcategories of products where density could change the class by which freight is being rated. That's a change for customers, and a lot of customers are worried about it. Overall, we analyze our shipment data, and some customers could have a slightly higher price while others might see a slightly lower price. Overall, we don't expect the change to be material in terms of how we do pricing. Our goal is to be there to support our customers through this change. We're doing outreach, communication, and training to ensure they see the impact. Today, we dimension the majority of our freight. We use a combination of overhead dimensioners and technology on handheld devices that our drivers can use to dimension freight at the dock of customers. We also obtain dimensions from customers. We work to ensure it's a smooth transition for them.

Yeah, Brian, if you think about the real estate, we had a gain driven by the Brooklyn site. We completed the sale of Brooklyn, and we opened a larger and better located facility in the same market. When you think about what that means, this was part of our overall plan when acquiring the sites at the end of 2023. A little less than half of those sites we acquired are net adds. Some are lease properties, and some will roll off, or we'll sublease at favorable terms. We're still working through a divestiture plan, and we are seeing interest from companies outside of LTL for some of the properties we are marketing.

Comes from Jason Seidl with TD Cowen. Please proceed.

Thanks, Kyle, Faghri, Mario and team. Good morning. Appreciate your time. You guys have a big focus on local customers. Maybe you could help us out with some numbers. Where do they stand when you compare them to sort of national customers in terms of profitability? And what percent of the business are they now? And where do you think you can get them to?

Good morning, Jason. This is Ali. We're looking to grow our local channel mix from roughly about 20% of revenue to 30%-plus over time, and this is both higher-yielding and higher-margin business for us. We're making a lot of good progress on this. You saw in the fourth quarter, we grew our local shipments by high single digits on a year-over-year basis. Currently, we're in the low 20% range for our mix. We've closed a few points of that gap and expect to gain a few hundred basis points each year as we move toward that 30% target over the next few years.

No, that's good color. A quick follow-up. Mario, you said the network is at 30% excess capacity currently. Given the network that you have now versus where it was before, where do you think excess capacity sort of needs to be to be at an optimal level for your operations?

Usually, as an LTL carrier, you want to be at that 30% excess capacity at the trough of the cycle because you need about mid-teens and excess capacity for fluctuations in volume between the start and end of the month or quarter. Being at 30% in the trough is a good position. When we purchased the service centers at the end of 2023, we selected locations where we historically faced capacity constraints, like Nashville, Atlanta, Columbus, and Minneapolis. These are places where we needed incremental capacity, and now we have it. Looking at the next up-cycle, we have been positioning the business effectively to capitalize on that. When considering all categories in real estate, we feel fantastic about where we are.

Great. Our next question comes from Jeffrey Kauffman with Vertical Research. Please proceed with your question.

Thank you very much. First of all, congratulations on terrific results in a difficult quarter. I want to ask about currency. This is something that's been flagged by a lot of other companies in the industry, and we think of North American LTL being kind of insulated. But can you talk about any currency impact that's affecting translation or results in the North American business, as well as the European business? How should we think about this?

Sure, Jeff. This is Ali. When you think about our European business, we did see an impact from the stronger dollar. That was a bit of a headwind for that business for the quarter as a whole. However, we still delivered growth above market in the fourth quarter, with revenue increasing for the sixth consecutive quarter. Despite the FX impact, we were able to maintain growth.

And if I could just follow up on that. Is that more of just a revenue impact? Or does that affect the operating income line as well?

It's a little bit of both, Jeff.

Thank you. At this time, I would like to turn the call back over to Mr. Mario Harik for closing comments.

Thank you, operator, and thank you, everyone, for joining us today. As you saw from our results, we delivered above-market results, and these are all direct results of our focus on execution. As we continue to invest in customer service, network expansion, and cost efficiencies, we're confident in delivering another strong performance this year. Importantly, we have a long runway to unlock many more years of margin expansion and earnings growth. On that note, operator, we can end the call.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.