XPO Earnings: Retail Destocking and Sluggish Industrial Sector Pressuring LTL Tonnage and Margins

XPO’s XPO first-quarter organic top line increased about 1% year over year, excluding the November truck brokerage segment (RXO) divestiture. Revenue came in slightly ahead of our forecast as LTL yields are holding up better than we anticipated thus far this year. Relative to first-quarter 2022, LTL tonnage fell 2%, while total yield was up about 2.5%. In short, retail-sector restocking has retrenched on elevated inventories and industrial end markets are softening, pressuring volumes across the LTL industry following an exceptionally robust growth phase. That said, the current trucking backdrop is not unexpected, and we’ve already been baking in a pullback in 2023. European trucking segment revenue grew 6% (removing foreign exchange), likely due to new contract wins and lingering pricing strength, though we expect pricing gains to diminish as the year progresses.

Total adjusted EBITDA margin expanded to 11%, from a pro-forma 9.7% due mostly to corporate cost reductions, as LTL segment margin declined. Using the firm’s revised calculation, which excludes pension income but includes segment allocated corporate costs, LTL’s adjusted operating ratio (expenses/revenue), or OR, deteriorated to 89.6% from 88.9% (higher is worse). This was worse than our expected run rate, though we’ve been anticipating normalization this year on the demand pullback. The LTL margin decline stems from lost leverage from falling tonnage, wage inflation, and higher deprecation linked to ongoing network investment, only partly offset by cost efforts such as insourcing more third-party linehaul miles.

We expect to temper our near-term LTL OR forecast, but that impact will likely be offset by raising our LTL yield assumptions, as well as the time value of money. Thus, we do not expect to materially alter our $40 DCF-derived fair value estimate.