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XPO CEO says demand is mixed amid ‘softer macro’ environment

XPO CEO Mario Harik discusses shipping demand, the economic environment, the truck driver shortage, his background, and the company's latest earnings.

Video transcript

- XPO now an independent company after spinning off its truckload brokerage business RXO. And also, we've got a new CEO for XPO. That's Mario Harik. And he is joining us now. Mario, full disclosure, you and I chatted a little bit last night at a reception at the NYSE following the formal spin off here. And we, of course, have talked to Brad Jacobs, who is now stepping down as the CEO of the company, about the rationale behind what's going on.

But just to take a step back-- we have talked so much about the broader economic landscape. We've talked a lot about the buildup that we've seen in inventories in a lot of industries. What are you guys seeing across the country in terms of the flows of goods?

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MARIO HARIK: Julie, it was great seeing you. And thanks for having me on. So we are seeing a softer macro this year than what we saw last year. And we're hearing mixed feedback from our customers. Today, our less-than-truckload business is 2/3 industrial companies. And we're seeing some of these companies having more product flow through their supply chain so they're ending up shipping more product while others are seeing softer demand. And on the retail side, it's similar feedback.

Now, that said, you wouldn't see it in our numbers. We delivered a great third quarter where we delivered record EBITDA. We grew in our LTL business. We delivered record revenue and record EBITDA. And we're seeing an acceleration of tonnage, which is a measure of volume, where we flipped to positive on a year on year basis in September. And we expect to be positive on volume in the fourth quarter as well.

- Just given this backdrop, Mario, how are you investing in the business? Have you pulled back at all?

MARIO HARIK: We are planning-- for our less-than-truckload business, we are continuing to plan to invest more into the business. Over the last year, we pivoted to the next phase of our LTL business. We call it LTL 2.0, which is based on capitalizing on the high return on invested capital into our less-than-truckload business. So we're opening up more terminals. We're adding more trailers to our fleets. We're adding more trucks. And we're seeing the success of doing so. Again, we accelerated our tonnage trends where we bucked typical seasonality. And we are also bucking industry trends in terms of gaining market share as well.

- In those tonnage trends, is there anything that says to you that there is a spending pullback among some of the most notable consumers that you're carrying for?

MARIO HARIK: So, today, our business is 2/3 industrial companies and call it 20% to 25% are e-commerce and/or retail-type companies. We are seeing some customers slowing down where the consumer, for example, is buying less. But we are also seeing some retail companies having to turn through inventory to have the right type of product in their supply chain. And in that case, they are shipping more products.

For the industrial companies, again, a lot of these companies through COVID had pent-up demand, where now they are being able to get the product they need to fulfill open purchase orders. And that's leading to more demand, while others are seeing softer demand. So, currently, it's a very mixed environment. And, generally, the macro is softer than where it was a year ago or where it was earlier in the year. But using our own company-specific initiatives, we are being able to go out and gain market share by focusing on delivering great service for the customer and having capacity in our network to gain that business.

- Mario, what's happening on the trucker front these days? We heard a lot about the trucker shortage that even before the pandemic, right, this was something that was pretty acute in the industry. What's the status in the industry more broadly and then for XPO specifically?

MARIO HARIK: The driver shortage, obviously, is not new to our industry. And it's something that did accelerate through the pandemic. Now, things are getting easier where we are now than where we were earlier in the year. Just to give you an example, in the third quarter, we saw an increase in applications per posted RAC go up by 58% on a year on year basis.

But we there as well we had a company specific initiative that I'm very proud of that helps us counter the driver shortage. We operate our own driver schools out of 130 locations. And this year, we are on track to graduate more than 1,700 drivers to join our rank. And it's a great career opportunity for people who join our company as dockworkers, and they can actually become a driver where they can make more wages and have a great career with us over the years to come.

- Mario, you're following big footsteps and a big personality in Brad Jacobs. I'm convinced he's off camera there. But maybe he's not. What should investors know about you? Tell us a little about your story.

MARIO HARIK: You got it. So my background is in technology. I initially-- this is where my education was. I went to MIT for it for my engineering degrees. And since then, I used to be in the tech sector for a while. I've been with XPO for the last 11 years. I was Brad's third hire on the team back in 2011. And we've been part of every decision we've made. And I've learned a ton from Brad over those 11 years. And I look forward now to this next chapter of being CEO and look forward to the next chapter of our company. We're very excited about moving forward.

- In that extensive work history, where do you think about some of the parallels that we've seen in previous economic downturns and how you intend to lead XPO through what is the impending or anticipated next downturn?

MARIO HARIK: Well, we are modeling for different scenarios for next year depending on if the macro further softens from here or if things do get better as well. Now, in our LTL business, it's a business that has a high moat associated with it where you haven't had big competitors go into less than truckload in 30 to 40 years. And that leads to strong pricing dynamics where, obviously, price stays positive in our industry. Even in a soft market, we anticipate still having pricing power to our customers.

The second area is managing variable costs. If the macro does soften-- today, 75% of our costs are variable based on the volume that we are moving through our network. So we would anticipate to work both the efficiency angle and using leveraging our technology as well to make sure that we are managing that variable cost to the volume we are seeing in the environment. But again, I would intend to gain market share. And we are bucking typical trends. And we're bucking industry trends in terms of being able to gain more market share from our customers.

- Well, good luck this holiday season. Good luck on your CEO journey. Looking forward to staying in touch. XPO CEO Mario Harik. We'll talk to you soon.

MARIO HARIK: Thanks so much.