XPO, Inc. Q2 2026 Earnings Call

Welcome to the XPO. Q2 2026 Earnings Conference call and webcast. My name is Saki and I will be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. If you have a question, please dial star one on your telephone keypad. Please limit yourself to one question when you come up in the queue. If you have additional questions, you're welcome to get back in the queue. And we'll take as many as we can. 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 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 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 were 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 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 investor section on the company's website. I will now turn the call over to XPO 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. 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. Is a 300 basis point improvement from the second quarter last year, and a significantly outperformed normal seasonality. The foundation of our outperformance continues to be the superior customer experience we delivered through disciplined execution and refined 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. In other 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. The ties 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 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, earn 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 two and a half points versus last year, which outperformed our quarterly target of 1.5%. Another example is route optimization, which we discussed on our prior calls Currently, more than two thirds 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 placed inside the trailers and provide our dock workers with actionable feedback in real time. In the. Third 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 leverage we executed on in the second quarter are firmly established as a foundation for outsized value creation We'll continue to enhance our service. Invest in 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 two 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. And our LTL segment. Revenue increased 15% to $1.4 billion, reflecting an acceleration in both yield and volume growth. Turning to cost and 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 industry truckload rates trended up significantly throughout the quarter. Our purchase transportation costs increased by just $8 million. This is because our insourcing strategy is performing as planned. Reducing our exposure to truckload rate volatility. Our. 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 27.3%, excluding real.

Gains, LTL 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. 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. Aligned with available capacity. Under our committed borrowing facility. Total liquidity at quarter end was approximately $898 million. Our net. Leverage ratio improved to 2.1 times, trailing 12 months. Adjusted EBITDA compared to 2.3 times 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 repurchases while continuing to strengthen the balance sheet through debt. Paydown. In June. We paid down another $100 million on our term loan to start the third quarter. Bringing our year to date debt pay down 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 tonnage per day. Importantly, volume 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 three metrics outperformed normal, seasonal patterns. These trends reflect our ability to consistently earn profitable market share through world class service in 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. Yields 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 three years, through a historic freight recession, we've improved or by nearly 800 basis points with plenty of runway ahead. Our. 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 three 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 in. 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.

Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to one question. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two. If you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys. One. Please, while we pull for questions. The first question is from Ken Hoexter from Bank of America. Please go ahead.

Hey, great., you know, 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 you know, some parameters on that. If you're talking about levels of, of operating ratio performance or revenues, and then Mario just, you know, at the end, you kind of ran through some of the AI stuff. You're running., rolling out and reduced damages, 50% load quality increase, 40%. These are massive numbers. Maybe put some numbers or frame the opportunity here for, for expenses going forward. Thank you.

You. Got it. Ken. Well, first, Starting on outperformance, I'll start with the third quarter or we do expect another strong quarter for margin performance here in the third quarter. And as you know Ken normal seasonality for us is for or to increase 200 to 250 basis points from Q2 to Q3, which normal seasonality puts O R for the quarter north of 82%. But we do expect a significantly outperform that. And for our O ought 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 it's driven by a combination of price accelerating volumes and cost efficiency. And it puts us firmly on track to outperform our 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 refer to. It's a new solution we're launching for all of our dock workers. It was here in pilot in the second quarter, where every time a dock worker is loading a trailer, they actually take photos. Every third of the trailer, AI analyzes that photo in real time and tells them where they're falling short on loading whether a certain pallet needs to be strapped to the wall of the trailer, or where they get 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 TMD, around dock efficiency, about labor planning, all of these have a massive runway ahead of us here in the quarter, we improved productivity by nearly two and a half points versus the expectation of one and a half. And again, the runway is massive ahead of us for all of these solutions.

Thank you Mary.

The next question is from Scott Group, from Wolfe Research. Please go ahead Hey, thanks. Good morning. 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, 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 I don't know what's your what do you how do you think about the timeline to, to get there? That's, you know, give or take another thousand basis points of margin improvement. What are the incremental margins assumed with that? Or, you know, pace of margin improvement? You think you can do the next bunch of years? Thank you.

You got it. Scott. So, 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 overall 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 what the back half has in store for us. But first, Scott, if you look at the at the volume side, it has tracked well above seasonality here. More recently. And we're seeing both our initiative in gaining market share as well as the positivity we're hearing from customer translate into more freight, more freight on, 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, 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, on, on margin. Improvement in terms of getting to a low 70s and beyond or, and this is what really gets us excited about, about the, the years ahead. If you look at it today, we have a low teens pricing gap and. And opportunity that we were going to go get above market pricing growth. And if you look at it over the last three years, we have been outperforming the market on yield on the 2 to 3 points, sometimes a bit more per year. And that's driven through a combination of from one perspective, our service product continues to improve and we expect we can get a point of extra yield associated with that over over a long runway, five, five plus years. And then the other two components are around premium services and continuing to grow with our small to medium sized customers on premium services.

If you recall, what 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're currently 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 progress in Q2 and July, we've seen any further inflection in improvement there, but we're being able to onboard more of these customers who value service, value, relationship. And our goal is to give them a 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 five plus years.

Thank you.

The next question is from Jonathan Chappell from Evercore ISI. Please go ahead.

Thank you. Good morning. Ali. You said you expect the to queue up performance to accelerate and then Mario in something for three Q 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 ,, 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 and the revenue per shipment increasing sequentially. And where would that put you ?, relative to kind of the normal seasonal trends on three Q or progression?

Sure, sure. John. 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 four points better than normal seasonality, relative to the 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, 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, John, 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 two year stack basis relative to the second quarter, and ultimately, that speaks to the momentum we're seeing from from a demand perspective. Similarly, from a pricing standpoint, as Kyle 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 shipments that 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. John, 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 how demand trends through the rest of the quarter. But but we do expect another very strong quarter of margin outperformance here, here in the near term.

Thanks a lot, Ali.

The next question is from Richa Harnain from Deutsche Bank. Please go ahead.

Hey. Yeah. Thanks for the time., you know, I was hoping you could talk about the competitive dynamic a bit more., you know, the strong July performance., definitely stands out and I'm wondering if that's, you know, there's some validation in your outlook that, you know, as things start to heat up,, maybe the smaller regional players you compete with struggle a bit more because they've already been, you know, operating at really high utilizations and you're getting that spillover freight or, you know, is this truckload coming back into LTL? Is that becoming more prominent trend that you're seeing in 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? Thank you.

Yeah. So 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, where we estimate service center count to be down. You know, a lot, about 10% as an industry and door count to be down mid-single digit over 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 over the last three years. So what we're seeing this year is a few dynamics. The first one is around having seen pent up demand for the industrial sector, folks have not deployed enough capital in in that industrial, purchasing industrial goods across the country. And that's starting to come back now. It's still not yet in full recovery territory, because when you look at it, ISM has been called in that low to mid 50 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 fully in upswing scenario.

That said, on the demand side, we are getting a lot of activity from customers. We, you know, 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 overall and overall volumes. 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 three years, which is which is fantastic to see. Now on on the truckload, you referenced