Q2 2025 XPO Logistics Inc Earnings Call
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Welcome to the XPO second quarter 2025 earnings conference call and webcast. My name is Melissa and I will be your operator for today's call.
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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 follow-up looking statements, except by the extent required by law.
During the call, the company will 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 in 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 and the investor section on the company's website.
I'll now turn the call over to xpo's Chief Executive Officer. Mario harik Mr. Herrick, you may begin.
Good morning, everyone.
We're joining our call.
I'm here with k.
Movements, I would see financial officer and I leave agree our chief strategy officer.
Go to New York today. 24th a strong second quarter results.
We generate the 2.1 billion dollars of Revenue and adjusted EBT of 340 million.
I would adjust the values at EPS of $15 exceeded expectations.
And our North American LTL, business continues to outperform, the industry building on our momentum across the network.
2 years.
Our adjusted.
And a soft rate environment.
On the scoring, the strength of our operating model.
And in the second quarter, we outpaced both the industry and normal seasonality on marginal extension.
This was underpinned by above Market heal 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.
And speak to.
Starting with customer service.
In the second quarter, we achieved year-over-year Improvement and damage frequency and a damage claims ratio of 0.3%.
This reflects discipline, we bring to our service culture.
We also continue to raise the bar with on-time performance, with our 13th straight quarter of year-over-year improvements.
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.
and more than 17,000 Traders, our Fleet
Our average tractor age is now less than 4 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 LDL service centers in North America.
Including 2 additional brake, bulb, locations, and Carly Pennsylvania and Greensboro North Carolina.
These facilities sit in key Freight corridors and are ramping up fast. Helping us move, more directly loads by building density in the network.
Our customers shipments are flowing more efficiently. End to end. And we're reducing both 3 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 and a freight market rebound, and unlock more operating leverage.
Now, let's serve to pricing, which continues to be a key driver of our outperformance.
Our strong service levels are enabling us to earn above Market heal growth and win new business.
In the second quarter, we increased yield excluding fuel by 6.1% year-over-year, with sequential growth from the first quarter.
And we see a long Runway to further align our pricing, as we enhance our values of 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 best-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 smiles to just 6.8% 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 water opportunity ahead.
Our new AI powered.
Models.
Driving additional savings, reducing normalized, line, haul Miles by 3%, empty Miles by over 10%.
And Afraid the versions by more than 80%.
Recently, we started piloting, AI driven functionality for trailer and Route assignments, and pick up and delivery operations.
The early results are encouraging, with positive trends and stops per hour.
Trainer utilization.
We're excited about what AI can mean for our operations and our customers, and we expect it to become increasingly important for our strategy over the long term.
In closing, we reported another quarter of our performance that showcased the operating momentum. We 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. I'll cover the company's financial performance along with our balance sheet and liquidity position
Total company Revenue was 2.1 billion dollars in line with last year and up to 6% sequentially from the first quarter.
In LTL segment, Revenue declined, 3% on a year-over-year basis.
Largely due to a reduction in fuel surcharge revenue tied to the price of diesel.
Excluding fuel. LTL revenue is down 1%.
on a sequential basis, LTL Revenue, increased 6%
On the call. Sign, LTL, we continue to make meaningful progress in reducing our purchase Transportation expense,
Our third-party carrier, expense declined, 53% year-over-year. As we in-source more line haul miles,
This resulted in 36 million in savings for the quarter.
With labor. We held our cost of salary wages and benefits. Roughly flat year-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 costs per mile improved 6%, supported by the addition of newer tractors to our fleet.
LTL depreciation expense increased 13% or 10 million dollars.
Consistent with our strategy investing in the network.
Including our Rolling Stock.
Next, let's turn to adjust the iodine.
Companywide. We generated 340 million dollars of adjusted Ava.
Down 1% from a year ago.
In our LTL segment, we grew adjusted evida by 1% to million dollars 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 Eva of 44 million while the corporate segment had a $9 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 89 cents of diluted earnings per share.
And on adjusted basis, EPS was $15, compared with 1.12 cents a year ago.
Lastly, we generated 247 million of cash flow from operating activities in the quarter and deployed 191 million of net capex.
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, a quarter end.
And our net debt, leverage ratio, improved to 2.5 times. Trailing 12 months, adjusted ibida, 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 dollars 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 Freight environment.
Total shipments per day, declined 5.1%, compared with the prior year.
We drove meaningful growth in our local channel, which 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 year-over-year basis from the first quarter. This is a positive trend that 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% in 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.
6%.
Both underlying metrics also improve from the first quarter. Marking our 10th consecutive quarter of sequential increase in revenue for shipment.
We expect our sequential pricing gains to continue through the rest of the year supported by our high service levels, premium offering and growth in the local channel.
Our approach, the 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 82.9% in the second quarter, outperforming normal seasonality and delivering on our Outlook.
On a year-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 increase Revenue 4% year-over-year and delivered. A 38% sequential increase in adjusted ebit. Dot ahead of seasonal expectations,
we also grew adjusted even though year-over-year and 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 like to highlight the levers that are driving. Our industry-leading margin expansion in LCL.
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 my 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 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. Um, maybe you can just give us a little bit of color on the um,
Oh for the third quarter and I know you talked about a 100 base points of improvement. How how for the year, how we're thinking about that and then maybe just big picture. Um the grocery stuff, sounds new. Uh maybe Mario just talk a little bit about what the opportunity of that is and and why that's an attractive Market.
You got us. Uh, so so we're starting with the third quarter or our Outlook. We do expect another strong quarter for the margin performance, and now typically, uh, normal seasonality for us on, oh sequentially, it 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 a flattish on on a quarter, over a quarter basis, which represents about both a very strong year-on-year Improvement and a significant outperformance to 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, uh, and what we expect in the third,
Quarter. We expect full year time. It should be down in that mid single digit range and obviously, nobody can predict the macros, you will see how the how the year plays out. But as we have said last quarter, this would be a supportive of a 1 0 0.
Appeared on year or on improvements and which is a very strong outcome in a soft rate and would be the only LTL carrier improving margins again, you know, on year after improving them, by 260 basis points last last year.
Closer.
See attractive markets, we we estimated to be Scott about a billion dollars in in Market size and it comes with a very good margin. And we today, we are under represented in the segment of business. We are in that low 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 on those services. And we've had early success here in the second quarter on boarding, a few customers, and we expect that to happen 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 hexar with Bank of America. Please proceed with your question.
Hey Greg, good morning. Um, Mario and and team, um, I guess I'm going to jump over to to the 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. Are we are we testing the limits of what you want to do, and I guess Mario, what what's the next leg of of operational Improvement to continue to drive you toward the, the upper 70s?
So we were down to a new record 6.8% here in the second quarter and we expect to continue to bring that down and that mid single digit range uh through the course of the back half of the year.
Now, let's see that would be 11 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 comp Dynamic of a good cost guy in 2026. Now, keep in mind though, for us, the biggest Improvement in that cost category is around, uh, making sure that you are, we are immune to truckload rates coming up. So in the next upcycle when volume is up, when yields even higher than what it is today, we will 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 to Prior upcycles.
The other 2 levels of cost that were very excited about moving forward. Uh, the first 1 is around, AI capabilities and Technology. We, we have launched many capabilities here, uh, in the, 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 at the top of the cycle, we are improving productivity across our Network. And, uh, when when you see that cycle turn, respect to meaningfully improve productivity as well, here in the second quarter. Uh, we launched the new AI enhancements. So I would line all models that enabled us to reduce the
The line haul miles were driving for the same amount of volume and that low to mid single digit range, which is a great great benefit for us. And we're also piloting now, pnd incremental capabilities in AI, that will make our pnd cost even even lower. So, we're excited about the Outlook of these Technologies. We're launching across across the network and the the the other level is around the new brake bulb location that we have been launching here to the course of the last year, typically in LTL, the washer the service center, the more efficient you are. And when you think about it here in the first half, we launched 2 of the largest service centers and Trucking in North America in Greensboro North Carolina and in Caroline Pennsylvania. And these allow us to build density in our line, haul Network, reduce 3 handles and be able to get effectively a much more efficient Network and how we operate. It even improved service quality as well. So these are all the cost levers, we expect to compound over time here Beyond 2025 going to 26 27/28 as we launch those capabilities.
And then you can on on the Europe side. Uh, you you're right. The second quarter, what was a strong quarter for us and what was the challenging environment? Uh, we grew year over year, organic revenue for the 6 consecutive quarter. And then if you look at adjusted ebit our sequentially, what's up? Nearly 40%. And that was much better than normal seasonality. I think in particular, we saw strength in the UK and Central Europe on the iPad side, both markets for us were up in that load and mid single digit range on a year-over-year basis. As you think about iPad growth as you think about the second half of the year and the third quarter in particular, typically I bet on our European segment steps that
Consequentially, Q2 to Q3 by call it, mid single digit million dollar sequentially, but we would expect to outperform that as we move from up into the third quarter from a, from a seasonality perspective.
Great job on outperforming seasonality on both sides. Thank you very much for the time. I appreciate it.
So, thanks again.
BMO Capital markets, please. Proceed with your question.
Yeah, good morning. Mario and team. Um, so
I I I kind of big picture questions, so you've highlighted some of the past and
focusing on the revenue leapers that you're, um, that you're executing on to drive this Revenue per shipment performance,
My question is, are we in a third year of this kind of muted freight market right now? If we have another year of this kind of performance, with the market being muted and tough,
Um, are you experiencing a change in the conversation with your customer? Does it get harder to achieve the type of, um,
You know, leverage from the initiative that you're doing on the service side, the initiative is that you're doing on penetrating local channel, does it get harder as you go into another year potentially a week and market demand, I'm just wondering, how should we think about kind of going into 2026, uh, about this momentum. That is very self-help driven here on that Revenue per shipment. If we have another year of, uh, you know, muted, uh, you know, backdrop for Freight demand.
Performance, that is meaningfully about.
Market now, for a number of years. But a lot of that, if you, 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 probably 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 at 5 years for us to bridge the gap with the Best in Class carriers. So we have a, a massive Runway ahead of us in terms of these improvements and and high levels. If you break down that Delta, when we started our plan about half of it was driven by a better service product that led that carrier to have better pricing over time.
About 500 basis points where these premium services that that were a a gap for us. We didn't have them in our in our portfolio of offering for customers and about 2 and a half points of yield. Differential were driven by our local channels which represented 20% of our book of business as opposed to 30%, is what the target would be. And by going from 20, 200 sized businesses to 30%, that's equivalent to about 2 and a half points of yield. Now, our goal for the first category on service, leading to better pricing, is to bridge that Gap at 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 SS oral 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. But we started our plan. Our
As a percent of Revenue were 9 to 10% and we can go up to 15% is what the target is. So and we're currently call it a couple of points better than where we started and we still have another runway for 3 years of outperform.
And then same thing on the local channel growth. When we started, we were at 20% as a percent of total. We're now in the low to mid 20% range here. This last quarter 30 we grew the local segment, the small to medium-sized businesses had single digits on each basis which is an acceleration from the first quarter as well. So when you, when you look at it I would go to bridge that Gap have a point a year and we're 2 years into a 5 year uh, runway for, for that aspect.
So when you think of our yield initiatives, all of them have a have a very long Runway years ahead of us and here in the, what is the drop of the cycle? I mean, the Isn has been subseasonal now for the, so for the better half of 3 of 3 years and then the other part of 3 years and yet we are delivering impeccable yield across across the board and we expect that to continue over the quarters and years to come and even get better in the upcycle.
Okay, thanks. I appreciate it.
Thank you. Our next question comes from the line of Jonathan Chappelle with evercore isi.
Proceed with your question.
Thank you. Good morning. Um, Ollie. You gave a message on monthly tonnage that kind of similar, uh, to some of your peers who reported earlier June had a much weaker than expected, pretty big, deceleration than July, um, you know, still weak, but slightly better than normal seasonality.
As we think about what uh Mario had said about a flat o2q to 3 Q with ksk getting easier on tonnage and in August and September. Do you expect that 8% to kind of Whittle its way down to a mid single digit decline? Or are we starting from such a low point in June, um, that even better than the normal seasonality would would relate to kind of a high single digit tonnage decline in the third quarter.
Range. And that was slightly better than what we saw in June on a year-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 softened as a whole, and that continued into the month of September. So we would expect those year-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 year-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 Aller with Goldman Sachs. Please proceed with your question. Yeah, I sort of taking, um, things a different direction. Let's just say that.
We finally get, uh, some manufacturing expansion whenever that is next year, or what have you, and, uh, the negative tonnage in Flex to positive. Can you talk through how, with all the stuff that you've done in the last 2 or 3 years, um, what sort of incremental margins do you think you could produce over the course of the start of the next upcycle and through it? Thanks.
Yeah, you got to draw this. If you if you first of all with 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, 2 years in a row, is the expectation. Uh, and obviously in the upcycle we're going to it's uh 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 incremental. If you, if you go back to late last year in the fourth quarter, the last quarter of Revenue growth before the software he first half of the year, I would incremental as well in the 70% range. I would ebit incremental obviously, we'd love it to be 70% in the upcycle but uh, you know we would say we don't want to set too, too big of an expectation. So see we're comfortably in that 40% range. Now what what are the drivers I I just mentioned earlier on I would yield initiatives that I think above Market yield growth now it's normal in enough cycle to see a industry go up meaningfully. So if it's in the industry is doing it, the high single digit or high single digit, do you expect to outperform?
in terms of overall,
Year performance.
And if you break it down, all the levels that we have in terms of growing with the small to medium-sized businesses, I mean so far here today we've onboarded more than 5,000 new local customers so
Going to give you an example on the momentum that we build in an upcycled with these type of customers. Similarly, when you think about the premium Services, all of these are launched and gaining seen we're building pipelines on each 1 of them. And in a upcycle
Carriers that don't have the capacity might have service issues and in that in that particular case will be able to onboard more of these premium services and grow them at a higher clip.
when you look at the cost side is,
Historically, we used to have a bigger headwind from Persia Transportation. Where when the
Up Cycle, comes the truckload rates, go up and that particular case our exposure now is a much much lower exposure which means higher incremental margins.
Similarly, on the productivity.
When when page was up, 3 through productivity, the 2 quarters after after their, uh, they received operation by 7% in 1 quarter to 4% in the following quarter currently in the 12th of the cycle when improving productivity by about a point a quarter. So when you fast that forward with the compounding effect of the AI initiatives of our technology, you can imagine productivity is going to be at a much much higher clip as well, and ultimately we have now a larger locations 30% excess capacity. A fleet agent is in a fantastic Place, service quality that is in a fantastic place and I'll tell you, if I can tell you how excited we are, when that
Account, it will 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 City, please proceed with your question.
Hey, good morning. Uh, and congrats on some of the Improvement here, uh, in a tough Freight Market. Uh, Mario, I was curious to get your thoughts. Just obviously there's, there's a, um, industry disruption event, uh, happening next year with, uh, the separation of the largest player from his parents. I'm curious if you're seeing any impact, uh, on on the market or the competitive Dynamics, uh, from that. And just if you could talk about the overall competitive environment, and the extent to which you're seeing maybe people, uh, being a little bit more aggressive on pricing than what we've seen in, in the past, thanks.
Yes. So so
Every LTL operators knows that the number 1 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, I don't see, I don't see that changing if they were on a standalone basis or part of the of the bigger FedEx.
Thank you. Our next question comes from the line of Stephanie Moore with Jeffrey. Please proceed with your question.
Great. Good morning. This is Joe hassling on for Stephanie Moore, congrats on the, uh, good results. Um, 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 this sequential Improvement in yield we've seen, can can we expect to see that kind of pace continue into the second half? Um, and then just obviously the, um, growth and local channels and the Big Driver of that. So can you sustain, you know, kind of that high single digit type quick growth with a local channel. Thanks.
So this is Kyle. So when you think about Q3 yield X fuel, 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'd expect Q3 yield X field 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 initiatives. We have on the pricing front speaking specifically to local channel. When you think about local is Mario, mentioned the start of this initiative, we're about 20% percent 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 Weatherbee with Wells. Fargo. Please proceed with your question.
Hey thanks. Good morning guys. Um, what else about Labor productivity? Um, and get a sense of maybe how you think that plays out in the back half of the Year? Obviously, you're guiding to better than normal seasonality on the operating ratio. So, potentially this plays into that, but I guess it's 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 are there levers? You can pull in the near term even in a down volume environment.
well, if you think about the ability our ability to
To drive labor productivity.
Order. Even with tonnage being challenged, we're able to grow improve productivity 1%. Um, if you think about 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 if you think about line haul costs, 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, um, coming up to speed. So we feel very good about our ability to drive momentum, um, on the labor front.
Got it. Thank you very much.
Thank you. Our next question, comes from the line of Richard harnen with Deutsche Bank, please proceed with your question.
Hey, thanks. Um, so I wanted to ask a little bit more about the revenue environment and what exactly happened in June. So, you know, you're the second LTL carrier. Now that's talked about, you know, a pretty steep deceleration, that happened in June and then, you know, very pleased to see a snapback sort of, in July. But maybe talk through the Dynamics of what happened there. And then as we think about the full year, um, you know, I appreciate that coms, you get easier but just risks to the guide and how you intend to offset that if the tonnage environment continues to be shaky.
So this is uh this is Ali. So when you think about our shipment Trends throughout the second quarter, they were very consistent. Uh and also in line with seasonality. Now we did see softer weight per shipment in the month of June and there was really 2 Dynamic that were driving this first macro tear and tariff for uncertainty did have a greater impact on weight per shipment for some of our small to medium-sized customers. Uh, we do think this impact is transitory. This is a channel where we're seeing very strong growth and is O accreta for us. And we also did have a tougher comp in the month of June as well.
Use that third quarter. And then overall, as you think about our ability to to deliver on our oh, Outlook obviously, we're not, uh, 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 9% in the quarter. And what's going to allow us to deliver on that sort of, uh, 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 2/3 of 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 the line of Tom wits with UBS. Please, proceed with your question.
Uh, yeah, good morning. So wanted to ask you a little bit, uh, about the grocery store. Again, I know you had a a question on that, talked about that a bit but um, 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 some share from a few players. Like that's that's, you know, kind of unusual for big LTL to be in that area. Um, and then
So, 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, LTL, you have a large number of, you know, uh, customers variety of customers. So we don't necessarily know what the next, uh, area is. You might look at, but how many other things are there in the pipeline in 2627 that are like? Hey, this is an interesting part of the market that we don't compete in, uh, you know, actively today, and we can add that on.
Thank you.
Makes sense. Thanks. Um, so when you look at the grocery business, it is a more Consolidated business in the LTL segment. And the reason why is that a great service is a prerequisite to be able to deliver on those expectations for the customers and what we, what our service improvements, you know, I mentioned earlier on that I would on time has improved for the 13th consecutive quarter uh here here for us and similarly on the on the claim side, we have 1 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 get the service them in that in that line of business as well. Uh, so it is more Consolidated today and we expect to grow and adhere over over the quarters and years to come. Now, 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 retails.
So it allows like expanding our trade show offering 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. Now, the the first thing Tom, I say, for each 1 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 the gift that keeps on giving here over the quarters and and years to come with with groceries. Specifically, we're now building the pipeline, we're going to start converting a in a number of these accounts here in the back half of the year and going into 2026 other services include, for example, expedite service is something we don't offer today. Although we have 1 of the fastest networks in the industry uh, in terms of trends at times. But offering that incremental expedited service for the customer is something we're contemplating things like security dividers in our tra trailers or things we're contemplating, but we're looking there is another probably 3, 4 or so, incremental premium Services. We're looking at here for the next year or 2
So so if you think about it, kind of how far through those you are in the impact, are you?
You know, halfway through 30% through just in terms of the actual volume or Revenue contribution from the the broader book of new Services just where where are you at? Probably on that.
So, with with early Innings, I mean, I'd say we're we're the third of the way of where we want to be by, by, to 2027 2028. Uh, we are, if you it goes back to the incremental Revenue. We get from as a sort of services. Um, as I mentioned earlier, Tom, we do we, when we started our plan, we were 9 to 10% of our Revenue was driven by accessories. And now we're up couple of points from from that from that number. And we still have it on the way here for the next 3 years, to get to call it 15% 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.
Purchase a quick follow-up on. Uh, Ari's question about FedEx, is there? We saw the announcement earlier about the NFC delay in terms of and then pushing it out to December, uh, where I think everybody else has gone forward with that new structure. So wanted to hear if that was an opportunity or
basically sounds like a challenge for them. Um, so how does that affect, um, XPO. And then maybe just some broader comments on cash flow and capital deployments. Um, call maybe you can give us a little bit of sense in terms of where you think.
Capex is going to head into uh, 26 and Beyond. You know, what are sort of Leverage targets? We should think about in terms of deleveraging, then ultimately, you know, what sort of buyback deployment, uh, should we be thinking about here?
Sure, Brian. So let's start with the nmfc changes. So so nfda implemented changes on how Freight's classified. And if you think about it, really, the main change was 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 have different carriers implemented differently. It's tough to tell, what, why they made a delay, you know, for us, we Dimension over 90% of our freight.
So, we collect the info needed to, 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, uh, 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 1 comment to make is that you're asking about leverage and some of the buyback piece I think, what's important too. 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 1 we think capex is going to moderate. So you think about last week we spent almost 15% 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 of billing bringing those facilities offline, that'll mitigate. Same thing with the fleet. We're we're sub 7% 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 ibida. 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 cabex needed by the business, and we'll continue to do that. And I think second to that, as you asked about leverage, you know, we're still going to uh, drive towards our long-term, leverage targets of 1 to 2 times. And in fact, this month we paid down 50 million of our Term Loan B to continue to start that process. Now as cash continues to build, we'll have more access 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 talked about the impact from bonus depreciation this year and into next year.
Yeah. So when it comes comes to the uh 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 to Creation will be a help for us in the back half of this year and into next year in terms of the cash tax. Um, 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
This year and next year on cash taxes.
Thank you. Our next question comes from the line of bask and Majors with Susana 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 know, you're only 10 million dollars in but I'd be curious, you know, is this more opportunistic? Is it excess cash? Um, how value sensitive are? You just just some of the thoughts about, you know, how we can potentially size that up as as a driver of your growth going forward. Thank you.
you got it, basketball and just said, when you think of capital allocation,
It's a, it's a 100, appreciate it. Part of our of our, uh, shareholder value creation over the years to come. Since 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 of value creation and earnings growth.
If we look at the restructuring and transaction costs added together here. Um,
Do they have backs were hundred million dollars a couple of years ago down to 80 last year. They're, they're run rating. It may be 50 or so, in the first half of this year, um, that's encouraging to see. Do you think that, you know, the earnings quality and, uh, will continue to improve going forward and and what's the cash flow impact of that? Thank you.
So bask if you look at those lines I mean I think we were significantly lower than the second quarter um and most of these expenses relate to restructuring and this is some of the costs take out we've mentioned earlier.
You know, this was focused really on that salary and some of the functional support teams. So that's going to help us contribute to to Really earnings growth. Uh, moving forward. Um, certainly will help us from an O out performance in the back half of this year. And again, as Mario said because it's a structural, this is not only helps in the back half of this year, but also into next year.
Thank you. Our next question comes from the line of Jason sill with TD Cowen. Please proceed with your question.
Thank you, operator. Mario, team, good morning, congrats on the good quarter. I wanted to go back to the side. I mean, you, you guys have done a really great job of insourcing line, Halo. It seems you're well on your way to your sort of 2% goal, uh, for 27, you know, between now and then, can can you put a dollar amount on getting to that 2%, sort of what would it mean? Uh, for the bottom line and cost? And then also you referenced utilizing, uh, Ai and and had some early successes there. So how should we think about the opportunity to save costs with AI over the next say 3 years?
Hey, you guys so, so we're starting with the third party line of insourcing. So, so keep in mind that today, whenever we insert third-party line, haul miles, we are insourcing that to our own equipment and I would own drivers and even in the, in the depressed truckload rate and vitamin. We save 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 LTL, we don't we don't 2 pups to move the freight or 2 2 short Traders, 28 ft trailers to move to to move the phase while third party and which is 56 feet worth of space. While we usually get only 53 feet worth of space with a with a third party car.
So you're getting this incremental, call at 6% more space, which also adds more density and higher efficiency as well. We also get a service benefit
That whenever our drivers hear you look at last quarter, we're on.
Easy, 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, separate the freight, we can secure the freight mode 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.
if you think about it as though, Jason in the upside,
I would internal miles won't go up 20% and cost. So, from that perspective, we isolate our pnl from a, from a big headwind. If you were still at 25% outsourced miles in, uh, in out in, in the, in the network. Now, when you look at, uh, overall, the 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 in vitamin, it's 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.
You monitoring and this is enabling us to also improve productivity, even in the drop of the cycle. So we see that as being a big level for us over the years to come. And again, we're improving productivity in the drop of the market. Let me tell you, when that demand environment starts improving productivity is going to go through the roof.
No, no. That 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 3 years.
in, in the near term, we all expect
Low single digit of productivity improvements per year, but this is against a declining volume of vitamins. Uh, we haven't yet, put forward goods for it, but when you take a step back, and again, you look in the upcycle, like, post Yellow, we have been seeing mid single digits for activity improvements. So we, 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 the line of Daniel imbro with Steven zinc, please proceed with your question.
Yeah good morning, thanks for squeezing this in here. Um Kyle or Ali maybe 1 of the pricing side you mentioned. You expect yields just have subsequently in the back half when we think about maybe the driver of that. Can you quantify how much is that an acceleration and maybe core pricing? You're seeing, is it higher or else? It's real attachment. Is it just easier comparisons? And then expanding on the easier comparisons, I guess helping to frame up the second half, should we still expect the 2-year stacked increase to to decelerate through the back half of the year just as we think about uh what happens with comparisons in the back. Half on yields. Thanks.
So Danielle, when you think about core pricing, you know, I think about our contract renewals and renewals have been very strong, you know, the second quarter was in a similar range to what we've seen in the last several quarters. You know? That gets a lot of confidence in our ability to deliver strong above Market, renewals moving forward and we'd expect Q3 renewals to be stronger that we saw in Q2 now.
When you think about a lot of the issues that are helping us drive it, and as I said before, we would expect, I mean, a year-over-year basis. Our Q3 yield X fuel 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 ssor moves. So, again, the goal on ssor, is to get to 15% of Revenue. We're now in the low, double digit range, so that will continue to improve and that'll help us in the back half.
Of the year. You think about growing our local channels? So again local channels 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 to move forward. And then, I think, when you think about renewals in 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. So our yield is up 6.1% year-on-year. Rep for ship was up. 5.6%, you know, and seeing those flow through is a good indication that when we're having it be with customers, we're retaining that Freight within the network. So those those renewals are really flowing through, so we feel very good about the back half of the Year continuing to improve sequentially. And then I said, the Q3 number is going to be up on a year-over-year basis
Higher than the Q2 number.
Thank you. Our next question comes from the line of Robbie chancre with Morgan Stanley. Please proceed with your question.
Uh good thing. It's morning guys. Uh just a couple here. Uh Mario I think you said in your prepared remarks that you uh, see a measurable gains from AI. Uh, can you potentially quantify what those returns are? And also this, this may be a stupid question, but uh, how transferable are your initiatives, uh, in both Tech and opiates between the US and the European operation
yeah, you got
Yeah. So when when
Being 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 digits, less miles to move that Freight. Uh, we saw a double digit reduction in NC miles, and we saw a 80% reduction in diversions, which helps service. So it's been a, a tremendous impact here in the second quarter, just for the line, haul capabilities, we launched
She helps them to do it but they still have to manually manually. Do it and in the in the future version it's going to be all Aiden. So as a supervisor, you hit 1 button for for AI to give you the right answers and that would minimize the amount of travel you have on your dog improving, dog, efficiency as well. So these are the example of things that we are launching. And again, when you, when you compound these towards towards the future, we're seeing very meaningful impact here in the near term and we expect more upside in the 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 Lyon Hall, not very transferable because the the net, with the LTL networks in Europe are a smaller in size naturally. So you have less line haul optimization that you need to do in the environment and similarly on pricing typically they're the pricing environment prices. Is the freight buy 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, our Scotch neuberger with Oppenheimer Company. Please proceed with your question.
Hi, good morning. Uh, this is, Daniel are from scarred. Thanks for taking our question. I just want to ask on, uh, on maintenance cost per mile. I mean, the the the fleet Age come down nicely. Is there a meaningful opportunity uh, to reduce maintenance costs going forward. Thank you.
Sure. Daniel, this is, uh, this is Ali. 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 4 years old and so we have 1 of the youngest Fleet in the LTL industry. And that's driving a reduction in our, in our maintenance costs per mile which, which were down in that low to mid single digit range here, uh, here in the second quarter. And as we move forward, we would expect to continue to drive. Our maintenance costs per mile lower as 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 for this. Uh, thanks everyone for joining us today.
Sending margins, even in the drop of the cycle. But excited about the Freight Market recovery as we expect to accelerate our operating module and Improvement. We look forward to updating you next quarter operators, 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.