Brad Jacobs - Chairman, Chief Executive Officer David Wyshner - Chief Financial Officer Matt Fassler - Chief Strategy Officer Tavio Headley - Senior Director of Investor Relations Meghan Henson - Chief Human Resources Officer Ravi Tulsyan - Treasurer Kyle Wismans - Senior Vice President of FP&A.

Welcome to the XPO Logistics, Second Quarter 2020 Earnings Conference Call and webcast. My name is Rob and I’ll 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. [Operator Instructions] 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 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.

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.

You can find a copy of the company’s earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section on the company’s website. I will now turn the call over to Brad Jacobs. Mr. Jacobs, you may begin..

Thank you, operator. Good morning everyone.

In addition to my remarks today, you will hear from David Wyshner, our Chief Financial Officer; Matt Fassler, our Chief Strategy Officer and also, for the Q&A portion of the call, we have Tavio Headley, our Senior Director of Investor Relations; Meghan Henson, our Chief Human Resources Officer; Ravi Tulsyan, our Treasurer and Kyle Wismans, SVP of FP&A.

The second quarter was dominated by the severe challenges of COVID-19. Nevertheless, we did deliver better-than-expected revenue, adjusted-EPS, adjusted EBITDA and, notably, free cash flow. For us, the trough was in April in both North America and Europe.

Since then, we've seen a recovery in Europe with a more recent rebound in North America, and all of our sites are open. Each month in the quarter showed sequential improvement across our operating regions.

Organic revenue for the company as a whole has gone from being down 21% in April year-over-year to down just 10% in June, and we’ve continued to gain ground in July. The improvement has been broad-based in both transportation and logistics.

In North American LTL for example, our tonnage per day was down 24% in April year-over-year, but down only 13% in June. We continue to regain tonnage in July. In Europe our LTL pallet count per day at the end of June was up from the trough in France by 49% and in Iberia by 44%. The U.K. was up 25% from the trough.

And our European logistics business came back strong in the quarter, with a 7% increase in year-over-year revenue per day in the month of June. These are all positive trends going into the back half of the year. I also want to mention the three executive appointments we made this week.

Eduardo Pelleissone is our new Chief Transformation Officer and Alex Santoro is Executive Vice President of Operations. These are two rare, talented operators who will work with our business leaders to turbocharge our profit improvement initiatives. We're excited to have them both onboard.

I'm also extremely pleased that we have our first Chief Diversity Officer in LaQuenta Jacobs. LaQuenta has an impressive record as a champion of diversity at blue chip companies. She’ll be leading initiatives that are high priorities for us, reporting directly to me.

So to wrap it up, I’m proud of the extraordinary focus our organization has placed on keeping our employees safe throughout the pandemic while keeping supply chains moving for our customers. There are still a lot of unknowns with COVID, but our positioning is strong.

For years we've been investing in our vision for the future of supply chains, including our e-commerce capabilities, intelligent automation of warehouses and customer solutions that are in high demand for outsourcing. These industry trends have been accelerated by the pandemic.

Finally, I want to say again how grateful I am to our employees for their intense dedication in such unusual times. It’s a privilege to lead Team XPO. And with that, I'll turn the presentation over to David. David..

Thanks Brad and good morning everyone. Today I'd like to discuss our second quarter results, our balance sheet and liquidity and our outlook. In the second quarter we generated revenue of $3.5 billion, adjusted EBITDA of $172 million and an adjusted loss per share of $0.63.

All three figures reflect year-over-year declines due to COVID, but they are all better than we expected at the beginning of the quarter. Matt will review the segment detail in a few minutes. We generated $214 million of cash flow from operations in Q2, spent $116 million on CapEx and received $23 million of proceeds from asset sales.

As a result, we generated positive free cash flow of $121 million in the quarter. This brings our year-to-date free cash flow to $216 million, which represents a year-over-year increase of $66 million, despite our having $75 million of cash outflows this year related to our exploration of strategic alternatives.

We've been able to generate positive free cash flow during the pandemic by managing working capital aggressively, turning our receivables into cash. We became even more disciplined about collections in the COVID environment, working with our customers to reduce our receivables and staying disciplined with respect to payment terms.

We continue to use trade receivables programs, including our European Securitization, to manage our working capital. We didn't repurchase any shares in the second quarter, so we continue to have $500 million of authorized share buyback capacity.

We throttled back our planned capital expenditures dramatically at the start of the quarter, but have begun to reopen the spigot a bit as demand and new business opportunities have rebounded.

We currently estimate that our gross CapEx will be $450 million to $475 million this year, which is up from our May estimate of around $400 million, but down about 26% from our pre-pandemic plans. And we estimate that as a result of our regular course asset sales, our net capital expenditures will be $250 million to $300 million this year.

Even though financial markets have normalized significantly over the last four months, maintaining strong liquidity continues to be a top priority for us as an organization. We issued $1.15 billion of 6.25% five-year senior notes in April and May. The proceeds are part of our $2.3 billion cash balance at June 30.

This cash, combined with available debt capacity under committed borrowing facilities, gives us total liquidity of $2.8 billion at quarter end. Our net leverage at June 30 was 3.5x adjusted EBITDA, which is in the middle of our targeted range of 3x to 4x. We have no significant debt maturities until mid-2022. Our liquidity position is strong.

In the second quarter, our adjusted EBITDA was right in line with what you would expect based on the combination of our second quarter 2019 results, a 17% year-over-year reduction in revenue due to the pandemic, the 77% variable 23% fixed breakdown of our expenses and the nearly $50 million of COVID related costs we incurred.

We've been seeing sequential improvement from month-to-month since April with that favorable trend continuing in July. Revenues in the first half of the month were down high single digits year-over-year. And we estimate that our COVID related costs will be $10 million to $25 million in Q3.

Based on these conditions, we expect to generate at least $350 million of adjusted EBITDA, including COVID related costs in the third quarter. This means we're positioned to outperform the results that would be implied by a high single-digit year-over-year revenue decline and our mix of variable and fixed costs.

This is because of benefits that we expect to realize in Q3 from operating initiatives, restructuring programs and other cost saving actions that we've implemented.

On the cash flow front, with us having generated more than $200 million of free cash flow in the first half, we continue to be confident in our ability to deliver hundreds of millions of dollars of free cash flow this year. Lastly, COVID-19 clearly dominated the second quarter of 2020. Revenues bottomed in April and have been recovering ever since.

Throughout the quarter we protected our employees, kept serving our customers and adjusted our variable costs to align with dramatic declines in demand. We also solidified our liquidity, continued to generate significant positive free cash flow, implemented cost saving actions that will benefit future quarters and invested in technology.

As a result, we expect the third and fourth quarters to be much stronger than Q2, and we are enthusiastic about our longer term prospects as a leader in the markets we serve. With that, I'll turn things over to Matt..

Thanks David. I’ll review the second quarter income statement and shed some more light on the trends we've seen in July. Starting with our transportation segment; segment revenue was down 22.6% in the quarter year-over-year and organic revenue was down 19.3%. Adjusted EBITDA declined by 60%.

This included $27 million of costs related to COVID, primarily in our North American LTL unit. LTL tonnage per day declined by 19% in Q2 versus the prior year, primarily due to weak activity levels in industrial, manufacturing and automotive. April was the trough and the business gained momentum as we moved through the quarter.

While we did well in consumer staples, this vertical was not enough to offset the shut down in the industrial economy. As industrial sectors reopened, our trends improved. LTL tonnage was down year-over-year by 23.5% in April, 20.8% in May and 12.8% in June. Improvement continued in July. Yield, excluding the impact of fuel improved 1.9% year-over-year.

Yield growth in July is in line with Q2. Our LTL price increases on contract renewals remain solid, up 3.7%, which kept us on pace with the Q1 increase. Our adjusted operating ratio in LTL was 90.1% for the quarter, compared with 88.3% a year ago.

The biggest driver of the change was lower tonnage, and we also had a negative impact of about 250 basis points from $20 million of COVID costs. These drags were offset in part by the improvement in yield. We are also effective at controlling key variable costs, including P&D, dock operations and line haul.

Our XPO Smart productivity tools are proving valuable in this environment. Bear in mind that this was just the second full quarter since XPO Smart was rolled out nationally in our LTL network. The analytics are driving up dock productivity by 6.5% on average year-over-year.

We're encouraged by the early results and we expect the improvements to compound going forward. We also grew load factor by 3.9% and improved empty miles by 24%, better than the 15% decline in shipments.

We expect the combination of a better revenue outlook and strong expense management in LTL to produce a significant sequential improvement in adjusted operating ratio in Q3, with much more modest year-over-year erosion. Within our freight brokerage business, truck brokerage delivered a strong performance in a volatile market.

Revenue fell 8%, but net revenue rose 3%. Brokerage volumes troughed in May and rebounded strongly in June. And we posted solid year-over-year increases in net revenue margin each month in the quarter. We procured capacity exceptionally well, buying at a 7.5% discount to the market, aided by the pricing tools within our XPO Connect platform.

XPO Connect continues to drive significant efficiencies in our truck brokerage service. In the second quarter the load count was essentially flat with Q2 last year and we handled it with 14% less headcount. Intermodal revenue was down sharply, reflecting the shutdown in automotive production.

Intermodal revenue trends began to recover in June and have improved significantly in July as truckload capacity tightened. Last mile was a real highlight for us in the quarter. Revenue increased 3% year-over-year, while net revenue dollars rose 11%. Net revenue margin rate in last mile increased by 270 basis points to a record 37%.

And here again, revenue trends accelerated as the quarter progressed. Our last mile specialization in heavy goods continues to benefit from the growth of e-commerce, and we saw strong demand for home improvement goods and exercise equipment. This was partially offset by slower appliance installations due to COVID restrictions. Turning to Europe.

In our transportation business, Q2 revenue declined by 29% versus the prior year, organic revenue which excludes the impacts of FX and fuel was down 23% for the quarter as a whole. Importantly, the year-over-year trend in organic revenue growth became more positive throughout the quarter.

We were down 37% in April when the government lockdowns in Europe sharply curtailed our automotive, industrial and chemical customers. We rebounded to a 20% decline in May and a 14% decline in June. The theme for the quarter in European transportation was “first in, first out”.

Among our larger countries, France and Spain locked down first and recovered first. The U.K. locked down several weeks later. The timing of the U.K. trough recovery is tracking later as well, and the curve of the recovery there has been more subdued. Overall, July market conditions have continued to improve for European transportation.

Moving on to our logistics segment. The contractual nature of this business mitigated the impact of COVID, as did our vertical mix and the embedded relationships we have with key customers. Logistics segment revenue was down 8% year-over-year for the quarter and organic revenue declined 6.5% — again, improving each month.

Adjusted EBITDA declined 39%, including the impact of $19 million of COVID costs. In North American logistics, revenue declined 11% versus Q2 last year. We had solid growth in e-commerce and omni-channel retail, along with good results in consumer packaged goods and consumer technology.

This was offset by the elimination of lower margin business and by temporary shutdown requests from a number of our customers. At the peak of the pandemic, 8% of our sites were impacted by closures, and now all of our sites are up and running. In logistics, as in LTL, our proprietary XPO Smart tools are driving productivity and cost efficiency.

Nearly two-thirds of our warehouses utilize XPO Smart and we're seeing an average labor productivity improvement of 5%. Some individual sites are much higher. This tech is still in the early innings of the value it can bring to the business.

Also, I’m pleased to report that XPO Direct, our shared space distribution network, operated solidly in the black for the second consecutive quarter. The secular growth in e-commerce is driving more opportunities with omni-channel retailers. In Europe, logistics revenue declined by 6% year-over-year.

FX had a negative impact of about 2.6 percentage points on revenue. Importantly, organic revenue for European logistics turned positive in the month of June. Consumer verticals represent about 85% of our European contract logistics revenue, with the vast majority related to either e-commerce or food and beverage.

Consumers leaned into these verticals during the pandemic and we were happy to keep those goods flowing. We're encouraged by how well this business is performing and we see additional opportunities to grow the top and bottom lines. We’re rolling out XPO Smart across Europe to drive labor productivity in our logistics warehouses.

We had a soft opening for our warehouse of the future in the U.K. last month, which kicked off a 15-year contract with Nestlé. And the trend toward near-shoring creates additional potential business for us. Our acquisition of logistics operations from Kuehne + Nagel in the U.K. is on track to close this fall.

That's an overview of the operating trends that underlie our Q2 results. Moving down the income statement, interest expense was $82 million in the quarter, versus $72 million a year ago. Our GAAP effective tax rate rose to 35% from 24% a year ago. Our weighted average diluted share count was $91 million.

In a loss-making quarter, diluted shares outstanding don't include common stock equivalents. Our basic share count was down slightly from Q1 and from the year-ago number, reflecting the impact of our first quarter share repurchase activity.

Our diluted loss per share was $1.45 for Q2 versus earnings per share of $1.19 a year ago, and our adjusted diluted loss per share was $0.63 versus EPS of $1.28 a year ago. I want to note two items in our reconciliation of GAAP to non-GAAP metrics. We incurred $50 million in pre-tax restructuring costs in the quarter, primarily for severance.

The pandemic led us to take a deeper dive into our cost structure and significantly reduce our overhead costs, particularly in Europe. This will drive approximately $100 million of annualized cost improvement. We expect to achieve this run rate by the middle of 2021.

The other item is the $46 million we booked in transaction and integration expenses in the quarter, primarily associated with our exploration of strategic alternatives. The largest piece of this relates to employee retention.

To summarize the second quarter, we responded to the pandemic by taking care of our employees, looking after our customers, protecting our liquidity and cash flow and rightsizing our variable cost to market conditions. As David mentioned, the adjusted EBITDA we delivered was in line with our mix of fixed and variable costs.

In Q3, we remain focused on all of these critical efforts. At the same time, our operating environment is becoming increasingly stable and we're directing more of our attention to our strategic profit initiatives, particularly XPO Connect and other technologies that can leverage the return of demand.

We now have more than 62,000 truckload carriers registered on XPO Connect globally. Downloads of our Drive XPO app grew 87% in the three months of Q2 versus Q1, and now exceed 150,000 downloads in total. And we more than doubled the number of customers on the platform in the same period.

In LTL, we continue to make headway with our pricing initiatives, particularly as we gauge price elasticity, digging deeper into the full cost profile of each RFP. And we’re expanding the data we use to optimize the line-haul portion of LTL in terms of visibility, compliance and routing. The opportunities within contract logistics are also compelling.

Our capabilities with advanced automation are both a driver of new business and a competitive advantage. Customers who explore in-house robotics options often come to the conclusion that the cost of entry is high and the solutions can be tough to implement.

Our first-mover advantage with goods-to-person systems and collaborative robots is leading companies to outsource these projects to us. Another tailwind in contract logistics is that retailers are coming to us for more e-commerce capacity.

In the short run, customers need interim capacity to manage peaks in demand, especially since the pandemic has made buying patterns less predictable. For the mid-term, they’re interested in arranging additional distribution centers for supplemental capacity on a regional basis.

And longer term, retailers and brands are assessing transformational changes that de-risk their logistics networks. We can meet all of these needs. I’ll close by mentioning a few other highlights of the quarter. XPO was once again recognized by Gartner, which named us a worldwide leader in their magic quadrant of 3PL providers.

This was the third straight year that we were designated a leader by Gartner. Also in the quarter, we were proud to provide critical support to the City of New York’s Office of Emergency Services during the peak of the pandemic. And the Tour de France race is scheduled to start on August 29 in Europe.

2020 marks the 40th anniversary of our partnership with this celebrated event. We're proud to help bring some much-needed sport to the world stage.

Not only will our trucks and drivers cover every kilometer of the course — for the first time two of our ecofriendly, natural gas powered trucks will be at the finish line with the competitors arrive in Paris. With that, I'll turn the call back over to the operator and we look forward to your questions..

Thank you. [Operator Instructions] Thank you and our first question is coming from the line of Ravi Shankar with Morgan Stanley..

Ravi Shankar:.

Brad Jacobs:.

Ravi Shankar:.

Matt Fassler:.

Ravi Shankar:.

Brad Jacobs:.

Ravi Shankar:.

Brad Jacobs:.

Ravi Shankar:.

Brad Jacobs:.

The next question comes from the line of Allison Landry with Credit Suisse. Please proceed with your questions..

Allison Landry:.

Good morning, Allison. I wouldn't guide to 3.7% yield, because that contract renewal rate is part of our business, but not all of our business. But we are seeing positive yield. So, 1.9% positive yields in the quarter was helpful and the yield trends were positive every month.

It wasn't enough though, even with a couple of points of yield, to overcome a tonnage decline of 19%. When you have tonnage decline of 19% — you can do all kinds of great stuff, but you’re going to have to be able to overcome that, given the fixed-cost nature of the LTL business and the operating leverage. But Q2 tonnage also shows an improving trend.

Tonnage was down in April 24% year-over-year; it was down 21% year-over-year in May. It was down only 13% in June, and here in July it’s down single digits. So, there's a decent trend there. And there were some bright spots in LTL ,despite the poor OR. Load factor was up 3.9%. It was the highest load factor we’ve had in eight years.

Empty miles improved 24% year-over-year versus shipments being down 15%. Dock productivity was up 6.5%. And I would point you to our guidance for Q3. One of the reasons why we're going to generate at least $350 million of EBITDA in the third quarter is that we fully expect our OR in Q3 in LTL to be substantially better than it was in Q2.

I feel that we're fully on track to achieve at least $1 billion of EBITDA. We have pushed that out from 2021 to 2022, and you'll see steady progress between now and there, getting to that level..

Allison Landry:.

Okay, so there was this one whale in Europe and there were two whales here in the United States. In the U.K., we signed a $250 million contract that starts October 1. It's a 5-year contract in transportation, it’s delivery of chilled dairy products to stores and it’s with Arla Foods.

In the United States, we had two big e-comm wins and these will be some of the most automated warehouses in the world. So, we have one new e-comm fulfillment center on the west coast for a global branded apparel company. It is our largest site in the United States —1.2 million square feet. It's a five-year contract.

It started this month and it's on its way to ramp up to 400 robots. And then we also have another large e-comm fulfillment center on the west coast for a global fashion retailer. That starts in September. It's also over 1 million square feet, also highly automated and that will be ramping up to 500 robots.

So, we have some good momentum in the backlog on commercial wins..

Allison Landry:.

Thank you. .

Our next question is from the line of Chris Wetherbee with Citi. Please proceed with your question..

Chris Wetherbee:.

Chris, its Matt. A couple of points on that.

First of all, as you start off by looking at the third quarter and you look at the EBITDA guidance and you think about the kind of revenue trend that we generated in July, you'll see that the decremental margins that are embedded in that are better than the decremental margins that we generated in Q2, and better than the decremental margins implied by that 77/23 math that we spoke about last call and that David mentioned earlier today.

Secondly, as you emerge from the downturn, obviously we have flexed our variable costs. We are starting to make more headway with fixed costs. Fixed is probably a slightly higher percentage of your cost structure after a down year than it would have been going into a down year.

So that implies the potential for more operating leverage to the upside, particularly, obviously, when you cycle a very unusual quarter like the one that we had in Q2, which obviously will be a big part of the ‘21 story. We’re not going to talk much about ‘21 yet, but obviously that's the way the arithmetic works.

So, to reiterate, the third quarter will be a substantially better performance on that front than the second quarter and then, emerging from a down revenue year, you have the opportunity to generate better incrementals than you’d have in an average year.

Plus, we have the 10 levers and the progress that those are likely to bring us above and beyond that..

Chris Wetherbee:.

We are hugely excited about the 10 levers. This is a massive potential to literally transform the business. You’re already seeing some benefits, but you'll see continuous quarter-after-quarter, year-after-year benefits from the 10 levers and, in 2023, we will have achieved a substantial part of that profit pool.

We had a quarterly operating review a couple of weeks ago for three days, and a good part of that was going over the 10 levers and crowd sourcing everyone on each lever.

What do you think? What do you think is the highest? What do you think is the lowest? What do you think is the likely? And, collectively we're feeling very good about each one of those levers. If you look at Smart, this has already helped us variablilize and manage labor costs nimbly.

The labor productivity that improved 6.5% year-over-year in the second quarter, we would not have been able to do that without Smart. Smart improved the labor productivity in our contract logistics facilities by about 5% already and we’re looking to improve on that going forward. So, I think the benefits will just keep compounding going forward.

In truck brokerage, Connect helped us handle the same number of loads this quarter year-over-year, but with 14% lower headcount. So, that's an important lever. When you can get that kind of productivity from a sales force, that's really, really helpful. Look at procurement. In procurement, we've got about $8 billion or so of non-labor expenses.

Adding Eduardo and Alex, they are going to be a big help with that. They’ve got a lot of experience with that. On pricing, we're in the early innings of what we can deliver. We used pricing within Connect this quarter to buy 7.5% better than DAT. So, we bought 7.5% better than the market, due to the technology we're using on Connect.

There is a big opportunity on pricing and LTL as well, for pricing elasticity and more automation on that. And in LTL, you have the process improvements in terms of optimizing line-haul and P&D spend, so we’re very excited about the levers. The core of our strategy is to deliver substantial, long-term shareholder value, as we have.

And our focus is on allocating capital in ways that achieve the best risk-adjusted returns. These 10 levers are a very, very, very important part of that strategy..

Chris Wetherbee:.

Brad Jacobs:.

Thank you. The next question is from Brandon Oglenski with Barclays..

Brandon Oglenski:.

Brad Jacobs:.

Brandon Oglenski:.

Brad Jacobs:.

Brandon Oglenski:.

Brad Jacobs:.

Our next question is from the line of Amit Mehrotra with Deutsche Bank..

Amit Mehrotra:.

Brad Jacobs:.

Our next question is from the line of Scott Schneeberger with Oppenheimer..

Scott Schneeberger:.

Brad Jacobs:.

Our next question is from the line of Brian Ossenbeck with J.P. Morgan..

Brian Ossenbeck:.

Brad Jacobs:.

Our next question comes from the line of Ari Rosa with Bank of America..

Ari Rosa:.

Matt Fassler:.

Brad Jacobs:.

The next question coming from a line of Jordan Alliger with Goldman Sachs..

Jordan Alliger:.

Brad Jacobs:.

Our next question is from the line of Jason Seidl with Cowen..

Jason Seidl:.

Brad Jacobs:.

I see its 9:30. We apologise to those who didn’t get a chance to ask a question, but we look forward to speaking to you off-line later today. Thank you very much. Talk to you again in three months.

Have a great day!.

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