Rocky Mountain Trucking LLC

An XPO truck leaving a facility in Houston

XPO Logistics provided long-term financial targets for its less-than-truckload and brokerage units Monday after the market closed. A spinoff of its brokerage segment, RXO, is planned for Nov. 1. The remaining XPO entity will become a pure-play LTL provider, following the divestiture of a European transportation unit at a later date.

LTL revenue is forecast to record a compound annual growth rate (CAGR) between 6% and 8% through 2027, starting from a 2021 result of $4.1 billion. Adjusted earnings before interest, taxes, depreciation and amortization is expected to grow at an 11% to 13% annual rate.

Over the six-year period, XPO’s (NYSE: XPO) adjusted operating ratio is expected to improve by at least 600 basis points. The LTL unit recorded an 87.6% adjusted OR excluding real estate gains and pension income last year. The adjusted OR also includes approximately $80 million in previously unallocated corporate costs, which will be part of XPO’s operating expenses starting in 2023.

Gross capital expenditures are expected to range between 8% and 12% of revenue annually at XPO.

“The revenue and profit assumptions don’t appear very conservative, in our view,” Deutsche Bank analyst (NYSE: DB) Amit Mehrotra said in a Monday evening note to clients. “We note, for example, that XPO’s 7% CAGR for LTL revenue through 2027 compares to 10% and 11% CAGR growth at ODFL and SAIA over the last 6 years … which included a time of unprecedented industry volume tailwinds, significant market share gains (ODFL) and network expansion from a regional to national network (SAIA).”

RXO’s targets call for adjusted EBITDA between $475 million and $525 million by 2027.

RXO generated adjusted EBITDA of $302 million for the 12 months ended June 30. That number included previously unallocated corporate expenses and the expected costs associated with being a stand-alone public company, among other items.

As a percentage of revenue, RXO’s capex and depreciation and amortization will equal 1% annually from 2023 to 2027. Annual interest expense is expected to be $37 million in the same period.

XPO also provided preliminary results for the 2022 third quarter.

Consolidated revenue of $3.04 billion was below the consensus estimate of $3.1 billion at the time of the print. However, adjusted EBITDA is expected to range between $348 million and $352 million, ahead of the company’s guidance of $330 million to $345 million (excluding gains on real estate sales).

The operating ratio in the LTL segment is expected to be 85.1%, 82.9% or better on an adjusted basis. The result will be at least 150 bps better y/y.

XPO reiterated the full-year 2022 expectation for at least $1 billion in adjusted EBITDA in LTL, which includes $50 million from expected gains on real estate sales during the fourth quarter. However, it lowered OR expectations for the year. The annual adjusted LTL OR is only expected to improve between 50 bps and 100 bps in 2022 compared to “at least 100 bps” previously.

During the quarter, LTL revenue per hundredweight was up 7% y/y excluding fuel surcharges. Tonnage was down 2.9% y/y for the period but improved each month as the quarter progressed, turning positive in September.

Select metrics were also provided for the brokerage segment. Revenue was down 2% y/y and volumes increased 9% y/y. Margin dollars, or revenue less transportation and services expenses, increased by 31% y/y.

Net debt-to-trailing 12-months’ adjusted EBITDA at XPO is expected to be two times at the end of the year following the separation of the businesses.

XPO will release full third-quarter results on Oct. 31.

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