XPO Logistics, Inc. Stock

Welcome to the XPO Q2 2026 Earnings Conference Call and Webcast. My name is Sachi, and I will be your operator for today's call. [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 security 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 the 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 are 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 on the company's website. I will now turn the call over to XPO's Chairman and Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone, and thank you for joining us. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. This morning, we reported record second quarter results that demonstrate the increasing strength of our earnings power. Company-wide, we reported revenue, adjusted EBITDA and adjusted diluted EPS at the highest levels in our history. Excluding real estate gains, our adjusted EBITDA was up 25% year-over-year to $425 million. And adjusted diluted EPS was $1.64, up 56%.

In North American LTL, we grew adjusted operating income by 36% on a 15% increase in revenue, highlighting the scalability of our network and the operating leverage in the business. We also brought down our adjusted operating ratio below 80%, which is a new record for us. That's a 300 basis point improvement from the second quarter last year and a significantly outperformed model seasonality. The foundation of our outperformance continues to be the superior customer experience we deliver through disciplined execution amplified by our technology.

Notably, we achieved a new service milestone with our damage claims ratio, bringing it below 0.2% for the second quarter in a row and to the best level in our history. This is a product of operational excellence, investments in capacity and proprietary technology working together to build customer satisfaction and trust. Another example is our reputation as one of the fastest and most reliable LTL networks in the industry with broad geographic coverage and consistently high service levels, decide directly to our gains in market share.

In short, world-class service is the gateway to expanding our business and translating customer value into shareholder value. To accomplish this, we've engineered our network to support long-term growth while running efficiently across different demand environments. Since 2021, we've increased our trailer fleet by more than 30% and tractor count by more than 20% and expanded our network capacity with 15% additional doors. We've also invested in our workforce, improving retention while maintaining the ability to scale labor hours with demand. This gives us the capacity to take on substantially more volume in the recovery while maintaining service quality.

Each of these investments strengthens our operating leverage, enabling us to grow efficiently now and over time. They also reinforce our commercial performance by creating more opportunities to increase wallet share, earned price and win new business. In the second quarter, our service quality helped us accelerate contract renewal pricing. And we're continuing to expand revenue streams with high-margin local customers and premium services where we have a meaningful competitive edge. These are all structural advantages inherent to our business. We're building our network for years of above-market pricing growth and profitable market share gains.

Before I close, I'll spend a few minutes on our proprietary technology and its broad impact across the business. In the second quarter, we used our workforce planning technology to improve productivity by nearly 2.5 points versus last year, which outperformed our quarterly target of 1.5%. Another example is out optimization, which we discussed on our prior calls. Currently, more than 2/3 of our operations are using this technology for pickup and delivery, and we're seeing measurable results with fewer miles and more stops per hour. We're also seeing encouraging results from the pilot of our trailer loading technology. This application uses AI to assess images of freight place inside the trailers and provide our dock workers with actual feedback in breadtime.

In the second quarter, at the pilot sites, load quality improved by more than 40%, while damages were reduced by 50%, contributing to both service quality and operating efficiency. As we grow the business and expand the use of our technologies, the financial, operational and competitive advantages will increase as well. In closing, the levers we executed on in the second quarter are firmly established as a foundation for outside value creation. We'll continue to enhance our service, investment capacity drive above-market pricing growth and scale our proprietary technology to operate more efficiently.

Our results reinforce our confidence in the strategy and the significant value it can create. And that value creation is underpinned by 2 key objectives: achieving an annual LTL operating ratio in the low 70s or better; and generating billions of dollars of cumulative free cash flow in the coming years. With that, I'll turn it over to Kyle to walk through the financials. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll walk through our financial results followed by our balance sheet, liquidity and capital allocation. For the second quarter, we grew total company revenue 13% year-over-year to $2.4 billion. In our LTL segment, revenue increased 15% to $1.4 billion. reflecting an acceleration in both yield and volume growth. Turning to cost in LTL. Our expense for salary wages and benefits increased 7% year-over-year or $46 million. Our productivity initiatives continue to help mitigate the impact of higher inflation and freight volumes. Our cost for fuel operating expense and supplies increased 24% or $53 million primarily due to higher fuel prices. While ins truckload rates trended up significantly throughout the quarter, our purchase transportation cost increased by just $8 million.

This is because our in-sourcing strategy is performing as planned, reducing our exposure to truckload rate volatility. Our depreciation expense increased 5% or $4 million, consistent with our continued investments in the network to support long-term growth. Moving to profitability company-wide. We delivered $434 million of adjusted EBITDA. Excluding $9 million of real estate gains in the quarter, adjusted EBITDA increased 25%. Our LTL segment generated $390 million of adjusted EBITDA and improved margin by 310 basis points to 27.4%. Excluding real estate gains, adjusted EBITDA increased 27%. Lastly, in LTL, we grew adjusted operating income 36% to $287 million.

In our European transportation segment, adjusted EBITDA was $48 million. And in our Corporate segment, adjusted EBITDA was a $4 million loss. Returning to the company as a whole, operating income increased 37% year-over-year to $271 million. Net income was $162 million, representing diluted earnings per share of $1.36. On an adjusted basis, diluted EPS was $1.70. Excluding $0.06 per share of real estate gains in the quarter, adjusted diluted EPS increased 56%. Turning to our second quarter cash performance, we generated $207 million of free cash flow, and we had $298 million of cash on hand at quarter end after completing $101 million of net capital expenditures, $70 million of common stock repurchases and $70 million of term loan repayments.

Combined with available capacity under our committed borrowing facility, total liquidity at quarter end was approximately $898 million. Our net leverage ratio improved to 2.1x trailing 12 months adjusted EBITDA compared to 2.3x at the end of the first quarter. We're driving meaningful increases in free cash flow generation through a combination of strong earnings growth and moderating capital expenditures. We now expect to more than double our free cash flow for the full year compared with 2025. This gives us greater flexibility in accelerating share repurchase while continuing to strengthen the balance sheet through debt paydown.

In July, we paid down another $100 million on our term loan to start the third quarter, bringing our year-to-date debt paydown to $200 million. And with that, I'll hand it over to Ali to talk through our operating results.

Thank you, Kyle. I'll begin with our LTL performance where we delivered another quarter of profitable growth and record margins. For the full quarter, shipments per day increased 2.8% year-over-year, while weight per shipment declined 1.8%, resulting in 1% growth in clinic per day. Importantly, volumes strengthened as the quarter progressed. Shipments per day increased 0.2% year-over-year in April, 3.3% in May and 5.1% in June. Tonnage per day followed a similar trajectory, improving from down 1.5% in April to up 0.5% in May, followed by a 4% increase in June. We saw the improvements continue in July with an estimated increase above 6% in both shipments per day and tonnage per day on a year-over-year basis and with weight per shipment roughly flat. .

All 3 metrics outperformed normal seasonal patterns. These trends reflect our ability to consistently earn profitable market share through world-class service and any economic backdrop. In the second quarter, this was amplified by a steady improvement in freight demand. Pricing remained a source of strength throughout the quarter. Yield, excluding fuel increased 4.4% year-over-year and improved sequentially, supported by an acceleration in our contract renewal pricing. Revenue per shipment, excluding fuel, also improved both year-over-year and sequentially. We expect both metrics to continue improving sequentially in the third and fourth quarters as we align more of our pricing with the value we deliver and expand the mix of accretive business.

Notably, given the improving trend we've seen in weight per shipment, we now anticipate revenue per shipment growth, excluding fuel, to accelerate more than we previously expected in the third and fourth quarters. This is a benefit to both revenue growth and profitability. Turning to our adjusted operating ratio in LTL, we improved OR in the second quarter by 300 basis points year-over-year to a new company record of 79.9%, outperforming normal seasonality by more than 100 basis points.

Over the past 3 years, through a historic freight recession, we've improved OR by nearly 800 basis points with plenty of runway ahead. Our European business also delivered another strong quarter of growth on both the top and bottom lines. We reported record revenue in Europe, marking our 10th consecutive quarter of growth on a constant currency basis. Adjusted EBITDA increased 9% year-over-year, and we expect that growth to accelerate in the second half of the year.

Before we move to Q&A, I leave you with 3 key takeaways from the quarter. First, we're consistently earning profitable market share with an expansive network differentiated by superior service and a commitment to continuous improvement. This is the basis of our value proposition. We're also driving above-market pricing growth while unlocking structural productivity gains through AI and other initiatives for network optimization. And finally, we expect our second quarter outperformance to accelerate as freight demand recovers. This is the latest validation of our ability to significantly expand margins over time. With that, we'll take your questions. Operator, please open the line for Q&A.

[Operator Instructions] The first question is from Ken Hoexter from Bank of America.

Great. really great job and congrats on breaking sub-80 and outperforming seasonality again, great to see. I guess maybe just talking about the outlook going forward, Ali, you're talking about accelerating earnings. I don't know if you want to put some parameters on that, if you're talking about levels of operating ratio performance or revenues? And then Mario, just at the end, you kind of ran through some of the AI stuff you're running -- rolling out and reduced damages 50%, load quality increased 40%. These are massive numbers. Maybe put some numbers or frame the opportunity here for expenses going forward?

You got it, Ken. First, starting on output performance, I'll start with the third quarter OR. We do expect another strong quarter for margin performance here in the third quarter. as you know, a normal seasonality for us is for OR to increase 200 to 250 basis points from Q2 to Q3, which normal seasonality but so hard for the quarter north of 82% but we do expect to significantly outperform that, and for abroad to be below 81% here in the third quarter. And that's a strong outcome overall, and it applies another very strong quarter of year-on-year margin improvement and is driven by a combination of price, accelerating volumes and cost efficiency and posture on track to outperform our full year target for margin improvement. .

In terms of technology, I mean, as you know, we've always been very tech forward in our thinking. And the solution you referred to, the solution we're launching for all of our dock workers. It was here in pilot in the second quarter when every time a dock worker is loading a trailer, they actually take photos every turn of the trailer. AI analyzes that photo in real time and tells them what they're falling short unloading, whether a certain pallet needs to be strapped to the wall of the trade road where they got to use an airbag or if they're not using safe stack bars. So all of that happens in real time so the dock workers can actually correct what is happening as they are loading the trailer. And we have seen tremendous success in the pilot so far, and we expect to roll this out across the entire network through the back half of the year.

But similarly, all the other solutions around P&D, around occuficiency, about labor planning, all of these have a massive runway ahead of us here. In the quarter, we improved productivity by nearly 2.5 points versus an expectation of 1.5%. And again, the runway is massive ahead of us for all of these solutions.

The next question is from Scott Group from Wolfe Research.

So seems like you're clearly going to exceed the margin target for the year. I don't know if you have an updated view on that. And then maybe just more importantly, longer term, Matt, I thought I heard you say in the prepared comments, like a low 70s OR. I don't know that I've heard you say that specifically before. So what's your -- what do you -- how do you think about the time line to get there? That's give or take, another 1,000 basis points of margin improvement, whether the -- I don't know, incremental margins assumed with that or pace of margin improvement you think you can do the next bunch of years?

You got it, Scott. So first, I'll start for the full year margin outlook. Based on what we delivered so far in the first half of the year and our expectation for the third quarter, we do expect to outperform our initial outlook, which was to improve or for the full year by 100 to 150 basis points. And we now expect full year margin improvement to be at least 200 basis points. And obviously, we'll see what the back half has in store for us. But first, Scott, if you look at the volume side, it has tracked well above seasonality here more recently. And we're seeing both our initiative and gaining market share as well as the positivity we're getting from customers that have taken to more freight on our trucks. As Ali mentioned in the opening remarks, we expect July to be above 6% of tonnage growth here.

And that means that for the full year, we now expect tonnage to be up a few points relative to when we started the year where it was more of a flattish expectation. On the pricing side, the trends have been favorable, and we expect our pricing strength to continue through the rest of the year. And on the cost side, also our execution has been very strong through productivity, what I mentioned earlier on about the AI initiatives as well. So if you break it down, a lot of great momentum across all of these pieces, and that's going to enable us to outperform our initial full year expectation on margin improvement.

In terms of getting to a low 70s and beyond OR, this is what really gets us excited about the years ahead. If you look at it today, we have a low teens pricing gap and opportunity that we have -- we're going to go get above market pricing growth. And if you look at it over the last 3 years, we have been outperforming the market on yield like call it 2 to 3 points, sometimes a bit more per year. And that's driven through the combination of -- from 1 perspective, our service product continues to improve, and we expect we can get the point of extra yield associated with that over a long runway, 5, 5-plus years. And then the other 2 components are around premium services and continuing to grow with our small- to medium-sized customers.

On premium services that you recall -- when we started our plan, we had 9% to 10% as a percent of revenue being revenue, and our goal was to get to 15% plus. And we've thought of be halfway through that, and we see a massive amount of opportunities as we onboard new customers on these services. And similarly, on local accounts, we are actually accelerating the growth with small- to medium-sized customers. here in the -- both as the quarter progressed in Q2 and July, we've seen any further inflection and improvement there. But we're being able to onboard more of these customers who had you service that your relationship and our goal is to get them the delightful experience every time they ship with us, and we're seeing growth there as well.

So that's the big opportunity. Scott, if you look at it, that double-digit pricing opportunity is what would get us there and beyond over the next 5 years.

The next question is from Jonathan Chappell from Evercore ISI.

Ali, you said you expect the 2Q outperformance to accelerate and then Mario insinuated something for 3Q without putting a pin on it. I wouldn't think you expect tonnage and shipments to continue to increase by 6% as per July. But if you play out the string on seasonality for August and September from where you're exiting July. What are we looking for from a volume perspective? And I get the revenue per hundredweight the revenue per shipment increasing sequentially and where would that put you relative to kind of the normal seasonal trends on 3Q OR progression? .

Sure, Jon. So from a volume perspective, as Mario noted, July for us was up over 6% tonnage on a year-over-year basis. And that was about call it, 4 points better than normal seasonality relative to the month of June. Typically, what we see is tonnage is usually down in that low to mid-single-digit range sequentially as you move from June into July. This year, it was flattish. And so much better than normal seasonality. Now if you just roll forward that above seasonal trend, we've been seeing through the rest of the quarter, that would put full quarter tonnage for us up somewhere closer to that mid-single-digit range on a year-over-year basis. And keep in mind, Jon, this does account for a comp dynamic we have in Q3, where August and September are tougher comps on a relative basis.

However, if you zoom out, that mid-single-digit tonnage growth we expect in the third quarter does imply a meaningful acceleration on a 2-year stack basis. relative to the second quarter. And ultimately, that speaks to the momentum we're seeing from a demand perspective Similarly, from a pricing standpoint, as kind of noted, we do expect both yield and revenue per shipment ex fuel to increase sequentially here, both in Q3 and Q4 on a year-over-year basis, we would expect our yield to be up in a similar range as Q2. That's even with the improving weight per shipment trend we're seeing here more recently, as we noted July, weight per shipment was flat on a year-over-year basis. that's a great outcome as it points to an improvement in underlying core pricing.

And ultimately, that improvement in weight per shipment, the benefit to revenue per shipment, which is why we do now expect our revenue per shipment ex fuel to accelerate year-over-year here in the third quarter to a greater degree than we initially expected. And ultimately, that's going to be accretive to both revenue and profit growth. And all of that, Jon, is what underpins the OR outlook that Mario referenced earlier, where we would expect our OR to meaningfully outperform seasonality in the third quarter to be below 81% here. ultimately how much below 81% is going to depend on how demand trends through the rest of the quarter. But we do expect another very strong quarter of margin outperformance here in the near term.

The next question is from Richa Harnain from Deutsche Bank.

I was hoping you could talk about the competitive dynamic a bit more, the strong July performance definitely stands out. And I'm wondering if that's -- there's some validation in your outlook that as things start to heat up, maybe the smaller regional players you compete with struggle a bit more because they've already been operating at really high utilization and you're getting that spillover freight? Or is this truckload coming back into LTL. Is that becoming a more prominent trend that you're seeing your weight per shipment kind of improving? Or kind of just like what's going on in the competitive backdrop that's allowing the strong outperformance.

Yes. Richa, if you look at -- there are a few dynamics there. The first one, as we've always discussed, industry capacity has been down over the last few years. since the last peak in 2021, when we have service center count to be down, call it about 10% as an industry and door count to be down mid-single digits over that same period of time. Now when that industry capacity was shrinking, it was at a time when industry demand was meaningfully down. It was down in the mid-teens through the industrial recession that we have seen over the last 3 years. So what we're seeing this year is a few dynamics. The first one is add-on having seen end up effectively demand for the industrial sector. Folks have not deployed enough capital in that industrial and purchasing industrial goods across the country. And that's starting to come back.

Now we're still not yet in form recovery territory because when you look at ISM has been over in that low to mid-50s so far year-to-date, all expansionary, which is really good, but we haven't seen yet the over 60 type numbers, which is when the market is fully an upswing scenario. That said, on the demand side, we are giving a lot of positivity from customers. We -- as you know, we do a survey every year before every earnings call. and our customers, we have now doubled the number of customers relative to the beginning of the year that do expect an acceleration in the back half of the year, which is very, very exciting. And we're starting to see that in existing customer demand starting to see a pickup in an overall volume.

Now when you break it down between retail and industrial, retail continues to be a positive territory. On the industrial side, what changed from last quarter is that we are seeing manufacturing starting to build momentum, and we haven't seen that in more than 3 years, which is fantastic to see. Now on the truckload, truckload to SCL conversion. We are in the early innings of seeing some of that where, as you know, truckload rates here today are up more than 40% so far. And we are seeing some -- we estimate to be somewhere in the low to mid-single digit total tonnage that has moved from SEL to truckload and we expect that to come back to the back half of the year or going into next year as those -- if those truckload rates stay consistently high, like they have been here so far with the increase year-to-date.

And the last component, I would say we're taking market share. I mean we're taking market share for 2 reasons. One is that we, historically, a lot of the premium services that we are offering, we were not participants and so we had very low market share and we're growing those whether it's close to reconsolidation, whether it's us arrived by date, whether it's trade show shipping, whether it's new store rollouts, all of these are for us ramping over time, which is helping us gain market share as I mentioned earlier on, our local small- to medium-sized customers, we continue to grow that book of business as well. So all of these, I think, what is kind of -- is what is causing the inflection in volume that we are seeing here and a meaningful step-up versus seasonal trends as well.

The next question is from Stephanie Moore from Jefferies..

Maybe touching on just the overall pricing environment. One, maybe I just misheard it, but I believe you said contract renewals have accelerated. So if you could just touch on that, again, apologies if I missed that. But in general, I mean, I think help us maybe bifurcate pricing actions that are more so driven by actions that are within your control? And then pricing that might be -- or improved pricing that's driven by the underlying environment and what it seems to be just an overall stronger freight environment?

Sure, Stephanie, this is Kyle. So you're right. So when you think about contract renewals, they did accelerate. We're up in the mid- to high single-digit range. And I think what's important when you look at renewals and you look at the results, is a strong flow-through we're seeing. So if you look at the second quarter as an example. I mean, obviously, that strong pricing that was above market really translated to a strong outperformance. And we said in the quarter, we're 100 basis points better than normal seasonality and improved year-over-year probably over 300 basis points. I think what we're seeing right now is really a productive pricing environment. And we think that's going to continue as the market continues to improve.

And as Mario said, we have a lot of different strategies that we're deploying to really continue to drive strong pricing here in the remainder of the year.

The next question is from Jason Seidl from TD Cowen.

Operator and team, nice job in the quarter and sort of impressive outlook here. A couple of questions. Given the better trends that you're seeing in terms of the demand side, and if we extrapolate them for 3Q and 4Q, where are you guys going to exit the year in terms of available capacity? And also, how should we look at head count given these better trends?

Great question, Jason. So if you look -- if we first look at it on the capacity side or doors, and equipment. I thought with the rolling start, we're feeling great for rolling stock. I mean if you think about it, that is more than 30% more trailers more than 20% more tractors and that's going to give us a runway through the next few years as we continue to invest in our fleet to be able to handle any demand in that. A similar dynamic for the door side and usually in a down cycle as an LTL carrier, having in excess of 30% door capacity is very helpful because that enables you to be able to take on more volume when the up cycle comes and you can support both your existing customers as well as gain profitable market share gains.

And we're feeling great about where we are on that portion of it as well. And not all capacity adjacent created equal because you can imagine as a network business, you can have certain markets where you are short on capacity and this is what we have done our investments, a lot of the investments we've done, whether it's in the South or the Southeast or the Southwest were all driven in areas where historically we had capacity constraints, and now we are actually feeling great about where we are. If you look at a market like Nashville or Atlanta, in Texas or in the Midwest, I mean we've done a really good job in complementing our network and adding those mega facilities in those very large markets to be able to support our customers in the context of an up cycle.

On the labor side, on the head count side, we feel very good about where we are right now. From one perspective, we continue to improve productivity, as I mentioned earlier, and that gives us an incremental amount of labor capacity, what you can do more with the existing head count that you have. Now if you look at over the last few years, we are only down slightly on headcount. So relative to where we were in the month of July, we can handle another low to mid-single-digit more shipments with the existing workforce and by letting of ours back up. But we've also been proactive in hiring as well based on what we're hearing from customers, and we're seeing the demand environment in some markets, we've already ramped up our hiring efforts, and we're seeing very, very good traction so far. Now if the industry thematic company accelerates further from here and we see a hockey stick type demand recovery, we're also confident in our ability to further expand the workforce.

As you know, our employee turnover is the best it's ever been and we can spin up more than 130 driver training schools to help support our growth there as well. So on all aspects of capacity, we're feeling great, we're in ideate to support our customers and grow with them in the context of a demand recovery.

The next question is from Jordan Alliger from Goldman Sachs.

So it's been a while since wait per shipment, I think, back to flat or positive. I'm just curious if you could give some thoughts from here. Is your expectation that, that will move into the positive at this point in time? And then just real quickly on just a price follow-up. -- if we do have that broadening industrial recovery that we're hoping for, given you're already seeing very strong pricing, can price be pushed up even further from here?

Sure, Jordan. I'll start on weight per shipment and then pass it to Mario to talk about the pricing outlook from a weight per shipment standpoint, we are seeing encouraging trends. Here in the second quarter, our weight per shipment improved by about 1 point on a year-over-year basis relative to the first quarter, also outperformed seasonality as we move from Q1 into Q2. Now here more recently, we've seen weight per shipment improve even further in the month of July, weight per shipment was flat on a year-over-year basis. That was also better than typical seasonality relative to July, and it's ultimately being driven by that improvement in the underlying industrial demand backdrop that Mario referenced earlier. .

If you just roll forward what we've been seeing here more recently, it would put weight per shipment down year-over-year in the third quarter. That does factor in a tougher comp that we had the month of August, which subsequently gets easier in September. However, we do expect weight per shipment to be down less year-over-year in Q3 versus Q2 that order as you cycle into the fourth quarter, we do see a scenario where weight per shipment starts to inflect positive on a year-over-year basis entering 2027. Ultimately, that's going to be driven by the demand environment and how much further it improves from here, but we do expect weight per shipment to start to inflect positive on a sustainable basis over the next few months as we enter the ending of the year.

Jordan, when you look at the industry pricing overall, we are starting to see a more constructive industry pricing environment. As I mentioned earlier, you have a dynamic where you have demand and the early innings of picking up and then you have capacity that has gone out of the market. So we do believe that you're going to see an industry overall pricing recover over the quarters and years to come. Now the way we think about it, I mentioned earlier on the runway that we have above market to grow our yield performance, which is called it a 2 to 3 points of outperformance between the premium on service, premium services and growing to small- and medium-sized customers.

Now in a soft macro environment and as you know, we've been in a rate recession for 3-plus years, you see typically LTL pricing to be up in that low-single digit. And our expectation is that we would outperform that by 2 to 3 points on a consistent basis. As the environment starts picking up, you will see industry pricing go up to mid-single digit, and then we expect to outperform that. And then eventually, when the industry pricing gets up to high-single digits in a full blown recovery, we'd expect to outperform that by a few points there as well. So that's how we think about this trend, and we believe we are currently in the early innings of what would be a multiyear company with industry pricing going up, demand going up, being constrained by capacity for the sales have not invested in growing capacity.

The next question is from Chris Wetherbee from Wells Fargo.

I wanted to ask about productivity, so you outperformed productivity target again in the second quarter. I think you've done that a number of the last several quarters. I guess as we think forward, Well, I guess, seems to be different is the fact that tonnage is inflecting more positively here. So you're able to get the productivity without the help of volume. I'd imagine productivity is probably a bit easier as we go the volume growth, but maybe you could help sort of lay out what you think maybe is the right way to think about productivity? Is it still sort of 1.5 points on a year-over-year basis? Do you think it can be better kind of in a more favorable demand backdrop?

Well, overall, you're spot on that, Chris, whenever you see higher volumes, you tend to be more productive because you have more density in your network. As I said, these things are not linear. -- in terms of how you improve that over time. And for us, our target is 1.5 points, call it, over the next x number of years based on all the solutions that we are deploying our AI capabilities and what we're doing, but we have been outperforming that number. When you look at the post Yano bankruptcy and you saw an uptick in overall freight volumes, above seasonal trends. We also were able to improve productivity meaningfully higher over that period of time. But again, a stop-line year, our expectation is 1.5 quarter and if you zoom out and you look on a multiyear trajectory, we do expect to outperform that as well, given our proprietary technology firing on all cylinders, but also, obviously, field execution being very disciplined in how we're executing in the field. .

The next question is from Tom Wadewitz from UBS.

I wanted to see if you could offer a little bit of thought on how inflation may affect the business. Obviously, you're seeing good price, good tonnage, great operating leverage. But how do you think about where maybe there is some inflationary pressures? And I guess I'm thinking comp and benefits, in particular, that's your big expense line. And maybe how that affected in 2Q and how you look forward with that also, I guess, related to that is just in the driver market. I think we've heard some feedback that some of the tightening aside from -- is maybe not terminal driven, but more so drivers getting a little tight. I don't know if you see that or if that's a factor in terms of how you look at inflation. .

Sure, Tom. So when you think about inflation, I think overall inflation we see in the mid-single-digit range. I think you're right. I think the core of that really is the wage inflation you would expect to see. And I think beyond that, I think more broadly, you'll see a point or 2 from particular health insurance, as you would expect. I think if you look at where we see that, we'll see that certainly on the SWB line you see in the second quarter. So we saw some inflationary pressure there this quarter. I think beyond that, obviously, something like higher volume and shipments will play a factor there.

We also did have some setup comp. But I think the important point there is really the productivity. And Mario already spoke to the productivity, but having 2.5 points of productivity in the quarter really helped us manage that. So when you think about the core inflationary pressure, really be on labor, we're always going to look to manage labor ensure labor is adjusted to the freight we have on the dock. And I think we've been effective in doing that when you continue the results.

And in terms of driver -- go ahead, Tom.

I was just going to say, like on the -- you mentioned some of the incentive comp or other pressure in 2Q. Is that like would we expect to see that 3Q looking forward as well? Or is some of that temporary 2Q.

I think from what you'll see as far as the components that will impact us in the back half, I think you'll see some of the similar components. So certainly, the wage benefit inflation will be there, the higher incentive comp will be there as well. I think the important point, though, that's contemplated in our outlook for the back half of the year. When you think about the overall OR for the year improved by more than 200 basis points. we're already taking that into consideration.

In terms of the driver market, so we are seeing the hiring market tighten -- and we believe that the component of that is what's happening in the promo space where you have capacity that is going out. So you have a lot of the large lease and the launch of cars who are now hiring drivers as well. As I said, we -- given our benefits and comp packages for our drivers and given the fact that we have a very young fleet, I mean, our average truck age is sub 4 years. We've been very successful in being able to add drivers in some markets where we need to, and we have seen very good traction there as well. But the buzzer market is tightening on hiring as well. .

The next question is from Brian Ossenbeck from JPMorgan.

Maybe just real quick, firstly, commentary on fuel. Obviously, still swinging around a little bit, probably still will impact in the current quarter and how you think about that in the outlook? And then just more broadly, maybe for Mario, can you just talk about the mix seems to be shifting a little bit just based on the weight per shipment trends inflecting more positive. Can you just talk more about the 3PL layer, I guess, or that part of the structure? Because it seems like others are having problems with that in terms of their pricing? It looks like you're getting or industrial flow through than maybe some other companies we've heard of so far. So I want to see if there's anything you can point to in terms of why there's a relative difference with some of your peers to the extent you got visibility on that. .

Sure, Brian. This is Ali. On the fuel side, when you look at our second quarter performance and our ability to outperform seasonality and deliver that 300 basis points of year-over-year improvement really goes back to the strong operational execution that we're delivering tied to our accelerating pricing, the profitable market share gains above productivity target that we're delivering. Now certainly, fuel helps. But I think if you zoom out and you look at over the last 3 years, we've delivered nearly 800 basis points of OR improvement in an environment where fuel was down for the majority of that period. And again, I think that speaks to the strong underlying operational execution that we're delivering. Here in the third quarter, based on what we're seeing with diesel prices, we do expect diesel prices to be down quarter-over-quarter and subsequently for our fuel revenue to also be down on a quarter-over-quarter basis.

Even with fuel down quarter-over-quarter, we would expect to meaningfully outperform normal seasonality here in the third quarter and for the full year and deliver very strong performance. Now on the 3PL side, transactional 3PL mix is the smallest part of our business as a whole. And typically, what you'll see, Brian, is that carriers will work more with 3PLs in softer in volume environments like we've been in over the last few years, but then as demand improves, you'll typically see that come lower. And that's what we've seen here more recently. As our volumes have accelerated through the second quarter and into the third quarter, we've seen our 3PL mix decline on a sequential basis.

Overall, if you zoom out, we're focused on OR accretive freight that fits our network. Ultimately, if it checks those boxes, we're going to pursue it. So we think about that business very similar to the rest of our book.

The next question is from Ari Rosa from Citigroup.

Congrats on some nice results here. I wanted to ask about the performance in Europe. It seems like it continues to improve. Just maybe if you could speak to the sustainability of that, what you're doing differently there? And then I noticed the transaction and integration costs were somewhat elevated or maybe it was restructuring costs in the quarter. Maybe just speak to what that is and if that continues.

You got it. I'll start and I'll turn it over to Kyle, on the restructuring side and the near-term results. But high level in Europe, we are driving a similar plan to what we drove here in the U.S. in terms of cost control, leaning into sales and hiring more salespeople, growing into new verticals, for example, we didn't used to do any work in luxury goods or aerospace or health care or medical work or technology -- and all of these are now verticals that we are actively pursuing. And we are on a very, very good trajectory of growth. We -- as Kyle mentioned earlier, we grew EBITDA in that business here in the second quarter in the high-single-digit range, and we expect to grow our EBITDA in the high teens in the back half of the year.

So we're seeing a very good acceleration of results driven by the execution of our plan. Now ultimately, I would go is to sell that business and -- but we're patient, we want to get the right price for it. And when the time is right, we're going to set that business based on that very strong momentum here on operating performance.

And then in terms of restructuring costs, I think the majority of the cost we saw in the quarter related to restructuring in Europe. And what we're doing there is really taking structural costs out. That was really some efforts focused on the salary and the functional support team. It's really going to help them streamline the operation moving forward. I think what's important there is you're seeing it flow through in the results. As we said, you're up 9% year-over-year growth in the second quarter, and that growth is going to accelerate in the back half of the year within the European business. It's also important to note that those restructuring spend that we're seeing in the second quarter will step down for the remainder of the year. .

The next question is from Bascome Majors from Stephens Inc.

You've given us a bit of a look forward with the longer-term margin target quantified and talking about the yield spread that you expect to maintain and where the market might go if it continues to rain tighten. Can you give us a big picture look at what the cash flow and incremental margin algorithm might look like for the business over the next couple of years? I know you don't want to guide demand out that far, but just with all of the changes and acceleration and productivity, that we've seen today. Just update us on sort of the long-term algorithm in the business?

It's Kyle. So I want to start with free cash maybe talk just about this year for a second. So if you look at '26, we started the year thinking we were going to improve free cash flow by 50% on a year-over-year basis. At this point, we're far ahead of the expectation. As I said in the prepared remarks, we now expect it to at least double year-over-year, really driven by 2 major factors. So 1 is continued ability to drive higher income, and the second is CapEx moderate. If you think on long term, how that translates, we think our EBITDA conversion is going to continue to accelerate as earnings continue to grow. And we're going to have a moderation in our CapEx profile and team over the last couple of years. which really means we're going to be able to generate billions of dollars of free cash flow in the coming years with compounding earnings growth and our ability to really accelerate both our share repurchase program and our debt pay down.

So we're really excited about what cash can do for us and how it transit in the future I think from the other standpoint from an incremental margin view, I think over the cycle, we think it can generate 40% incremental margins, and we demonstrated that so far. It's going to depend on the mix of volume and price. But I think over the long term, as Mario talked about, we expect yield to be the bigger driver of the contributor or top line growth. And that's going to have very strong growth at the bottom line. So we also talk about our yield initiatives, whether it's growing local, whether it's growing premium or otherwise, they're really early innings for us and there's a long runway to grow. So we expect really, really strong incremental margin for at least in the 40% range through the cycle.

Thank you. The next question is from Bruce Chan from Stifel. .

Just want to come back to some of the comments on demand. Mario, you mentioned that part of the volume outlook is coming from market share, which I think makes a lot of sense with your service levels and your sales force investments. But any sense for how much of that volume outlook is idiosyncratic versus what's coming from the market -- and maybe as part of that, any color on what you're seeing by end market would be helpful, too.

You got it, Bruce. Well, first, it's coming from the combination of 3 things I mentioned earlier on. From 1 perspective, we are gaining market share. from 1 perspective, we're starting to see truckload back to LTL conversion, but that's very early innings. And we're starting to see the industrial economy further strengthen as we are having given to the back half of the year. So these are the 3. It's tough to estimate because in any given month, you have a combination of all of these things that kind of work in your favor. And we believe currently the bigger component is our idiosyncatic market share gain levels. But at the same time, we're seeing the other 2 starting to contribute as well. And we currently, I mean, if you see there is a scenario here where you see both of these levers accelerate meaningfully in the back half of the year, that's not contemplated in our outlook yet. So obviously, we'll see in that industrial economy big up from here, you see eventually saw semi hockey stick type on the recovery on the potash side, but that's not contemplated in our outlook at this point in time.

Now in terms of the market share gain, just to kind of give you some color, we spoke about small- to medium-sized customers. If you look at last year, we were run rating with our very strong growth in that segment of business, we were roughly run rating at about 2,500 new logos, new customers a quarter in that particular channel. And here in the second quarter, we were at 2,700 to 2,800 customers that we have added. So a step up from where we were at the run rate of last year. Similarly on premium services, I'm very proud of the team driving those on the sales side and the operations side to execute on them because we're seeing very strong momentum in those services as well that are contributing to our panels growth.

In terms of end markets that we are seeing growth in. So high level, I'd say retail so far this year has been consistently positive modestly positive, but still the consumer is in a healthy place. We're still seeing that demand be in a good place overall. When I look at the industrial side, last quarter, we spoke about electrical being strong chemical or industrial for chemical industry being strong. equipment for agriculture being heavy equipment is being strong. And now what we have seen here in the second quarter, especially as we progress through the quarter, is manufacturing is starting to build its momentum as well. And if that continues because that's one of the largest parts of the industrial cycle with industrial complex we could see, obviously, things further improvement in the back half of the year from an overall demand perspective.

But generally, optimism of customers is higher demand is starting to pick up. Again, it's early innings. So that is a scenario here if we continue to see that ISM plays into higher industrial trade when we see a stronger recovery even in the back half on the pole side.

The next question is from Ravi Shanker from Morgan Stanley Investment Management.

Just a couple of your follow-ups. Mario, I think you said you're going to have a double-digit pricing opportunity in the next 5 years. Can you just talk about what the slope of that looks like? And maybe remind us what the expected pricing lag in terms of timing might be relative to TL. And also, I think you said that you think the network can absorb about mid-single-digit volumes here before you start bringing resources back. Sounds like you're going to get there next quarter, unless I'm misunderstanding that comment. And so can you just talk about when and how much you think that resource addition might actually start to show up?

You got it, Ravi. Well, first, I'll start on the pricing opportunity. We do expect it to be fairly consistent in terms of outperformance. So we don't see the slope outside of the market pricing and what that does. But in terms of our outperformance or the double-digit opportunity, we see that as being fairly steady in that 2 to 3 points higher than market average pricing is the way we expect that to roll out over the next 5-plus years. And that will be driven by the 3 levers I mentioned earlier on. So taking a bit more price given the improvement in service quality and then obviously growing more from a mix perspective, with a small to medium-sized customer and the premium services. And just to quantify them, Ravi, we estimate about 1 point coming from the better service product for the year on top of what the market is doing. A point will be coming from our premium services growing and us taking market share in those.

And some of these were very, very early innings. You look at a market like grocery consolidation, we still have a spec of that market, but we have a fantastic pipeline and the business keeps on growing in that in that segment of business, just as one example of those. But we would expect that as being roughly at a run rate of an incremental point per year on the price side.

And the last component is for the small- to medium-sized customers. We do expect that to be at a clip of about 0.5 point of incremental price driven by that portion of business as we continue to grow. In terms of the network absorbing more and more volume. So we already have started in the second quarter were hiring efforts in some ramping up hiring in some markets. And we've had great success so far, Ravi in that. As I mentioned earlier, between the benefits we offer between the -- what our network is the equipment that we have, we've been able to grow in a very, very good way in those markets we want to hire in. Then obviously, we'll see when the market goes from here.

So if we start seeing double-digit type tonnage growth, obviously, we're going to be into the markets where we need the incremental folks and kind of go from there to add people that we need.

The next question is from Christopher Kuhn from StoneX.

I'm just curious how the newer terminals have done that you've opened in the past couple of years and how that might be benefiting your overall performance?

Overall, Chris, the new terminals have been fantastic for us. And the reason why -- because we already operate in all of the regions where we added those terminals. So from the ones we've added around half of them were relocations, but we went from a smaller turbine also a bigger terminal and the other half were incremental adds in existing markets. But just to kind of give you an example, I was given the example for us, the city of Nashville. When we used to have the location southeast of the city and we -- given the amount of freight we used to break every night in that location. We used to have to call it, 4 million pounds of freight in our overnight shift. And we didn't have enough door capacity or yard capacity to manage through that. .

So since then, we used to also every day in dispatch about 35 drivers to go up more from the city of Nashville up in Armor to get the Goodlife. So since then, we opened up a break bulk location west of Nashville, 250 doors, 50 acres of land, one of the largest deepwater terminal in the city of Nashville and that enabled us to expand capacity, improve linehaul efficiency and that the new location in goodness will enable us to improve our P&D efficiency. So what we have seen is a step-up in both pickup and delivery and linehaul efficiency in the markets where we opened up these locations in while giving us the wrong way to be able to handle much more customer freight in these markets where we needed it.

So what we have seen so far a very quick ramp on productivity and improving of the operational performance from a cost standpoint, but also enabling us to handle more freight for the customers as well. We've executed on those in a very, very strong way.

The next question is from Eric Morgan from Barclays.

Maybe just a couple of quick ones. On line haul insourcing, I think your slides showed a slight uptick sequentially. I realize it's small so maybe just noise, but curious if anything to call out there and where you might see that going from here. And on Europe, just given the momentum in that business, any update or progress on strategic alternatives that you'd call out?

Yes. I'll start on the European side. But as I mentioned earlier, our goal, Eric, is to eventually sell that business. But we are patient on the price we want to get. Now if you look at the capital markets in Europe and generally the economy in Europe, although our business is outperforming meaningfully, what we're seeing in the market, that's not the case in Europe. In Europe, overall, the economy, I would say, is flattish, slightly slow, but through execution, gaining market share leaning on price, as Kyle mentioned, leaning on cost control and efficiency, we have been able to outperform the market here. But at some point, when we get the right price for it, we're going to sell that business, and we're going to use the proceeds to further accelerate our capital return to shareholders is how we think about it overall.

And then just quickly on the line haul miles. So our outsourced miles were in the mid-single-digit percentage range of total miles. That's actually the lowest level we've had in our company history. And if you look forward for the remainder of the year, it's a level we expect to be at for the rest of 26. We're in a great spot there. I think it really reflects what we've been able to do to inflate the P&L from any concern on truckload rates moving forward. So we feel like we're in a really good spot there for the remainder of the year. .

There are no further questions at this time. I would like to turn the floor back over to Mario Harik for closing comments. .

Thank you, operator, and thank you, everyone, for joining us today. As you saw, our strategy has delivered another quarter of strong results driving outsized value creation. And looking forward, we'll continue to grow the business, expand our margins and deliver higher free cash flow for years to come. With that, I'll ask the operator to please end the call.

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

Welcome to the XPO Q1 2026 Earnings Conference Call and Webcast. My name is Kevin, and I'll be your operator for today's call. [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 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 its earnings release. The forward-looking statements in the company's earnings release are 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 the call, the company also may 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 information, 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 Chairman and Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone, and thank you for joining us. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer.

This morning, we reported record first quarter earnings with strong momentum across the business. Company-wide, we delivered adjusted EBITDA of $319 million, up 15% year-over-year, and our adjusted diluted EPS was $1.01, up 38%. In North American LTL, we increased adjusted operating income by 20%, and we delivered an adjusted operating ratio of 83.9%, that's an improvement of 200 basis points year-over-year, which is also well ahead of normal seasonality.

These results mark a clear acceleration of outperformance driven by the disciplined execution of our strategy. It starts with customer service where we continue to make significant progress. In the first quarter, we reduced our damage claims ratio below 0.2% with damages at a record low. This is the service metric that matters most LTL customers. We've developed new AI-driven technology that addresses damages by improving how we load our trailers. These tools evaluate load quality in real time and helps us protect our customers' freight.

We're also running one of the fastest networks in the industry with the largest number of standard 1-day and 2-day. Our mix of speed, coverage and safe handling combined with reliable on-time performance is delivering a superior experience for our customers. And this is translating into better commercial outcomes, including stronger pricing and ongoing market share gains. We've also built our network to support growth by investing ahead of demand across our workforce, fleet and service centers. These are the three main components of capacity to move freight for our customers.

On the real estate side, we've added density in growth markets, and we continue to operate with more than 30% excess store capacity. This allows us to run our network efficiency today and respond quickly as volumes recover. Another area where we invest to gain a competitive edge is in our rolling stock of tractors and trailers. We have one of the youngest fleets in the industry with an average tractor age of 3.9 years. This gives us an advantage with reliability, safety and lower maintenance costs.

Trailers are just as critical to capacity because they enable more efficient freight flows across our network. We've manufactured more than 20,000 trailers since the start of the trade down cycle. And from a labor standpoint, we have a proprietary workforce planning model that uses technology to flexed labor hours as demand changes. This allows us to improve productivity while maintaining high service levels.

Taken together, our investments in capacity are creating strong operating leverage that will enhance our bottom line as the cycle turns. Another strategic lever is pricing, where we saw continued momentum in the quarter, with underlying trends that improve each month. As demand recovers, customers place more value on carriers that can rely on for both capacity and consistent service and that translates into stronger pricing and continued share gains for us.

One area where we're continuing to earn market share is with local customers. In the first quarter, we grew shipments in this high-margin channel by mid- to high single digits, an acceleration from the prior quarter. We're also continuing to shift towards higher-quality freight, including shipments that did our premium services. The demand for our rollout offering was a key driver of our margin improvement in the first quarter. And we're seeing increased adoption in verticals like grocery and health care, where we fill a definite need as customers in these segments have service-sensitive freight.

In short, we have multiple levers we can execute and a long runway to build on our momentum with a double-digit pricing opportunity over the years to come. And lastly, another important driver of our outperformance is cost efficiency. In the first quarter, our productivity improvement of 4% was well above our long-term target of 1.5%. We achieved this by ramping our technology to ensure that the benefits are both durable and scalable. Specifically, we're leveraging proprietary tools that use AI to improve planning, optimize trade flows and enhance day-to-day that with execution. This is especially valuable in linehaul and pickup and delivery operations where the savings can be significant.

For example, we've rolled out our pickup and delivery tools for route optimization to about half the network, and we're seeing tangible efficiencies, including fewer miles and more stops per hour. We expect to have this fully implemented by the end of the year. And to bring down our purchase transportation costs, we've reduced outsourced miles to some of the lowest levels in our history. This has given us a more flexible cost structure that mitigates our exposure to rises and truckload rates. Importantly, these initiatives are driving structural improvements that will scale as volumes recover, creating further opportunities for margin expansion.

In closing, our strong start of the year reflects the strength of our model and the consistency of our execution. We have a clear line of sight to achieving an LTL operating ratio in the 70s driven by ongoing service improvements, profitable share gains, above-market yield growth and robust cost efficiency across our network. Increasingly, all 4 of these drivers will be propelled by our proprietary technology and AI. We also see a significant opportunity to further compound earnings as we expect to generate billions of dollars of cumulative free cash flow in the coming years, accelerating share repurchases and debt reduction.

This is how we're building our path to long-term value creation for our shareholders. With that, I'll turn it over to Kyle to walk through the financials. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet and capital allocation. For the first quarter, total company revenue was $2.1 billion, an increase of 7% year-over-year. Revenue in our LTL segment grew 5% to $1.2 billion, primarily driven by higher yield and fuel surcharge revenue. On the cost side in LTL, we continue to operate more efficiently and with less reliance on purchase transportation.

Our productivity gains in the quarter helped mitigate the impact of wage inflation, linehaul insourcing and volume growth. Our salary wage and benefit expense increased year-over-year by 4% or $27 million. On purchase transportation, we enhanced our structural cost improvement by further reducing our use of third-party carriers. This will help us control linehaul costs as the cycle recovers and truckload rates rise.

Depreciation expense increased by $8 million or 10% year-over-year, reflecting our continued investment in the network to support long-term growth.

Turning to profitability. We increased adjusted EBITDA company-wide by 15% to $319 million. Our adjusted EBITDA margin was 15.2%, an improvement of 100 basis points from the first quarter of the prior year. In our LTL segment, we grew adjusted operating income by 20% to $198 million and adjusted EBITDA by 16% to $290 million. Our LTL adjusted EBITDA margin improved by 230 basis points to 23.6%. In our European transportation segment, adjusted EBITDA was $33 million. And in our Corporate segment, adjusted EBITDA was a $4 million loss.

Returning to the company as a whole, we reported operating income of $174 million for the quarter, up 15% year-over-year, and we grew net income by 46% to $101 million, representing diluted earnings per share of $0.85. On an adjusted basis, diluted EPS was $1.01, an increase of 38% year-over-year.

Moving to cash flow and CapEx. We generated $183 million of cash flow from operating activities in the quarter and deployed $104 million of net capital expenditures. We ended the quarter with $237 million of cash on hand after repurchasing $30 million of common stock and paying down $30 million on our term loan facility. Combined with available capacity under our committed borrowing facility, our total liquidity at quarter end was $837 million.

Our net leverage ratio was 2.3x trailing 12 months adjusted EBITDA, down from 2.4x at year-end 2015, continuing the trend over the last 2 years. We expect a meaningful step-up in free cash flow generation this year with momentum building over the next few years. This should accelerate the pace of share repurchases and deleveraging.

Before I wrap up, I want to highlight an update to our full year 2026 planning assumptions. We now expect our adjusted effective tax rate to be in the range of 23% to 24%. This is reflected in the latest investor presentation. Our other planning assumptions for the year remain unchanged.

With that, I'll hand it over to Ali to walk through our operating results.

Thank you, Kyle. I'll start with our LTL performance where we delivered another quarter of strong execution and outsized margin expansion. Shipments per day increased 3% year-over-year, while weight per shipment decreased 2.8%, resulting in tonnage per day turning positive by 0.1%. We're continuing to drive profitable growth in the business by increasing the number of shipments, improving network density and prioritizing both freight quality and mix to support yields and margins.

Our mix has managed to specific objectives, including share gains with local customers and market penetration with our premium offerings, and we're showing that we can achieve these objectives in any environment.

Looking at the first quarter trend year-over-year by month, January tonnage was flat. February was up 0.1%, and March was down 0.4%. Notably, shipments per day trended up each month. January was up 1.2%. February was up 3% and March was up 3.8%. For April, we estimate that tonnage will be down about 1 point compared with last year outpacing typical seasonality and that weight per shipment will improve sequentially and on a year-over-year basis versus March, also trending better than seasonality.

Turning to pricing. We delivered another quarter of above-market performance with yield up 4% year-over-year, excluding fuel. Importantly, our strong pricing trajectory is continuing to trend up. We expect both yield and revenue per shipment, excluding fuel, to accelerate on a year-over-year basis and improve sequentially through the balance of the year. We're driving this internally through continuous improvement in service and externally with our local customer base and premium offerings. These channels are both gaining traction with customers.

Looking at first quarter profitability in LTL, we reported a 200 basis point improvement in our adjusted operating ratio year-over-year. We also improved margins sequentially, outperforming normal seasonality by 100 basis points. This reflects our momentum with pricing as well as the application of our technology, which excels at productivity and cost control. Most recently, our AI tools are enabling precision planning and execution in driving operating efficiencies consistently across the network.

Turning to Europe. We continue to generate strong results. First quarter revenue increased 11% year-over-year. This was our ninth consecutive quarter of growth on a constant currency basis and we delivered another quarter of adjusted EBITDA growth that was better than seasonality relative to the fourth quarter.

Before we move to Q&A, I'd like to summarize the key drivers of our momentum in LTL. First is above-market pricing growth, which we support by ensuring our customers receive strong service. This dovetails with our focus on mix and freight quality. And as I mentioned, we expect our pricing trajectory to accelerate as we move through 2026. At the same time, we're creating structural cost advantages in our network through productivity gains, capacity investments and the ramping of our technology. Each of these levers has a sustainable impact on our best-in-class margin expansion and each represents significant upside as the cycle inflects.

With that, we'll take your questions. Operator, please open the line for Q&A.

[Operator Instructions] Our first question today is coming from Ken Hoexter from Bank of America.

Congrats on strong performance here as we see some rebound. But Ali, maybe just -- or Mario, talk about contract renewals. You talked about strong pricing. Should we see a deceleration in core pricing, given the acceleration of fuel? Maybe just talk about the mix there? And then, Ali, just given the impact on that, your thoughts on sequential operating ratio. If we're outperforming seasonality by a sizable amount here in the first quarter and you're getting that pricing, does that accelerate and continue to outperform seasonality as we look into the next quarter or two?

Yes, you got it, Ken. This is Mario. So our contract renewals in the first quarter accelerated from where we had in the fourth quarter. they went up in the mid- to high single digits in Q1 of this year. Now we also expect from a yield perspective, an acceleration, as Ali mentioned earlier, both from a yield ex fuel perspective and revenue per shipment perspective on year-on-year and sequentially in Q2 and through the rest of the year.

In terms of an outlook, based on what we have seen so far here and what we delivered in Q1, we do expect another strong quarter of margin performance in the second quarter. If you look at seasonal trends over the long term, we typically see our OR improve 250 to 300 basis points sequentially from Q1 into Q2 and we expect to comfortably outperform the high end of that seasonal range in the second quarter. This would also mean that on a year-on-year basis, we expect to improve OR in the second quarter more than we did in the first quarter. That's even a fast for us to get to a with an OR handle.

I mean, obviously, we'll see how the rest of the quarter here would roll out. And this will be overall a strong outcome, given that we're still in the early innings of what could be a recovery year.

Your next question today is from Richa Harnain from Deutsche Bank.

I guess I just want to better understand what's happening on the pricing and weight per shipment side. I believe revenue per shipment was expected to come in mid-single digit range for the year. Rate per shipment to be roughly flattish. We're starting the year below target on both. Also revenue per hundred it was not as strong as I would have expected, despite the lower weight per shipment. So just trying to understand, obviously, Mario, you said you saw continued momentum in the quarter, are pricing should accelerate. I just want to make sure that those are still targets for the year, appropriate targets. And then obviously, comps are a factor. But just generally, what's going to get us back to the acceleration phase.

Yes, Richa, it's Kyle. So just I want to highlight a little bit on yield. So as we talked about for the first quarter, we had another strong quarter of pricing performance. I think as Mario mentioned, a lot of the strong pricing translated to our OR outperformance in the quarter. So for Q1, we were 100 basis points better than normal seasonality and on a year-over-year basis, we improved more than 200 basis points. And based on the price improvement we're seeing here in March and April, we would expect both yield and rev per shipment ex fuel to accelerate on a year-over-year basis in Q2 and through the rest of the year.

I think what's important is reflecting an increasingly constructive price environment as well as about our internal initiatives help drive price further in the future.

And then, Richa, on the weight per shipment side, specifically. So if you look at Q1, our weight per shipment was down 2.8% on a year-over-year basis. That was up about 2 points sequentially versus the fourth quarter, and that's very consistent with the typical step-up that we see as we move from Q4 into Q1. Now weight per shipment for us can bounce around from month to month.

Specifically, if you look at Q1 for us, we did ramp out the rollout of some of our premium services throughout the quarter. We're also taking a lot of share with local customers. And both of those channels do come with a lower weight per shipment profile However, they are very accretive to our margins. And ultimately, that's what drove that meaningful OR outperformance in the first quarter.

Now I think more recently, what's more encouraging is that weight per shipment trends have started to improve. So here in the month of April, per shipment was down about 1 point on a year-over-year basis. That was about 2 points better than typical seasonality. Usually, we see weight per shipment decline sequentially from March into April, and we actually saw an increase sequentially. And ultimately, that's what gives us confidence in that week for shipment trend improving as we move through the balance of the year.

Our next question is coming from Scott Group from Wolfe Research.

With the tonnage update is helpful, but I feel like comps get a little easier as the quarter goes on. Obviously, we've got big tailwinds coming from fuel. Any sort of directional thoughts on how you guys are thinking about sort of like total rev per day trends for the quarter? And then just given Q1 and the Q2 guide, like it feels like there should be good upside to the full year OR guidance of 100 to 150 basis points. Any sort of updated thoughts on how the full year OR could now look?

So Scott, I'll start with the second quarter in terms of the moving pieces and then pass it to Mario on the full year. In terms of Q2, from a tonnage standpoint, if you just roll forward normal seasonality from here and keep in mind, we do have slightly tougher comps in the months of April and May, and then June gets much easier on a year-over-year basis. We would expect tonnage to improve in each month of the quarter, and that would put full quarter tonnage flattish on a year-over-year basis.

From a pricing standpoint, as Kyle noted, we do expect our yield ex fuel and revenue per shipment ex fuel to accelerate on a year-over-year basis. here in the second quarter, we'd expect our yield to be comfortable in that mid-single-digit range here in the second quarter. So that should give you kind of some of the moving pieces in terms of the top line outlook.

And Scott, for the full year OR, I mean, as you mentioned, we delivered here in Q1, better-than-expected OR outlook than when we started the year. And we do expect Q2 to also be better than what we expected from the beginning of the year. As I mentioned earlier, we do expect to constantly outperform the seasonal trend into Q2 from Q1 and improve on a year-on-year basis, more than we did here in the first quarter. So it's fair to say that we had a high degree of confidence in potentially outperforming our outlook of 100 to 150 basis points of margin improvement this year.

Now there are also more things that can go well. I mean, from a volume perspective, so far, volume has tracked in line with our expectations, Q1 through April, but we are hearing more possibility from our customers. So if we start seeing volume inflect as we head into the back half of the year, where underlying demand continues to pick up steam, then obviously, all of that would be upside to our forecast.

If you look on the pricing side, as Ali mentioned, we expect an acceleration in Q2 for both yield and rest of ship, and we expect that to continue through the balance of the year as well. When you look at the cost side, our execution has been excellent. I'm very proud of the team in terms of having typically if you wanted a volatile quarter, but you couple that with fantastic AI and technology tools we launched, we've already so far launched our P&D optimization AI tool for half our network, and we haven't even done the large locations yet.

And if you look at our outperformance in the first quarter, we improved productivity by 4 points. If that continues to compound through the rest of the year, all of that could be upside as well. So again, we started the year with a lot of momentum in terms of Q1 and Q2. And we -- it's still early in the year, though, obviously, as we make progress here, we'll update on the full year as we continue to deliver those kind of numbers.

Our next question is from Fadi Chamoun from BMO Capital Markets.

I think you touched on this a little bit, I'm not clear. I understand the revenue per shipment year-on-year and quarter-over-quarter, I think was the weakest performance that we have seen since 2023. And you talked about mix and a few other things. I just want to make sure I understand why you've seen this deceleration in Q1? And obviously, you're talking about an acceleration going forward, I suppose that's driven by the yield. But my main question really, I'll start with this clarification is, can you talk a little bit about what you're seeing from the customers' conversation in terms of what the demand outlook looks like weight per shipment seem to kind of be moving a little bit in other direction? Are we seeing more pallets? Or are you seeing -- like what are you seeing on the kind of core organic demand environment with your customers?

Sure, Fadi. This is Ali. I'll start with the revenue per shipment trend and then pass it to Mario to speak about the customer demand outlook. From a revenue per shipment standpoint, as I noted, that can bounce around from quarter-to-quarter. And specifically for Q1 for us, we did see a lot of progress with some of our mix initiatives around local growth, around premium services which, again, those do come at a slightly lower weight per shipment profile but very accretive to our margins. And that's what drove that strong margin outperformance we had here in the first quarter.

Now I think what's been encouraging for us is we've started to see that pricing trend accelerate as we move through the first quarter, and that acceleration continued here into the second quarter from an underlying yield standpoint. At the same time, we're also seeing that weight per shipment trend normalize as well on a year-over-year basis. So that acceleration that we're seeing in yield combined with that normalization on a year-over-year basis and weight per shipment ultimately, that's what's driving that positive outlook on revenue per shipment accelerating here into the second quarter, and that's consistent with what we've seen here in the month of April as well.

And Fadi, when you look at the overall the demand outlook, we are hearing more optimism from customers. As you know, every quarter, we do a survey with our top customers, and we ask them what are you expecting for the back half of the year, not so beyond at the end of the -- or beginning of the second quarter here? And we are hearing more optimism where double the number of respondents that expect -- that now we expect an acceleration into the back half of the year relative to where they were in the first half of the year, and there were nearly no customers that expect a deceleration in the back half of the year.

We haven't seen those kind of survey results going back to 2021, which is very encouraging when we see what we're hearing from the customers. Now if I break it down, retail has been positive and consistently, you would see good demand on the retail side. On the industrial side, we're hearing a lot of the optimism, but we haven't seen it yet materialized in big swings. As you know, Fadi, if you go back since we've in an industrial recession now for 3 years and a freight recession in 3 years, volumes in the industrial economy are down in the mid-teens plus.

And what we're seeing now with ISM being over 50 for 3 months to kick off the year is very encouraging. In terms of subsectors of the industrial economy, electrical continues to be good. Equipment for ag is doing well. Chemicals is doing well. And just recently here in the month of April, we are seeing also showing some legs as well. So as we continue to see that ISM, which definitely takes, call it, 3 to 6 months in the trial license high volumes, if that materializes as we have to do into the back half, with the customer expectations, this could be a great setup in terms of seeing more of that demand coming down from the industrial side of the economy as well.

So again, early innings, but we're hearing much more optimism than we did a quarter or two ago.

Our next question today is coming from Jonathan Chappell from Evercore ISI.

Mario, I want to touch on the productivity comment again and one of your previous answers about the potential for that to compound. 4% is obviously significantly greater than your long-term target. So can you help us understand how you did so much better in 1Q from a productivity perspective? And is there a bit of, I don't know, front-loading, so to speak, that compounding at such a level may be just too high of a bar at least for the remainder of '26 as we think about the margin progression from here?

Well, overall, in the quarter, Jon, we did launch our new AI tool for P&D and optimization and it's now rolled out to have our network. And we're seeing measurable results out of the new AI solution with fewer miles, more stops per hour in our P&D environment. Now we already have implemented a number of solutions for line haul if you recall, middle of last year, end of Q2 heading into Q3 as well. And we are still seeing the wraparound effect of these improvements.

We've also launched updated models for our dock efficiency and we'll continue to compel those as we launch more and more changes to it. Now as you know, though, technology, Jonathan, is not -- it's not linear path. I mean there's always you launch something, you get a lot of feedback from the field of how to make it better and then you keep on improving those. And if you look at AI learns from the actual outcome. So for every AI algorithm that we have, we typically compete the standard better of how the outputs are comparing to what the ideal output would look like, and we keep on refining them over time, over time as well.

Now all of these tools had very strong execution in the field by our operators has contributed to that 4% productivity pick up in the first quarter. But we'll see how the year progresses from here. I mean we do expect to be above our target of 1.5% for the full year. And what you see here in the first quarter supports pretty strong compounding as well. But we're taking the conservative view on this, and we will see kind of where this goes from here. But AI is getting smarter.

Our next question today is coming from Jordan Alliger from Goldman Sachs.

Just sort of curious, can you given sort of some of your comments and the hopefully improved trend on the tonnage, can you talk to your excess terminal capacity, have you seen changes in that? I think previously you were somewhere in the 30% range. Has that started to move lower? And then sort of tied into that, in terms of thinking about a sub-80% operating ratio over time, what would be required in terms of excess terminal capacity to sort of get below that level?

Yes, you got it, Jordan. If you look at -- by the end of the first quarter, first starting with our network capacity, we had more than 30% excess door capacity, which is a sweet spot to be in the LTL carrier in a softer freight environment and expecting demand to inflect at some point and accelerate from here. So we feel great about where we are on that. And keep in mind, over the last 3 years, we added 15% more door capacity, but not all capacity is created equal because if you look at a sort of market where you were tight versus another market where you have a lot of capacity, that site market could cause a bottleneck in your network.

So when we've added this capacity with all in markets where historically, we were capacity constrained, think of in Atlanta, Georgia, I think in Texas, think Kansas, think Columbus, Ohio Gianapolis, Minneapolis, all of these are markets, Nashville. All of these are markets where historically, we did have a lot of capacity, and now we have fantastic, large breakbulk locations that will enable us to support our customers when that up cycle comes.

In terms of other forms of capacity, one is around the trailer side, trailers or the currency by which we move freight on our network. And as I mentioned earlier, we've added more than 20,000 new regular trailers to our fleet over the last 3 years. So all these investments have had an impact on our depreciation expense being up. And despite that, we have been improving more automatically over that period of time. but all of these would enable us to support our customers what that demand kind of comes there.

In terms of getting to an operating -- full year operating ratio into the 70s, all of the things that we are doing with enable us to get there. But the biggest contributor is about yield and yield performance. Today, we have a double-digit pricing opportunity for us to catch up with our best in class tier, and that comes through the 3 levers that Carl mentioned earlier on, where the first one is that continuous improvement in service. But if you look at this quarter, our claims ratio was sub 0.2%, and it's going to take us a bit of time for us to eventually become #1. That's the goal.

But overall, it's going to enable us to get more price and more premium freight from our customers. The second lever is around premium services. We have launched a dozen or so incremental services that we are offering our customers. And today, when we started our plan, 9% to 10% of our revenue came from accessorial revenue. We're up to 12% to 13%, and our goal is to get to 15% as we continue to compound those. And the third component is growing business with that small- to medium-sized customers. So that alone gives us a massive runway even without a macro recovery for us to get into the 70s from an OR perspective.

Now you start seeing demand in flat and we have the capacity to handle it and be able to support our customers. I mean, we see very strong incremental margins that come through that. Here in the first quarter, our incremental margins were 58%.

Our next question is coming from Stephanie Moore from Jefferies.

Mario, I think in the past, you've talked about total volume declines in this freight down cycle to the tune of maybe 15%, 20%. You can correct me on that. But as you think about what you view as XPO's ability to recover, if not the majority or even more so of that volume compression that we've seen over the course of the last several years. And then at the same point, can you talk about labor capacity? I think we talked a lot about door capacity, but where your labor capacity stands today? And then what would be required as you start to look at bridging that volume gap for the last couple of years?

Thanks, Stephanie. If you look at industry volumes, as you said, based on the cyclical factors we've seen here with the ISM sub-50 through end of last year for the better part of 3 years or we call it 3-year freight recession, we have seen the industry volumes be down in that mid-teens plus, somewhere in the 16 or so points over that period of time. Now keep in mind, 2/3 of our customers are industrial customers. So they have been impacted meaningfully by that freight slowdown over the last 3 years.

Now as we mentioned earlier, we've seen that pickup in overall industrial demand. So this could be the early innings of an industrial recovery here. Now in terms of our ability to handle incremental volume, the current excess door capacity we have will comfortably get us into that plus 15% more freight into our network to be able to handle that inflection point and potentially more given that we have added a lot of that incremental capacity in markets where historically we were capacity constrained.

Now looking at the labor side, usually, we want to make sure that our headcount is commensurate with what we are seeing in the volume environment and have enough buffers because in LTL, you can imagine if you have, on average, each one of your drivers or dock workers are working 40 hours a week, and they work now 45 hours a week. That alone is giving you double-digit more labor capacity in terms of hours and shifts that you can deploy.

But if we continue to see that sustained demand environment lead to higher volumes and a full eventual full recovery, we would need to add headcount, and we can leverage our driver training schools where today, we can operate these in 130 terminals. And Stephanie, it's a great program where we get some of our dock leads or dock workers who are doing a fantastic job, and we invest in them where we train them to get their CDL license, then join our ranks and then have great careers with us over the years to come as they become a professional driver.

We also, if you look over the last few years, we have had a meaningful decline in turnover rate of drivers and dock workers. I mean the whole leadership team has spent a lot of time in the field and listening to our employees and making sure that we are taking action on their feedback, and that has led over time with lower turnover as well of both drivers and dock workers. So first, you've got to hire or replenish your turnover and then hire for growth. And we feel great about our ability to do that given where we are today.

The next question is coming from Chris Wetherbee from Wells Fargo.

I guess a couple of questions here. So as we think about the outlook for the back half of the year, you noted the customer sentiment improvement. And I guess I wanted to think about what productivity might look like in the context of improving volumes. So you guys have done a wonderful job through what's been a pretty challenging freight environment. But we start to see tonnage grow and shipments grow more consistently, what do you think the productivity opportunity is relative to that 1.5 sort of longer-term target? Can it be sort of that 4% sustainable? Just want to get a sense of maybe how that plays out.

Sure, Chris. This is Ali. So from a productivity standpoint, as volumes start to improve, we would expect productivity to only accelerate. Historically, when we've been in periods where we've been in a volume growth environment. So for example, if you go back to the 4 quarters after Yellow went bankrupt, we were growing volumes in that, call it, low to mid-single-digit range for a period of 4 quarters after that. We were improving productivity in that mid-single-digit range on a consistent basis through that period.

So ultimately, as volumes start to improve, we do think there's more upside to that 1.5 points of productivity. Now as Mario noted, here in the first quarter, we were able to drive 4 points of productivity in a flat volume environment. So clearly, we have a lot of opportunity to drive upside just through our own initiatives even without a volume improving. But I do think the volume upside here gives us more confidence in delivering upside to that 1.5 points of productivity that's in our outlook for the year.

And just a quick clarification. As you guys think about a point of productivity, we're still thinking about somewhere in that like $20 million, $25 million range, that's roughly the way to be thinking about it on a gross basis?

Each point of productivity, Chris, is somewhere in that $25 million to $30 million of incremental EBITDA.

The next question is coming from Tom Wadewitz from UBS.

So I wanted to ask you a little bit more about the kind of what's in your assumptions for 2Q and what your customer feedback points to. It seems like things aren't off to the races, but they're improving. And I think that's -- I think you talked about industrial, that's true. So in terms of what you bake into your commentary on 2Q, is that just essentially normal seasonality in your kind of tonnage and shipments per day comments? And then does the customer feedback maybe lead you to think that there's a good chance that later in 2Q or second half, you actually see the market do better than normal seasonality and show some acceleration?

So in terms of the tonnage outlook, we are just rolling forward normal seasonality. So if you roll forward what we saw here in April into May and June, that would put full quarter tonnage flattish on a year-over-year basis. Now as you noted, as the demand environment starts to improve and we see this continuation of above seasonal volume performance, there certainly could be upside to that outlook. But I think we think the more appropriate way to think about it is just rolling forward normal seasonality through the rest of the quarter here.

Our expectation also is, as Mario noted, not only is that OR improvement is going to accelerate here on a year-over-year basis in Q2 versus Q1, but that we'll also see earnings growth or EPS growth accelerate on a year-over-year basis in Q2 versus Q1 as well.

Okay. But -- so we should look at that as upside. And I guess, Mario's comments on the survey given the kind of best results in terms of second half look you've seen in a number of years, that would be kind of upside to the way you're looking at things.

I think that's a fair way of thinking about it.

The next question is coming from Brian Ossenbeck from JPMorgan.

I wanted to see, Mario, maybe if you can talk about the context around the accelerating price and yields. You mentioned the gap to core pricing, but obviously rolling out some of the better mix in accessorials and new markets. So is there any way to maybe put some context around the relative change or at least the rate of change? And what's driving that from each of those different buckets?

And then I guess relatedly, you talked a little bit about fuel impact in the press release and a big topic for LTL, and it's hard to narrow down. But it looks like there was a bit of a net benefit this quarter. Just wanted to see how you're thinking about that and how we should be modeling that into second quarter as well given what we know now with energy prices?

You got it right. So first, I'll start with the high-level levers for pricing that I mentioned earlier on. So if you look at the size of the opportunity for us over the years to come, it's a double-digit runway for us to catch up with our best in last year on the pricing dynamic. Now if you break it down in terms of where that falls through, the lion's share of that, about 2/3 comes from an improving service product, where we are able to get more premium freight from our customers and higher quality freight. And we expect that to cause us to outperform typical yield trends in the industry by about 1 point per year on top of what we're seeing in the industry.

The second lever, the cadence is still unchanged for us, which is on the premium services side. We do expect the growth in these segments of business. We have another, call it, 3 points of opportunity ahead of us just in that category alone. And we also expect to be at roughly a run rate of 1 point per year on incremental above-market pricing, driven by us growing our market share in those 3 services. And Brian, just to kind of give you an example, a lot of them, if you think of the must arrive by date or a retail sold rollout or many of these services today we are under plus in terms of our market share of the overall industry versus how much market share we have in each 1 of those premium services.

Anywhere, it's been the low to mid-single-digit type market share contributions in those and we expect that to at least get to our overall market share of the industry, which is about 10% and kind of continue to grow from there, given the improvements in our service product. And then finally, on the local account side, we are roughly halfway through when we started our plan, we were at 20% of total were local accounts and our goal to get to 30. And our local sales team has been doing a phenomenal chaining with customers locally and onboarding more of that business. Just to give you an example, in the first quarter alone, we onboarded more than 2,600 new customers in that channel, which was an acceleration from where we were in the last year on a quarterly cadence basis as well.

And that's roughly around 0.5 point of yield per year we expect to get. So the best way to think about it is if you look at a multiyear runway where if the market -- as you know, in LTL, if the market is soft, industry yield could be up low single digits, and we expect to outperform that by 2 to 3 points. If the market is normalized, it would be -- our industry pricing will be in that mid-single-digit range, and we expect to outperform that to all the dynamics I mentioned by 2 to 3 points. And ultimately, if we start seeing an inflection in the macro, where capacity is down and you start seeing the demand come up, then obviously, industry pricing will be in the mid- to high single digits, and we expect to outperform that.

So that's how we think about it from a cadence perspective. And we're seeing these dynamics here in the near term, as you would see what we deliver in Q2, Q3 and Q4. And I'll turn it over to Ali to discuss the fuel side.

And Brian, on fuel specifically, obviously, there's been a lot of volatility in oil prices here more recently. So ultimately, we're going to see how diesel prices trend through the rest of the quarter. We would expect our fuel revenue here to be up on a year-over-year basis in the second quarter. Just one thing I'd point out is naturally as fuel prices go up, our revenue increases, but so does our cost to procure that fuel as well. I think ultimately, if you zoom out, customers see our prices inclusive of fuel, all LTL carriers have very similar fuel surcharge structures in place.

And when you're thinking about our second quarter outlook specifically, and our ability to outperform seasonality, ultimately, that's being driven by our strong operational execution, it is being driven by that above-market pricing growth we're delivering, our profitable market share gains as well as some of the ramping momentum that we're seeing on the productivity side as well.

The next question is coming from Jason Seidl from TD Cowen.

Mario team, nice quarter. There's been a big spike in truckload spot and contract renewal rates. Wanted to maybe walk through any potential upside this may provide to both your tonnage and also your pricing outlook as we move throughout the rest of 2Q and the rest of '26?

Well, Jason, when you look at truckload versus NPL, as we've said in the past, we expect that with the lower truckload rates through the trough of the truckload cycle, we have seen roughly around 2 to 3 points, call it, in that low to mid-single digit industry, LTL tonnage has moved from LTL to truckload. And we believe that kind of falls in 2 categories. One would be heavy shipments where when the truckload rates came down to the $2 mark with fuel, what you have seen is effectively the breakeven point of an LTL shipment to move over to truckload come down to about 15,000 pounds or so. And we estimate that to be somewhat in the 0.5 point to 1 point worth of industry volume that had gravitated or went over to the truckload industry.

The second category is usually large customers have PMS systems that can optimize based on multiple LTL shipments, if the rate of truckload is now more desirable where the shipments can still make service, and that's very important, then they would convert that over to truckload as well. And we estimate that on a combined basis both of these to be again 2 to 3 points. Now as you point out, with the truckload capacity that has gone out of the market and with both spot rates going up, although contractual rates are starting to go up, but they haven't seen that mega increase here. But as this continues to go up, you're going to see more of that conversion of those truckload shipments come back to LTL.

Now if we see that inflection happen accelerate in the back half of the year, obviously, you will see that follow 3 points come back to the LTL sector. faster than that, but we'll see how that kind of materialize. And one key point there, Jason, as well is that we have, with the in-sourcing of third-party linehaul, and keep in mind, we've been doing this for now more than 3 years, we have been able to reduce our exposure to truckload rates meaningfully. And what that means is those truckload rates go up, our cost structure will stay in check because we are using our own drivers and equipment to move that freight in the line haul network.

So that's something we're excited about here in the next up cycle because that's going to give us much higher incremental margins by keeping that cost category check.

Yes, you guys have clearly been putting yourself in a better position for the TL up cycle. But just so I'm clear that any move of those, call it, 2 to 3 points back towards the LTL sector is upside to the guidance that you're giving us?

That's correct. So if we see those -- that's going to come back to NPL, obviously us and all the carriers will benefit from that type of movement. It's going to put more pressure on the overall NPL capacity, industry capacity as well, which over time will lead to higher industry pricing, too.

Next question is coming from Ari Rosa from Citigroup.

So Mario, I wanted to ask to get your thoughts on competitive dynamics across the industry. To what extent do you think competitors are also sitting on available capacity? And does that impede t's ability to take share, just kind of speak to the level of share gain that you expect to take especially as the cycle accelerates? And also to what extent maybe there's a tension between winning share and pushing yield, if you're seeing that or how you're thinking about kind of elasticity there?

Yes. So Ari, first, if you look at overall industry capacity. If you look at 3 pandemics, if you look at 2019, or pre Yellow bankruptcy, when you look at where we are now on industry terminal counts, that is down roughly around, call it, in the high single-digit, low double-digit range in terms of service center count. And then if you look from a door's perspective, overall door count is roughly down about mid-single digits over that same period of time.

So today, you have less capacity than you had either prepandemic or, call it, post-pandemic but pre Yellow bankrupt. Now it's natural whenever demand has gone down over the last 3 years. With the industrial economy being slow, demand is down 15 points. So today, we have more than enough capacity to be as an industry to be able to handle 15% less volume. But as that starts to inflect what Jason asked earlier on about the blockload conversion back into LTM, coupled with the industrial economy at some point in this country that ISM continues to show those strong size of life, then obviously, you're going to start seeing demand go up and that you would have carriers that will have enough capacity compared to those volume increases.

Now we see we're in a great position because we have been planning for that for the last 3 to 4 years, adding door capacity, adding equipment and making sure that we are very well positioned to capitalize on that. And importantly, service our customers in the right way. That's what it's all about. They can get of the customer. So that's how we think about it. In terms of pricing versus volume, we don't think about it in those terms. We think about it more that we have an opportunity to improve overall our yield performance given those 3 levers I mentioned earlier on. And this has multiple years of runway.

But if you see the demand go up, you would see overall industry pricing go up. And we expect to outperform that by 2 to 3 points per year over the years to come as we continue to execute on our strategy and plan.

Your next question is coming from Scott Schneeberger from Oppenheimer.

It's Daniel on for Scott. Could you please discuss how you think about the top line outlook for Europe? How you anticipate performing versus the market? And secondly, how do you think about opportunities to improve the margin for that business?

Scott, it's Kyle. So the European business continues to perform really well in what's been a pretty soft macro for some time now. If you look at the first quarter, we grew organic revenue for the ninth consecutive quarter, and the team delivered another quarter of strong EBITDA growth in the outperforming seasonality. To your second question about thinking longer term on margins, we have a strong plan to improve profitability in Europe, both this year and next year.

And we're really following a similar playbook that we've done in the U.S. So we're going to take meaningful cost out there, and we're executing on that now and we'll continue through the rest of this year. We're also expanding the sales force, driving more premium services and growing in new verticals, some of what we see here. That includes growing in aerospace, luxury goods and thinking more about our warehouse offering.

And I think lastly, as 1 of our bigger levers here in the U.S. has been pricing, they're also looking at pricing, too, and they have a great service product. They want to make sure they get commentated for that service product. So we can really good about Europe and where the head in the future.

The next question is coming from Ravi Shanker from Morgan Stanley.

Two, maybe the first 1 just on the cycle itself. There's a first up cycle that you guys are going in with a much lower reliance on PT. So how do you think about driver inflation, especially as the TL market kind of tightens up and maybe that pressure going to spill over to LTL as well? And maybe a bit of the off-the-wall kind of big picture question for you, Mario. I know XPO today is a product of the bigger XPO breakup, but do you feel the need to have a logistics operation within the company just given the traction some of the brokers are having and maybe the direction the industry is going down?

I'll talk with the second half of the question. I mean, overall, with an LTL carrier, and we're focused on being in a LTL carrier. So we don't see a logistics offering adding value, the runway we have in terms of margin expansion and EBIT and op income growth over the next 4, 5, 6 years, there is tremendous ahead of us, Ravi. So we don't see a need to -- a combination of both top line growth as well as meaningful margin expansion is what will enable us to grow earnings meaningfully over the years to come.

And there's another dynamic associated with that which is accelerating free cash flow generation. As I mentioned earlier, we expect to generate cumulative billions of dollars of free cash flow over the years to come, which will further compound that earnings growth, a combination of paying down debt and buying back shares is going to enable us to return the capital back to shareholders after we back on the business. So we see this as being the levers for long-term value creation for us here. We also do intend to, at some point, sell our European business.

It's a question of not a matter of if and when we do that, it's going to be an acceleration of our capital allocation story. In terms of the lower reliance on PT, for drivers capacity that you mentioned. So typically, in LTL, obviously, our turnover of drivers is meaningfully lower than what you see in the truckload industry, and it has also improved a lot over years, given our focus on our front line working and listening to them and feedback loops and adding new trucks and taking care of the customers from a service perspective.

So we have seen the turnover of our drivers and dock workers come down meaningfully and we -- as I mentioned earlier on, we have an ability to hire our -- train our own drivers in our driver schools. So in an up cycle, we would lean on that where we have the capacity to graduate up to 2,000 drivers per year where we actually paid their wages and we actually invested them and eventually they become a professional driver with us. So that's how we think about driver capacity and that upside of being able to add to it.

Our next question today is coming from Eric Morgan from Barclays.

I wanted to follow up again on the 2Q OR comments in LTL. Mario, I think you mentioned a 7 handle. It could be a possibility this quarter. So just wondering if you could expand a bit on what gets you there? Are you saying that if volume accelerates over the next couple of months, that's a possibility? Or can you do that with the flattish tonnage number you noted for the full quarter? And also just maybe how fuel plays in there. Does it become less likely if diesel prices come down a bit from here?

Yes, you got it. So Eric, if you look at the quarter as a whole, as Ali mentioned earlier on, if you think about our tonnage for the quarter, and April for us was slightly better than seasonal trends when you compare it to March with also a pickup in weight per shipment as well. If you roll forward seasonality of April through the rest of the quarter, that implies that tonnage would be called it flattish for the quarter. So if we see that tonnage do better, then obviously, there's more upside here.

Now if you look at the first quarter, though, our first quarter was in line with our expectation on tonnage, yet we still outperformed on margin improvement and earnings growth in the quarter. So that is a path for us to get there even if tonnage stays flat through the quarter. Now going back to the other levers. One level is around yield, we are seeing a yield acceleration, as Kyle mentioned, here in the month of April, higher cost factor yields in the first quarter, our premium services continue to compound, our additions of new small to medium-sized customers continue to accelerate, so if we see yields accelerate beyond our expectations, that could be incremental to our margin improvement.

And then when you look at it from a cost perspective, we are not expecting the same level of productivity improvement at Q1, although we are launching our solutions to more terminals. So in theory, we could get more. So we'll see how that kind of plays out through the rest of the quarter here. But we are just 1 month and then we have 2 more months to go. But no matter how you look at it, we do expect to outperform comfortably outperform the high end of the seasonal range of sequential improvement from Q1 to Q2. And generate a very strong margin improvement here in the second quarter with that path to the 7 handle, but we'll see what the other has in store for us here for the next 2 months.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Chairman and CEO, Mario Harik. Please go ahead.

Well, thank you, operator, and thank you, everyone, for joining us today. We're off to a great start of the year with accelerating momentum, and we expect another year of strong margin improvement and earnings growth. We look forward to updating you on our performance next quarter. With that, operator, end the call.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

Welcome to the XPO's Fourth Quarter 2025 Earnings Conference Call and Webcast. My name is Shamali, and I will be your operator for today's call. [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 applicable securities laws, which, by their nature, involves 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 also may 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 on the company's website.

I will now turn the call over to XPO's Chairman and Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone, and thank you for joining us. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer.

This morning, we reported another quarter of strong execution to close out the year. Company-wide, we delivered fourth quarter adjusted EBITDA of $312 million and adjusted diluted EPS of $0.88. Excluding real estate gains in both periods, adjusted EBITDA increased 11% and adjusted EPS increased 18% year-over-year.

In North American LTL, we generated adjusted operating income of $181 million, which was up 14% from the prior year. And we improved our adjusted operating ratio by 180 basis points, significantly outperforming normal seasonality. We've now expanded our LTL margin by 590 basis points since 2022, which marked the start of one of the most prolonged freight downturns in history. This speaks to the resilience of our strategy, and it will continue to serve us well this year and in the long term, regardless of the cycle.

The key components of our strategy are fully within our control, and I'll start with our most important lever, customer service. In 2025, we reduced damages and improved service quality to new company records, reflecting our focus on providing a superior customer experience. We're achieving this by balancing our network more precisely, reducing the number of freight rehandles and implementing tighter operating processes at the service center level. And critically, our stronger service performance is translating directly to better commercial outcomes. As a result, we've been able to earn higher prices and gain market share by providing consistent world-class service.

When we make ongoing investments in the business, we're strengthening the connection between service quality and value creation. For example, we've deliberately invested in the network ahead of the up cycle to create more than 30% excess door capacity. This has given us the flexibility to operate more efficiently in the current environment, and we're positioned to respond quickly in a recovery.

On the equipment side, our average tractor age at year-end was 3.7 years, giving us one of the youngest fleets in the industry. This improves reliability and safety while reducing our maintenance cost per mile to the lowest level in our history. From a labor standpoint, we're staffed to support any near-term increases in demand while maintaining our high service levels. Combined with lower employee turnover and the national scale of our driver training schools, we're well positioned to flex labor efficiently as volume grows. Each component of our capacity has a role in making sure we realize significant upside from our operating leverage when demand recovers.

Next is pricing, which has a direct correlation to margin performance. Throughout 2025, we saw customers place more value on our service as reflected in the pricing gains we earned. For the full year, we grew yield, excluding fuel, by 6%. It was also the third consecutive year that we improved revenue per shipment for every quarter. In addition, the expansion we're driving with local customers and premium services is contributing to our above-market pricing growth. These revenue streams come with higher margins, and we see long runways for both as core parts of our business.

Another highlight of 2025 that contributed to margin was our improved cost efficiency. This was underpinned by productivity gains and a lower reliance on purchase transportation. Productivity improved roughly 1.5 points for the year with the ramp in the second half from our latest technology rollouts. These are proprietary applications that use AI for planning, freight flow management and network operations.

Importantly, we've completed a successful pilot of our AI-driven route optimization tools for pickup and delivery. And now we're expanding this internally developed technology to nearly half of our service centers this quarter. We expect this to further reduce overall miles and improve stops per hour across a cost category of nearly $900 million.

And on purchase transportation, we exited the year with the lowest level of outsourced miles in our company's history at 5.1% of total miles. This has given us greater control over service quality and a more flexible cost structure. These cost efficiencies will scale with volume, and we expect the benefits to margin to grow over time.

To sum it up, we've entered 2026 from a position of strength following a year of significant progress and outperformance. While we're pleased to have reported above-market results for another 4 quarters, we have multiple drivers to improve our LTL operating ratio well into the 70s in the years to come as a substantial expansion of our operating margin.

Number one is pricing, where we see a double-digit opportunity to surpass the market and pricing growth over time by continuing to enhance service quality and revenue mix. Another key is our investment in capacity ahead of the cycle. We've built excess capacity across our network, positioning us for profitable share gains and operating leverage as demand recovers. And we have a long runway to improve cost efficiency and productivity through network applications of AI at scale. These are all high-impact initiatives that are already driving results.

Importantly, our progress will be amplified by the billions of dollars of cumulative free cash flow we expect to generate in the coming years, starting with a meaningful acceleration in 2026. This will fund an increase in share repurchases and debt reduction to further compound our earnings growth.

With that, I'll turn it over to Kyle to walk through the financials. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll walk through the fourth quarter financial results, followed by our balance sheet, liquidity and capital allocation.

For the total company, revenue increased 5% year-over-year to $2 billion. Revenue in our LTL segment was $1.2 billion, up 1% from last year as our increase in yield more than offset the decrease in volume.

Turning to cost. We continue to make progress in key areas that relate directly to margin. On a year-over-year basis, our salary, wage and benefits expense decreased 1% or $7 million, driven by strong productivity gains. And our purchase transportation expense decreased 46% or $20 million as we continue to in-source linehaul miles and optimize the network. This is a structural cost reduction that will help support stronger incremental margins as truckload rates rise when the freight market recovers.

Depreciation expense increased 11% or $9 million, reflecting our ongoing investments in equipment and capacity to support long-term growth.

Moving to profitability. Total adjusted EBITDA was $312 million for the quarter with $285 million generated by our LTL segment. Excluding gains on real estate transactions, adjusted EBITDA increased year-over-year by 11%, both for the company as a whole and for the LTL segment. In Europe, adjusted EBITDA was $32 million, while corporate adjusted EBITDA was a loss of $4 million.

For the total company, fourth quarter operating income was $143 million. Net income was $59 million and diluted earnings per share was $0.50. Net income includes $14 million of gains on real estate and equipment as well as $33 million of restructuring expense. This was primarily from previously granted equity awards related to the transition in Board leadership. On an adjusted basis, diluted EPS was $0.88. Excluding $0.08 per share of real estate gains in the fourth quarter of 2025 and $0.21 per share in the fourth quarter of 2024, adjusted EPS increased 18%.

Turning to cash flow and CapEx. We generated $226 million of cash flow from operating activities in the quarter and deployed $84 million of net capital expenditures. We ended the quarter with $310 million of cash on hand after repurchasing $65 million of common stock and paying down $65 million on our term loan facility. Combined with available capacity under our committed borrowing facility, total liquidity at year-end was $910 million.

Our net leverage ratio at year-end was 2.4x trailing 12 months adjusted EBITDA for 2025, down from 2.5x for 2024 and significantly lower than the 3x we reported for 2023.

As we look ahead, we expect to meaningfully increase free cash flow generation this year and over the years to come. This will enable us to accelerate share repurchases while also continuing to strengthen the balance sheet through debt paydown.

Before I close, I'll summarize this year's planning assumptions to help you with your models. For 2026, we expect total company gross capital expenditures of $500 million to $600 million, interest expense of $205 million to $215 million, pension income of approximately $14 million, an adjusted effective tax rate of 24% to 25% and a diluted share count of approximately 118 million shares. These assumptions are included in our latest investor presentation.

And with that, I'll turn it over to Ali to cover the operating results.

Thank you, Kyle. I'll begin with our LTL operating performance, where we continue to execute well and expand margins despite the challenging freight environment.

On a year-over-year basis, our shipments per day declined 1.6% and weight per shipment was down 3%, resulting in a 4.5% decrease in tonnage per day. These trends reflect ongoing softness in the industrial sector, but importantly, we're continuing to take share in the most attractive parts of the market. We're growing our business with more profitable local customers and by expanding our premium service offerings. Local shipments now represent approximately 25% of revenue, up from 20% just a few years ago, while premium services are now about 12% of revenue, up from less than 10% previously. These are deliberate shifts in our mix that will make increasing contributions to volume, price and margin performance.

Looking at the quarter month by month compared with the prior year, October tonnage was down 3.8%. November was down 5.4% and December was down 4.5%. On shipments per day, October was down 1.4%, November was down 2.2% and December was down 1%. In January, however, we saw an improvement. Our January tonnage was roughly flat year-over-year, which outperformed normal seasonality. We saw this positive trend even with the impact of the major winter storm at the end of the month, which we estimate had about a 3-point impact on tonnage.

Turning to pricing. Our yield performance in the fourth quarter continued to be strong, increasing 5.2% year-over-year, excluding fuel. Both yield and revenue per shipment improved from the third quarter and revenue per shipment has now increased sequentially for the 12th consecutive quarter. We're gaining price through value delivered, supported by strong service quality, continued growth in the local channel and our premium offerings.

Moving to profitability. Our fourth quarter adjusted operating ratio in LTL improved by 180 basis points from the prior year, accelerating from the third quarter and significantly outperforming normal seasonal patterns. We're driving this margin expansion through a combination of pricing, cost initiatives and productivity improvements enabled by our proprietary technology. Even in a soft demand environment, these structural advantages are allowing us to outperform our peers and keep elevating that performance over time.

Turning to our European business. Our results continue to trend favorably. On a year-over-year basis, revenue increased 11%, supported by our eighth consecutive quarter of revenue growth in Europe on a constant currency basis. Adjusted EBITDA increased 19% year-over-year and performance tracked better than normal seasonality relative to the third quarter.

To wrap up, our fourth quarter performance highlights the strength of our strategy. We're managing through a soft freight market while continuing to improve mix, deliver consistent pricing gains and expand margins. We're also making targeted investments in the network to generate high returns over time, and our proprietary technology is leveraging AI for cost and productivity improvements. Together, these capabilities position us to outperform in the current environment and accelerate results as demand recovers.

With that, we'll take your questions. Operator, please open the line for Q&A.

[Operator Instructions] Our first question comes from the line of Ken Hoexter with Bank of America.

So I guess you mentioned, Ali, there at the end, ex storm, it sounds like tonnage would have been up about 3% and you're outperforming seasonality. Given the thoughts on ISM, maybe your initial thoughts on how significant we can see this outperformance or versus your normal trends, talk about what your normal trends are for first quarter for both revenues and OR and what you think that indicates for the year if you keep this seasonal outperformance?

Ken, this is Mario. So when you look at January for us, tonnage was flat on a year-on-year basis and shipments were up by about 1 point for the month. And when you look at that on a relative basis compared to December, that was a couple of points better than normal sequential seasonality from December into January. And this was after December being roughly about a couple of points also better than seasonality relative to November as well.

Now as you mentioned and Ali mentioned earlier, we did see an impact from the winter storm, and we do estimate that to be 3 points for the full month. So that outperformance would have been even higher versus seasonal trends. Now what's driving that, we are seeing both from a demand perspective, a bit more strength, especially on the industrial side in the month of January. But a lot of it was the company-specific initiatives that we have been driving in terms of gaining market share and higher margin and accretive business. So from one perspective, we continue to grow in our local account segment or the small- to medium-sized businesses that we are growing. Through the course of 2025, we added about 10,000 of these customers to our book of business.

And similarly, we are growing in new verticals that in the past, we were not growing in. Examples are grocery consolidation, where through the back half of last year, we nearly tripled shipments in that segment of business. And we're also growing in areas like health care, where we onboarded a few large customers in that space as well that are very service sensitive. And obviously, they're seeing all the great progress that we are making there as well. So it's a combination of underlying strength and market share gains in more multiple segments of the business is what we're seeing here.

In terms of OR outlook, if you look at typical seasonality for us from the fourth quarter to the first quarter, if you look over the long term, we typically see OR deteriorate by about 50 basis points sequentially and we do expect to outperform that normal seasonality here in the first quarter. And we do expect to -- our OR -- for our OR to improve sequentially from Q4 into Q1, which is a strong overall outcome driven by all of our initiatives in pricing and cost efficiency in AI and obviously, the volume environment here being a bit better as well.

Our next question comes from the line of Scott Group with Wolfe Research.

So Mario, helpful color on Q1. I know last year, you gave some thoughts about how to think about full year margin improvement. Wondering if you have similar thoughts this year on the LTL side. And then maybe if you can just give us an update on where we are on the local penetration and where you think that can go?

Scott, first of all, for the full year, we do expect another strong year for both margin improvement and earnings growth in 2026. Starting with OR, we'd expect our OR to be in the 100 to 150 basis points of improvement for the full year, which thought would be an acceleration relative to what we saw last year. And that's without a meaningful macro recovery. So this is assuming that, again, we're not going to see the market pick up, although we're obviously with ISM earlier this week, if that strength continues, that would change the outcome. So if we do see the macro recover, we would expect to drive upside to our results. And the primary drivers for that is that we do expect another year of above-market yield growth driven by all the initiatives that we are driving in that arena.

And similarly, we also expect another strong year in cost efficiencies, and that's driven by our AI initiatives. I mentioned earlier that we are in the process now of launching our new internally developed AI route optimization technology for pickup and delivery, and we expect to roll out half our network here in the quarter. So as these build momentum through the course of the year, we do expect more cost efficiencies as well. And a lot of these are still early innings.

On the volume side, it's still tough to predict. Again, there are good signals here, good signs as we kick off the year, but we'll see how this kind of progresses from here. In terms of local accounts, we -- so last year, we've added approximately 10,000 new local accounts to our book of business. If you recall, Scott, initially, when we started targeting that segment of business, we were at 20% of the total book was small- to medium-sized customers. And our goal was to get to about 30% in a period of roughly 5 years, and that's equivalent to about 2.5 points of yield, about 0.5 point a year of outperformance driven by that segment of business. And we are currently at 25% of the book is small to medium-sized customers. We're about halfway to our target of 30%, and we expect that to continue over the years to come as we continue to onboard more of these customers.

Our next question comes from the line of Fadi Chamoun with BMO Capital Markets.

Mario, I wanted to go back to the comment that you made about the cost efficiency. I think you said 1.5 points of productivity gains, I think it was last year. And you talked about technology and AI optimization and some of the things you're implementing affecting $900 million of cost base. I just wanted to kind of dive into what kind of productivity target, like we want to think about cost savings opportunity as we go into 2026. What does this envelope look like?

And then just one clarification on the prior couple of question discussion. It seems like you're attributing a lot of the kind of January improvement or your volume performance to the XPO initiatives that you are doing and not necessarily to any meaningful improvement in the end market or in the demand environment. We saw one of your peers talk a little bit more favorably about the demand and talked a little bit more favorably about the progress in the weight per shipment, which we didn't see in your numbers. I'm just wondering if there's more clarification you can provide on that.

Yes. So Fadi, when you look -- I'll start with the second question and then come back to AI and cost efficiency. On the volume side, we did see both. So when you look at our outperformance in January, it was a component where if you take a step back in December, we did see more strength on the retail side, and we had a few projects with customers like retail store rollouts through the course of December that also helped our results to outperform sequential seasonality from November into December. And then the outperformance in January was a combination of both. From one perspective, we saw a switch in a better demand environment for the industrial economy, but it's still overall early innings, Fadi.

So if you look at the ISM, when new orders were at 57, the ISM itself was at 52, these are very strong numbers. We are still not seeing that level of ISM performance materialize in the underlying demand. However, the industrial demand in the month of January has strengthened compared to where we were in the fourth quarter, and that's a very positive sign.

Now on top of the performance of the ISM and the industrial complex, beyond that, we were able to drive all of these initiatives, which we have been working on through the course of all of 2025 and then prior to be able to continue to onboard highly profitable business to the overall mix. So I think the outperformance was driven by a combination of both company-specific, but also early signs of life in the industrial economy, which is very positive.

In terms of your first question on technology and AI, we are very excited about the opportunity ahead of us. And if you look at last year and over the last few years, but last year specifically, we were able to improve productivity by about [ 8.5 ] points for the full year, and that was driven by our tech initiatives, and that accelerated in the back half of the year to above 2 points of productivity improvements.

Now when you look at '26 and beyond, there are multiple levers where we are using AI to improve our cost structure. The first one is around linehaul efficiency. We've discussed this in the past where for every point of improvement in linehaul, we get approximately $16 million of profits for the full year. And for every point of P&D efficiency improvement, it's now slightly higher than what we discussed in the past, about $900 million worth of cost. And this is where we piloted our new technology across 12 service centers in our network last quarter, and we're going to be accelerating the rollout here in 2026. And then for every point, it's $9 million to the bottom line per year. Then on the dock side, for every point, it's about $4 million of improvement per year. So this kind of gives you the magnitude of impact.

Now in terms of our expectation, what we currently expect for 2026 is a low single-digit improvement in productivity as well. But based on what we're seeing with these initiatives and what the run rate we're exiting at last year, there is a case where the upside could be all the way up to mid-single digit, but we're still early innings at this point, and we'll see how these start compounding over time as we launch those capabilities. And of course, we're using AI in pricing and in supporting our sales force as well. So we have multiple other initiatives to continue to improve our operating performance through technology as well.

Our next question comes from the line of Jonathan Chappell with Evercore ISI.

Mario or Ali, on the revenue per shipment side, 12 straight quarters of sequential improvement, which is obviously really good. It feels like the year-over-year rate of change is starting to decelerate, now we're down to 3% in 4Q. Can you help us think about what you're assuming for '26? And also, is that a commentary, maybe that slowing rate of change on now that you reached 12% accessorials, it's maybe a little bit harder to get incremental accessorial impact? Or is that more indicative of maybe a pricing environment that doesn't have the same momentum as it may have had last year?

Sure, Jon. This is Ali. So we expect a strong year from a pricing improvement standpoint here in 2026. For revenue per shipment specifically, we expect revenue per shipment to be up somewhere in that mid-single-digit range, similar to our expectation for overall yield growth. From a weight per shipment standpoint, we'd expect weight per shipment to be roughly flattish on a year-over-year basis. So that's going to help drive an improving trend year-over-year for our revenue per shipment here in 2026. The other way you can think about it, Jon, as you mentioned the 12 consecutive quarters that we've improved revenue per shipment through the fourth quarter. We expect that trend to continue here through 2026. So we expect to continue to grow revenue per shipment sequentially each quarter as we move through the year. And that's going to be driven by all of the initiatives that we're executing on the pricing side.

In particular, there's a lot of runway for us on local customers. Mario talked about it earlier in terms of getting those local customers up to 30% of our overall book of business and a similar trend on premium services. A few years ago, we were about 10% of our book of business was premium services. We're at 12% currently. However, we see a path to 15-plus percent over time. So there's a long runway there for us to continue to expand our offering and continue to drive that above-market yield growth and pricing growth here in 2026 and beyond.

Our next question comes from the line of Jordan Alliger with Goldman Sachs.

Just sort of curious, obviously, you guys are doing a good job from an XPO perspective. I'm thinking though out over the next several years or a couple of years, if we do -- if some of these demand indicators do wind up becoming more fulsome and we get an inflection across the LTL industry, can you talk a little bit about overall LTL industry capacity relative to what sort of price or yield reaction would occur if the industry itself went from down volumes to positive volumes and again, in the context of overall industry capacity?

Yes. Well, if you look at overall industry capacity, it has been relatively flat over the last decade. And while there were a few carriers besides us who have added capacity, others have been also reducing LTL footprint. And you also couple that with the bankruptcy of Yellow a few years ago, you tend to see that capacity has gone down quite a bit.

Now in terms of how much has it gone down by, if you look -- if you compare pre-COVID, so 2019 to where we are today on overall service center count, the industry is down 11 points over that period. And on door count, it's down 6 points. If you compare it to pre-COVID to post-COVID where we are -- I mean, pre-Yellow to post Yellow, so if you go 2022 to 2025, both service center count and door counts are down 6 points over that period.

Now when you compare that to what volume has done over the same period, keep in mind, we have been in a subseasonal industrial environment now for 3 years with the ISM being sub-50 for the most part, that has caused LTL volumes to be down in the mid- to high teens, give or take, in terms of shipment count across all public and private carriers over the same period of time. So as volume -- if what we're seeing here in the ISM continues to gain steam, which at some point, it would. And usually, the ISM is inversely correlated with the Fed fund rate. So when we start seeing the Fed fund rate continue to decline and you see the ISM start to pick up again, at some point, you won't have enough capacity in the sector compared to what we're seeing to what you would see from a demand recovery.

There is also another dynamic that has happened over the last few years, and that's between public and private carriers. When Yellow went bankrupt, a lot of that freight ended up going or more of that freight ended up going to the private carriers and the public carriers. So the private carriers are currently more strapped on capacity than the public carriers. And obviously, in our case, we have more than 30% excess door capacity to be able to support that recovery whenever that recovery comes. So it's very fair to assume that when you start seeing the watermark of overall demand go up and as capacity starts to dry up, you're going to see more and more customers go to the carriers that do have that capacity. And naturally, you will see the pricing dynamic of the overall industry continue to raise on average.

And as Ali mentioned earlier on, we have multiple initiatives to catch up with our best-in-class peer where we see a double-digit opportunity of incremental pricing growth just to catch up to those pricing levels through the 3 levers that we mentioned earlier on. So it would be not only positive for the tonnage environment, but definitely very positive for the yield or pricing environment as well.

Our next question comes from the line of Stephanie Moore with Jefferies.

I guess I appreciate the color so far for January and your thoughts for the quarter. But clearly, you guys have invested quite a bit through Network 2.0 and the like. So maybe as we think about what your incremental margins could look like in an up cycle, that might be helpful because clearly, I don't think looking at historical results would be probably that relevant given the investments that have been made over the last several years. So any help you can give us, Mario, on incremental margins would be appreciated.

Stephanie, it's Kyle. So if you think about incremental margins, we'd expect to be comfortably above 40%. And if you think about the contributors to that, the biggest is yield. So we were talking about that earlier. But if you think about yield, it's going to have really strong flow-through from the bottom line, and we're going to have a lot of our initiatives really just coming through to fruition now. So you think about local shipments continue to grow, as Mario mentioned, you think about accessorials continue to grow, that's really going to help us drive really strong incrementals from a yield perspective.

And then if you think about where we are from a demand and capacity standpoint, as Mario just talked about, we're in a great position to continue to deliver. If you think about the structural improvements we've made, not only in the count of service centers and our tractors and trailers, but also reductions in structural costs. So again, we've been able to really improve our third-party linehaul spend and get that down to 5%. And you think about the AI initiatives that continue to help us drive more productivity both from a P&D standpoint as well as on the dock, we're in a great position to not only capture more of that revenue, but also do it with a high amount of productivity. So from our standpoint, we should be easily in the 40% range when you think about incremental margins in an up cycle.

Our next question comes from the line of Chris Wetherbee with Wells Fargo.

Maybe one quick clarification question. Mario, you talked about the assumptions for the operating ratio in 2026, and you noted no macro improvement. I just want to make -- get a sense of what the actual tonnage sort of underlying tonnage assumption is in the 100 to 150 OR for '26. And then maybe zooming out a little bit and thinking about CapEx and cash flow. And so given the capacity that you have, you noted the tractor age is on the lower side, maintenance per mile is low as well. How do you think about that going forward? And then as you balance that kind of cash out relative to returns to shareholders, how you think about that, that would be great.

Chris, it's Ali. I'll answer the first part and pass it over to Kyle. In terms of the tonnage assumptions, if you just roll forward normal seasonality from January, that would put full year tonnage roughly flattish year-over-year, and that would be supportive of that 100 to 150 basis points of OR improvement that we expect for the year. Now to the extent that you see that above seasonal volume performance that we've seen in the last couple of months continue through the rest of the year, there would be meaningful upside to that OR outlook that we've talked about. So ultimately, it depends how volume trends through the rest of the year. But overall, we expect a strong year of margin improvement with or without a macro recovery.

And then, Chris, if you think about CapEx, so when you think about CapEx for last year, we spent about -- on the LTL business, about 12.4% of revenue on CapEx. And if you think about what we'll do this year, that's going to moderate a couple of points. So we're obviously lapping a year of significant network expansion, you think about the service center brought online. In addition, we had a lot of fleet additions that brought our third-party line haul down to 5.1%. So if you think about this year, that number will come down probably more towards like the midpoint of our long-term guidance range of 8% to 12%. What that's going to do for us from an overall free cash flow standpoint, it's really going to increase our free cash flow. So if you think about '26 for us from a free cash flow standpoint, we should be up north of 50% year-over-year. And that's going to be a combination of both lower CapEx spend as well as a continued improvement from an income base, as Mario talked about with OR improvement.

So when you think about what that can do for us, that's going to give us a lot of flexibility going into this year to do really two things. So not only we will be able to continue the effort on buying back shares. So last year, we repurchased about $125 million of shares. That will accelerate as the free cash flow continues. But then we're also going to have the flexibility to help continue to pursue our long-term target of being 1 to 2x leverage. We repaid about $115 million of Term Loan B this year. Again, that will accelerate as well. So we're going to have a lot of cash this year, and that's going to give us a lot of flexibility moving forward to have -- find the highest return for our shareholders from that cash.

Our next question comes from the line of Richa Harnain with Deutsche Bank.

Yes, one quick clarification for me and then a general question. But the clarification is the outlook for the quarter, Q1 to achieve margin expansion sequentially. What are you baking in as the assumption for tonnage? Do we expect this better than seasonal lift that we saw in January to continue for the rest of the quarter? Are you assuming more like seasonal trends for February and March?

And then the bigger picture question, Mario, in the past, I believe you suggested that in the next up cycle, price is going to lead. Just wanted to get an update on that. If you have this double digit, I think you said 30% excess capacity on a door level, why wouldn't you improve pricing consistent with what you've been doing, but have sort of volumes lead in driving revenue growth to effectively soak up that excess capacity, drive strong incrementals, which you guys are speaking about. And then that 30%, if you can translate that for us in terms of what that means in terms of how many shipments you can absorb, how many more shipments you can take on, I should say, without further investment in real estate or maybe how much you can do without taking on more trailers and people, that would be helpful.

Richa, this is Ali. I'll start on Q1, then pass it to Mario. So for Q1 from a tonnage perspective, if you just roll forward normal seasonality off of January through the rest of the quarter, that would imply full quarter tonnage being flattish on a year-over-year basis. And keep in mind, that does also factor in the tougher comps through the rest of the quarter. And that's really what's underpinning the OR outlook that we talked about in terms of outperforming normal seasonality and also improving OR sequentially from Q4 to Q1. Ultimately, it is still early in the quarter. March does have the largest impact on the quarter as a whole. So ultimately, that will be the biggest swing factor and probably a better indicator of whether this better-than-seasonal volume performance we've seen here in January is sustainable.

And Richa, when you look at the overall pricing and in the context of an up cycle, so generally, in our business and our industry, it's a capacity-constrained industry. So obviously, for the last 3 years, we have been in a depressed industrial demand environment, which had -- made the industry have enough capacity for the volume that we are seeing. But when that volume in the industrial economy starts recovering, you won't have enough capacity. And when you think about an LTL network, profitability and margin generally comes from yield, comes from pricing in terms of how we think about it. So naturally, typically in a down cycle, you tend to see the industry be up low single digit on pricing. In a good cycle, you would see it in the mid-single digit. And whenever you are in an up cycle, you could tend to see that being in that mid- to high single-digit type increases in pricing.

Now given that we have initiatives to be able to bridge the gap from us from where we are today to where our best-in-class peer, we have a double-digit pricing opportunity to go capture. And that's when you normalize our shipment characteristics in terms of weight per shipment and length of haul compared to our best-in-class peers. So our goal through the initiatives we just mentioned, whether it's premium services, whether it's small to medium-sized customers, whether it continue to get a more profitable mix of business, we're going to be driving those pieces to get a few points above market pricing for all of these components on top of the industry's pricing going up.

Now in terms of our ability to gain more tonnage, obviously, in an up cycle, we will also gain more tonnage, but we generally, we would want to get more price because that's going to have a higher flow-through to the bottom line as well.

Now when you look at the volume side and how much we can handle, so typically, in an LTL network, you need approximately in the mid-teens excess capacity to be able to handle the up and down cycles related with beginning of month versus end of month type volume fluctuations or what the Monday would do versus a Friday would do or what beginning of the quarter versus end of the quarter would do. So that fluctuation, typically, you need about 15 points or so of excess door capacity so you can handle those up and down. So we see anywhere between the mid-teens to the low 20% range of incremental volume we can get with our current door capacity. And beyond that, we would be expanding further and adding more physical capacity.

Now there are also other forms of capacity like holding stock and obviously, people as well -- and on the rolling stock side, we feel that we are in a great, great position. Over the last 3, 4 years, we have added more than 19,000 new trailers to our fleet, and we have added more than 6,000 new trucks to our fleet, giving us today one of the youngest fleets in LTL. Our average fleet age is 3.7 years as we exited the year. So we're feeling great about being able to capitalize on that. And importantly, to be there for our customers when that up cycle starts, we're able to move that freight and provide great service for them along the way.

Our next question comes from the line of Tom Wadewitz with UBS.

Congratulations on the momentum in the business. The -- I wanted to see if you could talk a little bit about underlying inflation. It sounds like you got some pretty helpful productivity opportunities related to the tech and AI initiatives. OD had their call yesterday kind of talked about higher inflation, I think 5% to 5.5%, so maybe a bit higher versus '25. So maybe a thought on how you see underlying inflation. And then when you weave in productivity, does your kind of -- do you get maybe more overall cost benefit and into the margin in '25 or -- excuse me, in '26? Or just how do we look at those different pieces together?

Yes. So if you think about it in the long term, so we think cost per shipment is going to be up somewhere in the low single-digit range. And the way to think about that, so for us, core wage inflation is in that 3% to 4% range. And then on top of that, we see higher benefit costs of maybe 1 point or 2. But as you imply, I mean, we expect to offset that with our productivity initiatives. So from an AI standpoint, that's going to help us, whether it's line haul, pickup delivery or dock, drive further improvements there. And then I think from a labor standpoint, just more broadly, in the fourth quarter, we delivered 2 points of labor productivity. We expect that to continue. So if you think about it on a net basis, once you account for that productivity, we would expect our cost per shipment to be in that low single-digit range despite having that core wage inflation and higher increase for benefit costs.

So do you think underlying inflation is much different from last year or kind of similar?

I think it's going to be similar. So if you think about wage inflation, it's going to be similar. I think what we're seeing, and I think others in the broad space are seeing some of the benefit cost insurance costs are a bit higher this year than prior. But I think on a net basis, you're going to be pretty similar on a cost per shipment.

Our next question comes from the line of Brian Ossenbeck with JPMorgan.

I just want to see if you can give a little bit more color on two areas of the market. First would be just the -- you call it the vertical or industry expansion into things like grocery and health care. What's the rate of change you expect in '26? And does that fall under the premium services or something else? And then just given the move in spot truckload market and worries about capacity getting a little bit tighter, have you started to see any truckload spillover to any sort of degree? I know it's not necessarily a big part of your business, but curious to see if that's starting to happen.

Thanks, Brian. Well, first, starting with grocery. We see that as being a large market that we're going to continue to ramp in. We estimate the size of that market, Brian, to be in the $1 billion market size range, and it does come with very good margins. Now today, it's a small part of our business as we continue to grow our market share in it. And predominantly, there are 2 carriers that manage the majority of grocery consolidation business in the industry, and we're starting to make now more and more inroads into that part of the business. We have achieved preferred carrier status now with a number of large grocers and we have nearly 200 incremental customers in our pipeline that we want to go after. But if you look at it, again, today, we are in the low single-digit percentage of total industry size of the $1 billion worth of grocery. And our goal is to continue to grow through that 2026 and beyond as we continue to gain market share.

Now in terms of what that -- it is a premium service from the perspective that you do get the base charges for the actual freight, but then there's a service on top of that, which is your consolidation service that you are offering to the grocers. The way that business works is once you achieve preferred carrier status with a large grocer, and we have a lot of the smaller companies that are shipping into the grocer, and we consolidate that freight at a destination terminal before we actually do a trailer drop to that particular grocer, where they can optimize their own docks by not having to deal with multiple shipments coming in through the course of the day as an example. So this has a benefit both on the overall volume side as well as on the premium side, given it's charged through an accessorial mechanism as well.

The second component on the truckload to LTL shift, we do think that as truckload rates go up, you will see some of that freight that has left the LTL segment to go to truckload come back to LTL. But we've always thought that this is a small number. When you look at direct conversions between heavy shipments that are, call it, 14,000, 15,000, 16,000 pounds, this is where it's usually sub-1% of an LTL network. So we see some of that would be coming back to LTL with heavier weight per shipment as truckload rates go up.

The second component is typically customers who are using a transportation management system, they can optimize multiple LTL shipments into truckload granted if the service can be -- service requirements can be met. We estimate that when truckload rates are lower, you see a bit more of that conversion, but we only estimate that to be a couple of points. So when you look at it on a full numbers basis, we estimate somewhere in the low to mid-single-digit range of tonnage that has gone to truckload would be coming back to the industry.

Now with LTL, 2 to 3 points of industry volume, that's a decent amount that we would expect to come back into LTL whenever truckload rates are recovering. But one also -- one last thing, Brian, I would say, and that's more of a -- that will help us with higher incremental margins in the next up cycle is the fact that we have reduced our reliance meaningfully on purchase transportation. So you can imagine as truckload rates eventually recover by 20%, 30% that's going to be a much lower headwind on our P&L because only mid-single digits of our linehaul miles at this point are outsourced, and we're planning on taking that number even further down here in 2026, which would further isolate our P&L from any truckload rate increases through the course of the year or '27.

Our next question comes from the line of Jason Seidl with TD Securities.

I think a lot of questions have been sort of directed or dancing around sort of the longer-term outlook. The last time you gave an update, it was from '21 to '27 and you looked at an OR improvement of at least 600 basis points, and you're tracking quite nicely to that. Given sort of your productivity initiatives, given hopefully an industrial recovery and a greater push into sort of your premium as well as your local services, how do you see sort of the next couple of years in terms of your OR improvement? You just had Old Dominion come out and not give a date around it, but talked about sort of a longer-term sub-70 OR. So I was wondering where you think XPO's North American targets could sit?

Well, overall, on the long term, if you compare us to our best-in-class peer, I mean we have all the levers to be able to get there from an OR perspective. It's just going to take time as we continue to execute. And as you said, Jason, in what was over the last 3 years, a historic freight recession, we were able to improve our operating margin by nearly 600 basis points, while the rest of the industry took a meaningful step backwards on overall margin performance. So when you look at that, we do expect our OR over the years to come to eventually get into the low 70s from an overall margin perspective. And it's all the levers we have discussed in the past.

From one perspective, we still have a double-digit pricing differential between us and the best-in-class peer through the 3 levers that we mentioned, a better service product over a longer period of time has led to some of that outperformance. And our goal is to effectively get an incremental point per year on that over the years to come to continue to bridge the gap. On the accessorial side, when we started our plan 3, 4 years ago, we were at 9% to 10% of our revenue was accessorial revenue. We're up to 12% now, and our goal is to get to 15%. So that's an incremental point per year over the next 3, 4 years. And then on the small to medium-sized customers, when we started our plan, 20% of the book was effectively those kind of customers, and our goal is to get that to 30% and we're halfway through. So we have another 2 to 3 years to be able to bridge that gap.

So these are the kind of levers on the yield side. When you look at the cost efficiency side, we have been able to improve effectiveness or efficiency overall productivity across our network quite a bit, a combination of technology and AI as well as the investments in capacity by having larger service centers, we can operate our network more effectively. And we still see a big runway ahead of us. I mean we are assuming in our plans a low single-digit productivity improvement per year. But when you look at what AI is doing these days, I mean, there's more upside there as well. Then you couple that with as the volume environment recovers and our ability to take market share in some of these new verticals like health care or grocery consolidation, that's going to further give us incremental tonnage as well.

So if you add all these things up, if we -- and again, we'll see whether these are early signs of an up cycle or not, it's very tough to call the cycle. But without the cycle, we've been able to improve margin and have a long runway of margin improvement and obviously, if we have help from the cycle, that's only going to accelerate our plans. And eventually, we want to get our OR well into the 70s. And eventually, at some point in the 60s as well.

And Mario, following up to your comments on what AI can do to your productivity measures. I mean, how meaningful do you think that could be? Could it sort of double your expected productivity gains?

Well, overall, as we roll them up, still in our expectation because every time you roll out a new technology solution, you have certain targets. But then as you roll it out and you keep on doing changes to it and you train the AI further and as it learns from the actual changes and the real freight we're seeing in the network, it keeps on evolving. In our current expectation, it's 1.5 points. Back half of last year, we had gotten to above 2 points of productivity. And some of these early solutions could have more upside, as I mentioned earlier on, but we'll see how these kind of get rolled out. We take them a step at a time, and we keep on investing in them and our team iterates on them. And we -- the 1.5 points could be conservative, but we'll see kind of how that materializes here over the quarters and years to come as we launch some of these solutions.

Our next question comes from the line of Ravi Shanker with Morgan Stanley.

Just a quick follow-up on the local accounts. Can you just remind us again kind of who do you compete with for those local accounts? And how does the cyclicality or seasonality of those accounts maybe differ from national accounts or maybe they don't?

Great question, Ravi. If you look at the local accounts, generally, we estimate that the industry, roughly 1/3 of LTL shippers in the industry, so about 30% are small- to medium-sized customers. So they are -- and think of a small- to medium-sized customer as being, say, a small manufacturer that is shipping 5 pallets a week as opposed to a large company that could be out of one location shipping 200 shipments in a given week. Usually, they have less density. And usually, they operate at a higher margin because effectively as an LTL carrier, we don't get the same density that you get with a large customer where you might be doing things like trailer pools or swaps effectively make your cost structure a bit more efficient.

Now in terms of who -- where we -- as I mentioned earlier on, we're halfway through our plan to catch up with the rest of the industry, and we have more runway to go here. In terms of who we compete with, it's every carrier out there, both the regional guys and the large national networks. So we are competing with every other carrier like we always have on capturing that market share for these local accounts.

Now growing with them is usually easier said than done. And the reason why you need a great service product and you need great relationships with the customer. And this is where our local sales force are doing a fantastic job growing that segment of business. We have increased the size of the sales force by about 25% over the last few years. And as they ramp in productivity, they're being able to be out there meeting customers face-to-face and onboard more of that business, again, onboarding 10,000 new accounts through the course of 2025, which I couldn't be more proud of.

Now in terms of the cycle and how it impacts small- to medium-sized customers versus larger customers, usually, the larger the customer, they use a TMS system to optimize their freight flow. So naturally, what you tend to see in the down cycle, larger accounts, their weight per shipment stays relatively flat. It might still come down a bit, but you see the shipment count come down more. For local customers, what you tend to see is a higher impact on weight per shipment because naturally, if they had a customer who was buying 3 pallets worth of fasteners, now maybe they're buying 2 pallets worth of fasteners, subsequently having a lower weight per shipment. So typically, there are seasonal changes when the cycle is down, weight per shipment is down. When the cycle is up, weight per shipment is up versus the larger the customer, you tend to see when the cycle is down, you can see shipment count is down. And then when the cycle is up, you see shipment count being up.

Our next question comes from the line of Bruce Chan with Stifel.

Helpful commentary on the different target end markets so far. I was wondering if you can maybe give any comments on pricing trends or negotiating behavior at this point in the cycle between them, like renewals or bid frequency for SMBs versus enterprise, for example?

Yes. So if you think about renewals, what we're seeing in the fourth quarter is pretty consistent what we saw in the third quarter. So we've been pretty consistent from that standpoint. And you think about the cadence of renewals. So typically, we have about 1/4 of book that renews every quarter. But one thing to keep in mind is that when you think about local accounts, many of those are on our standard tariff arms, so they get impacted by the GRI. That's about 1/4 of the book that gets impacted by the GRI versus individual negotiations.

And we have reached the end of the question-and-answer session. I would like to turn the floor back over to Mario Harik for closing remarks.

Thank you, operator, and thanks, everyone, for joining us today. As you saw from our results, we're outperforming the market based on our own initiatives and disciplined execution. Even without a recovery in the demand environment, we expect strong margin expansion and earnings growth this year. And if the recent pickup in demand continues, we're well positioned to capitalize on it and accelerate our results even further. With that, operator, please end the call.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.

Welcome to the XPO Q3 2025 Earnings Conference Call and Webcast. My name is Stacy, and I will be the operator for today's call. [Operator Instructions] Please note that this conference call 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 applicable security 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 risk 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 are 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 on 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, and thank you for joining our call. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer.

This morning, we reported another quarter of strong execution. Company-wide, we generated adjusted EBITDA of $342 million and adjusted diluted EPS of $1.07, both exceeding expectations. Excluding a nonrecurring benefit in the third quarter last year, adjusted EBITDA grew by 6% and adjusted diluted EPS by 11%. In our North American LTL business, we grew adjusted operating income year-over-year by 10% to $217 million and improved our adjusted operating ratio by 150 basis points to 82.7% significantly outperforming seasonality. We've now achieved 350 basis points of margin expansion over 2 years in a soft rate market, underscoring the power of our operating model.

Importantly, we grew LTL adjusted EBITDA to the highest level of any quarter in our history at $308 million. The consistency of our performance highlights 2 inherent strength of our business. First is our ability to drive above-market yield growth. And second, to optimize our network with high impact proprietary AI and other technology. The foundation of our operational strength is our world-class service and it's the most powerful catalyst of customer loyalty and margin expansion. In the third quarter, we reduced damage frequency to the best level in our history, and we improved on-time performance year-over-year for the 14th consecutive quarter. These improvements reflect the importance we place on delivering consistently for customers as a core tenet of our culture and the pride our team takes in meeting that goal.

We're also optimizing our network so that our facilities, fleet and technology work together to reduce 3 handles, shorten transit times and increase productivity. These operational gains are being supported by the investments we've made in our network and equipment, which continue to enhance service quality and drive long-term cost efficiency. Speaking specifically to our investments, we focus on high-growth freight markets, and we have one of the strongest LTL networks in the industry. We use the 30% excess door capacity in our network as a strategic tool optimizing freight flows today while positioning to capture profitable share gains and stronger incremental margins as the cycle turns.

On the equipment side, our investments have lowered the average age of our tractors to 3.6 years at quarter end, giving us one of the youngest fleets in the industry. And newer fleet, combined with the efficiency of our maintenance program, strengthens reliability, safety and service performance, in the third quarter, it drove a 10% reduction in our maintenance cost per mile. Together, these investments are improving efficiency across line haul, dock and pickup and delivery operations while ensuring we have the right capacity in place to support growth ahead.

Turning to pricing. Our service quality and focus on a more profitable mix drove another quarter of above-market yield growth and margin performance. In the third quarter, we grew yield excluding fuel by 5.9% year-over-year and 3.1% sequentially. We also improved revenue per shipment, excluding fuel sequentially for the 11th consecutive quarter. Underpinning this performance was the value shippers placed on our reliability and damage-free service. We're also seeing benefits from a [indiscernible] mix of local accounts and premium services, both of which carry higher margins and contributed to the outperformance in the quarter. By rigorously executing our strategy, we're translating the strength of our service into industry-leading yield growth and meaningful margin expansion.

Turning to cost efficiency. Our progress for productivity and AI continue to be a highlight in the quarter, while our reduced reliance on purchase transportation will insulate our cost structure when the cycle turns. Starting with purchase transportation, we improved outsourced miles to 5.9% of total miles, the lowest level in company history and down from 25% a few years ago. Our lower reliance on third-party carriers gives us greater control over service quality and will support stronger incremental margins when truckload rates recover. Notably, productivity was the largest contributor to our strong cost performance in the quarter, enabled by our AI-driven optimization tools, which are generating measurable returns. In linehaul, the models we deploy are driving meaningful reductions in overall mines run as well as empty miles and the impact of these gains accelerated throughout the quarter.

More recently, we rolled out automated mapping for door loading to streamline filer utilization. This has already increased shipments per trailer by low single digits versus last year. Linehaul represents our largest cost category at about $1.6 billion per year, so the efficiencies we realized here had a significant impact on our P&L. Pickup and delivery is another area where our implementation of AI solutions is showing strong potential and is in the early innings. As the local routes we run is precisely optimized for time, distance and number of staff, collectively, these initiatives contributed to a year-over-year productivity improvement of 2.5 points in the quarter. This reinforces how quickly AI is gaining significance as a driver of our margin outperformance. And we're just beginning to mark its potential. As these tools scale, we expect ongoing enhancements of productivity, margins and the customer experience across our operations.

In closing, I want to frame today's strong earnings report within the context of the strategy that powers our model. Together, they keep us performing ahead of the market independent of the macro. At its core, our model integrates a high-performing network of capacity with key markets, advanced technology and a culture that excels at delivering world-class service and results at scale. And our applications of AI are amplifying our strategy, creating new opportunities to meaningfully expand our margins. It's a dynamic combination and asset cycle terms, we expect our momentum to accelerate driving greater upside to margin and [indiscernible] value creation for our shareholders.

With that, I'll turn it over to Kyle to walk through the financials. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet and liquidity.

For the third quarter, total company revenue was up 3% year-over-year to $2.1 billion. In our LTL segment, revenue was also up to $1.3 billion. Excluding fuel, LTL revenue grew 1% year-over-year, supported by ongoing strength in our yield. On the cost side, our salary wage and benefit expense increased just 1% year-over-year due to productivity improvements. Our AI-driven tools helped to offset the impact of inflation and the added labor cost from an insourcing initiative. We also drove additional efficiency gains across the network, including a 48% decrease in third quarter purchase transportation expense as we in-source more line-haul miles. Strategically, the in-sourcing we're doing now should significantly mitigate costs later when the cycle recovers and third-party carriers raise their rates.

Depreciation expense in the LTL segment increased 11% or $9 million, consistent with our strategy of investing in capacity and equipment to support long-term growth. Turning to profitability. Company-wide adjusted EBITDA increased 3% year-over-year to $342 million. In LTL, adjusted EBITDA was up 9% to $308 million and adjusted operating income was up 10% to $217 million, both for company records. We also expanded our LTL adjusted EBITDA margin by 180 basis points to 24.5%, reflecting strong pricing and operational execution. In our European transportation segment, adjusted EBITDA was $38 million, and corporate adjusted EBITDA was a loss of $4 million. For the total company, operating income was $164 million and net income was $82 million. Diluted earnings per share decreased to $0.68, reflecting a $35 million charge related to a legal matter dating back to Con-way in the 1980s before we acquired the company. On an adjusted basis, diluted EPS was $1.07, up 5% year-over-year. And lastly, we generated $371 million of cash flow from operating activities in the quarter and deployed $150 million of net CapEx.

Moving to the balance sheet. We ended the quarter with $335 million of cash on hand after repurchasing $50 million of common stock and paying down $50 million on our term loan facility. Combined with available capacity under our committed borrowing facility, this gave us $935 million of total liquidity at quarter end. Our net leverage ratio was 2.4x trailing 12 months adjusted EBITDA compared with 2.5x in the prior quarter. Looking ahead, while we remain committed to investing in initiatives that support long-term growth, we expect our CapEx to moderate and free cash flow conversion to increase. This positions us with greater flexibility in continuing to return capital to shareholders while strengthening our balance sheet.

And with that, I'll hand it over to Ali to walk you through our operating results.

Thank you, Kyle. I'll start with a review of our LTL operating performance where we continue to expand margins and deliver record third quarter adjusted EBITDA despite a soft freight market. Shipments per day were down 3.5% year-over-year and weight per shipment declined 2.7%, resulting in a 6.1% decrease in tonnage per day. Notably, folk shipment and tonnage per day improved year-over-year versus the second quarter, a positive trend we expect will continue for the fourth quarter.

One key driver of this improvement in shipments per day was our local channel where we continue to take profitable share. High-margin local shipments now represent 25% of our total, up from 20% just a few years ago. This reflects the success of our targeted sales initiatives for these desirable customers and the strong appeal of our service quality. Looking at monthly trends compared with the prior year, July tonnage was down 8.7%, August tonnage was down 4.7% and September was also down 4.7%. Moving to shipments per day. July was down 5.6%, August was down 3.4% and September was down 1.5%. For October, tonnage is estimated to be down in the 3% range, in line with normal seasonality compared with September.

Turning to pricing. We delivered another quarter of above-market yield performance with 5.9% growth excluding fuel versus the prior year as well as a sequential improvement. Revenue per shipment, excluding fuel, also increased sequentially for the 11th consecutive quarter, underscoring the momentum of our pricing initiatives. We expect to improve pricing sequentially again in the fourth quarter supported by our premium services and growth in the local channel. Underpinning this, our data analytics and proprietary technology are becoming increasingly adept at aligning pricing with the value we provide to customers.

Turning to profitability. Our LTL margins were exceptionally strong as we improved our adjusted operating ratio by 150 basis points year-over-year, exceeding our outlook and we were the only public LTL carrier to expand margins this quarter. Sequentially, we improved our adjusted OR by 20 basis points in a quarter that typically sees 200 to 250 basis points of seasonal deterioration. It marks the first time we've achieved sequential OR expansion in the third quarter, aside from extraordinary years like 2020 and 2023, and it underscores the continuous improvement that is a hallmark of our strategy. Looking at our European Transportation segment, we continue to grow the business and strengthen its position against the challenging macro backdrop. We increased third quarter revenue 7% year-over-year, while gaining wallet share with existing accounts and new customer wins. Adjusted EBITDA, one they get outperform typical seasonal patterns reflecting disciplined execution across our operations. In addition, we grew the sales pipeline by high single digits, putting us in a strong position to capitalize on rising demand in key markets.

To close, I want to highlight what continues to set our performance at par. Our LTL results reflect industry-leading trajectories for profitability, cost efficiency and operational excellence. We're consistently generating above-market yield growth earned through our service while also increasing the contribution from high-margin local customers and premium services. Pricing is a key driver of our margin outperformance with a long runway to continue compounding these gains regardless of the macro environment. And on the cost side, our deployments of AI are adding to the bottom line, driving meaningful improvements in productivity and network efficiency. All of these structural advantages are independent of the cycle, contributing to our outperformance today while positioning us to accelerate earnings growth as freight volumes recover.

Now we'll take your questions. Operator, please open the line for Q&A.

[Operator Instructions] First question has from Ken Hoexter with Bank of America.

Great. Ali and Mario and Kyle, I guess just a great job on operations and in-sourcing. I mean just continued cost controls. But the key here, I guess, is the October tonnage you just noted was down 3%. Industry leader is, I guess, 4x worse than that. Maybe, Mario, if you want to talk a little bit about is that the system is now enabling you to address customers faster, better on pricing? And then maybe talk about how you expect to outperform seasonality. And then carry that over to your thoughts on margins into fourth quarter?

Thanks, Ken. Well, if you look at October tonnage for us, that would be down in the 3% range, which should we still have a few days to close out of the month, but this is where we expect it to be. And that's largely in line with typical seasonality from the month of September into the month of October.

Now if you think about the reasons of the outperformance, a lot of that goes back to our strategy is firing on all [indiscernible]. I mean, from one perspective, our service product has never been better. We are onboarding more small- to medium-sized customers than we've had in the past. So far, year-to-date, we have added 7,500 local customers. And here this last quarter, we added another 2,500 local customers, and that's paying the dividend. And when you look at premium services that we are launching, customers are taking advantage of that. We want to be there for them. And these are services that customers are asking for and they come at a higher yield, they come at a higher margin but they also check the box where these are things we were not doing in the past for our customers. Over the last 1.5 years, we launched a half a dozen of these services. Here, the latest one was good consolidation in the second quarter. And we're seeing more momentum accelerate in those 3 services as well.

So these are some of the factors why we're seeing, again, in outperformance when it comes to the volume side. When it comes to the margin outlook, typically for us, in the fourth quarter, we see a sequential increase of OR of 250 basis points from Q3 to Q4. And we do expect to continue to materially outperform that seasonality here in the fourth quarter, and this implies that OR will also improve meaningfully on a year-on-year basis and accelerate versus where we were in the third quarter on a year-on-year basis is our current expectation. And that's what put us on the path towards delivering on our full year outlook of 100 basis points of OR improvement. Now keep in mind, Ken, is the second year in a row where we meaningfully after the industry, and that's our expectation. And we're still in the early innings. I mean, if you roll forward, obviously, at some point in a cycle in a soft macro with improving margin and whenever the cycle starts turning, we're going to improve it even more.

Next question is Scott Group with Wolfe Research.

Mario, just to follow up, I know you said you expect to outperform seasonality on OR in Q4. But any sort of color magnitude? And then I think any way you look at it, right, you're exiting Q4 with a lot of year-over-year margin improvement. I know it's early, but any way to think about -- any early thoughts on how to think about margin improvement into next year?

Yes. I'll start with next year just kind to give some color on it, and then I have Ali just cover more details on the fourth quarter [ staff ]. But if you look at next year, obviously, we do expect a strong year of both OR improvement and earnings growth in 2026. And this is even in the current soft macro environment. So without assuming any macro recovery yet, which is up what we're hearing from customers, by the way, customers are starting -- we're hearing more and more from customers that they do expect the recovery in 2026, but we'll see what the macro has in store. But even without a natural recovery, we do expect to improve both OR meaningfully and the earnings as well.

Now we will talk more about the specifics of 2026 once we report the fourth quarter. But at a high level, just from a building market perspective, we're going to continue to benefit from another year of above-market yield growth. As you know, Scott, we [indiscernible] the only trajectory, the bridge the gap between us and best-in-class on yield and we still have 11 points to go get over the years to come. In premium services, we're still, I would say, in the early to middle innings in terms of getting to the 15% target of assessorial as a percent of revenue on -- if you look at -- if you think of our local accounts for small to medium-sized businesses, we are currently in the, call it, 25% range of the book is those kind of customers and now we're going to get up to 30%. It's going to take a number of years for us to get there. So we still have a lot of runway in terms of all the initiatives that we are driving to deliver that above-market yield growth.

And the second category, which we're very excited about, is on the cost side with AI. We've launched multiple capabilities here in the second and third quarter that have paid dividends and all of these are incremental to what we're doing. And we have the other number of initiatives that are currently in pilot that are also showing very early signs of upgrade numbers here that we're going to be able to improve our productivity even further as we head into '26 and '27 and beyond as well. So all these are the levers that are -- that will enable us to drive the stand-up performance and this is without a macro recovery.

And Scott, this is Ali. On the fourth quarter from a margin perspective, as Mario noted, we do expect to materially outperform seasonality here in the fourth quarter. If you just take the 100 basis points of OR improvement we expect for the full year that would imply a modest sequential increase in our OR as we go from Q3 to Q4, but obviously, much better than the typical 250 basis points of seasonal increase that we normally see as we go into the fourth quarter. And I think, more importantly, Scott, what that implies is a pretty meaningful acceleration in our year-over-year go our expansion relative to the 150 basis points we just delivered here in the third quarter.

Okay. So in the ballpark of like 250 basis points of year-over-year improvement?

That's in the right range, Scott.

Next question is from Jonathan Chappell with Evercore ISI.

It sounds like as we look past the fourth quarter, yield is going to be -- continue to be one of the biggest drivers, especially if we're not expecting much of a macro improvement. Can you walk through some of these cost line items and how we should think about the cadence going forward? It seems like PT is maybe getting to about as low as it can get to, correct me if I'm wrong. So a lot of these AI initiatives, productivity, et cetera, does that mostly come out of maybe some of the bigger cost line items, salaries and wages, et cetera? Just as a helpful framework to think about OR improvement potential next year without any volume.

You got it, Jonathan. So first on, when you think about the PT in-sourcing, that's only a modest cost benefits for us in 2025 even. And the reason why when we in-source third-party line home we've hired people, so that would show up in the salary, wages and benefits line. And we also added equipment, [indiscernible] operation, and that shows up in both depreciation and a higher a set of miles from a maintenance perspective, the cost per mile that it goes up as well.

On a net basis, if you look at the reduction in purchase transportation expense on the D&L and the addition of these incremental costs, that's only a very small cost benefit that we had in 2025 and here in the third quarter as well. The outperformance on the cost side have been coming from a better productivity. So if you think about it in the third quarter, we improved productivity, which we measure as shipments -- hours or labor hours per shipment has improved by 2.5 points despite shipments being down about 6 points, and that's the biggest -- the bigger part of the outperformance that we said in the early innings of delivering on these improvements. If you take a step back and you look at all the things we're doing from a technology perspective, from a field execution perspective, our operators in the field are just killing it and you think about being able to manage and giving them the tools to be able to be more successful as well, we do expect that to compound over time and will go up further on the cost side. But the best way to think about it would be we have wage increases obviously caused our overall cost to go up and other cost inflation and then we offset that with productivity and how we're operating and moving freight across the network as well.

Next question, Jordan Alliger with Goldman Sachs.

Just sort of continuing out, maybe just thinking longer term and let's say we get to the point of inflection on tonnage with all that you've done on PT and in-sourcing and these productivity benefits you're talking about and technology, et cetera. When we get to that point of inflection, can you maybe talk to how you're thinking about incremental margins whenever that churn actually is, whether it be next year or whenever. And what can we see? Or how do you feel that leverage will look on incrementals?

Sure, Jordan. It's Kyle. So if you think about incremental margins, we'd expect those to be comfortably above 40%. And if you think about the major drivers for that, yield, obviously, is going to be the biggest contribution to the top line growth. And that's going to support a really strong flow through to bottom line. And as Mario talked about from the yield initiative standpoint, we're still in the early innings. There's a lot of run rate of growth, whether it's growing premium as we talked about, increasing local channel or otherwise.

When you think about this demand recovers, again, we're in a great position to deliver those based on the structure we've put in place. So obviously, the PT coming down is going to insulate us from rising truckload rates. That's going to be a strong operating leverage and you couple that with having world-class service and 30% excess capacity, we'll be in a great position to capitalize on the demand recovery of the margin.

Next question, Stephanie Moore with Jefferies.

I wanted to talk a little bit about -- maybe we think about the multiyear pricing opportunity. Clearly, you've made a lot of strides this year that will also create -- will be more difficult comps in 2026 as well. So barring, we still don't see a major improvement in the volume environment what's your degree of confidence that you can continue to see strength on the pricing front as we think out over the next 12 months?

Thanks, Stephanie. Well, if you take a step back and you think longer term, today, the pricing -- when we started our plan a few years ago, the price differential between us and best in class was 15 points. And that this is obviously ex fuel and normalized for their network versus our network. And today, although we are in the trough of the freight cycle, that differential is at 11%. Now we've always said it's going to take us 5-plus years for us to bridge the entire gap. And that's what kind of gets us excited about the future is that the run rate on a lot of these initiatives are -- again, with the early or middle innings depending on the initiative for us to be able to continue to drive that above market yield growth.

Now if you think in the current market, the way we think about it, when we thought about our plan, we had roughly around 9% to 10% of our revenue came from what we call accessorial revenue. So these are premium services. Well, let's say you're moving the shipments for the customer in and out of a tad show as an example, you would be charging a small incremental charge associated with that. And our goal is to go from 9% to 10% up to 15%. As of last quarter, we were at 12%. So we have another 3 points to go, and we expect to get that roughly about 1 point a year over the next 3 years.

If you look at small to medium-sized businesses, when we started our plan, we were under-clubbed in that area, we were about 20% of the book was those type of customers and how we've been able to add more and more of these customers with up to 25% and now of the mix being small, medium-sized businesses. And our goal is to get to 30% at a clip of roughly, call it, a couple of points per year. And every couple of points for a year of more small to medium-sized businesses is an incremental 0.5 point of yield that we get just given these are smaller customers, they typically operate at a higher margin as well. So we have another, call it, 2.5 years of run rate on that specific level for us to go.

And then the last one was when we saw the price differential on contract renewals was approximately about 8 points and our plan was to scale that difference about the point for the year. And we are a few points in. So we have another 5 years of incremental price we can get given the great service product we are offering our customers to bridge that gap as well. So the way we think about it, again, it's a big opportunity, it will take us a number of years to get there. Even the soft freight macro would delivering now for a few years in a row above market yield improvement given those levels, and we expect that to continue through the years to come. And when the cycle turns, that's going to accelerate even further as well.

And just one quick follow-up. I know you gave some commentary about moderating CapEx. And if we kind of put the put the pieces together in terms of your expectations on what we just talked about on yield and expectations to continue to grow margin through 2026. Can you talk about what that means from just a free cash flow standpoint?

Yes. Stephanie, so if you think about free cash flow, just sort of CapEx for this year. So I mean from a CapEx standpoint, we're going to moderate a couple of points anything on a percent of revenue basis. So last year, about 15%. This year, that will come down a couple of points. And again, we're lapping a year significant expansion from a service center standpoint, and that's really a onetime spend in nature as well as on the fleet investments will come down as we've made a lot of progress on our line haul and source.

So if you think beyond this year, that CapEx number is probably closer to the midpoint of our long-term guidance range. We said 8% to 12%. We're probably somewhere in the middle of that. So what that's going to do for us is really help us drive even more cash flow when you think about next year. I mean, this year, I think we're going to grow north of $400 million from a free cash perspective. And again, we're generating higher income. We'll get some benefit from lower cash taxes and the lower CapEx coming through. And I think in the long term, as EBITDA continues to accelerate and earnings grow and we have a lower CapEx profile, we're going to generate much more cash in the future.

Next question, Fadi Chamoun with BMO Capital Markets.

Yes. I wanted to see if you can give us some kind of guideline of how to think about your pricing for the fourth quarter. You said that it would improve quarter-over-quarter. Are we still looking at something in the 5% to 6% range? And as we go into 2026, like are you seeing 150 basis points? I suspect that your like 100 to 150 basis point kind of premium pricing. Do you think that continue to be sustained as we go into 2026 based on some of these levers that you just talked about, Mario, as far as what's driving that premium pricing?

Yes. [indiscernible] 2026 in the long term, Fadi. So we do expect to continue, as I mentioned, if you look at it on the assessorial side, we had a point on the small to medium-sized businesses, we have a 0.5 point. So all of these would be incremental to what the market is doing.

Now obviously, as you know, if the market goes up and down, we're going to -- whatever the market does, I would also outperform it based on the company specific levers that we are guiding. That's how out I think is how we think about it.

Yes, Fadi, if you think about it from the fourth quarter on a year-over-year basis, we'd expect yield ex fuel to be in a similar growth range on a year-over-year basis that we saw in the third quarter.

Next question, Chris Wetherbee with Wells Fargo.

Maybe 2 quick questions here. First, as you think about tonnage in the fourth quarter, obviously in line or maybe I guess the third 3% decline in October, can you think -- can you talk a little bit about what normal seasonality might mean for the full quarter in 4Q? And then if you think about just sort of the pricing environment, maybe more broadly, there's been some concern about pricing in LTL, particularly given where LTL is now. I don't have any thoughts there, maybe contract renewals. It seems like the pricing environment is still fairly stable for you. You're getting better than sort of industry level, just maybe some comments broadly on how you think the competitive environment looks today.

Chris, I'll start with the fourth quarter volume. So October, as you know, for us, tonnage was down in that 3% range year-over-year. Now if you just roll forward normal seasonality for the rest of the quarter, that would imply full quarter tonnage being down in a similar range year-over-year as the month of October, perhaps a little bit higher when you factor into tougher comps in November and December. But for the quarter as a whole, we would expect it to look similar as what we saw here in the month of October.

And on the pricing discipline, Chris, so we continue to see a constructive industry pricing impediment. Going back to your question on contract renewals for us is accelerated in the third quarter versus where we were in the second quarter. And at a high level, I mean, although we have been in soft freight market, customers and we've been [indiscernible] now for 3 years, yet to continue to see that very strong industry pricing. And there's a few reasons for that. I mean, if you take a step back, this business is a cost inflationary business. We have to invest in equipment. We have to give our [indiscernible] rate increases. We have to invest in service centers. And customers do understand that for us to be able to provide the net play service, we need to be able to invest in our network.

And on the industry capacity side, we -- if you look over the last few years, there has been a significant amount of capacity to exit the market. But when you look at 3 COVID levels compared to where we are today, you have 10% less industry terminals, and you have roughly around 5%, 6% less doors. And if you compare it to 3 yellow bankruptcies to where we are today, both terminal count in the industry as well as door count is down in that mid-single-digit range. So a lot of the conversations that were happening with our customers, you can have that all concerns when that cycle stops turning, they want to make sure that we're working with the carrier, the tens of capacity to be able to support them while delivering a great service product for them as well. And all these things lead to that, again, very discipline industry where pricing stays steady. And again, we have to invest and that kind of invest itself in the pricing pattern there as well.

Next question, [indiscernible] with Deutsche Bank.

So just piggybacking off that last question. Maybe, Mario, you can just flesh out a little more around the competitive environment in terms of like maybe what your customers are saying. Any -- down 3%, something very special is happening at XPO, but it seems like the broader industry is struggling a bit more. So maybe you can talk about, like, again, just what customers are saying regarding overall macro trends and when maybe we could look forward to coming out of this malaise? And then yes, in terms of like you just said that certain customers are leaning more into quality. Just talk about who's really struggling out there? Is it like on the private side, are you noticing more service disruption? And are you benefiting from that taking share from that category to the market?

Thanks, [ Rachel ]. Well, if you look at the customer demand outlook, as you know, every quarter, we do a survey with our top customers, and we just wrapped up here the third quarter one last week. And what we're hearing from customers for the fourth quarter has been consistent with what we've been getting from a trade recession perspective, where demand is still soft. We're not seeing the underlying tone from customers for the fourth quarter. So as we close the year be bullish or bearish is kind of somewhat in the middle. It's fairly neutral on the demand side.

Now we are seeing differences between customers. Some customers are doing better than others, depending on the segment of what industry they are in as well. Now the sad for 2026, we are getting more optimism in terms of the overall demand outlook. A large number of customers now expect an acceleration in 2026, which is encouraging to hear. Now if you take a step back, in our industry that the LTL volumes are correlated with the ISM Manufacturing Index, which has been, as you know, subseasonal [indiscernible] for the better part of 3 years. However, when you look at periods of change in the Fed fund rate, there is an inverse correlation between the ISM manufacturing index and the Fed fund. So you can imagine a declining rate in patent is going to, over time, just up the ISM and lift back up the industrial manufacturing and get onto here in the country.

The second area is around the big beautiful build that's stimulating customers thinking about pulling forward that capital or sub delaying the capital deployment to a certain extent to make sure they can take a benefit of that. You also hear about the 7 around tariffs. I think the tariffs have impacted the economy this year given there was more uncertainty. So a lot of companies defer the capital deployment accordingly. But if you think about all of these things, they all conversion to 2026. A lot of these things would be behind us in the back meter. But as said, it's very tough to call the nature. I mean, what customers are saying they do expect an acceleration. But there's a lot of moving parts here with more leaning towards the positive side. Now if you break it down between the type of customers in the third quarter, retail performed relatively better than the industrial accounted [indiscernible], on the industrial side, which is 2/3 of our customers, machinery, electrical equipment, HVAC were stronger, while equipment or industrial for ag was a bit softer. But overall, I mean, obviously, you see what the [indiscernible].

Again, it's a tough to predict environment, but that is more optimism on 2026 and looking forward. In terms of other carriers, it's tough to tell because it's not necessarily that you have one carrier that will struggle across the entire book, but you have certain regions and certain veins. And that kind of changes again, depending on the region, which carries [indiscernible] customers as well.

Next question is Tom Wadewitz with UBS.

So Mario, I wanted to get your thoughts on the next upturn and how important volume growth or share gain is. It does seem like whether you're the private players like whatever SCs are now or whether you're kind of OD sitting there with 35% excess capacity, there are a number of players that are like, "Yes, hey, when the market is stronger, we're going to take share" and then you got FedEx Freight is kind of a wildcard. I'm just wondering, you're improving service, getting a lot of price, which is great. Do you need to take share in a freight upturn to kind of make your plan work? Or is it just like, hey, you can grow the market and you continue to get better pricing and you really do very well from a financial kind of margin and earnings perspective, even if you're not growing above the market. So just thinking about kind of how important that volume lever is and beyond market growth when you think about the next upturn?

If you take a step back, I mean, we -- for us, in the next cycle upturn, obviously, as Kyle mentioned earlier on the incremental margins would be off the charts. And in a volume growth environment, you would have effectively earnings growing also at a very, very fast clip. Now how we get there, there are 3 dynamics at play. There is a pricing dynamic or a yield dynamic, let's say, volume dynamic and that's the cost dynamic. And the beauty of this is that in the up cycle, all of these actually go in the right direction.

If you think about it last year, even in a declining policy environment, with improved margins by 260 basis points. This year, we punished being down all that mid-single-digit plus range. We're improving margins meaningfully as well. So you can only kind of if you roll back into a model what tonnage increases, yield increases and cost improvements would do, you have mega increases in terms of earnings and margin expansion. And now in terms of how we get there, first, starting with yield, if you look at our industry, since the bankruptcy of [indiscernible], and since COVID, you've had the private care years have been up on tonnage over that period of time. while the public CEOs are more down on tonnage, and the industry as a whole is down in the mid-teens, and that's pretty close to what you see if you look at the U.S. sensors data for industrial companies, that we service in LTL, they have a similar amount of volume decline over the same period of time, about 16 to 17 points, not revenue decline because they offset that with pricing, but volume decline.

So as the industrial economy starts coming back, you have fallen in the mid-teens range of tonnage that is waiting to come back into [indiscernible]. While that one stock coming back, you have the private carriers who some have added some capacity, but they will get tap out on capacity faster than what the public carriers would be able to do. And carriers that have the excess capacity, we today, as of last quarter, we are north of 30% excess capacity, similar to the best in class carrier year and we would be able to support our customers there to be there for them in the context of that up cycle. Now we don't want to be the biggest market share gainer. We want to increase market share. We want to grow market share, but we don't want to be #1. If you think about it, it's all about the mix of business that we have and accelerating our yield growth associated with that as well. So we want to be the #1 performer on yield improvement over that period of time.

And the third dynamic on this one is at our [indiscernible]. If you look post yellow bankruptcy, volumes were about 7 points better than seasonality from Q2 of that year to Q3 of that year. And during those -- the following 2 quarters, we improved productivity by 7 points and 5 points, so call it, the mid- to high single-digit range. You couple that with the new AI initiatives we're launching, you can see an increasing volume environment, productivity not improving in 1 or 2 or 3 points you will see productivity even improving at a faster clip. You would see line-haul density improving as well in our network. And all of these would drive lower cost on a per unit basis, which leads to higher margin expansion and more earnings or associated with that as well.

You have a quick thought just a follow-up within that on what your kind of productivity metric is we should really focus on. You've got a lot of things going on with AI and productivity, and then you got the operating leverage. But what metric or 1 or 2 metrics we should look at just to kind of see the tracking on productivity?

Well, overall, every quarter, we kind of give an update on -- we typically count is because we want to combine it all together as labor hours per shipment, and this is what improved over the last quarter by 2.5 points and accelerated from where we were in the first half of the year. But internally, we use 3 predominant KPIs. One is that how many pallets per person per hour are we moving on our docks. What is the stops per hour we're seeing in how a pickup and delivery operation in our city operation. And in line haul, it's a combination of what we call node average, which is how much weight are we putting in a tough equivalent of a and what we call load factor, which is a component of miles and tons.

But ultimately, when you combine all of these things, we look at them on a eventually, you see it in the salary bridges and benefits line that would offset the cost inflation we will be seeing in wage inflation, but we typically give the hour square shipment as a proxy to these KPIs.

Next question, Brian Ossenbeck with JPMorgan.

Maybe just 2 quick ones on the demand side. Are you seeing anything from the government shutdown from a direct or indirect effect? And I know you guys talked more about grocery and we got this net funding running out in a couple of days here. So do you think that would have any sort of meaningful impact? And then just maybe more broadly, truck market's got some optimism here that it might be recovering or stabilizing? Any updated thoughts on how that's affected your book of business currently either from a consolidation or direct competition perspective?

Thanks, Brian. I'll try to cover all that, if I missed one, just let me know. But first, starting on the government shutdown, we don't expect that as being impactful overall to LTL volumes. I mean usually, at least for us, we don't do much government freight as any. And I believe most of our peers fall in the same category. So there's no direct impact from that on LTL overall demand.

On the -- some of the company-specific items that you mentioned that gross reconsolidation, that's a great opportunity for us because when you look at that market as a whole, it's a note of 1 billion of size what we estimated to be. It's an attractive market. It's a high-margin market because effectively, we use our network to help growers consolidate freight from multiple inbound shippers and to the locations so they can free up their docs and have a more organized operation. And obviously, in our case, because you get the density at delivery that kind of helps slide a bit and how we operate that business. And historically, we've been under club in that part of the market. We had a very small share compared to our overall market share in the industry. And we did enhance this offering in the second quarter.

And so far, the last quarter, we achieved preferred carrier status with 6 large grocers and we had a pipeline of an incremental 100-plus customers that we are going after in that space. So we do expect that to be a growth market for us because we haven't been participating in the past as an example. In terms of the truckload capacity impact to the LTL industry. We've historically said, Brian, that we -- if you think of the direct conversion, it's small, it's sub-1% of LTL freight typically is over that 15,000 mark. We -- it might make sense in the trough of the top load cycle to move it to truckload. When capacity exits, that would be a modest improvement, you will get to see that point come back into LTL. The second area is that we estimate that customers use CMS systems to consolidate LTL to truckload where it makes sense and we estimate that to be in the low to mid-single digit range about a couple of points of volume that would have less NPL and went to truckload. And as talk about 83 cover that's going to convert back to LTL as well. So you're talking, call it, in the low to mid-single-digit range of incremental tonnage that would come with top load rate coming back into LTL.

Next question, Jason Seidl with TD Cowen.

Mario and team, congrats on the very solid quarter. You guys mentioned utilizing AI a bunch to sort of help improve your place in the LTL market. Can you maybe dive into that a little bit more, talk about some of the things that you guys -- that you sort of maybe have in the works now for the future? And then where do you think you are versus the rest of the peer group in terms of your adoption of AI in the marketplace?

Well, first is, Jason, for us, it's a very, very exciting area of development. And it's first part, I mean, as you know, for the better part of the decade, we have been investing in our technology infrastructure. So unlike other carriers, we don't use mainframes, for example. We don't use all school systems that are all cloud-based and all hosted with Google Cloud and this enables us to actually move quicker on being able to embed AI capabilities within the frameworks within the applications that we are launching.

But going to your question, there are 5 areas where we are applying AIN at different levels of maturity, some are in pilot that we're in the process of rolling out and some have already rolled out. But 2 of the 5 areas are top line revenue generating. And then 3 of the areas are cost savings related. On the top line, we are rolling out AI pricing bad that effectively you can crunch tens of millions of data points and be able to provide better pricing for customers at the lane level and do this in a very, very effective way. We're still entitled in that capability. And that would help us continue to ensure our above market yield growth as we get smarter at how we price.

Number two is assisting our salespeople through AI tools. For example, we built our own AI lead scoring set of algorithms where effectively the AI analyzes again, in that case, hundreds of thousands of customers of who would be a good shipper with XPO. So to give you an example, today, if you have a shopper whose location is 2 miles down road from one of our terminals that is an industrial manufacturer that obviously is going to have a high propensity of point ship [ XPO ] with LTL versus if you have a company that doesn't necessarily move freight that 100 miles away from a XPO terminal then obviously that would be less attractive for us. And we're also launching tools that help our sellers become more productive, too. We just recently launched a tool that helps organize our centers day when it even routes their customer visits to make it -- to make more effective for them to be able to see the most amount of customers in a given day in that local market.

But these are 2 set of AI capabilities we're launching towards top line growth. And there are 3 set of capabilities that we are launching on the cost side, and these are in linehaul and pickup and delivery and in dock efficiency. Starting with linehaul, we just -- as I mentioned earlier, we launched in new AI made that helps us with managing exceptions in our linehaul network. And we launched that in the second quarter and further enhancements in the third quarter. Just to give you an example, just this capability alone, we reduced our [indiscernible] by 12%, our diversions by more than 80% and reduce our overall linehaul miles for the same amount of freight in the low to mid-single-digit range. On pickup and delivery, we are still in the early innings of launching enhanced the optimization algorithms. We're going to be in pilot just in 4 terminals, and we're seeing great early results of those AI capabilities.

Then on the [indiscernible] side, we already have done tremendous progress there. Our small tool with labor forecasting and how we manage how much head count you need but every shift, when does the ship start with person when does it end per person. All of that is being done by AI as well. And that's all these tools ultimately are in the hands of our great operators in the field who can then execute on that and deliver the kind of numbers we are delivering here.

I appreciate all that great color. I guess my follow-up would be something we haven't talked about much, which is Europe and maybe you can give sort of the backup and the outlook for Europe. And are there any countries that are showing some strength that you talked about some of the positivity from your customers in the U.S?

Jason, this is Ali. So our European business continues to outperform in a soft macro environment. Here in the quarter, we grew organic revenue for the seventh consecutive quarter. Specifically, we're seeing outperformance in the U.K., and we've also accelerated pricing growth for the second quarter a row, all of that translated to adjusted EBITDA here in Q3 outperforming normal seasonality and we'd expect that to continue here into the fourth quarter as well. I think typically, what we see as we move from Q3 to Q4 is that EBITDA steps down, call it, in that $10 million range sequentially. However, similar to the third quarter, we would expect to outperform that normal sequential step down in the fourth quarter, driven by the outperformance of the business.

Next question, Bascome Majors with Susquehanna International Group.

Maybe to follow up on Jason's questions, bigger picture. When we look at Europe, it's, call it, 5% of your earnings and operating income, 10% of EBITDA, but it's over 40% of consolidated operating expenses. And if we take a step back and think about cost takeout and profit improvement opportunities, like what's directed specifically at Europe? And is there an opportunity to really move the profit contribution up a lot higher on that low base, but -- of profit but high base of expenses?

Thanks, Bascome. Well, similar to what we -- obviously, the lion's share of our focus is on our North American LTL business given the profit contribution as you highlighted, to the overall company. But for Europe specifically, there are multiple levers that we are pursuing for growth. As I mentioned -- as Ali mentioned earlier, we're obviously outperforming seasonality on profit growth from Q2 to Q3 and same thing with growing our overall revenue in that business as well. But there are multiple cost takeout opportunities as well associated with that business and higher efficiency.

Today, we're either #1, 2 or 3 in LTL and truckload and in warehousing in Western Europe and we also have a plan to expand margins. Now I don't think the margin expansion in that business is going to be anywhere we are the magnitude of what you see here in the North American LTL business. It just has different costs. But at the same time, we are working on other initiatives. And you can see here we're performing better than seasonality on the profit line. [indiscernible] grew better in a good split in 2026 as despite the softer freight macro in Europe. As I said, [indiscernible] sell the business. [indiscernible] obviously, if you play more LTL carrier [indiscernible] were patient, we want to make sure we get the right price for it. And whenever the time is right, we're going to sell that business and become a pure-play North American LTL.

Next question, Christopher Kuhn with The Benchmark Company.

I appreciate it. Just thinking longer term, I mean, your shipments have exceeded best-in-class. It seems like the pricing opportunity could be even beyond the time frame you've given and the service levels have been good. I mean, is there any reason over the long term that your OR can actually exceed best-in-class?

One day, if you look at the OR differential, more than the lion's share is driven by price and a combination of mix and price through the 3 levers I mentioned, Chris, earlier on -- but if you break it down. I mean, when we started our plan, I think the margin differential was about 15, 16 points, and now that's down to about half of that, about 800 basis points, which is the remaining runway that we have.

But as I mentioned earlier on, our price differential on a normalized basis is 11 points, and that goes back to actually operating our network more cost efficiently given some of the AI tools and the optimization if we use machines for to be able to optimize our cost structure. Now if you think over time, as we bridge the pricing gap, there's no reason why I would go first kind of get down to the 70s and the mid-70s and the low 70s kind of our expectation over the years to come is how we think about it over the longer term.

I would like to turn the floor over to Mario for closing remarks.

Well, thank you, Stacy, and thanks, everyone, for joining us today. As you saw in our results, our strong execution extended our track record of continuous improvement. And while expanding margins in the trough of the cycle, and we're positioning the business for the years of outperformance going forward as well. With that, operator, please [indiscernible] the call.

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