Earnings Call Transcript
XPO, Inc. (XPO)
Earnings Call Transcript - XPO Q1 2024
Operator, Operator
Welcome to the XPO First Quarter 2024 Earnings Conference Call and Webcast. My name is Jessie, 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 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 or on its website. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section of the company's website. I will now turn the call over to XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.
Mario Harik, CEO
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 financial results that were well above expectations for revenue and earnings in a soft market for freight transportation. It was a strong first quarter for us company-wide, reflecting the momentum we carried into 2024. We grew revenue year-over-year by 6% to $2 billion, and we improved our adjusted EBITDA by 37% to $288 million. Adjusted diluted EPS was 45% higher year-over-year at $0.81. As you saw in our results, our LTL 2.0 plan is firing on all cylinders. I want to frame my comments this morning around the 4 pillars of our plan and the tremendous progress we're making. I'll start with the pillar that is most important to our growth and profitability, which is to provide world-class service to our customers. Our first quarter damage claims ratio continued to be among the best in the industry at a company record of 0.3%. This was an improvement from 0.7% last year and from 1.2% when we launched LTL 2.0 just over 2 years ago. The underlying driver of this improvement has been a reduction of more than 70% in damage frequency. Another key service metric is on-time performance, which has now improved on a year-over-year basis for 8 consecutive quarters. In short, we're delivering meaningful service improvements while moving more volume through our network, with a multi-year plan that balances operational excellence and investments in the network. This includes the freight airbag systems we introduced in the second half of last year. That equipment is now installed in 75% of our service centers, and we expect to complete the rollout by mid-year. The sites that have the airbags are seeing an improvement in damage frequency of greater than 20%. We've also recently updated our trailer loading procedures, which will continue to enhance our service quality over time. And as we insource more miles from third-party carriers, we expect this to further reduce damages and improve on-time performance. We've made it clear to our customers and employees that service quality is our North Star, and we're well on our way to becoming the best-in-class LTL service provider. The second pillar of LTL 2.0 is to invest in our network. Our business has historically generated a high return on invested capital. Since the launch of LTL 2.0, we've added over 12,000 trailers and 4,000 tractors to our fleet. This has allowed us to operate more efficiently and maintain strong network fluidity while insourcing more linehaul transportation. Over 2/3 of our 2024 CapEx is allocated for fleet. We added nearly 1,600 tractors in the first quarter, which brought down our average tractor age to 4.2 years from 5 years at the end of 2023. The new tractors are more efficient to operate, resulting in an improvement in our fleet maintenance costs. We also manufactured nearly 1,300 trailers in the quarter, and we recently celebrated the 30th anniversary of our production facility in Arkansas. We are the only U.S. freight transportation company to manufacture its own trailers, which puts us in a unique position to create capacity when our customers need it, and we can do it with less capital. In terms of the 28 new service centers we acquired in December, we've now opened the first 6 on schedule in April, with another 6 planned for the second quarter. This is expanding our presence in growing freight markets like Nashville, Las Vegas, and Houston. We plan to bring another dozen sites online by the end of this year and expect all 28 to be operational by early 2025. The third pillar of our plan is to drive above-market yield growth. Yield is our single biggest opportunity for margin improvement, and it's a highlight of our results this morning. We grew yield, excluding fuel, by 9.8% year-over-year, which helped us deliver nearly 400 basis points of adjusted operating ratio improvement. Even with the gains we've made, we still have a significant pricing opportunity that we can capture over time through 3 distinct levers: by improving our service, growing our accessorial business, and expanding our local customer base. As we continue to improve our service, we're able to align our price with the value we deliver. This was reflected in our contract renewal pricing, where we achieved year-over-year growth in the high single digits for the third consecutive quarter. We also captured a double-digit increase in assessorial revenue as customers took advantage of our premium services. The fourth quarter rollout of our retail store offering went well, and we're developing a pipeline of customers, specifically for this premium service. In the first quarter, we introduced another new service called Must Arrive by Date, which is already gaining strong customer traction. And we're expanding our trade show and cross-border services with the support of our new service centers in Las Vegas and Nogales, Arizona. Lastly, we're continuing to have success in growing our local customer base. From a strategic perspective, local accounts are a higher-margin business for us, and we've expanded our local sales force to double down on this opportunity. In the first quarter, we earned 10% more shipments from local customers compared to the year ago. The final pillar of LTL 2.0 is cost efficiency, specifically with purchased transportation, variable costs, and overhead. In the first quarter, we reduced our purchased transportation cost by 21% year-over-year by covering more linehaul miles in-house while also paying lower contract rates for the miles we outsource. We ended the quarter with 18% of linehaul miles outsourced to third parties, which was a reduction of 370 basis points year-over-year. That puts us at the higher end of our target range for the 200 to 400 basis points improvement this year. We expect to accelerate the number of miles we bring in-house in 2024, which will give us greater efficiency, flexibility, and quality control. This will be supported by our initiatives to add driver teams and sleeper cab trucks for long-distance hauls. We've onboarded over 100 of these teams, and we're targeting a few hundred sleeper trucks to be in operation by the end of this year. Lastly, as our volume growth continues to outpace our headcount growth, our variable labor cost creates an ongoing margin opportunity. We managed this effectively in the first quarter through the strong execution of our operational teams and our proprietary technology. Turning to Europe. Our business continued to perform well in a soft macro environment. We increased both revenue and adjusted EBITDA versus the prior year, supported by a strong pricing environment and a robust sales pipeline. Our strongest year-over-year growth rates and adjusted EBITDA were in France and the U.K., which are 2 key geographies for us. In France, the increase was in the mid-teens, and in the U.K., it was in the high single digits. Across the European business as a whole, our first quarter EBITDA was the highest it's been since the pandemic. In summary, we made significant progress in executing our strategy in the first quarter while continuing to make investments in long-term growth. Our service quality is at record levels. We're growing yield faster than the market, and we're driving cost efficiencies in areas that have the greatest impact on earnings. The initiatives we put in place are contributing to our strong operating momentum and cementing our foundation for future growth. We've come a long way on LTL 2.0, and we're still in the early stages of unlocking our full potential. Now I'm going to hand the call over to Kyle to discuss the first quarter results. Kyle, over to you.
Kyle Wismans, CFO
Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet, and liquidity. It was a strong first quarter across the board. Revenue for the total company was $2 billion, up 6% year-over-year. This includes top line growth of 9% in our LTL segment and 1% in Europe. Our LTL revenue, excluding fuel, was up a robust 12% year-over-year. On the cost side in LTL, salary, wages, and benefits were 10.5% higher in the quarter than a year ago. The increase primarily reflects weight and benefit inflation as well as incentive compensation aligned with the segment's strong first quarter performance. We mitigated these impacts by delivering our fifth straight quarterly increase in labor productivity on a year-over-year basis. Our labor hours per day increased by 3.5% in the quarter while our shipments per day increased by 4.7%. We were also more cost-efficient with purchased transportation through a combination of insourcing and rate negotiation. Our expense for third-party carriers was down year-over-year by 21%, which equates to a $21 million savings in the quarter. Depreciation expense increased by 22% year-over-year or $13 million, reflecting the investments we're making in the business. This continues to be our top priority for capital allocation in LTL. Our first quarter CapEx was primarily allocated to purchasing new tractors from the OEMs and manufacturing more trailers in-house. Next, I'll add some detail to adjusted EBITDA, starting with the company as a whole. We generated adjusted EBITDA of $288 million in the quarter, which was up 37% from a year ago. Both our North American and European segments contributed to the increase. Our adjusted EBITDA margin was 14.2%, representing a year-over-year improvement of 320 basis points company-wide. We also continued to rationalize our corporate cost structure. Our first quarter corporate net expense was $5 million for a year-over-year savings of 44%. Looking at just the LTL segment, we grew our adjusted operating income by 50% year-over-year to $175 million, and we grew adjusted EBITDA by 40% to $255 million. This reflects the combined impact of pricing gains, cost efficiencies, and an increase in volume. In our European Transportation segment, adjusted EBITDA was $38 million for the quarter, up 3% over the prior year. Company-wide, we reported operating income of $138 million for the quarter, up 138% year-over-year. And we grew net income from continuing operations by 294% to $67 million, representing diluted earnings per share of $0.56. On an adjusted basis, EPS increased by 45% year-over-year to $0.81. And lastly, we generated $145 million of cash flow from operating activities in the quarter and deployed $299 million of net CapEx. Moving to the balance sheet. We ended the quarter with $229 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $793 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 2.9x trailing 12 months adjusted EBITDA. This was an improvement from 3x at year-end 2023, and we expect to further reduce our leverage this year. The ongoing investments we're making are enhancing our earnings growth trajectory and will support our long-term goal of achieving an investment-grade profile. Now I'll turn it over to Ali, who will cover our operating results.
Ali-Ahmad Faghri, Chief Strategy Officer
Thank you, Kyle. I'll start with our LTL segment, which reported another quarter of profitable growth with strong underlying trends. On a year-over-year basis, we increased our shipments per day by 4.7% in the quarter, led by 10% growth in our local sales channel. This resulted in growth in tonnage per day of 2.6%, and our weight per shipment was down 1.9%, which was less of a decline than the prior quarter. On a year-over-year basis, this was our third consecutive quarter of improvement in weight per shipment. On a monthly basis, the trends across our operating metrics were broadly positive. Our January tonnage per day was down 1.1% year-over-year, February was up 3.5%, and March was up 5.9%. Looking just at shipments per day, January was up 1.4% year-over-year, February was up 5.8%, and March was up 7.2%. In April, our preliminary tonnage per day was up 3.1% year-over-year while our shipment count was up 4.8%. On a 2-year stack basis, April shipments per day and tonnage per day accelerated versus the month of March. We also delivered another strong quarter of yield growth. We grew yield, excluding fuel, by a robust 9.8% compared with the prior year. While our improving weight per shipment was a modest mix headwind to yield, our revenue per shipment, excluding fuel, accelerated for the third consecutive quarter to a year-over-year increase of 7.9%. Importantly, our underlying pricing trends are strong as we continue to align our pricing with the better service and value-added offerings we provide. Our contract renewal pricing was up 8% in the quarter compared with a year ago. Turning to margin. Our first quarter adjusted operating ratio was 85.7%, which was an improvement of 390 basis points year-over-year. We've now reported nearly 400 basis points of year-over-year margin expansion in each of 2 consecutive quarters, and the current quarter is tracking for an improvement at the same level or better. Our strong margin performance was primarily driven by yield growth and bolstered by our cost initiatives and productivity gains. Sequentially, our adjusted operating ratio improved by 80 basis points, which outperformed our expectations. Moving to our European business. We delivered year-over-year revenue growth despite ongoing softness in the macro environment. As with the prior quarter, our strong pricing outpaced inflation. Volume improved month by month and turned positive on a year-over-year basis in March. We also grew adjusted EBITDA versus the prior year even with fewer working days, reflecting disciplined cost control. The team continues to execute well and earn new business from high-caliber customers. This momentum is reflected in our sales pipeline, which has expanded to nearly $1.2 billion. This should continue to strengthen our position in key European geographies. I'll close with a summary of our strong start to the year, which lays the foundation for the significant margin improvement we expect in 2024. As you heard from us this morning, we're continuing to deliver record service levels, providing more value to our customers and earning higher returns. Our service improvements, combined with the momentum of our accessorials offering, drove another quarter of strong yield growth. And we realized meaningful cost efficiencies through our linehaul insourcing initiatives and labor productivity gains. In summary, our strategy is working. We're delivering strong revenue and earnings growth, and we're still in the early stages of realizing our margin expansion opportunity. Now we'll take your questions. Operator, please open the line for Q&A.
Operator, Operator
Our first question is from Ravi Shanker with Morgan Stanley.
Ravi Shanker, Analyst
So, Mario, you said that you are seeing some pretty good pricing momentum, and there's a lot more to come. How much of your order book is repriced already? And kind of what's the potential opportunity there as you kind of go through the year?
Mario Harik, CEO
Yes, Ravi, Mario. In the first quarter, our overall contract renewals increased in the high single digits. Typically, we renew about a quarter of our contracts. This positive performance was largely due to the service improvements we are offering our customers, who recognize the value of avoiding disruptions in their supply chain. They also see our investments in our network as a way to enhance service quality. This marks the third consecutive quarter of high single-digit growth for us. Since the bankruptcy of Yellow, we have another quarter to effectively renegotiate as we move forward.
Ravi Shanker, Analyst
Got it. That's helpful. And maybe as a follow-up, I think you said 2Q OR, I think year-over-year improvement is similar. Can you just unpack that a little bit more? Kind of how do we think about the evolution through the months of Q2? And kind of how much OR would improve versus seasonality?
Mario Harik, CEO
Yes, you got it, Ravi. I'll provide details on the tonnage, yield, and operating ratio outlook as we usually do. For tonnage, we saw a 3% increase in April compared to last year, with shipment counts aligning closely with those in the first quarter. We anticipate a similar level of increase in the second quarter. April's performance exceeded typical seasonality when compared to March. We will give another update on May tonnage in early June. Regarding yield, we expect year-on-year improvements consistent with first-quarter trends, and April results fell within a similar range. Revenue per shipment accelerated from the fourth quarter to the first quarter, and we expect this to further increase in the second quarter in absolute dollar terms. From an operating ratio perspective, we anticipate a strong quarter with margin improvements. We expect a sequential improvement from the first quarter to the second quarter of 200 to 250 basis points as we head into the third quarter. This positions us in the low to mid-83% range for Q2, indicating over 400 basis points of year-on-year margin improvement, which we believe will reflect very strong performance in this freight market.
Operator, Operator
Our next question is coming from the line of Ken Hoexter with Bank of America.
Ken Hoexter, Analyst
Great. That's great detail, and Mario, congrats and way to go. Just the talk about the growth of local sales and what that's meant. It seems like that had outsized growth compared to your national sales in the quarter, and it seems to be accelerating. Maybe talk about the pace that you expect that to continue because that's been an important driver for the pricing that you're talking about.
Mario Harik, CEO
Thanks, Ken. It is a big part of our strategy to grow local account business because, Ken, these are more sticky relationships we have with those customers. And they are supported with a local relationship with one of our sellers in a local market. So over the last 12 months, we increased the headcount in our local sales force by roughly around 25% over that period of time. And we're seeing great performance. Here in the first quarter, shipment count was up 10% on a year-on-year basis. Just to give you a stat there, we've added more than 3,000 new buying accounts in that channel so far year-to-date. So it is a segment of growth for us. We're investing more in it. And when customers see our focus on service and taking care of them and taking care of their freight, we're seeing very good growth associated with that.
Ken Hoexter, Analyst
Great. On the future growth, we've seen some volatility in some customers kind of taking on freight and losing it. Maybe talk about the demand environment in the backdrop here. We've had mixed signals. Our indicator seems to be improving in the backdrop. Any signs that you're seeing demand improve in the backdrop?
Mario Harik, CEO
We are seeing the freight markets continuing to be soft, Ken. The underlying demand from customers is soft. However, it's stable. It seems to be bouncing along the bottom from that perspective. Obviously, again, for us, April was better than seasonality, but a lot of that was based on our sales efforts, and our quality improvement. Our service improvements are enabling us to drive those gains. Now if you break it down between industrial and retail, you saw the ISM peak over 50 for the first time in March, but then it dropped back down to 49 here in April. So we're seeing the industrials be a bit more muted. And now when we talk about industrial customers, and we usually survey them on a quarterly basis, they do expect growth in the back half, but it seems to be muted growth. On the retail side, inventories are largely normalized at this point, and what our customers are telling us, they do expect, again, growth in the back end given the easier comps, but it's still softer consumer demand as well. So again, the market seems to be on the softer side in terms of the underlying demand. But again, for us, it's about gaining more momentum in that local account segment, and as we deliver great service numbers, our customers are rewarding us with more freight.
Operator, Operator
Our next question is coming from Daniel Imbro with Stephens.
Daniel Imbro, Analyst
I wanted to dig into the cost side in a little bit more detail. Obviously, better performance on the OR here in the first quarter. And you mentioned bringing linehaul in-house, 200 to 400 basis points this year. Where could that go in '25 and beyond? And then, Mario, on the variable cost side, what are the other levers that you and the team are targeting? So as we kind of execute on this initiative, what's the next leg of the cost takeout you see in the model?
Ali-Ahmad Faghri, Chief Strategy Officer
Sure. Sure, Daniel. So when you think about linehaul insourcing, obviously, an important strategic initiative for us here in the first quarter, we were at about 18.1% miles that were outsourced to third parties. We improved that by 370 basis points on a year-over-year basis, also improved 150 basis points quarter-over-quarter. And that was at the higher end of our full year target range of improving by 200 to 400 basis points annually. In terms of our target, we've talked about cutting third-party linehaul miles in half by 2027 relative to where we were at year-end 2021. So that would get us to somewhere in that low-teens percent range as a percentage of total miles. That's not only going to be a cost benefit for us, but it's also going to help us with service as well. As we've talked about more recently, we've been rolling out initiatives to accelerate the pace of insourcing, specifically team drivers and sleeper cab trucks. We already have 100 of those teams onboarded. And we expect to have a few hundred of those teams in the fleet by the end of 2024, and that's going to allow us to drive efficiencies in our linehaul network but also accelerate that pace of insourcing.
Mario Harik, CEO
And in terms of variable cost levers, Ali mentioned the insourcing of third-party linehaul, which you saw in the first quarter with our purchase transportation costs down over 20%. Looking at other levers around variable labor costs, the team has done an excellent job managing labor operationally. In the first quarter, we achieved the fifth consecutive quarter of productivity improvement. Our shipment count increased more than our headcount in the first quarter, resulting in benefits to the bottom line. This improvement is driven by our operational execution in the field and our proprietary technology that helps us manage labor effectively. Looking ahead, these are two significant levers for us: the continued reduction of purchase transportation costs and improved labor productivity.
Operator, Operator
Our next question is coming from the line of Fadi Chamoun with BMO Capital Markets.
Fadi Chamoun, Analyst
Congratulations on the strong results. Were there any costs related to the new terminals that you opened in the first quarter? Are there any ongoing costs anticipated as we progress into the second quarter and the latter half of the year with the reopening of these terminals? Additionally, regarding pricing, you mentioned that renewals are tracking in the 8% range. Does that encompass the entire book of business that has started to be renewed as service levels improved last year? I'm trying to understand whether we will face tougher comparisons in the second half of this year or if the momentum is likely to be sustainable.
Mario Harik, CEO
Thank you, Fadi. I'll begin by discussing the openings of the Yellow site or the recently acquired sites. Then I'll hand it over to Kyle for a conversation on contract renewals. When we examine the new service centers we are launching, we expect no significant cost burden this year; rather, they should be neutral and will start contributing positively in 2025 and later. In the short term, during the second quarter, there may be a minor cost impact, likely within the 10- to 20-basis-point range on operating results associated with these sites as we start operations and begin to realize efficiency gains. The reason for this is that our service centers already cover 99% of all zip codes and fall into three categories. In some markets, we are transitioning from smaller to larger locations, which allows us to improve productivity and efficiency due to the increased space on the dock. However, our variable costs remain unchanged because we simply relocate our team and equipment from one site to another. The second scenario involves adding a new site in a market where we already have a presence, as seen in Nashville with our new Goodlettsville site. Here, we are redistributing the existing team between multiple sites, which leads to only a minor cost per door impact due to the increased space but no significant cost implications overall. Additionally, we have two smaller markets, Eau Claire, Wisconsin, and Nogales, Arizona, which are new markets but are smaller terminals. The Nogales site, located just across the border from Mexico, is already exceeding our expectations in terms of demand. Overall, we view these new sites as neutral in the short term and expect them to be accretive starting in 2025.
Kyle Wismans, CFO
Fadi, when considering renewals, we've renegotiated around 25% of our contractual agreements each quarter. After the disruption last year, we've addressed about 75% of our contracts. Looking ahead, we anticipate that contract renewals will be in the high single-digit range for the rest of the year.
Operator, Operator
The next question is coming from Jon Chappell with Evercore ISI.
Jonathan Chappell, Analyst
Kyle, kind of a simple one for you maybe. So in February, you gave some annual guide, low single-digit tonnage; yield, ex-fuel, mid-single digit; OR, 150 to 200 basis points improvement. And it feels like with the 1Q upside and the commentary that Ali and Mario have given about April so far and how 2Q is tracking that. You're off to a much better start. Is there any way to frame what the full year guide may look like based off the first 4 months of the year vis-à-vis the February guide?
Kyle Wismans, CFO
Sure. So I think what's important to think about is if you take the Q2 guide we walked through today, so if you're in the low to mid-83s. If you think about that and you roll through typical seasonality for both Q3 and Q4, that would imply our full year OR to be at the high end of the outlook range. Now there's still a path, Jon, we can do better than that given the momentum we have now and potential for a macro recovery, but it's still early in the year. We'll give you an update as the year progresses.
Jonathan Chappell, Analyst
Okay. And no change to the others, tonnage or yield as well?
Kyle Wismans, CFO
No change right now to the assumptions.
Operator, Operator
Our next question is coming from Stephanie Moore with Jefferies.
Stephanie Moore, Analyst
I wanted to actually follow up on the prior question or 2 questions ago on just the ramp of terminals. Any change in the timeline of the ramp of these service centers, just given what is a weaker macro?
Mario Harik, CEO
We do not expect to alter the timeline for opening because we view this as an investment for the next decade and beyond. We are focusing on markets that currently face capacity constraints, such as Las Vegas, Brooklyn, and Houston. These locations are where we lack sufficient facilities and can see rapid improvement. Additionally, we are concentrating on cost efficiency. For example, at the Goodlettsville site, we are not increasing variable costs significantly. For the first phase, which involves opening about a dozen terminals in the second quarter, we will add around 30 employees to support these service centers. We already have available labor in these areas, so we are either reallocating our existing teams or moving personnel between service centers. We do not anticipate the overall economy affecting our schedule for openings. We plan to open up to 12 terminals in the second quarter, another 11 to 12 in the latter half of the year, and approximately five more sites in early 2025.
Operator, Operator
Our next question is coming from Tom Wadewitz with UBS.
Thomas Wadewitz, Analyst
Congratulations on the impressive results. I want to ask about the momentum you're experiencing. How sensitive do you think your volume and pricing trends are to the overall freight market? While your service improvements play a significant role, it's difficult to overlook the influence of freight market trends. Could you share your thoughts on how volume and price are affected by fluctuations in freight? Additionally, how sensitive is your operating ratio improvement to changes in volume? I know it is responsive to price, but if volume comes in two points lower than anticipated, will you still achieve similar margin improvements?
Mario Harik, CEO
Thanks, Tom. I'll address the first question regarding market sensitivity. We're not immune to market fluctuations. If there’s a significant slowdown in the latter half of the year, it will affect us. However, we believe we will outperform because our strategy is effective. Our service offerings are improving, and customers are responding with higher prices. We're introducing new premium services that are well-received in the market, and we're expanding our local sales team, which has a higher margin. We are actively working to mitigate the potential impact of macroeconomic changes. For instance, despite a subdued freight market in the first quarter and being in a freight recession, we are still achieving strong results due to our effective strategy and execution by the team. If the volume decreases, we will certainly face pressure from that front, but we anticipate gaining market share over time. Moreover, many of our pricing initiatives, which contribute to our positive pricing metrics, are driven by the factors I just outlined.
Thomas Wadewitz, Analyst
And what about the second part being like if you get 2 points less, whatever, pick a number of volume growth, is the OR improvement sensitive to that or not particularly so?
Ali-Ahmad Faghri, Chief Strategy Officer
So Tom, this is Ali. As Mario mentioned, we're not immune to the macro, but within our baseline outlook, we're assuming very modest assumptions around tonnage growth. You saw here in 1Q and also in 4Q as well with relatively modest tonnage growth on a year-over-year basis in that low single-digits range. We were able to deliver 400 basis points or nearly 400 basis points of year-over-year OR improvement. As you roll forward into the second quarter, we're assuming tonnage up in that low to mid-single-digit range. We expect 400-plus basis points of OR improvement. So for us, specifically, while there is some sensitivity to the tonnage outlook, where we're focused on is driving yield growth, driving cost efficiency, and we have a lot of control over our own destiny and a lot of company-specific levers we can pull to drive both yield growth and cost efficiencies to drive stronger OR improvement even in a softer macro environment.
Operator, Operator
Our next question is coming from Brian Ossenbeck with JPMorgan.
Brian Ossenbeck, Analyst
Just wanted to maybe get your thoughts on competition, both with other LTLs, some of which are expanding their footprint as well. But also some of the last question from Tom, in terms of the freight market, we have seen probably a bit more weight from a weaker truckload market, but you're also seeing better weight per shipment in your trend. So doesn't seem like you're as exposed as maybe some others. So maybe you can walk through the details on that.
Mario Harik, CEO
I'll begin by addressing the second part of your question regarding weight per shipment. We've observed sequential improvements in weight per shipment. This is largely due to our disciplined approach in selecting the types of freight we accept into our network, ensuring it aligns with LTL network standards, which positively impacts our overall margins. Recently, I had the team conduct an analysis on the movement of freight from LTL to truckload. We found that approximately 0.5 points of shipments, identified as heavy LTL shipments, have declined more sharply compared to other segments. This trend has been primarily influenced by lower truckload rates. While this shift is not significant, we are noticing some movement from LTL to truckload. The positive aspect is that if the truckload market tightens, it could create favorable conditions for LTL, leading to a rebound. Regarding industry dynamics, a year ago, all Yellow service centers were operational, but now about half have been sold. Currently, around 80% to 90% of this capacity is returning to LTL carriers. In a year, we expect to see 94% to 95% of the industry capacity that was available just a year ago. Overall, we are experiencing a freight recession. Shipment counts in our industry are down in the teens compared to the baseline of 2021, which wasn't exceptionally strong either, as LTL shipments had already declined below levels seen in 2019, 2018, or 2017. Essentially, capacity diminished during a period when freight markets were weak. While half of that capacity is returning, we have yet to witness a meaningful recovery in shipments. Therefore, as soon as we see a notable recovery in the market, it will become apparent that there is insufficient capacity in the LTL sector overall.
Brian Ossenbeck, Analyst
Just to quickly follow up on that then, looking into later half of this year and probably more like next year, what are some of the incremental margins you would expect, I guess, the new facilities in particular, especially in some of the bigger areas with more density? Should that be similar to what we saw this quarter, which was around 40% or so, or maybe a little bit less, and of course, it would depend on the pace of the macro? But I just wanted to get your sense in terms of how those assets would fit when the recovery does come back.
Ali-Ahmad Faghri, Chief Strategy Officer
Sure, Brian. This is Ali. We do expect very strong incremental margins on these new service centers. As you saw here in 1Q, we delivered very strong incremental margins. In 2Q, if you look at what we're implying for OR, that implies incremental margins north of 50%. And as we cycle into the second half of the year and into 2025, as these new service centers come online, we would expect to maintain that very strong performance in incremental margins comfortably above 40%.
Operator, Operator
Our next question is coming from Jason Seidl with TD Cowen.
Jason Seidl, Analyst
For the Mario team, congrats on the strong quarter. One question, one follow up here. How should we think about this push to the more local accounts as an impact on the overall yield? And I understand how the margin impact works. I was just curious if there's any impact on yields.
Mario Harik, CEO
And then, Kyle, I wanted to follow up. You mentioned being at the "higher end" of the OR target range. And I'm assuming you meant the better end, but the lower OR. I just want to clarify that.
Kyle Wismans, CFO
Yes, I'll address the first part of your question. When considering the local account strategy and the shift from 20% to 30% of the overall portfolio, we believe there is a significant opportunity for yield improvement. We have previously noted a potential gap in the mid-teens. By expanding our local accounts, we estimate that we can close this gap by about 2 to 3 percentage points just from this growth. Regarding the operating ratio target, based on our current performance and expectations, seasonal trends are likely to place us at the higher end of that target, around a 250-basis-point range.
Operator, Operator
Our next question is coming from Jordan Alliger with Goldman Sachs.
Jordan Alliger, Analyst
Longer-term question. I think you'd mentioned that LTL 2.0 is still in the earlier days or earlier innings. And obviously, now since you first put that plan out, you have the former Yellow terminals that you're rolling out. Any thoughts on assessment sort of the longer-term margin improvement potential that you could get to in less-than-truckload vis-à-vis the original expectations or updated expectations?
Mario Harik, CEO
Thanks, Jordan. Well, initially, we set out to achieve at least 600 basis points of improvement from a baseline of 2021 through 2027. But that's what we always said at least because we're not stopping at 600 basis points, and we're not stopping in 2027. But with the momentum we have and all the initiatives and the plan working as expected, we do expect to get there faster. But obviously, we're not stopping at 600 or 2027. Our goal is to get to the 70s from an OR perspective and eventually into the mid-70s and eventually the low 70s.
Operator, Operator
Our next question is coming from the line of Brandon Oglenski with Barclays.
Brandon Oglenski, Analyst
Mario, could you discuss the service outcomes for the quarter? I understand that you reported a very low claims ratio. How does this relate to the opening of new terminals? Does XPO become more positioned for growth over the next two to three years, keeping in mind that it's dependent on the cycle?
Mario Harik, CEO
Yes, we believe that the new service centers will enhance our service delivery. With more space available on the dock, we can optimize the loading process, which allows us to create pure trailers that move through the network without needing rehandling. This increased space will help us improve our service over time. Additionally, our efforts to bring third-party linehaul operations in-house are also expected to enhance service. We are implementing various technologies, such as airbags systems and loading innovations, to further enhance our service quality. Our primary focus is on continuously improving service and driving yield rather than chasing tonnage. When market conditions change, we will be prepared to take on more freight, but we remain committed to ensuring that it is valuable freight operating at the appropriate yield. So, our goal is to enhance yield while continually improving our service product.
Operator, Operator
Our next question is coming from Scott Schneeberger with Oppenheimer.
Scott Schneeberger, Analyst
Could we touch on Europe? I think Mario, you mentioned it was the best quarter since COVID and seeing some strength in the U.K. and France. What end market specifically? And I guess I'll throw in the question too of, is now an improved time to be considering that disposition?
Mario Harik, CEO
First, I'll start with the back half of the question. Our long-term plan remains to be a pure-play North American LTL carrier, and selling that business is a strategic priority of ours. But we're going to be patient. We want to make sure that we are maximizing the returns on that business. It is a business that has a lot of scarcity value. In Western Europe, we're either #1, #2, or #3 in LTL, truckload, and brokerage. And it's in key Western European geographies, think about U.K., France, Spain, Portugal. So it's not a matter of if, but when. Meanwhile, the business is performing really well. And as you mentioned, our EBITDA for the first quarter was the highest it's been since the pandemic. And some of these key geographies in France, for example, our EBITDA was up in the mid-teens. In the U.K., our EBITDA was up in the high single digit. And a lot of it is driven by really good strong sales pipeline driven by good pricing. And the team is just executing at every level in our European business. And keep in mind that in the backdrop of a soft freight economy, and we have seen our volumes inflect positive in the month of March.
Operator, Operator
Our next question is coming from Kevin Gainey with Thompson, Davis & Company.
Kevin Gainey, Analyst
Congrats on the quarter. I actually wanted to go into operating cash flow. It was a pretty strong quarter for that. And I was wondering what levers kind of drove that from your standpoint. Or was there any kind of efficiency changes that you guys have done there? And then maybe the outlook that you guys have for the remainder of the year on cash flow.
Kyle Wismans, CFO
Yes. From the cash flow perspective, it was another strong quarter in terms of working capital. Typically, Q1 shows a negative cash flow, but despite that and the increased capital expenditures, we achieved a very good outcome. It's important to note that for the rest of the year, we anticipate generating over $100 million in cash flow for 2024, even with the higher spending levels on capital expenditures. We projected $700 million to $800 million in our planning assumptions, and we expect to stay within that range, which will still allow us to comfortably exceed $100 million in cash flow. In terms of timing, Q1 is negative, but we had a significant number of tractor deliveries in the first quarter—1,600 units—which is more than we typically see in an entire year. Therefore, the capital expenditure figure for Q1 at $299 million is expected to decrease as the year progresses. We feel very confident about our ability to generate cash this year.
Operator, Operator
We have reached the end of our question-and-answer session. I would like to turn the floor back over to XPO's Chief Executive Officer, Mario Harik, for concluding comments.
Mario Harik, CEO
Thank you, operator, and thank you all for joining us today. I'm proud of our strong first quarter and the tremendous progress we're making. As you can see from our results, our LTL 2.0 plan is working and is gaining momentum in a soft macro for freight transportation. We look forward to updating you on our continued progress next quarter.
Operator, Operator
Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.