Welcome to the XPO Second Quarter 2024 Earnings Conference Call and Webcast. My name is Sachi 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. [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 the meaning of the 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 may also 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.

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 a strong second quarter for both revenue and earnings in a soft market for freight transportation. Company-wide, we grew revenue year-over-year by 9% to $2.1 billion. And we increased our adjusted EBITDA by 41% to $343 million. Adjusted diluted EPS was 58% higher year-over-year at $1.12. I'll start with the strategy that's driving our above market earnings growth and margin expansion. There are four pillars to LTL 2.0. First is to provide world class service. This revolves around the service metrics that are most important to our customers. In the second quarter, we improved one of the most important metrics damage claims ratio to a company record of 0.2%. This compares with 0.3% in the first quarter and 0.7% last year. Since late 2021, when we started LTL 2.0, we've driven more than a 75% reduction in damage frequency. We also improved our on-time performance on a year-over-year basis for the 9th consecutive quarter. We already have one of the industry's fastest networks of one and two-day lanes, and when coupled with our strong on-time performance, this is a key differentiator for our customers. We achieved these improvements while handling higher volume across our network by prioritizing both operational excellence and network investments. Specifically, we have two major levers with long runway to improve our service. One is the opening of 28 new service centers and the other is our in-sourcing of purchased transportation. In addition, we're constantly implementing a number of shorter-term initiatives. For example, we now have freight airbag systems installed in over 95% of our service centers. We're seeing a strong return on this investment through a…

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet, and liquidity. We reported a strong second quarter across the company with revenue up 9% year-over-year to $2.1 billion. This includes top-line growth of 12% in our LTL segment and 4% growth in Europe. Excluding fuel, our LTL revenue was up 13% year-over-year. As we took on more business in LTL, we also improved our labor productivity. From the first to second quarter, we reduced our headcount sequentially, while our shipments per day increased by 4%. This helped to mitigate the cost of salaries, wages, and benefits, which in total were 11.5% higher in the quarter than a year ago. This primarily reflects wage and benefit inflation as well as incentive compensation aligned with the segment's strong second quarter performance. We were also more cost efficient with purchased transportation, primarily due to our in-sourcing initiative. Our expense for third-party carriers was down year-over-year by 22%, which equates to a $19 million savings in the quarter. Additionally, we continue to improve our maintenance costs, with our cost per mile down 12% year-over-year. Depreciation expense increased by 24% year-over-year or $15 million, reflecting the investments we're making in the business. This continues to be our top priority for capital allocation in LTL. Our second quarter CapEx was primarily allocated to purchase tractors from the OEMs and manufacture 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 $343 million in the quarter, up 41% from a year ago. Our adjusted EBITDA margin was 16.5%, which was a year-over-year improvement of 380 basis points. This was supported by margin improvement in both segments and the continued rationalization of our corporate cost structure. In…

Thank you, Kyle. I'll start with our LTL segment, which reported another quarter of profitable growth, reflecting strong execution by our operational teams. On a year-over-year basis, we increased our shipments per day by 4.5% in the quarter, led by more than 9% growth in our local sales channel. Notably, we grew tonnage per day by 3.4%, which is an acceleration from 2.6% in the first quarter. Our weight per shipment was down 1.1% with the year-over-year decline moderating from the prior quarter. This was our fourth consecutive quarter of year-over-year improvement in weight per shipment. On a monthly basis, year-over-year, our April tonnage per day was up 3.1%, May was up 2.4%, and June was up 4.6%. Looking just at shipments per day, April was up 4.7%, May was up 3.8%, and June was up 4.9%. For July, we estimate tonnage and shipments per day to be about flat year-over-year with both trends outperforming seasonality. On a two-year stack basis, July shipments per day and tonnage per day meaningfully accelerated versus June. Our pricing trends remain strong as we continue to align our pricing with our service quality and premium offerings. For the second quarter, our contract renewal pricing was up year-over-year by 8%. We also delivered another quarter of above market yield growth. We grew yield excluding fuel by 9% compared with the prior year. While our improving weight per shipment was a modest mix headwind to yield, our revenue per shipment ex-fuel increased sequentially for the 6th consecutive quarter and was up 7.4% year-over-year. We expect to continue increasing both yield and revenue per shipment quarter-over-quarter in the back half of this year, reflecting ongoing momentum with our pricing initiatives. Turning to margin. We improved our second quarter adjusted operating ratio by 440 basis points to 83.2%.…

Thank you. [Operator Instructions]. The first question is from Ken Hoexter from Bank of America. Please go ahead.

Hey, great. Good morning, and congrats on the strong results. Maybe Ali, just to kind of wrap on that, the tonnage ann shipments accelerated in June. Maybe your thoughts on the market here, is it share gains, benefits in new facilities, and relaying that you've always given some thoughts on the sequential move in the operating ratio. Obviously, you've got a lot of seasonality that typically increases it. Maybe your thoughts as we go into third and fourth quarter. Thanks.

You got it Ken. This is Mario. First, I'll start with the market. So we're continuing to see a soft freight market, but it's stable. If you look at the month of June, the ISM was in the high-40s at 48, 49. And the industrial demand was relatively stable. It did pick up a bit from the month of May and then underlying demand on the industrial side. But again, not major growth there. On the retail side, retail sales came in better and we did see the retail sector also hold up and increase a bit as well. But sequentially, we did see a pickup in the month of June compared to where we were in May. Now, if you take a step back on the quarter and July starting there on tonnage for us, July tonnage is about flattish, which outperforms seasonality by one to two points. And we expect a similar outperformance for the third quarter as a whole. Now, when we look at seasonality, we do exclude the impact of COVID since if you recall, Q2 to Q3 back then was a big upswing with the decline in Q2. And similarly, when you look at Yellow last year, it was outside of seasonal norms. So if you apply seasonality, it would imply tonnage in the third quarter to be down low-single-digits. And we expect to do better than that, where we expect to be flattish on tonnage for the third quarter as a whole. Now, the other moving part for OR going to your question on margin is on the yield front. And we expect a strong quarter for yield ex-fuel. As our initiatives continue to gain traction, we expect to be in the mid to high-single-digit range on a year-on-year improvement for yield. Even as we lap the tougher comps, weight per shipment could be a swing factor. We've seen that improve here through the course of the year for us. And it does imply an acceleration on a two-year stack for yield Q3 versus the first half. And it does imply a sequential increase on absolute dollar basis from Q2 going to Q3 as well. Ultimately, from an OR perspective, we also expect a strong quarter for margin improvement. We expect OR to increase sequentially by 100 basis points to 150 basis points, which is in line with seasonality. But similar to my comments on volume, if you do exclude the outlier quarters with COVID and the Yellow bankruptcy, typical seasonality is 200 to 250 deterioration and we expect to do much better than that, driven by volume, yield growth, and all the cost efficiencies we're implementing.

Very helpful. Thank you, Mario.

You bet.

The next question is from Scott Group from Wolfe Research. Please go ahead.

Hey, thanks. Just want to follow-up on operating ratio. So thanks for the color on Q3. How are you now thinking about the full year guide in terms of full year OR. And then I don't know, I know it's early, but clearly some continued good momentum on price and claims. How do you think this sets up from an OR perspective heading into 2025?

Hey Scott, it's Kyle. So when you think about 2024, we think it's going to be a strong year of margin improvement. Initially, we thought the year would be in the 150 basis point to 250 basis point range for the year of improvement, and we expect to land towards the high end of that range. And that's given the momentum we've seen so far in the first half, and assuming a stable macro in the back half of the year. A – Mario Harik And so for 2025, we expect a strong year in 2025 for OR improvement and earnings growth as well. Now, obviously, we're not immune to the macro. Macro would be the biggest swing factor there, but we expect a very strong year. And if you take a step back, we are driving above-market yield growth, and that's driven by the continuous service improvements that we are doing across the network, and that's translating into us gaining profitable market share. And customers want to give us more business, and we're driving higher yields. And they know that for us to provide this great service, we got to invest in our business. We're also making contributions from premium services and the growth of the local channel or the local account. When you look at premium services, we already launched a good number of them here through the course of the year, between retail store rollouts or retail solutions to tradeshows, to cross border in Mexico, expanding the service. And we're continuing to make great progress on in-sourcing. You saw here our results in the quarter. We got to a record level of in-sourcing of 15.9%, and we're ahead of our plan to get to the low-double-digit low-teens, and we expect to continue to accelerate that. And ultimately, we're opening up the new service centers, and these are contributing to cost efficiencies in the near-term. But as the cycle starts inflecting, at some point, they're going to give us more capacity as well. And they will be both OR accretive and EPS accretive in 2025. So overall, we expect a strong year, and we'll talk more about 2025 expectations as we report the fourth quarter results this year.

And I thought, did you give the pricing renewals number in the quarter?

Hey, Scott, it's Kyle. So the renewals in the quarter were up 8%.

Thank you, guys. Appreciate it.

You bet. Thank you.

The next question is from Daniel Imbro from Stephens, Inc. Please go ahead.

Hey, good morning, guys. Thanks for taking our questions. Maybe if we could follow-up, Mario, on the pricing on the accessorial side, I think there was a 5% gap when we came into this year between you and your best-in-class peer. I'm curious how much of that you think you've captured so far. And you mentioned a few of the services you've rolled out. I'm curious, have you introduced enough to close that gap fully? I guess, how long do you think it would take to close that accessorial pricing gap as well? Thanks.

Yes, you got it. So when you look at it, the difference on accessorial revenue as a percent of total from where we are today and where we want to be, where best in class is, there's roughly a 5 points difference. So we have grown this last quarter accessorial revenue double-digit on a year-on-year basis, and we are making inroads towards getting to that 15%. Currently, we're still in the, call it low-double-digit, low-teens territory. And we believe that overall, over the years to come, if we gain an incremental point of yield from accessorials over the next, call it three, four, five years, that would be a good cadence for us in terms of how we realize that. In terms of the services themselves, as you know, then whenever you launch a new service, a new product, you build the pipeline; you have to always train your sellers and you start building that pipeline over time. And we're seeing a lot of great traction. There's still roughly call it about three or four services we want to be launching over the course of the next year that we're currently working on. But we already have made really great progress on launching some of these services, like I mentioned trade shows or retail store rollouts or retail solutions, and many of these other services.

Got it. And just to clarify, that was one point per year for the next few years, Mario, was your expectation?

This is how we think about it.

Great. Thanks so much. Best of luck.

You bet.

The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead.

Yes. Good morning. Thank you. Mario, so big -- big kind of piece of the OR improvement strategy over the medium-term, it's going to that's revenue per shipment to outgrow the market consistently. And accessorial is part of that and all of these things. I'm wondering if you can give us kind of behind the scene description, maybe example of how the service improvement in the last, maybe six, eight quarters that you've been going at it, have changed, the revenue mix have changed how your shipment profile with your customers changing or your customer profile is changing.

Thank you. Thanks, Fadi. If you take a step back in our industry, customers want great service. And the reason why they want that is because that avoids disruptions in their supply chain and how they move a product from their locations to their customers’ locations. And as you said, we've made tremendous progress on that over the last two years, we've reduced our damage claims ratio from 1.2% to a new company record here of 0.2%. And our customers see that even we -- in our new service centers, we put a slogan that says, we love our customers with three hearts next to it. And when you -- this is the relationship with building with the customers, they want to give you more freight; they want to give you more profitable freight. So in terms of the impact on the mix, we are being disciplined in terms of what we're taking on. So if we see a skid or a pallet that is non-conforming in size, doesn't fit well in an LTL network, if we see a freight that is not operating at a desirable margin for whatever reason, whether it's a customer who's not willing to pay a premium price, then we are turning away that freight or we are pricing it accordingly. And if we see a customer who wants to grow with us, whose freight fits our network that operates at a good margin, we're onboarding that freight. So we are being selective in terms of the freight we are taking on while supporting our customers. And we're also growing, now in terms of mix, it's largely unchanged between the industrial side and the retail side. We're still same proportions. But where we are seeing faster growth is in the local channel. These are mom-and-pop shops. We have now 25% more sellers in our ranks, and we're being able to gain more profitable market share in that channel. So far year-to-date, we've added more than 5,000 new customers in that channel. And we believe that that's going to grow with us here over the years to come.

Okay. Appreciate it. Thank you.

Thank you.

The next question is from Chris Wetherbee from Wells Fargo. Please go ahead.

Hey, thanks. Good morning, guys. You guys have been opening new facilities. Not all of them are net new facilities, and I think you have still some in the back half of the year. But I guess, is there a way to think about sort of the relative profitability of the new facilities this year relative to maybe what the facilities have been out that have been open for a longer period of time or operating at? I guess, we're just trying to get sense of maybe how things could look as we get into potentially a better tonnage environment in 2025 as those facilities ramp up.

Good morning, Chris. This is Ali. So when you think about the sites we're launching here, as we noted before, we would expect these service centers to be OR-neutral this year. As you move through the year, we're going to continue to ramp sites. We're going to have another 10 online by the end of the year, and then we'll open the remaining handful in early 2025. As these sites continue to mature, we would expect them to turn OR-accretive into 2025 and also EPS accretive as well. And everything we've seen so far from the 14 sites we've opened already confirm our view that as we get into 2025, these service centers are going to be contributing meaningfully from a bottom line perspective.

Got it. Thank you. Appreciate it.

Next question is from Jonathan Chappell from Evercore ISI. Please go ahead.

Thank you. Good morning. Ali, you mentioned revenue per underweight ex-fuel continue to increase sequentially throughout the rest of the year. Is mix starting to stabilize a little bit? And is this just pure core pricing and accessorials? Because you're coming up against some very difficult year-over-year comps and sequential increases would insinuate kind of low to mid-single-digit year-over-year increases as well. So can you help us think about maybe the continued headwinds of mix versus the core pricing momentum?

Sure, Jon. So when you think about mix, the biggest factor for us has been weight per shipment. Now, weight per shipment was down about 1% on a year-over-year basis in the second quarter. If you just roll forward seasonality from what we saw in July, from a weight per shipments standpoint, through the rest of the quarter, we would expect weight per shipments in Q3 to be down in that 1% range year-over-year, similar to what we saw in the second quarter, and a similar decline also in Q4, as well as our baseline forecast. So overall, we would expect mix from a weight per shipment standpoint to be relatively stable in the second half of the year relative to what we saw in the second quarter. When you think about our revenue per shipment outlook, we do expect a strong year from a revenue per shipment standpoint. As I noted earlier, we would expect revenue per shipment to increase sequentially both in Q3, and in Q4, and also accelerate on a two-year stack basis as well in the second half of the year versus the first half of the year. And our ability to drive that sequential improvement in two-year stack acceleration really goes back to all of the company specific pricing initiatives that we're executing on that are allowing us to drive that above market growth.

Got it. Thanks, Ali.

The next question is from Stephanie Moore from Jefferies. Please go ahead.

Hey, good morning, everyone. This is Joe Hafling on for Stephanie. Congrats on the good results. I guess, I wanted to ask on the terminal openings, and you mentioned the OR neutral impact. So I kind of wanted to ask on how are you able to mitigate these cost headwinds from new terminal openings? Is it just better revenue quality flowing through the new terminals? You mentioned, from a near-term perspective, it almost sounded like it was a cost of productivity advantage compared to some of your peers seeing some growing pains on the new terminal headwinds. I wanted to know how you're able to kind of keep that OR neutral outlook on the new terminal opening. Thanks.

Hey Joe, this is Mario. So when you think of the openings that we are doing so far, we opened up 14 service centers out of the 28 that we acquired. And out of the mix of these service centers, six of them are net adds. So these are markets where we are adding an incremental terminal and eight are relocations where we went from a smaller service center to a larger service center. Now, keep in mind that we already have a network that covers all zip codes in North America. So for us, the openings are about adding capacity, but in the near-term, it's about gaining efficiency and improving service as well. So when you think of the first tier of service centers that we've opened up, we've only added 50 net headcount to support these openings. And compare that to, we have 23,000 people. So it has almost no impact on cost. And the team has been executing very well on these openings. To give you an example, if you look at a market like Brooklyn, New York, we used to have 30, 40 doors in that market, small yards. We were tapped out on capacity. Now we moved into one of the largest service centers in Brooklyn, north of 80 doors, beautiful yard, gives us much more capacity. If you look at a market like Nashville, for example, we used to have a site in Southeast of Nashville, and every day we used to dispatch 30, 35 drivers North of Nashville for an hour each way to get to the customer pickup and delivery locations. Well, as soon as we opened up our Goodlettsville location north of Nashville, we relocated 35 of our drivers to that new location. And now we can cover that market with 10 to 15 minutes' drive times to get to the customer locations. So all of these service centers we opened up so far been on track, on time, either meeting or exceeding our expectation on cost efficiencies. And where we've opened them up, we've seen just in linehaul alone, 2 to 3 points of productivity pickup associated with the more space that we have with these service centers. So the execution has been very well -- going very well, and that we expect that to continue here through the course of the year going into early next year.

Great. Really impressive stuff. Thanks for the time and congrats on the quarter.

Thank you.

The next question is from Tom Wadewitz from UBS. Please go ahead.

Hi, yes. Good morning, and yes, really strong results. Wanted to see, Mario, if you could give us any thoughts on what might cause deviation versus normal seasonality in 3Q. I think you tend to give us a somewhat conservative framework and consistently give good results. What do you think might help you to do better than that 100 to 150 in deterioration sequentially in OR. And then just a broader question as well. I think there have been concerns about pricing environment, given the soft backdrop, and that there might be some kind of wrinkles and a little bit of increase in competition. And just wanted to get your thoughts on whether you're seeing that at all or whether you're just kind of seeing continued very stable, very favorable pricing backdrop. Thank you.

Thanks, Tom. First off, to clarify, in the third quarter, it would be in line with seasonality, but when you exclude the outlier quarters of COVID or the Yellow bankruptcy, we are meaningfully doing better than seasonality on OR sequential changes from Q2 into Q3. But this said, when you look at what could allow us to outperform the high end of the range of the 150 to 250 full year guide, a lot of it would be based on, one, what happens in the -- from a macro perspective, we're not assuming any improvement. We're assuming a stable macro, but no pickup in demand in the back half of the year. So obviously, if you see stronger demand, that could lead to better results. There are also a lot of idiosyncratic things that we are executing on, when it comes to, for example, in-sourcing third-party linehaul, if we execute faster than we expect, the cost flow through there would be beneficial. Similarly, when it comes to some of the new services we're launching, with the premium services we're launching, we currently have a great pipeline, we're converting that pipeline. If that goes ahead of plan, we can see upside as well. So there are many of these initiatives that we're doing, if we see upside in them, we expect to do better than where we are currently landing for the full year. Now, when you take a step back and you think about the pricing environment, we're still seeing a very favorable pricing environment in our industry. You look at our yield numbers. As Ali mentioned earlier, we expect acceleration on the two-year stack, a sequential acceleration as well on year -- on yield. Our contract renewals were call it 8% in the second quarter. We expect to be in the same and the same ballpark in the third quarter as well. We continue to see a good environment out there, especially if you're providing the great service product that we are, that is the biggest driver for being able to drive those meaningful yield improvements. And we're seeing that materialize in our business.

So, okay. So you're really not seeing a change in the competitive dynamic?

No, we're not seeing it in terms of overall industry.

Okay, great. Thanks for the time.

Thank you.

The next question is from Brian Ossenbeck from J.P. Morgan. Please go ahead.

All right. Thanks. Good morning. So Mario, you said you're still in the early innings of the yield story at XPO, renewing at high-single-digits. Now I wanted to see what your confidence, what you think is driving that in the future as you look into next year. And then maybe Kyle or Ali, you can give us a little bit more clarity details behind the different cost buckets that are getting you to that OR progression, whether its labor productivity, additional linehaul, insurance, was a decent improvement here in the quarter. So anything more specific on those separate buckets behind the OR would be helpful.

Yes. I'll start first with the contract renewal and what gives us confidence in pricing. So we expect to outperform the market from a yield growth perspective, but we're obviously not immune to the macro. If things change from an underlying demand perspective that could change the environment. And if things pick up, you would see massive yields improvement in our business. But there are three reasons for that. Number one starts with service. The service improvements we're doing for our -- we're making for our customers are drastic. I mean, if you think about where we were two years ago to where we are now, and we hear it from our customers all the time, when they see the level of support we're giving them, the focus on picking up on time, delivering on time, delivering damage free every single time, that this customer again want to give you profitable market share and they understand that we're going to charge a price for that. The second area is around the premium services. That's a big opportunity for us. As I mentioned earlier on, we want to go call it from the low-double-digit, low-teens accessorial as a percent of revenue to the mid-teens. And that's another opportunity. As we continue to rollout these premium services and build a pipeline, and that pipeline converts, we're going to see more profitable freight in that segment. And then finally, on the local channels we've onboarded all the local, the incremental local sellers we've wanted to add since last year. And now, as these local sellers ramp and their contributions become -- continues to build, we're going to see higher growth in that channel, which comes at a higher yield and a higher margin as well. So these are the three levers that we look at in terms of that yield improvement.

And then from a cost standpoint, Brian, if you think about salary, wage and benefits, labor being our largest cost element. In terms of headcount for Q3, we think we're going to be up less than our shipment growth sequentially. We would expect shipments per day in the third quarter to be up modestly, but we're going to do what we did in Q2, when we were up sequentially 4% on shipments and headcount was actually down. So I think when you think about that cost area, which is our largest, you think you're probably up mid-single-digit quarter-on-quarter. And then probably the second area I'd point to is linehaul in-sourcing. We're going to continue to in-source more linehaul. You saw purchased transportation down 22% in the second quarter. I'd expect that improvement to continue and accelerate in the third quarter.

And anything in particular on insurance, is that just lumpy from quarter-to-quarter?

From a Q2 perspective, we think insurance is going to be fairly consistent when you think sequentially.

The next question is from Bruce Chan from Stifel. Please go ahead.

Yes. Thanks, and good morning, everyone. Maybe just to follow-up, Ali, on those comments around the PT reductions accelerating in the back half. Really nice to see that. I think especially in a world with cheap spot and soft demand here, can you maybe just remind us of what your target is for that outsourced linehaul percentage this year and long-term, and then maybe help us think through any market factors that would influence the pace of reductions, whether up or down?

Sure, Bruce. So when you think about our progress that we made in the second quarter, we were able to bring our third-party linehaul miles as a percentage of total down to sub-16%. They came in at 15.9%, which was a company record for us, and improved by nearly 500 basis points on a year-over-year basis. Now, our goal is to get that number down to the low-teens by 2027. However, given the progress that we've made so far over the last several quarters, we would expect it to get there much quicker and our goal would be to continue in-sourcing even beyond that into the single-digit. More recently, we have been rolling out initiatives to accelerate that pace of in-sourcing, specifically team drivers and sleeper cab trucks. We'd expect to have a few hundred of these teams in our fleet by the end of the year, and that's going to allow us to accelerate that pace of in-sourcing even beyond what you've seen us deliver over the last several quarters. In terms of the market factors influencing the pace of in-sourcing, we have a lot of confidence that we can deliver the continued insourcing in any macro environment. Our expectation is that as we move into the second half of the year, and into 2025, you're going to continue to see both linehaul miles as a percentage of total, as well as our purchased transportation expense on the P&L continue to move lower.

Great. That's very helpful. Thank you.

The next question is from Ravi Shanker from Morgan Stanley. Please go ahead.

Thanks, everyone. Mario, you said earlier that you're seeing outsized growth in small local channel, mom-and-pop business versus national account. Can you unpack that a little bit more? Because I thought that maybe 12, 15 months ago, kind of you had onboarded a couple of large national accounts as well. How is that mix shifting? What is the actual kind of mix difference between the local channel and the enterprise channel? And also usually in up cycles, which part of the business kind of accelerates faster, the national networks or the local networks?

Thanks, Ravi. When you look at our local channel, so the shipment growth in that channel here over the last quarter was above 9%. Compare that to the overall network, has grown it's almost double the rate of growth for the rest of the network. So we're seeing meaningful progress in terms of getting more of those stickier relationships with local accounts. And the reason why that's really good business, again, it's a higher yielding business, but you also have a great local relationship with that customer that can grow with you over time as they grow their business. Now, in terms of how they react to a macro environment, they are about the same, I mean, what you typically see with the local accounts is that any software macro, the weight per shipment in that channel goes down higher than any strong macro compared to the national or the larger accounts, because usually larger accounts that use TMS systems to optimize how they're moving the freight. From a local perspective, you can imagine if you had a local manufacturer as an example, they might be shipping typically 2,000 pounds in a pallet in a strong economy, and in a soft economy that might be shipping less product; it could be 1,000 pounds a pallet. So it depends on the economy impacts weight per shipment more on the local channel. But we do expect in a cycle recovery both to grow meaningfully and be tailwinds, especially on the local side for tonnage and ultimately margins as well.

Understood. Thank you.

The next question is from Jason Seidl from TD Cowen and Company. Please go ahead.

Thank you, operator. Mario, you still talked a little bit about a sluggish backdrop, but some others have noted some green shoots along the way. I was wondering if you can give us a little bit more color about the demand function and what your customers are telling you what to expect in the back half of the year. And then just looking also for a clarification, the 8% renewal rate, what percent of the overall business did that cover?

Yes. I'll start first and I'll turn it over to Kyle for the renewal side. But in terms of the backdrop, Jason, we're seeing again stable macro but soft demand, a continuous soft demand. So what we're hearing from customers, we usually survey our large customers every quarter and this time for the back half of the year, about half of them said they expect things to be flattish in the back half and the other half was split equally between folks who expected some pickup versus folks who were expecting a bit of decline as well. So on a net-net basis; we are expecting a flattish type demand environment in the back half of the year. Now in terms of green shoots, there are certain scenarios. So if you look at the retail side, the fact that retailers are largely done with destocking and their inventories are in a good place. You could see with easier comps compared to last year, peakseason be slightly stronger on the retail side. And same thing on the industrial side, we are seeing some subsectors where potentially could see strength heading into the back half of the year as well. But I think currently we're not seeing a lot of green shoots that are showing a meaningful inflection point of demand, but we'll see where things go from here. I do think that the Fed lowering rates could stimulate both consumer confidence increasing retail and stimulate spending on the industrial side as well. But we'll see what that materializes like in the fourth quarter.

And then Jason from the renewal standpoint -- sorry, Jason, from the 8% that covers about a quarter of our contractual book, and just a little more color on renewals, renewals have been strong now for four consecutive quarters in that high-single-digit range. Our expectation for Q3, we should come in at a similar range we've seen so far in the first half.

Perfect. Appreciate the time, guys.

Thank you.

The next question is from Jordan Alliger from Goldman Sachs. Please go ahead.

Yes. Hi, morning. Just obviously done a real good job with LTL 2.0. I'm just curious, longer-term over the next several years; you're several quarters into this, if not more, at this point, new terminal openings. How do you think about the benefits you've derived? And when we get back to better demand footing, manufacturing and otherwise, can you maybe talk to what you're thinking in terms of incremental margin potential over the next several years? Thanks.

If you take a step back, in terms of where we are now, first in the overall demand environment, if you look in our industry at all the publicly traded LTL carriers, shipment count is down from 2021 to 2023 by roughly about 12%. Now, a lot of times I hear the feedback that this was the post-COVID run up in 2021. But in LTL specifically, 2021 was softer than pre-COVID. So when you compare 2018, 2019 to 2023 as a full year, shipment count in our industry was down in the mid-teens. And this is an industry that has historically grown in the low to mid-single-digit range commensurate with the IP, a bit higher than the IP. So when you think of the cycle inflection, that's going to be a massive tailwind both in terms of tonnage and volumes and in terms of pricing as well, because you won't have enough capacity in our industry. Now, you see a lot of those capacity additions, but Yellow was about 10% of the industry capacity and only half of that capacity is coming back into the market by next year. So the next cycle is shaping up to be a very strong cycle for LTLs across the board. Now, when you think about our execution, we've been able to execute very well on the plan and we're going to continue to execute very well on the plan. And you look over the last three quarters, we've delivered nearly 400 basis points of OR improvement quarter-after-quarter. And you look at the next cycle; we expect also very strong performance over the years to come. Now, in terms of incremental margins, we do expect them to change depending on what quarter it is and how much of the revenue growth is coming from yield versus volume and how well we do on the cost side. But just to give you an example, given the third quarter, we are expecting incremental margin more than 60% in what is a very soft freight environment. So again, we see massive upside here, and we're going to get to the low-80s from an OR perspective. Then we're going to get to the 70s and go from there. So that's how we think about the trajectory we're going to be on over the years to come.

Thanks.

The next question is from Eric Morgan from Barclays. Please go ahead.

Hey, good morning. Thanks for taking my question. I wanted to ask on CapEx, your average fleet age is down to four years. I think in the past you mentioned a target of four to five years. Maybe you could just clarify that. And then just given the fleet age, just wondering, next year you would expect to come back into that 8% to 12% range and maybe what some of the priorities might be. I know it's kind of early, but just given that the fleet's in better shape at this point.

Yes, Eric. So long-term target on fleet age is still 4.5 years. And when you think about CapEx this year as a percent of revenue, from an LTL standpoint, we're looking around 13%. I think next year you're going to normalize and come down. So certainly as we bring the Yellow service centers online, that'll help us reduce that number a bit. And then when you think about some of the in-sourcing efforts as those slow a bit as we get through our goals there, that'll help reduce the number as well. So I think you're probably down a point or two when you think on a percent of revenue basis. From a prioritization standpoint, when you think about our CapEx, obviously the majority across the company goes to LTL. And then within LTL, we'll prioritize continued fleet investments and then continued investments in real estate.

All right. Thank you.

The next question is from Kevin Gainey from Thompson Davis & Company. Please go ahead.

Hey gentlemen, good morning. Congrats on the great quarter. Maybe to take a different approach here. I was wondering if we could maybe talk through some of the kind of internal initiatives that you guys have done from a wage perspective in employee management. And I know Mario; previously you talked about like employee satisfaction and stuff like that. How is that affecting like retention, labor, outlooks and as the other point, maybe if you could breakout kind of the bonus compensation or at least percentage wise, maybe of what salaries and wages was for the quarter.

So starting with wages, our goal is to always make sure that our employees are very well compensated. And we have given above-market wage increases here this year that were effective at the beginning of the second quarter, which were in the mid-single-digit territory for our employees, for dockworker, drivers, et cetera. And in terms of employee satisfaction, if I think about the foundation of our plan, of our strategy, a lot of it goes back to two foundational elements. One is around customers and making sure we are providing the best customer satisfaction possible. And the second one is around making sure that we have the most satisfied employees in the industry, that they know we support them. We listen to them, whether it's myself or Dave or our operators in the field or Tim and Tony or Kyle, the whole company, we spend a lot of time in the field where we are in service centers, sitting in break rooms, talking to drivers, talking to dockworkers, because they are the folks who keep the freight moving for our customers. And we take that very seriously. Now, over the last two years, our employee satisfaction has gone up in a similar trajectory as we've seen our customer satisfaction in our service improvement. And it's been hitting company records quarter-after-quarter. And we're very proud of the progress we're making in overall employee engagement across the board. In terms of incentive compensation, the way we look at it, it's based on a combination of things, depending on where you are in the business, but it's a combination of OR improvement, a combination of revenue growth, and a combination of service improvements and hitting thresholds. And we also have localized incentive plans. We call it the Gladiator program, that whenever a service center hits a stretch goal of improving quality of reducing damages, we give monthly incentive and we do a whole cookout for all the employees at the location to celebrate the fact that we're taking care very well of customers freight. So that's another foundational element of our strategy that we usually don't talk about it. We're very proud of the progress we're making there as well.

Appreciate the color.

Thank you.

This concludes the question-and-answer session. I would like to turn the floor back over to Mario Harik for closing comments.

Thank you, operator, and thanks all for joining us today. We're continuing to move forward from a position of strength following a strong first half of the year, and we'll be sharing more progress with you each quarter. Operator, you can now end the call. Thank you.

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