How Yellow Corp. bankruptcy has created a capacity gap, XPO CEO explains

U.S. trucking company Yellow Corp. (YELL) filed for Chapter 11 bankruptcy last week and is in the process of laying off its 30,000 workers. This leaves a void to be filled in the logistics industry as shippers take on more capacity. U.S. delivery services like UPS are noted to have kept the economy afloat during the COVID-19 pandemic.

"Our number one priority is to safeguard the capacity we offer our existing customers," XPO CEO Mario Harik told Yahoo Finance Live, forecasting shipment rates and costs to increase as carriers make up for the 10% gap in capacity from Yellow's closure.

Harik discloses strategies to boost employment in the logistics industry, such as a truck drivers' school, as XPO shipments rose by 9% year-over-year alongside service volumes.

Video Transcript

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BRAD SMITH: Struggling trucking company Yellow has officially filed for bankruptcy after 99 years in business after a month long labor battle collapsed. But as Yellow nears the end of its road, what does this mean for other trucking companies and operators in the future?

XPO CEO Mario Harik joins us now. Mario, great to speak with you this morning and have you back on the program here. First perhaps let's start there because I mean, this is some big news that's come across in your industry. You evaluate how Yellow operated and more broadly the kind of negotiations that they ran into that pushed them to this point. What does this mean for companies like XPO and other operators in this industry?

MARIO HARIK: First up, Brad, thanks so much for having me on. And my thoughts go to everybody who has been impacted by these unfortunate events. Now for the rest of the less than truckload industry, our industry is one where the amount of capacity or service centers that existed in our industry have been flat over the last decade. So when you think about 10% of the industry capacity no longer being in operation, that leads to a disruption between supply and demand in terms of shippers wanting to move their shipments and not having enough service centers, which eventually leads to more tonnage and shipments going to other carriers and also prices going higher because it costs us more as a carrier to move freight for our customers when you have 10% of capacity that has gone out.

JULIE HYMAN: And Mario, it's Julie here. It's great to see you. You talked about this a little bit on the call, these dynamics, your earnings call last week. And coming as it does at a time when there is sort of secular waning demand in the industry, can you sort of help us understand how much of a boost this could give to you guys?

MARIO HARIK: Yeah. So first, I'll start with the numbers that we posted. So in the second quarter, this was before the industry disruption. We have been taking market share. So our shipment count was up 2% on a year on year basis. And that was driven by improvements of the service quality that we are driving for our customers. Now as a industry as a whole in the second quarter, shipment count was down high single digit, low double digit.

Now when you look at the month of July, you have seen an acceleration with other carriers taking on market share for us specifically. Now a portion of that was driven by our service product improvements. But our shipment count in the month of July was up 9% on a year on year basis despite the softness we're seeing in the freight economy.

BRAD SMITH: And so are there parts of the Yellow business that you look at and say could be attractive for XPO to take on and to purchase?

MARIO HARIK: So the way we look at it for our shippers, our number one priority is to safeguard the capacity we offer our existing customers and make sure that we keep on delivering the great service we deliver for them. In terms of onboarding new business, we look at it in terms of the fit of that freight to move into a less than truckload network. So typically you want 4 feet by 4 feet pallets that you can optimize and how you move them across the board. So again, we're seeing an increase in market share. And our shipment count was up 9%. What we're doing it with customers it makes sense for us to grow with on the long run as well.

JULIE HYMAN: Mario, I'm also curious about worker dynamics here because as we've talked about before, it has been a tough road to find drivers over the past several years at least. Does this then free up some folks? Does it make things a little less tight in terms of workforce in the trucking industry?

MARIO HARIK: So when you look at the trucking industry as a whole, it has been tough to hire a truck driver in both the good cycles and the softer cycles as well. And now in terms of the availability of drivers compared to the total industry, that's a smaller number. But when you look at the labor market today, they are a bit easier.

So if you look at the second quarter for us, we had three times the number of applicants for every open job rec than we did the same time last year. So it's a bit easier to hire to hire folks into our industry. But also there is area that I'm very passionate about where we run our own driver schools in more than 180 locations. And last year we trained more than 1700s new drivers to join our ranks. So it's a great program for career development but also help us find qualified candidates to join our ranks along the way as well.

JULIE HYMAN: That's right. I had forgotten about the driver's school. Thanks for reminding us about that. Since the labor negotiations were such a big part of what was happening at Yellow, remind investors where you guys stand now in terms of your unionized workforce and where you are in contract right now.

MARIO HARIK: So we as a company our employees here in North America have elected to work directly with management. So we usually-- so they don't have representation.

JULIE HYMAN: Gotcha.

BRAD SMITH: And then additionally here, Mario, I just think about some of the larger shifts that we've seen just in transportation and mobility as a whole over the course of this year and one of those larger themes is electrification but also the infrastructure that has been both spent into an administrative or public policy level. And then additionally where end consumers are wanting to see more solutions on the market. How has that translated into trucking? Are you seeing more uptake in trucking solutions or freight solutions that are powered by electric vehicles or even hydrogen vehicles?

MARIO HARIK: So I'll cover both what we're seeing in terms of infrastructure happening in the US as well as electric. On the infrastructure side, today 2/3 of our customers are industrial companies. And what we're seeing is a big trend of these companies moving their manufacturing here to North America either in the US, Mexico, or Canada. And that for us on the medium to long term is going to be tailwinds for the less than truckload industry because you would be moving effectively partial shipments going straight from manufacturing plant to a customer.

Now when it comes to electrification, it is we currently have pilots that are going on in California. And it's still a bit early because when you think about the battery packs that weigh 10,000 pounds and the charging infrastructure is still not there. Well, we need charging to happen very rapidly, so we think it's going to be a number of years before electrification takes hold in the world of trucking. Could be even 5 plus years at this point.

JULIE HYMAN: And Mario, just to sort of zoom way out here, we like to talk to you to sort of just get a general barometer of demand for goods in the United States. So where are we on that front?

MARIO HARIK: But first I'll tell you in the first half of the year, we saw the trough in the month of March. And both April and May improved modestly. But then things slid back again in June to improve again at the beginning of July. And we're hearing that feedback from our customers. On the industrial side, we're hearing mixed feedback.

Some industrial customers like automotive for example see a lot of strength heading into the back half of the year. Others are seeing either softer or steady softer demand type environment for the back half. The retailers are a bit more bullish. But a lot of our retail customers have worked through elevated inventory levels over the last couple of quarters. And now they feel that they are ready to be able to take on-- again, the consumer spend is still there. And it's still they do expect a slightly stronger back half than they originally expected as well. So it seems-- it looks like we are troughing and the things will get better from here. But obviously we'll see what the macro does, and that's going to have a bigger impact on the overall economy.

BRAD SMITH: Mario, for viewers that are watching this interview that are looking up the XPO ticker symbol and the Yahoo Finance platform right now, they're looking at that year to date performance. They're seeing the stock up 124%. This is not a company, you're not a management team that's coming out and talking about generative AI and has leaned into that hype phase to look at some of that valuation ballooning that we've seen over the course of this year. But is there-- if there is a next wave or catalyst for growth for the company even from this point, what would you point towards?

MARIO HARIK: Yes. So first I'll tell you, Brad, when you look at our performance so far, despite the increase in the share price so far this year, we are still undervalued compared to some of our peers in terms of multiple to profits that we are generating. We are also executing really well on our plan to deliver margin expansion. You look at the Q1 to Q2 time frame, we improved our margin by 200 basis points just from Q1 to Q2 and beating expectations.

And we have a great runway ahead of us where our plan is to expand our margins by at least 600 basis points by 2027 through our profits. And as we catch up our valuation to peers, there's a massive opportunity for shareholder value creation over the years to come.

JULIE HYMAN: Mario, great to see you as always. XPO CEO Mario Harik, thanks.

MARIO HARIK: Thanks so much for having