XPO, Inc.

Welcome to the XPO Second Quarter 2025 earnings conference call in webcast. My name is Melissa 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 1 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 into 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-GAP 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 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 by the extent required by law. During the call, the company will also refer to certain non-GAP financial measures as defined under applicable SEC rules. Reconciliation of such non-GAP financial measures to the most comparable GAP measures are contained in the company's earnings release and in 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-GAP financial measures in the investor section on the company's website. I'll now turn the call over to XPO's Chief Executive Officer Mario Harak. Mr. Harak, 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 Fagery, our Chief Strategy Officer. Earlier today we reported strong second quarter results. We generated $2.1 billion of revenue and adjusted EBITDA of $340 million. Our adjusted diluted EPS of $1.05 exceeded expectations. And our North American LTL business continued to outperform the industry, building on our momentum across the network. Over the past two years, we've improved our adjusted operating ratio by 470 basis points in a soft-trade environment, underscoring the strength of our operating model. And in the second quarter, we outpaced both the industry and normal seasonality on margin expansion. This was underpinned by above-market yield growth, ongoing cost efficiencies, and most important, the superior service that supports our customers. Additional highlights of the quarter include our strategic investments in the network and the technology that differentiates our value proposition. I'll speak to our recent progress starting with customer service. In the second quarter, we achieved -over-year improvement in damage frequency and a damage claims ratio of 0.3%. This reflects the discipline we bring to our service culture. We also continued to raise the bar with on-time performance with our 13th straight quarter of -over-year improvement. Our network speed and reliability are key differentiators for customers. We're continuing to elevate our world-class service levels with a customer-loving mindset across our organization, a significant network expansion, and technology-driven operating excellence. The ongoing investments we're making in the network support both long-term growth and efficiency. Since launching our LTL Growth Plan in 2021, we've added nearly 6,000 tractors and more than 17,000 trailers to our fleet. Our average tractor age is now less than four years, which improves reliability and reduces maintenance costs. On the real estate side, we're seeing strong contributions from the growth of our footprint. In recent quarters, we've opened some of the largest LTL service centers in North America, including two additional break-balk locations in Carlisle, Pennsylvania and Greensboro, North Carolina. These facilities sit in key freight corridors and are ramping up fast, helping us move more direct loads by building density in the network. Our customer shipments are flowing more efficiently -to-end, and we're reducing both re-handles and miles, while also enhancing our pickup and delivery operations. Almost all of the acquired facilities are now open, and we've met our target of 30% excess door capacity. This position starts to capture profitable share in freight market rebound and unlock more operating leverage. Now let's turn to pricing, which continues to be a key driver of our outperformance. Our strong service levels are enabling us to earn above-market yield growth and win new business. In the second quarter, we increased yield, excluding fuel, by .1% -over-year with sequential growth from the first quarter, and we see a long runway to further align our pricing as we enhance our value to customers. We're also seeing a benefit to mix from local accounts and premium services, which now represent a larger share of our revenue and carry higher margins. Demand continues to grow for our premium offerings, including our grocery consolidation service, which we expect to ramp in the coming months. It's an attractive end market with significant growth potential, and our differentiated service offering uniquely positions us to gain share in this vertical. Cost efficiency is another area of the business where we made meaningful progress in the quarter, most notably with labor productivity and line haul. Our proprietary labor planning platform gives our managers visibility into volume flows with the ability to adjust staffing to demand in real time. We're seeing significant benefits, including a second quarter improvement in labor hours per shipment versus the prior year. This is just one example of how our -in-class technology helps us improve margins, even when demand is down. It's a competitive advantage that will compound as industry volumes recover. On the line haul side, we reduced outsourced miles to just .8% of total miles, which brought down our purchase transportation expense by 53% year over year. That's more than 900 basis points lower than last year and the best level in our history, with more opportunity ahead. And our new AI-powered line haul models are driving additional savings, reducing normalized line haul miles by 3%, empty miles by over 10%, and freight diversions by more than 80%. Recently, we started piloting AI-driven functionality for trailer and route assignments and pickup and delivery operations. The early results are encouraging, with positive trends in stops per hour and trailer utilization. We're excited about what AI can mean for our operations and our customers, and we expect it to become increasingly important to our strategy over the long term. In closing, we reported another quarter of our performance that showcased the operating momentum we've built across every part of the business. We delivered strong yield growth, realized cost savings throughout the network, and deepened our competitive edge through world-class service and technology. Our AI initiatives are already generating measurable returns, and our investments in the network are unlocking new levels of efficiency and flexibility. We're operating from a position of strength with a clear plan to deliver sustained margin expansion and long-term value creation. 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. In our LPL segment, revenue declines 3% on a -over-year basis, largely due to a reduction in fuel surcharge revenue tied to the price of diesel. Excluding fuel, LPL revenue is down 1%. On a sequential basis, LPL revenue increased 10% on a -over-year basis, On the cost side in LPL, we continue to make meaningful progress in reducing our purchase transportation expense. Our third-party carrier expense declined 53% -over-year as we in-sourced more line-home miles. This resulted in $36 million in savings for the quarter. With labor, we held our cost of salary, wages, and benefits roughly flat -over-year by improving productivity, which offset inflationary pressures. Our technology has been the key to realizing steady productivity gains across our network. In terms of equipment, our maintenance cost per mile improved 6%, supported by the addition of newer tractors to our fleet. LPL depreciation expense increased 13%, or $10 million, consistent with our strategy of investing in the network, including our rolling stock. Next, let's start to adjust the dividend. Company-wide, we generated $340 million of adjusted EBITDA, down 1% from a year ago. In our LPL segment, we grew adjusted EBITDA by 1% to $300 million and expanded this margin by 90 basis points to 24.2%. These results speak to the strength of our operating model. We have the ability to deliver strong yield growth and cost discipline in a soft environment, as we did in the second quarter. This helped offset headwinds from lower fuel surcharge revenue, tonnage, and pension income. For our European transportation segment, we reported adjusted EBITDA of $44 million, while the corporate segment had a $4 million loss. For the total company, second quarter operating income was $198 million, which is a 1% increase from the prior year. Net income was $106 million, which equates to $0.89 of diluted earnings per share. And on an adjusted basis, EPS was $1.05 compared with $1.12 a year ago. Lastly, we generated $247 million of cash from operating activities in the quarter and deployed $191 million of net capbacks. Moving to the balance sheet, we ended the quarter with $225 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $824 million of liquidity at quarter end. And our net debt leverage ratio improved to 2.5 times trailing 12 months adjusted EBITDA, compared with 2.7 times a year ago. Looking ahead, while we remain committed to investing in initiatives that support long-term growth, we expect our capex to moderate and our free cash flow conversion to increase going forward. This positions us with greater flexibility to return capital to shareholders over time and pay down debt. Regarding share buybacks, we initiated our program with $10 million of the common stock repurchased in the second quarter. And we plan to scale up our buyback activity as free cash flow increases. This reflects our confidence in the long-term value of our shares. With that, I'll hand it over to Ali to walk through our operating results.

Thank you, Kyle. I'll begin with the review of our operating results for the LTL segment, where we continue to execute well despite the soft-rate environment. Total shipments per day declined .1% compared with the prior year. We drove meaningful growth in our local channel with shipments up by high single digits, which is an acceleration from the prior quarter. We're capturing share in this high margin segment through targeted outreach and a value proposition that clearly resonates with our customers. With weight for shipment down 1.6%, tonnage per day declined 6.7%, largely in line with normal seasonal trends. Importantly, we improved both tonnage and shipments per day on a -over-year basis from the first quarter, a positive trend we anticipate will continue in the second half. Looking at the monthly numbers compared with the prior year, for tonnage, April was down 5.5%, May was down 5.7%, and June was down 8.9%. For shipments per day, April was down 4.1%, May was down 5%, and June was down 6.2%. For July, we estimate that tonnage will be down in the 8% range, which is slightly better than normal seasonality compared to June. Turning to pricing, we delivered another quarter of strong yield performance. Yield excluding fuel was up .1% -over-year, and revenue per shipment increased 5.6%. Both underlying metrics also improved from the first quarter, marking our 10th consecutive quarter of sequential increase in revenue per shipment. We expect our sequential pricing gains to continue through the rest of the year, supported by our high service levels, premium offerings, and growth in the local channel. Our approach to pricing is highly disciplined and managed with our proprietary technology to ensure a fair price for the value we deliver. This is a key driver of our margin improvement. Moving to profitability, we improved our adjusted operating ratio by 300 basis points sequentially to .9% in the second quarter, outperforming normal seasonality and delivering on our outlook. On a -over-year basis, this is an improvement of 30 basis points, making us the only public LTL carrier to expand margins. We achieved these strong results through a combination of disciplined yield management, cost efficiencies, and productivity gains, all enhanced by our technology. Looking at our European transportation business, we made solid progress despite the tough macro backdrop. We increased revenue 4% -over-year and delivered a 38% sequential increase in adjusted EBITDA ahead of seasonal expectations. We also grew adjusted EBITDA -over-year in several key markets, including the UK and Central Europe. This demonstrates the strength of our execution and customer relationships. Another encouraging sign is the value of prospective business in our sales pipeline, which is trending higher than the prior year. We're seeing increased demand across Europe as customers respond to the quality and range of our service offerings. To wrap up, I'd like to highlight the levers that are driving our industry-leading margin expansion in LTL. First, we're consistently delivering above-market yield growth, and we expect to sustain that going forward as our pricing initiatives continue to gain traction. We're also making further improvements to our cost structure, realizing significant savings from insourcing line haul miles and becoming more productive across our network. Our proprietary technology is a key factor in these gains, as it helps us extract more value from every shipment. The structural advantages underlying our strategy enable us to drive margin expansion even as industry volumes are down. We're uniquely positioned to outperform in any part of the cycle and deliver long-term earnings growth. Now, we'll take your questions. Operator, please open the line for Q&A.

Thank you. As a reminder, please press star 1 to join the question queue. Please limit yourself to one question when you come up in the queue. If you have additional questions, you're welcome to get back into the queue, and we'll take as many as we can. Our first question comes from the line of Scott Group with Wolf Research. Please proceed with your question.

Hey, thanks. Good morning. Maybe you can just give us a little bit of color on the OR for the third quarter. I know you talked about 100 base points of improvement for the year, how we're thinking about that. And then maybe just a big picture, the grocery stuff sounds new. Maybe, Marion, just talk a little bit about what the opportunity of that is and why that's an attractive market.

You got it, Scott. So first, starting with the third quarter OR outlook, we do expect another strong quarter for margin performance. Now, typically, normal seasonality for us on OR sequentially increases by 2 to 250 basis points from Q2 to Q3. But given what we're seeing so far, we expect our Q3 OR to be at a similar level to Q2, so call it flattish, on a quarter over quarter basis, which represents both a very strong year on year improvement and a significant outperformance seasonality on a sequential basis. And that's going to be driven by our continued strength in yield and our effective cost management as well. Now, when you look at the full year OR, given how volume trended in the first half of the year and what we expect in the third quarter, we expect full year flattish to be down in that -single-digit range. And obviously, nobody can predict the macro, so we'll see how the year plays out. But as we said last quarter, this would be a supportive of 100 basis points of year on year OR improvement, which is a very strong outcome in a soft-trade environment and will be the only LPL carrier improving margins again year on year after improving them by 260 basis points last year. In terms of the new offering on the grocery consolidation side, it's a great business. This is a business where you would have a grocer that has suppliers shipping a product into their dogs, and then we help them effectively consolidate that trade in our terminals and then be able to get all of that trade, all at once, at a grocer. It's an attractive market. We estimate it to be, Scott, about a billion dollars in market size, and it comes with a very good margin. And today we are underrepresented in that segment of business. We are in that -single-digit range, and we expect to grow in it over time. Our service product has never been better, so we can support our customers there on those services. And we've had early success here in the second quarter onboarding a few customers, and we expect that to ramp in the back half of the year as well.

Helpful. Thank you, guys.

Thank you. Thank you. Our next question comes from the line of Ken Hexter with Bank of America. Please proceed with your question.

Hey, Greg. Good morning, Mario and team. I guess I'm going to jump over to a side that we don't talk about much, but Europe really posted some pretty stronger than expected results. Maybe talk a little bit more about what was the surprise drivers there, what we can expect as we move into the rest of the year, and then on the core side, just how low purchase transportation is. Are we testing the limits of what you want to do? And I guess, Mario, what's the next leg of operational improvement to continue to drive you toward the upper 70s?

Yeah, you got it. I'll start on the line haul side and the cost levers for all our improvement, and I'll turn it over to Ali to discuss Europe. But when you look at starting with the line haul insourcing, so we were down to a new record, .8% here in the second quarter, and we expect to continue to bring that down in that single-digit range through the course of the back half of the year. Now, let's see. That would be a lever for us if you think of 2026, because our entry point in 2025 was higher than the exit point. We're still going to get a calm dynamic of a good cost guy in 2026. Now, keep in mind, though, for us, the biggest improvement in that cost category is around making sure that we are immune to truckload rates coming up. So in the next up cycle, when volume is up, when yield is even higher than what it is today, we would be able to get less of a headwind from truckload rates going up, and that's going to be a meaningful improvement compared to prior up cycles. The other two levers of cost that we're very excited about moving forward, the first one is around AI capabilities and technology. We have launched many capabilities here in the second quarter, and we're going to continue to launch these in the back half of the year going into 2026. And if you think about it again, even in the top of the cycle, we are improving productivity across our network. And when you see that cycle turn, we expect to meaningfully improve productivity as well. Here in the second quarter, we launched new AI enhancements, so our line haul models, that enabled us to reduce the total line haul miles we're driving for the same amount of volume, and that looked to -single-digit range, which is a great, great benefit for us. And we're also piloting now P&D incremental capabilities in AI that will make our P&D cost even lower. So we're excited about the outlook of these technologies we're launching across the network. And the other lever is around the new break-bulk location that we have been launching here for the course of the last year. Typically in LPL, the larger the service center, the more efficient you are. And when you think about it here in the first half, we launched two of the largest service centers in trucking in North America, in Greensboro, North Carolina, and in Carlisle, Pennsylvania. And these allow us to build density in our line haul network, reduce rehandles, and be able to get effectively a much more efficient network in how we operate it, even improve service quality as well. So these are all the cost levers we expect to compound over time here beyond 2025, going into 26, 27, 28, as we launch those capabilities.

And then, Ken, on the Europe side, you're right. The second quarter was a strong quarter for us, and what was a challenging environment. We grew -over-year organic revenue for the sixth consecutive quarter. And then if you look at adjusted EBITDA sequentially, it was up nearly 40 percent, and that was much better than normal seasonality. I think in particular, we saw strength in the UK and Central Europe on the EBITDA side. Both markets for us were up in that low to -single-digit range on a -over-year basis, as you think about EBITDA growth. As you think about the second half of the year and the third quarter in particular, typically EBITDA in our European segment steps down sequentially Q2 to Q3, if I call it -single-digit million dollars sequentially. But we would expect to outperform that as we move into the third quarter from a seasonality perspective.

Great job on outperforming seasonality on both sides. Thank you very much for the time. Appreciate it.

Thanks, Ben.

Thank you. Our next question comes from the line of Fadi Shamoon with BMO Capital Markets. Please proceed with your question.

Good morning, Mario and team. So I had a big picture question, so you highlighted some of the thoughts, especially focusing on the revenue leapers that you're executing on to drive this revenue shipment performance. My question is, in the third year of this kind of muted freight market right now, if we have another year of this kind of performance and market being muted, being tough, are you experiencing change in the conversation with your customer? Does it get harder to achieve the type of leverage from the initiative that you're doing on the service side, the initiative that you're doing on penetrating local channel? Does it get harder as you go into another year potentially of weak market demand? I'm just wondering, how should we think about going into 2026 about this momentum that is very self-help driven here on that revenue per shipment if we have another year of muted backdrop for freight demand?

Well, Fadi, if you look at it, if you take a step back, we've been delivering yield performance that is meaningfully above market now for a number of years. But a lot of that, if you take a step back when we started our plan, the yield differential between us and the best in class carrier normalized for weight per shipment and length of haul was about 15 points. And through the course of the last few years, we were able to take that gap from call it 15 points down to the low double digit low teams. And we have another year double digit percentage to go above market over the next call it five years for us to bridge the gap with the best in class carrier. So we have a massive runway ahead of us in terms of these improvements and high level. If you break down that delta when we started our plan, about half of it was driven by a better service product that that carrier to have better pricing over time. About 500 basis points where these premium services that were a gap for us, we didn't have them in our in our portfolio of offering for customers. And about two and a half points of differential were driven by our local channel, which represented 20 percent of our book of business as opposed to 30 percent is what the target would be. And by going from 20 percent of the book being small to medium sized businesses to 30 percent, that's equivalent to about two and a half points of yield. Now, our goal for the first category on service leading to better pricing is to bridge that gap a point a year incremental to what the market is doing. And this is what effectively we've been doing here over the last few years. If you look at accessorial revenue, we launched a half a dozen or so premium services last year, and these are resonating very well with our customers, especially when you couple them with a great service product. So more and more customers are signing up for these services. When we started our plan, our accessorial as a percent of revenue were nine to 10 percent. And we can go up to 15 percent is what the target is. And we're currently call it a couple of points better than where we started. And we still have another runway for three years of our performance. And then same thing on the local channel growth. When we started, we were at 20 percent as a percent of total. We're now in the low to mid 20 percent range. Here this last quarter, we grew the local segment, the small to medium sized businesses, has single digit on a college basis, which is an acceleration from the first quarter as well. So when you look at it, our goal is to bridge that gap half a point a year and put two years into a five year runway for that aspect. So when you think of our yield initiatives, all of them have a very long runway years ahead of us. And here is the top of the cycle. I mean, the ISN has been subseasonal now for the better half of three years and then a better part of three years. And yes, we are delivering impeccable yield across the board. And we expect that to continue over the quarters and years to come and even get better in enough cycle.

Thanks. I appreciate it.

Thank you. Our next question comes from the line of Jonathan Chappelle with Evercore ISI. Please proceed with your question.

Thank you. Good morning. Ollie, you gave a message on monthly tonnage that's kind of similar to some of your peers who reported earlier. June, kind of much weaker than expected, pretty big deceleration. Then July, still weak but slightly better than normal seasonality. As we think about what Mario had said about a flat OR 2Q to 3Q, with comps getting easier on tonnage in August and September, do you expect that 8% to kind of whittle its way down to a -single-digit decline? Or are we starting from such a low point in June that even better than the normal seasonality would relate to kind of a high single-digit tonnage decline in the third quarter?

Sure, John. So you're right. July was down somewhere in that 8% range. And that was slightly better than what we saw in June on a -over-year basis and also better than normal seasonality relative to June. Now, when you think about Q3 as a whole, the comps do get easier as we move through the quarter. If you recall, John, back in August of last year, industry demand had softened as a whole, and that continued into the month of September. So we would expect those -over-year tonnage declines to moderate as we move through the third quarter, and for the full quarter tonnage to be down less on a -over-year basis than what you saw in the month of July.

Perfect. Thank you.

Thank you. Our next question comes from the line of Jordan Eliger with Goldman Sachs. Please proceed with your question.

Yeah, sort of taking things a different direction. Let's just say that we finally get some manufacturing expansion whenever that is next year or what have you, and the negative tonnage inflects to positive. Can you maybe talk through how, with all the stuff that you've done the last two or three years, what sort of incremental margins you think you could produce over the course of the start of the next upcycle and through it?

Thanks. Yeah, you got it, Jordan. First of all, we're incredibly excited about the upcycle when it comes. I mean, obviously, here even in a freight soft market and the down cycle, we're delivering margin improvement two years in a row is the expectation. And obviously, in the upcycle, we're off to the races. But I'll walk you through a couple of items. In terms of incremental margins, we do expect to be comfortably over 40% of incrementals. If you go back to late last year in the fourth quarter, the last quarter of revenue growth before the soft that we first had of the year, our incrementals were in the 70% range, our EBIT incrementals. Obviously, we'd love it to be 70% in the upcycle, but we would say we don't want that too big of an expectation. So we're comfortably in that 40% range. Now, what are the drivers? I just mentioned earlier on our yield initiatives, but I think above market yield growth. Now, it's normal in an upcycle to see LPL yield across the industry go up meaningfully. If the industry is doing it to half single digits or high single digits, we expect to perform that by a few points in terms of overall yield performance. And if you break it down, all the levers that we have in terms of growing with the small to medium sized businesses, I mean, so far year to date, we've onboarded more than 5,000 new local customers. So this kind of gives you an example on the momentum that would build in an upcycle with these type of customers. Similarly, when you think about the premium services, all of these are launched and gaining steam. We're building pipelines on each one of them. And in an upcycle, barriers that don't have the capacity might have service issues. And in that particular case, we'll be able to onboard more of these premium services and grow them at a higher clip. When you look at the cost side, historically, we used to have a bigger headwind from purchase transportation where when the upcycle comes, typically truckload rates go up. In that particular case, our exposure now is a much, much lower exposure, which means higher incremental margins. Similarly, on the productivity side, when you look at a post-Yellow bankruptcy, when tonnage was up, we improved productivity the two quarters after they ceased operations by 7 percent in one quarter and 4 percent in the following quarter. Currently, in the trough of the cycle, we're improving productivity by about a point a quarter. So when you fast-fast forward with the compounding effect of the AI initiatives, our technology, you can imagine productivity is going to be at a much, much higher clip as well. And ultimately, we have now larger locations, 30 percent excess capacity. A fleet agent is in a fantastic place. Service quality is in a fantastic place. And I'll tell you, I can't tell you how excited we are when that upcycle comes. So it could be a meaningful expansion and meaningful incremental margins there as well.

Thank you. Thank you. Our next question comes from the line of Ari Rosa with Citi. Please proceed with your question.

Hey, good morning and congrats on some of the improvement here in a tough freight market. Mario, I was curious to get your thoughts. Just obviously there's a industry disruption event happening next year with the separation of the largest player from his parent. I'm curious if you're seeing any impact on the market or the competitive dynamics from that. And just if you could talk about the overall competitive environment and the extent to which you're seeing maybe people being a little bit more aggressive on pricing than what we've seen in the past. Thanks.

It's a little bit off for for the FedEx spending that freight business. I think it would be good for the industry overall because it will continue to ensure that focus on price discipline and margin expansion. And as a standalone entity, as an LPL carrier, one of the biggest drivers for profit growth over time is driven by margin expansion. And every LPL operator knows that the number one lever to improve margins is around pricing. So we believe that's going to help overall the industry as a whole. But otherwise, I mean, they're a great company. They're a great competitor today and they will be a great competitor tomorrow. I don't see I don't see that changing if they were on a standalone basis or part

of the bigger FedEx.

Thank you. Our next question comes in line of Stephanie Moore with

Jeffries. Please proceed with your question.

Great. Good morning. This is Joe Haffling on for Stephanie Moore. Congrats on the good results. I guess my question is on how we should think about pricing into the back half. We've talked about, you know, consistent above market yield. But, you know, in terms of the sequential improvement in yield we've seen, can we expect to see that kind of pace continue into the second half? And then just obviously the gross and local channels is a big driver of that. So can you sustain kind of a high single digit type growth in the local channel?

Thanks. Sure. This is Kyle. So when you think about Q3 yield, we would expect to continue to improve sequentially from Q2. And now that improvement would continue in the Q4 as well. So if you think on a year over year basis, we expect Q3 yield, Q4 yield, and Q3 index yield to grow at or above the level we saw in Q2. Now, if you think pricing in terms of revenue per shipment, we'd also expect revenue per shipment to increase sequentially in both Q3 and Q4 this year. And to put that in context, that's building on 10 consecutive quarters of sequential improvement we delivered. So we feel really good about a lot of the initiatives we have on the pricing front. Speaking specifically to local channel, when you think about local, as Mario mentioned, the start of this initiative, we're about 20% share. We're now in the low to mid 20s, but the goal is to get to 30%. So you think about the ability to have that help us continue to grow yield in the back half. It should help us in the back half as

well as years to come.

Great. Thanks so much.

Thank you. Our next question comes from line of Chris Weatherby with Wells Fargo. Please proceed with your question.

Hey, thanks. Morning, guys. When asked about labor productivity and get a sense of maybe how you think that plays out in the back half the year, obviously you're guiding to better than normal seasonality and the operating ratio. So potentially this plays into that. But I guess as you think about the improvement, maybe in labor cost per shipment or how you think about that growth, do you need to see better volume environment to make further progress on that? Or there are levers you can pull in the near term, even in a down volume environment?

Well, if you think about the ability, our ability to drive labor productivity in the quarter, even with tonnage being challenged, we're able to grow, improve productivity 1%. If you think about it on a labor cost per shipment basis. So we continue to expect to improve that. When you think about a lot of our initiatives, we have their tech enabled. We expect to see further improvements both on the dock. When you think about motor moves per hour, if you think about pickup and delivery, our ability to do that. And then I think Mario mentioned this too, but you think about line haul cost and the ability to really integrate some of those larger service centers, that's going to help us drive further labor productivity. When you think about those breaks coming up to speed. So we feel very

good about

our

ability to drive momentum

on

the labor front.

Got it. Thank you very much.

Thank you. Our next question

comes from a line of Rachel Harnon with Deutsche Bank. Please proceed with your question.

Thanks. So I wanted to ask a little bit more about the revenue environment and what exactly happened in June. So you're the second LPL carrier now that's talked about a pretty steep deceleration that happened in June. And then, you know, very pleased to see a snap back sort of in July, but maybe talk through the dynamics of what happened there. And then as we think about the full year, you know, I appreciate that comps do get easier, but just risks to the guide and how you intend to offset that if the tonnage environment continues to be shaky.

Sure. This is Ali. So when you think about our shipment trends throughout the second quarter, they were very consistent and also in line with seasonality. Now, we did see softer weight per shipment in the month of June. And there was really two dynamics that were driving this first macro and tariff uncertainty did have a greater impact on weight per shipment for some of our small to medium sized customers. We do think this impact is transitory. This is a channel where we're seeing very strong growth and is O.R. accretive for us. And we also did have a tougher comp in the month of June as well on a weight per shipment standpoint. So if you look at it on a two year stack basis, that does help normalize for some of that dynamic. Now, as you go into the third quarter, we have seen some of that weight per shipment decline on a year over year basis continue into early July. However, more recently, we've seen some normalization in that trend versus seasonality. So we would expect that trend on weight per shipment to improve on a year over year basis as we move through the third quarter. And then overall, as you think about our ability to deliver on our O.R. outlook, obviously, we're not we're not immune to the macro. However, as we've demonstrated, we do have multiple levers to pull on both the yield and the cost side to mitigate the impact of lower volumes. You saw that here in the first half of the year. And in Q2 in particular, our decremental margins were nine percent in the quarter. And what's going to allow us to deliver on that sort of performance comes back to the yield out performance, our ability to continue to grow yield above market. And then also on the cost side, when you think about our cost structure being about two thirds variable, we have the ability to manage labor, to align our labor costs to the volume we're seeing in the network. And our technology plays a big part in that as

well.

Thank you. Our next question comes from a line

of

Tom Wotowicz

with UBS. Please proceed with your question.

Yeah, good morning. So wanted to ask you a little bit about the grocery again. I know you had a question on that, talked about that a bit, but is is that something that is, you know, a couple players are big in that and it's kind of specialized and you'll probably take a look at that. I think that's kind of unusual for big LPL to be in that area. And then just thinking about that, you know, kind of competitive dynamic there. And then how many areas are there left in the pipeline like that, that, you know, just things that are, you know, LPL, you have a large number of, you know, customers, variety of customers. So we don't necessarily know what the next area is you might look at, but how many other things are there in the pipeline in 26, 27 that are like, hey, this is an interesting part of the market that we don't compete in, you know, actively today and we can add that on. Thank you.

Thanks. Thanks, Tom. So when you look at the grocery business, it is a more consolidated business in the LPL segment. And the reason why is that the great service is a prerequisite to be able to deliver on those expectations for the customers. And what we, with our service improvements, you know, I mentioned earlier on that our on time has improved for the 13th consecutive quarter here, here for us. And similarly on the on the claims side, we have one of the best claims ratios in the industry as well. And that's resonating with customers. So we're seeing actually some of these customers come to us and ask us to get on boarded and be able to kind of get to service them in that in that line of business as well. So it is more consolidated today and we expect to grow and adhere over over the quarters and years to come. If you recall last year, we have launched a number of these premium services all the way from must arrive by date, for example, where you have to get to a customer within a certain time window and date window to services like retail store rollout, like expanding our trade show offerings. So all of these come at a higher yield because typically the customer pays an extra fee for the incremental service that they're asking for. Now, in terms of what's left out of these services, the first thing I say for each one of those, once you launch them, you train your sales force on how to sell them. And then you build the pipeline for these opportunities. And that pipeline grows over time. So that's going to be the gift that keeps on giving here over the quarters and years to come. With grocery specifically, we're now building the pipeline. We're going to start converting a number of these accounts here in the back half of the year and going into twenty twenty six other services include, for example, expedite service is something we don't offer today, although we have one of the fastest networks in the industry in terms of transit times. But offering that incremental expedited service for the customer is something we're contemplating things like security dividers in our trailers are things we're contemplating. But we're looking there is another three or four or so incremental premium services we're looking at here for the next year or two.

So if you think about it, kind of how far through those you are in the impact, are you halfway through 30 percent through just in terms of the actual volume or revenue contribution from the broader book of new services? Just where are you at broadly on that? So

with early innings, I mean, I'd say we're the third of the way of where we want to be by by 2027, 2028. We are if you it goes back to the incremental revenue we get from accessorial services. As I mentioned earlier, Tom, we do not we when we started our plan, we were nine to ten percent of our revenue was driven by accessorials. And now we're up a couple of points from from that from that number. And we still have it on the way here for the next three years to get to call it 15 percent of the percent of revenue.

Thank you. Our next question comes from the line of Brian Austin back with JP Morgan. Please proceed with your question.

Good morning. Thanks for taking the question. First, just a quick follow up on Ari's question about FedEx is there we saw the announcement earlier about the NMFC delay in terms of them pushing it out to December where I think everybody else has gone forward with that new structure. So when did you hear if that was an opportunity or basically sounds like a challenge for them? So how does that affect XBO? And then maybe just some broader comments on cash flow and capital deployment. How many of you can give us a little bit of sense in terms of where you think CapEx is going to head into 26 and beyond? You know, what are the sort of leverage targets we should think about in terms of the leveraging and ultimately, you know, what sort of buyback deployment should be thinking about here?

Sure, Brian. So let's start with the NMFC changes. So, so, and if the implemented changes on how freight is classified, if you think about it, really, the main change was subcategories of existing classification of products and now class can be determined by density of that product. So, you know, we don't really think it's going to materially impact any any way pricing is done. I mean, for us, we're really thinking about how to proactively communicate with our customers to make sure they understand how their freight is properly classified and rated. I think, you know, to your question, you know, different carriers implement it differently. It's tough to tell why they made a delay. You know, for us, we dimension over 90 percent of our freight. So we collect the info needed to really drive this a multitude of ways. And we want to make sure our customers understand the impacts. But I think thus far from the implementation on July 19th, we really haven't seen any changes. And then if you move into free cash flow and how we think about capital, I think one comment to make that you're asking about leverage and some of the buyback fees, I think what's important to think about is the leverage. And two, if you step back and think about our overall ability to generate cash, when you think about the business moving forward, you know, we think a couple dynamics are going to take place. So one, we think CapEx is going to moderate. So you think about last year, we spent almost 15 percent of revenue on CapEx in the LTL space. That's going to come down a couple of points this year. We talked about no longer having the level of need in terms of bringing those facilities offline. That'll mitigate. Same thing with the fleet. We're sub 7 percent from an outsourced line haul miles. That'll help us reduce that CapEx need. And then in addition to that, you know, we're going to see less cash taxes in the back half of this year and next year. And then we're going to continue to grow EBITDA. So from a cash flow standpoint, we think we're going to generate a lot of cash both this year and then into next year. Now, when you think about capital allocation, how do we prioritize that? I think first and foremost, we want to fund CapEx needed by the business. And we'll continue to do that. And I think second to that, as you ask about leverage, you know, we're still going to drive towards our long-term leverage targets of one to two times. And in fact, this month we paid down 50 million of our term long B to start that process. Now, as cash continues to build, we'll have more excess cash that's going to give us more flexibility to redeploy that. And we'll look at accelerating that share buyback both in the back half of this year and into next year. I mean, what we're going to do is really what drives the highest return of capital for our shareholders.

Then Kyle, just in back from bonus depreciation this year and into next year.

Yeah. So when it comes to the tax legislation that passed, I think from our standpoint, there's going to be a few impacts on that side. So obviously, the 100% bonus depreciation will be a help for us in the back half of this year and into next year in terms of the cash tax. But I think there's a couple other pieces there, Brian, that's going to help us as well, both the interest expense deduction as well as the deduction for R&D investments. So I'd expect a material impact from a cash standpoint in the back half of this year and next year on cash taxes.

Thank you. Our next question comes from the line of Bascom Majors with the Susquehanna International Group. Please proceed with your question.

Thanks for taking my question. Just to follow up on that earlier question, can you talk philosophically about how you're thinking about the buyback? You're only $10 million in, but I'd be curious, is this more opportunistic? Is it excess cash? How value sensitive are you? Just some of the thoughts about how we can potentially size that up as a driver of your growth going forward. Thank you.

You got it, Bascom. As Kyle just said, when you think of capital allocation, one of our biggest goals is to create shareholder value. And that comes, and if you look at the back half of this year, we're going to generate a meaningful amount of free cash flow. And going into next year, with capital stepping down, earnings growing. We do a better tax profile as well. We do expect also a meaningful cash increase as we head into next year. After we fund the business, philosophically the way we think about it is that we're going to be both paying down debt and buying back shares. And that's going to compound over time. And the ratio will depend on what we're seeing from the overall value perspective of the stock and valuation. And kind of how we are accelerating also our takeout of the debt stack as well. But that's going to be an underappreciated part of our shareholder value creation over the years to come. So again, when you think about it with that free cash flow growing over time, both that pay down and the buybacks will compound. That would enable us to have another level of value creation and earnings growth.

If we look at

the restructuring and transaction costs added together here, the addbacks were $100 million a couple of years ago, down to 80 last year. Their run rating at maybe 50 or so in the first half of this year. That's encouraging to see. Do you think that the earnings quality will continue to improve going forward? And what's the cash flow impact of that? Thank you.

So Bascom, if you look at those lines, I think we were significantly lower in the second quarter. And most of these expenses relate to restructuring. And this is some of the cost takeout we mentioned earlier. This was focused really on that salary and some of the functional support teams. So that's going to help us contribute to really earnings growth moving forward. Certainly will help us from an overall performance in the back half of this year. And again, as Mario said, because it's structural, this will not only help us

in the back half of this year, but also into next year.

Thank you. Our next question comes

from the line of Jason Seidel with TV Cowan. Please proceed with your question.

Thank you, operator. Mario, team, good morning. Congrats on the good quarter. Thank you, operator. I wanted to go back to the side. You guys have done a really great job of insourcing line hollow. It seems you're well on your way to your sort of 2% goal for 27. Between now and then, can you put a dollar amount on getting to that 2%? Sort of what would it mean for the bottom line in cost? And then also, you referenced utilizing AI and had some early successes there. So how should we think about the opportunity to save costs with AI over the next, say, three years?

So first starting with the third party line of insourcing. So keep in mind that today whenever we insource third party line haul miles, we are insourcing that to our own equipment and our own drivers. And even in the truck in the depressed truckload rate environment, we say roughly around 5% per per mile on a cost saving perspective using our own equipment. And this is just a mile for mile comparison. Now on top of that, we are getting a higher load average and higher efficiency running our own equipment because usually in LPL we run two puffs to move the freight or two short trailers, 28 feet trailers to move the freight. While third party, which is 56 feet worth of space, while we usually get only 53 feet worth of space with a third party carrier. So you're getting this incremental call of 6% more space, which also adds more density and higher efficiency as well. You also get the service benefit. Whenever our drivers here, you look at last quarter, we're on time nearly at 100%. When you look at third party carriers, they typically operate in that 90 to 95% on time. And we also get in our equipment safe stack bars to separate the freight. We can secure the freight more effectively, which leads to a better service product. So you have a cost benefit in the near term that is about 5% per mile straight up and then higher efficiency, which adds on top of that. Now, if you think about it, though, Jason, in the up cycle, when truckload rates are up 20%, our internal miles won't go up 20% in cost. So from that perspective, we isolate our P&L from a big headwind if we were still at 25% outsourced miles in the network. Now, when you look at overall the implementation of tech and AI, we couldn't be more excited about it. If you take a step back, I mean, I mentioned earlier on, we launched new AI capabilities in our line haul environment here in the second quarter. We did use on a normalized basis by the end of the quarter our line haul miles by low to mid single digit. I mentioned earlier on the meaningful outperformance we expect in the third quarter in terms of OR and margin improvement and a meaningful improvement on year on year basis. A portion of that is driven by these capabilities we have launched because when your biggest cost category is going down in low to mid single digit, that obviously is going to help you improve your margins over time. And then we're also applying AI. We're currently in pilot in a pickup and delivery applications where we have seen we're piloted currently in four terminals and we have seen a very good improvement in stops per hour and every P&P KPI as well. It will take us a bit of time to roll it out across the network, but we see that as being a meaningful lever there for improvement. And then finally on the doc side, we've improved our demand forecasting algorithms and how we, so the system that you've seen them Jason, where it tells you how many, how much people you need for next month, for 60 days, for 90 days with real time productivity monitoring. And this is enabling us to also improve productivity even in the trough of the cycle. So we see that as being a big lever for us over the years to come. And again, we're improving productivity in the trough of the market. Let me tell you, when that demand environment starts improving, productivity is going to go through the roof.

No, that makes a lot of sense, but there's no way to put a dollar amount on that for let's say over the next three years.

In the near future we are expecting in that low single digit of productivity improvements per year, but this is against a declining volume environment. We haven't yet put targets for it, but when you take a step back and again you look in the up cycle like post yellow, we have been seeing mid single digit productivity improvements. So we're not putting targets about it yet, but you can see what that would look like over the years to come.

Thank you. Our next question comes from line of Daniel

Ambrow with Stevens Inc. Please proceed with your question.

Good morning. Thanks for squeezing in here. Kyle or Ali, maybe one on the pricing side. You mentioned you expect yields to step up sequentially in the back half. When we think about maybe the driver of that, can you quantify how much of that in acceleration and maybe core pricing you're seeing? Is it higher accessorial attachment? Is it just easier comparisons? And then expanding on the easier comparisons, like it's helping frame up the second half. Should we still expect the two-year stacked increase to decelerate through the back half of the year, just as we think about what happens with comparison in the back half on yields?

Thanks. So Daniel, when you think about core pricing, I think about our contract renewals and renewals have been very strong. The second quarter was in a similar range to what we've seen in the last several quarters. That gives us a lot of confidence in our ability to deliver strong above market renewals moving forward. And we'd expect Q3 renewals to be stronger than we saw in Q2. Now, when you think about a lot of the initiatives that are helping us drive it, and as I said before, we would expect on a -over-year basis, our Q3 yield ex-yield to be at or above levels in Q2. A lot of the efforts are going to continue to compound and help us drive up yields in the back part of the year. Mario talked about the accessorial moves. So again, the goal on accessorial is to get to 15% of revenue. We're now in the low double-digit range. So that will continue to improve and that will help us in the back half of the year. We think about growing our local channels. So again, local channel, we want to get to 30%. That's still right now in the low to mid-20s and we're going to continue to move that up. And I think that coupled with strong renewals is really our confidence to move forward. And then I think when you think about renewals and all those efforts, the important point is not just getting a high renewal or yield, but it's seeing the flow through. And you think in the second quarter, really strong proof points. Our yield was up .1% year on year. Repfership was up 5.6%. And seeing those flow through is a good indication that when we're having it with customers, we're retaining that freight within the network. So those renewals are really flowing through. So we feel very good about the back half of the year. Continue to improve sequentially. And then I said the Q3 number is going to be up on a -over-year basis,

higher than the Q2 number.

Thank you. Our next question comes from the line of

Ravi Shankar with Morgan Stanley. Please proceed with your question.

Good morning, guys. Just a couple here. Mario, I think you said in your prepared remarks that you see measurable gains from AI. Can you potentially quantify what those returns are? And also, this may be a stupid question, but how transferable are your initiatives in both tech and ops between the US and the European operation?

Yeah, you got it. Yes. When you look at the AI initiatives, as I just mentioned to Jason, so what we are seeing in the near term, so with the new AI capabilities we launched in line haul, we saw a reduction in normalized line haul miles in the low to mid single digit range. So for the same amount of volume, we're driving low to mid single digit less miles to move that freight. We saw a double digit reduction in empty miles, and we saw an 80% reduction in diversions, which helped service. So it's been a tremendous impact here in the second quarter just for the line haul capabilities we launched. In terms of the capabilities, in terms of labor efficiency, whether it's in P&D or DOC, we're currently setting, again, muted expectations of improving low single digit productivity in the trough of the cycle. And as you know, Ravi, in an LPL network, when your thought is down, it's much harder to improve productivity, but we're improving productivity even against that backdrop. And we expect that to accelerate in the context of an upcycle, and that would be driven by those AI initiatives, both on the pickup and delivery side, where we are improving, for example, how we do it out-optimization. Today in our business, we know where all the deliveries are at any point in time because you're getting them through your network, but your pickups come through the day. So the AI can predict where these pickups will come from and be able to optimize their outs more effectively as an example. Other examples are in how we organize our DOCs. So today our supervisors have to manually adjust their DOC door plan. Technology helps them to do it, but they still have to manually do it. And in a future version, it's going to be all AI driven. So as a supervisor, you hit one button for AI to give you the right answers, and that would minimize the amount of travel you have on your DOC, improving DOC efficiency as well. So these are examples of things that we are launching. And again, when you can count these towards the future, we're seeing very meaningful impact in the near term, and we expect more upside in the future. In terms of how these things are transferable to Europe, some of it is transferable. So if you think about the cost side, if you think about route optimization, these are fairly transferable. If you think about labor productivity, that's fairly transferable. Now when you look at areas like line haul, not very transferable because the networks in Europe are smaller in size naturally, so you have less line haul optimization that you need to do in the environment. And similarly on pricing, typically the pricing environment prices the freight by pallet as opposed to the way we do it here in the US by class and by weight breaks, which is different than how we do it in Europe. So some of these capabilities that would not be transferable over to Europe.

Thank you. Our final question this morning comes from the line of Scott Schneeberger with Oppenheimer & Company. Please proceed with your questions.

Hi, good morning. This is Daniel from Scott. Thanks for taking our question. I just want to ask on maintenance cost per mile. I mean the fleet age has come down nicely. Is there a meaningful opportunity to reduce maintenance costs going forward? Thank you.

Sure, Daniel. This is all we see. So you're right. We've made a lot of progress as we've been investing in our fleet over the last several years in terms of driving down the average age of our fleet. And here in the second, it was sub four years old until we have one of the youngest fleets in the LTL industry. And that's driving a reduction in our maintenance cost per mile, which we're down in that low to mid single digit range here in the second quarter. And as we move forward, we would expect to continue to drive our maintenance cost per mile lowers into the second half of the year and into 2026.

Got it. Thank you.

Thank you. Ladies

and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Herrick for any final comments.

Thank you, Melissa. Thanks everyone for joining us today. As you saw from our results, despite a soft environment with executing on the levers we can control and expanding margins even in the trough of the cycle, we're excited about the freight market recovery as we expect to accelerate our operating margin improvement. We look forward to updating you next quarter. Operators, you can now end the call. Thank you.

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