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Strong Third Quarter Results Propel Long-Term Growth Plans

In today’s update, we announced plans to decrease our outsourced miles to below 10% next year, three years ahead of schedule. To support this objective, we’re increasing our driver teams and implementing more efficient trucks for long-distance shipments. Our proprietary technology allows us to quickly adjust labor hours based on volume fluctuations at the service center level.

Leading the Charge in a Soft European Market

Despite challenging conditions in Europe’s transportation sector, we continue to surpass industry performance. Year-over-year, we achieved a 7% increase in third-quarter segment revenue, marking our strongest quarterly revenue growth since 2021, with volume improving for the fifth consecutive quarter. Notably, the U.K. led with mid-teens organic revenue growth.

Strategic Growth Through an Expanding Sales Pipeline

Our sales pipeline in Europe is experiencing near-record growth, as we secure new business and replenish leads. This will support ongoing growth in key regions. Our strong third-quarter performance underscores the success of our strategic initiatives, which allow us to provide exceptional service and generate value for customers, even amid macroeconomic challenges.

Financial Results Demonstrate Robust Performance

Now, I’ll turn it over to Kyle Wismans, our Chief Financial Officer, to go over our financial results.

Thank you, Mario. Good morning, everyone. We reported a solid third quarter, with a revenue increase of 4% year-over-year, reaching $2.1 billion. This includes a 2% growth in our LTL segment, while our LTL revenue, excluding fuel, rose by 5% from the previous year.

On the cost side, we successfully decreased expenses related to third-party carriers by 40%, saving $39 million in the quarter, thanks to our in-sourcing strategy. We managed to improve hours per shipment by 1%, which helped offset a 4% increase in salaries and benefits due to inflation. Fleet maintenance costs also saw a 12% reduction, contributing to cost efficiency.

Impressive Growth Metrics

For the whole company, adjusted EBITDA increased by 20% to $333 million, resulting in an adjusted EBITDA margin of 16.2%, up 220 basis points year-over-year. The LTL segment specifically saw its adjusted EBITDA grow 18% to $284 million.

Third-quarter operating income reached $176 million, a 14% year-over-year rise, with net income from continuing operations up approximately 11% to $95 million. This equates to a diluted earnings per share of $0.79, increasing 16% to $1.02 on an adjusted basis.

Financial Strength and Future Outlook

We ended the quarter with $378 million in cash and a total liquidity of $934 million. Our net debt leverage ratio improved from 2.7 times at the end of the second quarter to 2.5 times trailing twelve months adjusted EBITDA. Ongoing investments in our business will enhance our earnings growth trajectory.

Looking ahead, we updated our 2024 financial expectations, estimating interest expenses between $225 million and $230 million and narrowing our adjusted effective tax rate to 24%-25%. Diluted share count is expected to be around 120 million shares.

Operational Success in LTL Segment

Now, I’ll pass it over to Ali-Ahmad Faghri, our Chief Strategy Officer, for insights on our operational results.

Thank you, Kyle. In the LTL segment, we capitalized on a soft freight market, delivering another quarter of margin improvement and earnings growth. Overall, our shipments per day decreased by 3.2% from last year; however, local channel shipments increased significantly, highlighting our strategy’s effectiveness in gaining market share.

Despite a slight 0.7% reduction in weight per shipment, we outperformed the industry, reflecting seasonality in our tonnage metrics. Our pricing trends remain encouraging, with a 6.7% year-over-year growth in yield, excluding fuel, and a 6.6% increase in revenue per shipment.

Continued Focus on Margin Improvement

We recorded a 200 basis point year-over-year improvement in our adjusted operating ratio, now at 84.2%. This result is attributed to yield growth and cost efficiency initiatives, and we are proud to be the only public LTL carrier to expand margins in the third quarter.

Our outlook for the year includes an expected 150 to 250 basis point adjusted operating ratio improvement, with a target to meet or exceed the high end of this range.

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European Business Shows Resilience Amid Freight Challenges

Our performance in the latest quarter has allowed us to surpass industry expectations, even in a tough freight transportation market. We successfully kept our pricing above the inflation rate while controlling costs, minimizing the impact on our earnings. For the third quarter, adjusted EBITDA remained flat compared to last year. In the U.K., a crucial market for us, we saw double-digit growth. The improvements implemented in our business will further drive our success in Europe as the economy rebounds.

As I conclude, it’s important to highlight the main contributors to our record margins during this challenging freight cycle. We have made significant strides in service quality, which we anticipate will enhance profit margins for many years ahead. Currently, our pricing strategy is outpacing market norms, and we are beginning to tap into substantial yield opportunities. By cutting down third-party line haul miles to historic lows and managing our variable costs effectively, our efficiency has greatly improved.

These initiatives are in their early stages but are gaining traction, and their positive effects will become more pronounced once demand begins to pick up. Now, I will open the floor for questions. Operator, please begin the Q&A session.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Ken Hoexter of Bank of America. Please go ahead with your question.

Ken Hoexter — Analyst

Good morning, and congratulations on the ongoing margin improvement. Mario, continuing with this topic, can you explain the current pricing disparity compared to margins as you think ahead with Network 2.0? Also, considering the 8% drop in volumes in October, how is the underlying market evolving?

Mario Harik — Chief Executive Officer

Thanks, Ken. Regarding the pricing margin gap, we estimated it to be around mid-teens in pricing opportunities between us and top competitors. This year, we’ve made progress in closing that gap, reflecting our stronger yield performance compared to the overall market. Our service product has vastly improved, earning us high praise from customers. Additionally, we’re investing in our network and rolling stock, which comes at a cost but has been fruitful. We launched several new premium services, leading to higher revenue and margins. During the third quarter, our local account segment saw shipment counts rise more than 10%, contributing to our profitability. In the long term, we expect premium pricing to account for about half of our margin gap, with the remainder coming from both additional revenue and local accounts. Regarding volume trends, July was strong, but we observed a decline in August with September down roughly 6.1%. For October, we project approximately an 8% decrease, which aligns with seasonal expectations.

Ken Hoexter — Analyst

Thank you.

Mario Harik — Chief Executive Officer

Thank you.

Operator

Our next question is from Scott Group from Wolfe Research. Please ask your question.

Scott Group — Analyst

Good morning. Mario, with tonnage significantly down, are you concerned about pricing potential in the near term? Could you also discuss pricing renewals? Ali, based on your implied fourth-quarter guidance, it seems there may not be much year-over-year margin improvement. How should we think about LTL margin improvement in 2025?

Mario Harik — Chief Executive Officer

Absolutely, Scott. Regarding pricing, the market remains constructive, especially after a considerable amount of capacity left the market last year. Our peers are reporting similarly positive pricing trends. Historically, we tend to price 100 to 200 basis points above cost inflation, and that seems to be the case now. Our strong service quality is recognized by customers, allowing us to secure better pricing. Additionally, local accounts are yielding higher margins, contributing to our overall performance. In the third quarter, our revenue per shipment increased, which reflects our robust pricing outcomes.

Kyle Wismans — Chief Financial Officer

Regarding renewals, we saw high single-digit increases in Q3, marking our fifth consecutive quarter in this range. This performance is driven by our service enhancements. Revenue per shipment also rose by 6.6%, showing our consistent growth trend over the past seven quarters, which gives us confidence in achieving strong, above-market renewals well into next year.

Ali-Ahmad Faghri — Chief Strategy Officer

Concerning operational performance, we anticipate a strong fourth quarter, boosted by our yield management and cost control efforts. Traditionally, Q4 can be more volatile due to holiday demands and weather conditions. Nevertheless, we expect to exceed the five-year average for sequential operating ratio changes as we move into the fourth quarter.

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Service Improvement and Future Growth Highlighted in Latest Analyst Call

Financial Projections for 2024

The upcoming year looks promising as we anticipate being at or above the upper limit of our forecasted improvement range of 150 to 250 basis points in operating ratio. This signifies a strong performance, especially amid current market conditions.

Analyst Inquiry

Scott Group — Analyst

Thank you, everyone.

Ali-Ahmad Faghri — Chief Strategy Officer

Thank you.

Operator

Our next question comes from Daniel Imbro with Stephens Inc. Please go ahead.

Reed Seay — Analyst

Hey, everyone. Thanks for taking my question. This is Reed Seay on behalf of Daniel. Mario, it seems that services have remained strong, especially following the gains noted in the Mastio survey this year.

Besides in-sourcing line haul, could you explain where additional service opportunities might still address customer pain points?

Mario Harik — Chief Executive Officer

Overall, we’re on an effective path of service enhancement. Our damage claims ratio in the third quarter was 0.2%, a notable drop from 1.2% when we initiated our strategy a few years ago. This represents over an 80% reduction in damages across our network, a change our customers value greatly.

Consistent improvements continue on the on-time delivery front as well. We’ve achieved ten consecutive quarters of enhancements, and customer feedback underscores the speed and reliability of our network in picking up and delivering freight. Our strategic initiatives, including updating incentive compensation plans, launching airbags, increasing capacity, and utilizing technology to track damages at granular levels, have transformed how we load freight onto trailers.

Records were set every month during the last quarter for reduced damage frequency, a trend we expect to maintain going forward. Our operational teams are excelling in executing these strategies. Looking ahead, we have several initiatives aimed at further enhancing service. Starting with our in-sourcing of third-party line haul, using our own equipment allows for more efficient freight movement and better use of trailer space.

In October, for example, our Road Flex operation nearly achieved 100% on-time performance. As we continue to in-source third-party line haul, we expect our on-time numbers to improve even further, with a goal of consistently reaching the high 99% range.

Furthermore, expanding our network’s footprint will facilitate building pure trailers to destination, minimizing rehandling and thereby improving damage performance even more. Our ultimate ambition is to reduce our damage claims ratio to 0.1% in the coming quarters and years. All in all, we are on a strong trajectory, implementing a solid plan, and I am proud of the team’s progress.

Reed Seay — Analyst

That sounds great, thanks for the insights.

Mario Harik — Chief Executive Officer

Thank you.

Operator

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

Fadi Chamoun — Analyst

Thank you. Good morning. Can you share some insights on what you expect for 2025? Specifically, what leverage points do you see, considering the current conditions and opportunities in accessorial and local channels?

Do you think tonnage per day will stay flat this year? If we don’t observe significant macroeconomic improvements, what does 2025 look like for you? Is there still room for enhancements independent of the macro environment?

Mario Harik — Chief Executive Officer

For 2025, we anticipate a robust year regarding both operational improvements and earnings growth. This expectation persists even amidst the current sluggish macro environment. An improvement in demand will only enhance our results further. Looking at 2024, we expect to perform within or beyond our improvement guidance, despite a softer freight market.

Further details about 2025 will be shared in the upcoming quarter once we wrap up this year, but we are entering next year with a strong service track record, which allows us to adjust our pricing effectively. In 2024, we have launched several expanded premium services, generating excitement among our sales team and customers alike.

We’ve been building momentum and strengthening our revenue streams, which has improved our margins. To date, we have brought on over 8,000 new local customers this year. During the last quarter, even with a decline in overall shipment count, our local customer shipments rose by over 10%. Looking forward, our increased local sales team will continue to foster growth.

As for line haul in-sourcing, we anticipate achieving our 2027 target by the end of this year, significantly reducing outsourced miles. As a result, costs will benefit from this shift. Moreover, we have opened 21 out of 28 service centers so far, with plans to complete the remaining openings by the end of Q1 next year. These centers will improve our efficiency and ultimately enhance our earnings per share as we approach 2025.

In summary, we foresee a strong 2025 and are optimistic about future cycles, thanks to ongoing initiatives and capacity investments. We aim to drive our performance into the 70s and beyond.

Fadi Chamoun — Analyst

I appreciate your insights, Mario. Thank you.

Mario Harik — Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Chris Wetherbee with Wells Fargo. Please proceed with your inquiry.

Christian Wetherbee — Analyst

Thank you. Good morning, everyone. Mario, I want to expand on your earlier comments regarding the new facilities. You’ve opened 21 of the planned 28 centers. How do you assess the profitability of these new facilities? Are they aimed purely at expansion, or is there also a focus on improving efficiency and density?

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Strategic Growth: Insights from Mario Harik on Service Center Performance and Pricing Strategies

As the logistics industry navigates a shifting market, attention turns to the recent performance of service centers and the outlook for incremental margins.

Mario Harik — Chief Executive Officer

Thanks, Chris. Considering the new service centers we launched, we’ve opened 21 out of 28 locations. Among these, eight are entirely new sites that we added to expand into new markets, while 13 are relocations from smaller to larger facilities.

Looking ahead to 2024, we expect these sites to have a neutral impact initially, followed by an accretive performance in the subsequent year. It’s important to note that even with 21 new centers, we’ve only increased our workforce by 18, adding about 80 employees to manage these operations. This careful expansion is yielding efficiency gains.

Our data indicates improvements in delivery efficiency across the board. City operations have seen a percentage efficiency increase in the low to mid-single digits, and line haul efficiency has similarly improved. This is significant and suggests continued gains can be expected as we progress into next year. Currently, these new sites report incremental margins above 40%, with all operating at or above our expectations. This efficiency will prove beneficial in managing overall costs and enhancing margins, especially when freight market conditions improve.

Currently, demand for Less-Than-Truckload (LTL) services is down, with industrial comparisons showing a decrease of low to high teens in volumes compared to pre-COVID levels. However, this downturn places us strategically to utilize our additional capacity effectively once the market rebounds, allowing us to capture higher margins.

Christian Wetherbee — Analyst

Thanks, Mario. That’s very helpful.

Mario Harik — Chief Executive Officer

Thank you.

Operator

Next, we have Jon Chappell from Evercore ISI. Please go ahead.

Jonathan Chappell — Analyst

Good morning. I’d like to discuss the trends in revenue per shipment. There was a sequential increase, marking the strongest improvement of over 3% observed in recent quarters.

While challenges remain with accessorials and volumes, do you believe that a significant portion of available opportunities has been maximized during this downturn? Or should we anticipate a reacceleration in that area next year when favorable conditions return?

Kyle Wismans — Chief Financial Officer

Hello Jon. There are still ample opportunities for increasing revenue per shipment. Renewals have been robust, and as I previously mentioned, the accessorial segment is still a focus area. We aim for accessorial revenue to make up 15% of total revenue, and we’re currently above 10%. This indicates around five points of potential pricing upside remaining.

Additionally, there’s a growing demand for our premium services, like retail store rollouts and integrated cross-border services to Mexico. We are building a backlog in these areas. With the ongoing growth in local shipment accounts, we expect this to drive further pricing excellence. Overall, we believe we are just beginning to tap into these opportunities.

Achieving 15% of revenue from accessorials is a multi-year goal, and we have made good progress, but there is still considerable work ahead.

Jonathan Chappell — Analyst

Got it. Thank you, Kyle.

Operator

Next, we have Tom Wadewitz from UBS. Please proceed.

Thomas Wadewitz — Analyst

Good morning. It’s positive to see ongoing momentum in pricing and margin results. With many inquiries focused on pricing, could you share your thoughts on what normalized pricing might look like by 2025? Some industry experts suggest that LTL pricing may stabilize around 4% to 5%. Do you agree, and what differentiators might allow you to see pricing stay in the 6% or 7% range?

Ali-Ahmad Faghri — Chief Strategy Officer

Hi Tom. We’ve witnessed strong yield growth over the past quarters, and many initiatives have just begun. Service improvements will help maintain competitive pricing. Our local and premium service segments continue to expand, contributing positively to both yield and margins.

The industry overall has seen significant capacity losses in the last 12 to 18 months, setting a favorable pricing backdrop. Consequently, we expect to remain ahead of the industry performance concerning pricing. Numerous pricing initiatives are in motion, and we anticipate that momentum will persist into the fourth quarter and through 2025.

Mario Harik — Chief Executive Officer

From a market perspective, we anticipate outperforming in pricing as we move into 2025 and beyond. Analysts typically note that LTL pricing tends to exceed cost inflation. Our data supports the notion that when you factor in improvements like accessorial revenue and the increased mix from local accounts, we are well-positioned to achieve continued pricing outperformance.

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Market Trends and Company Performance: Insights from Industry Leaders

Executives discuss recovery projections and customer dynamics in the freight sector, highlighting challenges and strategies ahead.

Thomas Wadewitz — Analyst

Do you think the market could stabilize at 4% to 5%, particularly for strong players in the LTL sector?

Mario Harik — Chief Executive Officer

That aligns with our assumptions for next year.

Thomas Wadewitz — Analyst

Thank you for your insights.

Operator

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

Brian Ossenbeck — Analyst

Good morning. I appreciate the opportunity to ask a question. The hurricane had a significant impact on freight markets in October. Can you clarify if the 8% drop you mentioned was influenced by this event or the cyber attack? Additionally, Mario, could you provide an update on what you’re hearing from customers across various sectors as we approach year-end?

Mario Harik — Chief Executive Officer

Indeed, October saw notable effects from the previous year’s cyber attack on a competitor, which resulted in approximately 1,000 fewer shipments per day, equating to about a 2% reduction in tonnage. Normalizing for that, we can better assess the 8% figure.

The hurricane also disrupted shipping, particularly in the southeastern U.S., impacting our ability to transport goods in and out of the area for weeks. Thankfully, our team remained safe, and we managed a rapid response to support our customers.

From a demand perspective, industrial markets experienced a decline at double the rate of retail. The ISM index indicates a slowing economy, dropping to 46% or 47% over the quarter. In my discussions with clients, sectors like electrical equipment are optimistic, whereas construction and agriculture appear more cautious about demand moving forward.

Retail sales, while still down compared to last year, reflect a more stable environment with normalized inventories and steady consumer demand. Our local sales efforts have been fruitful, bringing in over 8,000 new customers this year, resulting in a shipment count increase exceeding 10% in Q3. However, the path forward remains uncertain.

Brian Ossenbeck — Analyst

Thank you for the clarification, Mario.

Operator

Next, we have Scott Schneeberger from Oppenheimer & Company. Please proceed with your question.

Scott Schneeberger — Analyst

Thank you, Mario. Could you elaborate on the new premium services you introduced? Are there more in the pipeline? Also, how is the investment in your sales force progressing?

Mario Harik — Chief Executive Officer

Absolutely, Scott. We’ve launched several premium services, including one for retail store rollouts. This service assists consumer packaged goods companies during major product launches, such as for holidays, by coordinating numerous shipments to various stores.

Another offering is ‘Retail Solutions,’ which ensures timely delivery to retailers with strict chargeback policies. Our goal is to facilitate tracking and storage to meet those deadlines while minimizing penalties for our customers.

Additionally, we opened a large service center in Las Vegas to support events like trade shows, where we provide five days of free storage as well as logistics assistance for deliveries and pickups.

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Strategic Expansion and Service Enhancements Propel Growth at Leading North American LTL Carrier

Expansion of Service Offerings in Mexico

Our efforts to improve customer service are evident as we expand our offerings in Mexico. Having operated in this market for over 30 years, we are one of the veteran carriers. Recently, we have increased our crossing locations and broadened our reach within Mexico, which has been well-received by our customers.

Impact of Additional Services on Operations

The extra services we provide do come at a cost, but these costs are manageable. More importantly, they are essential for our customers seeking reliable freight pick-up and delivery, especially with the additional requirements we cater to. In the near future, we plan to launch incremental services, including security dividers and exclusive use of trailers, where customers can reserve entire trailers for shipment.

Investment in Sales Force Growth

We have successfully achieved our initial goal of increasing our local sales force by 25%. While we continue to assess the size of our sales team, we are content with our current structure. Incremental hiring is ongoing, particularly in business development roles, as we finalize our budget for 2025.

Future Capital Allocation Plans

Scott Schneeberger — Analyst

Thank you for the insights.

Operator

The next question comes from Bruce Chan with Stifel. Please proceed.

Bruce Chan — Analyst

Good morning. Kyle, could you elaborate on how the potential sale of your European business might impact your capital allocation priorities? Additionally, any updates on that process would be appreciated.

Kyle Wismans — Chief Financial Officer

Absolutely. Our main priority is to reinvest in the business while achieving an investment-grade profile. Currently, our leverage stands at 2.5 times. A transaction involving our European business could significantly reduce that leverage. Since last year, we have made substantial progress; our leverage was at three times, 2.7 times last quarter, and it has now reached 2.5 times.

We’re committed to maintaining a strong financial profile, aiming to boost EBIT and cash flow generation. A European sale would expedite these goals.

Moving forward, the extent of our capital expenditure (capex) will play a crucial role. Traditionally, our capex sits around 13.5% to 14% of revenue for LTL services, but we expect that figure to decrease over time, especially as we launch new service centers. The opening of 28 service centers, with an estimated cost of $2 million each, will help lower this percentage, further expanding our flexibility in capital allocation.

Mario Harik — Chief Executive Officer

Regarding the future of our European operations, we aim to position ourselves as a leading North American LTL carrier. We intend to be patient with the potential sale to ensure we receive the correct valuation. Our European business holds significant value, being among the top players in LTL and dedicated solutions across key Western European markets.

Despite contemplating the sale, our European segment has performed robustly, achieving a 7% revenue increase year-over-year in the third quarter—making it our strongest growth period since 2021. This marks the fifth consecutive quarter of accelerated growth, which indicates that we are well-situated to leverage future market opportunities while remaining focused on our long-term goals.

The capital we generate, alongside proceeds from any future sales, will enhance our capacity for shareholder returns, ultimately supporting the growth of our earnings.

Bruce Chan — Analyst

Thank you for the clarity.

Operator

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

Ravi Shanker — Analyst

Thanks for the update. I have two questions regarding services. You mentioned significant improvements in damage claims—down to 0.2 from 0.4. Do you anticipate diminishing returns in this area? Also, regarding your position in the Matthew survey, could you share how you plan to penetrate national rankings further and your goals for the next three years?

Mario Harik — Chief Executive Officer

Our objective is to achieve best-in-class status in minimizing damages. Over recent years, we have successfully reduced damage incidents by over 80%, setting new company records every month. We remain committed to further improvement.

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Service Excellence Fuels Growth for LTL Carrier Amid Market Shifts

In the logistics industry, providing top-notch customer service translates directly to increased freight opportunities and higher pricing. Our commitment is to continue enhancing service quality until we achieve best-in-class status.

Regarding our recent Mastio service performance, we topped the charts for improvements over the past two years based on Net Promoter Score (NPS) metrics. This particular data point is crucial for assessing our overall performance. Additionally, we closely monitor customer satisfaction through weekly surveys for all shipments, yielding a more than 40% increase in satisfaction over recent years. Ultimately, satisfied customers contribute to our growing revenue and profit margins, which we attribute to our ongoing service enhancements.

Ravi Shanker — Analyst

Great. Thank you.

Operator

Next, we have a question from Jason Seidel with TD Cowen. Please go ahead.

Jason Seidl — Analyst

Thank you, operator. Good morning, Mario and team. Congratulations on the operational advancements this quarter. I have a question.

Several competitors are reporting a shift of freight towards truckload due to current weaknesses in the truckload market. I’m curious about two aspects: Are you witnessing this trend in your operations? And how swiftly do you think freight could revert back to LTL once the market stabilizes in 2025?

Mario Harik — Chief Executive Officer

Estimating how much freight has shifted toward truckload is challenging because this aspect tends to be less visible to us. Generally, shippers with Transportation Management Systems (TMS) have been using these tools for years, always comparing service requirements and costs between truckload and LTL. This practice isn’t new for us.

Shippers with TMS adapt quickly based on their analysis of rates and service demands. We anticipate that if truckload rates increase, many clients will reassess their options. The last quarter revealed our average length of haul was about 855 miles, with truckload rates potentially around $1,700 per shipment. In contrast, our average revenue per LTL shipment was $380, demonstrating a significant pricing gap.

For heavier shipments over 15,000 pounds, less than 0.3% of our total shipments fall into that category, suggesting minimal conversion there. We estimate a shift of about 0.5 points or less, but as truckload prices rise, we expect a resurgence of LTL shipments.

Jason Seidl — Analyst

That’s very helpful. Thank you, Mario.

Mario Harik — Chief Executive Officer

You’re welcome.

Operator

Our next question comes from Stephanie Moore with Jefferies. Please proceed with your inquiry.

Stephanie Moore — Analyst

Good morning, everyone. Thank you. Following up on the previous discussions regarding service quality, could you elaborate on your confidence in maintaining these high service levels during a potential market uptick, particularly when network strain could occur?

Mario Harik — Chief Executive Officer

Absolutely, Stephanie. It’s important to note that our service improvements were not simply reactions to lower volumes; they’ve resulted from targeted action plans. We implemented incentive compensation for our employees focused on enhancing service, integrated technology to track damages, and promoted a strong cultural change whereby peers hold one another accountable for excellent service.

To illustrate this, we experienced a notable 7% rise in shipment volumes from Q2 to Q3 last year, following the bankruptcy of a competitor, well above typical seasonal adjustments. Throughout this period, our service metrics, like damage rates and on-time deliveries, consistently improved month over month in 2023, corroborating our capability to handle increased demand.

Furthermore, our network is positioned with substantial capacity. By Q1 next year, we anticipate having over 30% excess capacity ready to accommodate additional freight demands, alongside an influx of 15,000 trailers and 4,000 trucks for our rolling stock.

Stephanie Moore — Analyst

Thank you for clarifying.

Mario Harik — Chief Executive Officer

Thank you.

Operator

Our next question comes from Ariel Rosa with Citi. Please go ahead.

Ariel Rosa — Analyst

Good morning. Congratulations on your strong results. Mario, I’d like to continue the conversation about your 30% excess capacity.

It appears many competitors also possess significant surplus capacity. From an industry perspective, what assurances do you have regarding market dynamics? If conditions remain loose, how long can you effectively manage this surplus? Also, how likely is it that competitors will begin to lower rates to attract more business, and what gives you confidence against that possibility?

Mario Harik — Chief Executive Officer

Thank you, Ari. I’m not currently worried about that risk. In LTL operations, real estate is a relatively small percentage of total revenue—typically in the low to mid-single digits. This means we won’t compromise on pricing just to fill capacity with less profitable freight.

XPO Logistics Reports Strong Margin Improvements Despite Market Challenges

Shifts in Capacity and Demand Post-COVID

Maintaining margins requires a competitive edge over other network players. Companies that fail to do so risk reduced earnings and must work harder for lower freight costs. The industry has seen shipping counts decrease recently, with demand down in the low to high teens compared to pre-COVID levels in 2018-2019.

The bankruptcy of Yellow last year removed 10% of the LTL (Less-Than-Truckload) capacity during a period of low demand. Following their exit, about half of the service centers were sold back to other LTL carriers. As a result, approximately 94% to 95% of the industry’s previous capacity has reemerged.

Customer Concerns and Capacity Planning

While visiting customers in the Minneapolis area last week, executives noted that concerns about future capacity were dominant. Customers recognized that some capacity was lost, but they are aware that overall demand remains subdued. When demand in the LTL sector begins to recover, it could lead to substantial growth opportunities for companies like XPO Logistics.

Insights on Pricing and Demand Elasticity

Analyst Jordan Alliger raised questions regarding price elasticity and customer behavior toward XPO’s service offerings. Chief Financial Officer Kyle Wismans addressed this by emphasizing that pricing aligns with the enhanced value provided to customers. As the company continues to invest in improving service, customers are more willing to accept higher prices to benefit from the better service, leading to above-market contract renewals.

For context, XPO has successfully decreased its damage claims ratio from 1.2% to 0.2% over recent years while achieving consistent improvements in on-time performance. This ongoing commitment to quality has helped elevate pricing power within the market.

Future Outlook and Expected Tonnes Demand

Looking ahead, XPO anticipates a slight decline in tonnage in the fourth quarter, likely in the mid-single-digit range compared to the previous year. This estimate incorporates normal seasonal variations seen in previous years. Because macroeconomic factors are significant, these expectations may shift based on future market conditions.

Closing Remarks from Leadership

During closing statements, CEO Mario Harik expressed confidence in XPO’s strategy and its strong team. He noted that the company’s service levels are robust and consistently improving. Local accounts have increased by over 8,000 year-to-date, and the company’s technology investments are streamlining operations. The focus is on being well-positioned for a future freight market recovery.

With a disciplined approach to growth, XPO aims to enhance margins through improved yield and premium service offerings. The leadership remains optimistic about updating stakeholders in the upcoming quarter.

Call participants:

Mario Harik — Chief Executive Officer

Kyle Wismans — Chief Financial Officer

Ariel Rosa — Analyst

Jordan Alliger — Analyst

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.