XPO Q3 2026 Earnings Call Transcript

XPO (NYSE:XPO) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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View the webcast at https://edge.media-server.com/mmc/p/7v55s8fq/

Summary

XPO reported a 12% year-over-year increase in revenue to $2.4 billion, with adjusted EBITDA up 27% to $433 million and adjusted diluted EPS increasing 59% to $1.70.

The North American LTL segment achieved a 17% revenue growth and a 35% increase in adjusted operating income, reaching historical highs.

Strategic initiatives focused on service quality, capacity expansion, AI-driven cost efficiency, and insourcing to reduce third-party carrier dependency.

XPO opened new locations in Phoenix and Kansas City, expanding network capacity by more than 30% and modernizing its fleet.

Future outlook includes expectations of continued margin improvement, with an annual operating ratio target in the low 70s and significant free cash flow growth to support share repurchases and debt reduction.

Management highlighted strong pricing trends, with yield growth ex-fuel tracking at 5% for October, and emphasized the long-term benefits of AI and technology in operational efficiency.

European operations reported a 5% revenue increase and a 26% adjusted EBITDA growth, with plans to further accelerate in the fourth quarter.

Full Transcript

Kerry (Operator)

Welcome to the XPO Q3 2026 earnings conference call and webcast. My name is Kerry 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 one on your telephone keypad. Please limit yourself to one question when you come up in the queue. If you have additional questions, you’re welcome to get back in the queue and we’ll take as many as we can.

Please note that this conference is being recorded. Before the call begins, let me read a brief statement on behalf of the company regarding forward-looking statements and the use of non-GAAP financial measures. During this call, the company will be making certain forward-looking statements within the meanings 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 to the extent required by law. During this conference, the company may also refer to certain non-GAAP financial measures as defined under applicable SEC rules.

Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company’s earnings release and the related financial tables or on its website. You can find a copy of the company’s earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures, in the Investors section on the company’s website. I will now turn the call over to XPO’s chairman and chief executive officer, Mario Harik. Mr. Harik, you may begin.

Mario Harik (Chief Executive Officer)

Good morning, everyone. Thank you for joining us. I’m here with Kyle Wismans, our Chief Financial Officer, and Ali Faghri, our Chief Strategy Officer. In the third quarter we delivered strong growth and margin expansion as we continue to convert more business into higher earnings. Company-wide revenue increased by 12% year over year to $2.4 billion. Adjusted EBITDA grew by 27% to $433 million, and adjusted diluted EPS increased by 59% to $1.70. In our North American LTL segment, we reported 17% revenue growth and 35% growth in adjusted operating income to $293 million. This is the highest level of adjusted operating income in our history. Our adjusted operating ratio improved by 260 basis points year over year, significantly outperforming normal seasonality.

We’re executing a powerful strategy focused on service investments in capacity, pricing and cost efficiency. Each component reinforces the others, and together they’re driving an acceleration in our results. You can see these connections most clearly at the core of our strategy, which is world-class service. In the third quarter, we again delivered a damage claims ratio below 0.2%. For the shipper, damage-free delivery means fewer business disruptions, less time resolving claims and greater confidence that freight will arrive as expected. This is especially important to customers with time-sensitive or high-value shipments who place a premium on working with a trusted provider. Our service record positions us to earn more of this freight and further improve our mix.

We view every customer interaction as being central to our success. Service quality earns us the next shipment, and continuous improvement maintains our advantage. There’s a strong connection between our network capacity and our ability to support customer relationships as they grow. We’re continuing to expand our presence in high-growth freight markets, most recently in Phoenix and Kansas City, where we opened two new locations this quarter. Strategically, we positioned our network to handle significantly more volume, with more than 30% excess door capacity to support growth.

We’ve also expanded and modernized our fleet, and we continually invest in our workforce. Together, these investments strengthen our network and allow us to move freight more efficiently, benefiting both our customers and our bottom line. We’re achieving a better balance of network density, utilizing more direct routes and reducing unnecessary freight handling. And importantly, these investments lower our cost to serve and build significant operating leverage into the business.

The same strategy informs our commercial initiatives, including pricing. We want to make sure the price we secure reflects both the quality of our service and the resources required to provide a world-class customer experience. Our service quality puts our team in a stronger position to have these conversations. It also opens the door with customers whose freight requires greater reliability, careful handling or specialized support. This is through our sales pipeline as well as with existing accounts.

When customers see how consistently we deliver, we have an opportunity to serve more locations and handle more of that freight. Local accounts and premium services remain important drivers to improve our revenue quality. These are areas where we continue to build lasting relationships and earn attractive margins by meeting specific customer needs. As an example, in the local channel this quarter, we increased the number of new customers we onboarded by 30% versus last year.

The result is a strategic approach that connects pricing, mix and share gains to the value we provide to shippers and the value we create for our shareholders. And we have a large opportunity to build on this momentum over time. The final component of our strategy is cost efficiency driven by our proprietary technology. Our company has always had a technology focus, and now AI is accelerating that advantage. We’re rolling out intelligent tools across our operations and seeing tangible results in how we route, handle and deliver freight. Even in the early stages of these applications, we’re moving more freight at lower cost and with improved service. At linehaul that means improving how we route freight and utilize trailer capacity.

We’re also running the network with fewer empty miles and freight rehandles. Since we rolled out a planning model that leverages AI, we’ve reduced rehandles by mid-single digits to the lowest level in over a decade. In our pickup and delivery operations, our proprietary AI-based self-optimization tools are now being used on nearly two-thirds of routes. The stack factors in customer appointment windows, distance and trailer capacity to arrive at the optimal route.

Our drivers are making more stops per hour while reducing miles per shipment. And our workforce planning technology provided valuable support in the quarter, helping our service centers handle nearly 6% growth in shipment count with only a low single-digit increase in headcount. We’re also using AI to give our dock workers real-time feedback on their trailer loading techniques before freight leaves the dock. This contributed to a 20% reduction in damages in the quarter versus last year.

Overall, we see AI as having a long runway for ongoing efficiencies and margin improvement. And lastly, our insourcing initiative is working exactly as planned, reducing our exposure to rapidly rising rates from third-party carriers. We also have greater control over our linehaul operations when we move this freight within our network. In summary, our third quarter results highlight the earnings power of our business, supported by a highly disciplined approach to both growth and margin expansion. We’re building a business that can grow profitably, and we expect to achieve an annual LTM operating ratio in the low 70s or better over the long term. We expect our free cash flow to accelerate going forward, allowing us to continue repurchasing shares and reducing debt. These actions strengthen our balance sheet while further compounding our growth in earnings per share and enhancing shareholder value.

Now I’ll turn the call over to Kyle for the financial results.

Kyle Wismans (Chief Financial Officer)

Thank you, Mario, and good morning, everyone. I’ll walk through our financial results followed by our balance sheet, liquidity and capital allocation. For the third quarter, we grew total company revenue 12% year over year to $2.4 billion. In our LTL segment, revenue improved to $1.5 billion, reflecting a 9% increase in revenue ex-fuel with meaningful growth in both yield and volume. Turning to costs in LTL, we continue to drive efficiencies across our operations, helping to mitigate the impact of higher freight volumes, wage inflation and increased incentive compensation tied to our strong performance.

Our expense for salary, wage and benefits increased 11% year over year, or $72 million. Our cost for fuel, operating expense and supplies increased 29%, or $66 million, primarily due to higher fuel prices, and our purchased transportation cost increased by just $10 million despite higher volume and rising truckload rates. Our insourcing strategy has significantly reduced our reliance on third-party carriers, mitigating this cost. Depreciation expense increased 3%, or $3 million, reflecting our ongoing investments to expand network capacity and support long-term growth.

Moving to profitability company-wide, we grew adjusted EBITDA 27% year over year to $433 million. Our LTL segment generated $389 million of adjusted EBITDA, up 26%, and we improved margin by 190 basis points to 26.4%. LTL adjusted operating income was up 35% to $293 million. In our European transportation segment, increased adjusted EBITDA to $48 million. In our corporate segment, adjusted EBITDA was unchanged from the prior year at a $4 million loss.

Returning to our consolidated results, operating income increased 76% year over year to $288 million. Net income was $181 million, representing diluted earnings per share of $1.53. On an adjusted basis, diluted EPS increased 59% year over year to $1.70. Turning to our third quarter cash performance, we generated $291 million of free cash flow. We ended the quarter with $260 million of cash on hand after completing $123 million of net capital expenditures, accelerating our common stock repurchases to $150 million and making $100 million of debt repayments. Combined with available capacity under our committed borrowing facility, our total liquidity at quarter end was approximately $860 million. Our net leverage ratio improved to 1.9 times trailing 12 months adjusted EBITDA compared with 2.1 times in the second quarter.

We continue to drive meaningful growth in free cash flow through a strong earnings performance and moderating capital expenditures. We’re on track to more than double our free cash flow this year compared to 2025, and we expect to continue increasing it in the years ahead. This gives us significant flexibility to return capital to shareholders while strengthening our balance sheet. In October, we paid down another $75 million on our term loan to start the fourth quarter, bringing our year-to-date debt paydown to $275 million.

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

Ali Faghri (Chief Strategy Officer)

Thank you, Kyle. I’ll start with our LTL business where we continue to capture profitable market share and deliver significant margin expansion compared with the prior year. Shipments per day increased 5.8% in the quarter, while weight per shipment declined 0.7%, resulting in 5% growth in tonnage per day. Volume growth remained consistently strong throughout the quarter, with shipments per day increasing 5.9% in July, 5.7% in August and 5.7% in September. Notably, we accelerated our shipment growth in the accretive local channel, which contributed not only to volume but also to margin. Looking at tonnage per day on a monthly basis, we had year over year increases of 5.8% in July, 3.7% in

Mario Harik (Chief Executive Officer)

August and 5.4% in September. On a two-year stack basis, volume growth accelerated and outperformed normal seasonality each month of the quarter. This momentum continued into October where we estimate preliminary shipments per day will increase in the mid-7% range and tonnage per day will increase in the mid-6% range year over year, with both metrics outperforming normal seasonality. More broadly, volume growth was driven by our differentiated service quality, our investments in capacity and our success in shifting mix toward higher-margin freight. Pricing remained a key driver of margin improvement in the quarter. Yield excluding fuel increased 3.6% year over year and improved sequentially. Revenue per shipment excluding fuel also improved sequentially and accelerated on a year-over-year basis.

Importantly, our pricing is continuing to strengthen, with year-over-year yield growth excluding fuel tracking up 5% in October and revenue per shipment growth up 4%. Given the momentum in our pricing trends, we expect both yield and revenue per shipment excluding fuel to improve sequentially and accelerate on a year-over-year basis in the fourth quarter compared to the third quarter. Moving to profitability in LTL, we improved our adjusted operating ratio by 260 basis points year over year to 80.1%. Notably, our margin improvement accelerated from the second quarter on a two-year stack basis. We also outperformed normal third-quarter seasonality by more than 200 basis points. These results demonstrate the strength of our LTL operating model and our ability to translate profitable volume growth and pricing gains into meaningful margin expansion.

Turning to Europe, we delivered another quarter of strong growth across the business. We increased revenue 5% year over year, marking our 11th consecutive quarter of growth on a constant-currency basis. Adjusted EBITDA growth accelerated to 26% year over year with positive contributions from each line of business. Based on current trends, we expect EBITDA growth to be even higher in the fourth quarter. In addition, we grew the sales pipeline by double digits, putting us in a strong position to capitalize on rising demand in key markets.

Before we move to Q&A, I’d like to close with a few thoughts on the momentum reflected in our results, particularly the gains we’re making with mix and volume growth, our favorable pricing trends and significant margin expansion. We’re also continuing to strengthen our competitive position through superior service quality, an expansive network and a margin-oriented approach to market share. At the same time, we’re creating structural cost advantages through network optimization and expanding use of AI across our operations, giving us additional levers to improve efficiency, customer service and profitability. Looking ahead, we see substantial opportunities to build on this momentum across the board, with meaningful upside as the freight market recovers.

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

Kerry (Operator)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. Please limit yourself to one question and one follow-up. If you have additional questions, you’re welcome to get back in the queue and we’ll take as many as we can.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. And our first question will come from Ken Hexter with Bank of America.

Ken Hexter (Analyst at Bank of America)

Great. Good morning, Mario and team. Great job on outperforming seasonality and strong margin gains. Just want to dig into the yield discussion. Given a lot of debate on the underlying market and since that’s a big focus on your ability to drive some of the outsized margin gains. So it looks like revenue per hundredweight decelerated to about 3.5%, 3.6%. Maybe just talk about the environment there. Ali, it sounds like you’re talking about maybe some acceleration coming and I guess maybe if you want to break that down.

I know you’ve talked about whether it’s SMBs or different types of focus to get you the additional points. Where do we get that gains from here? Thanks.

Mario Harik (Chief Executive Officer)

Thanks, Ken. This is Mario. We delivered another quarter of strong pricing, where we improved both yield and revenue per shipment ex fuel sequentially, but we also accelerated our revenue per shipment on a year-on-year basis here in the third quarter relative to Q2. Now at a high level, we always prioritize the yield flow-through to margin. And if you look for us in the quarter here, we improved our operating margin by 260 basis points, which accelerated significantly on a two-year stack and outperformed seasonality by more than 200 basis points.

Now in the quarter itself there were some mix factors that impacted us from a yield standpoint. If you look on a year-on-year basis, Q3 versus Q2, our weight per shipment improved by more than a point and our length of haul was down a few points. And both of these dynamics typically have a negative impact on yield. If you normalize for these shipment characteristics, our core pricing in Q3 accelerated relative to where we were in Q2. And as Ali mentioned earlier, here in October our yield growth ex fuel is tracking up 5% and revenue per shipment up 4% as we’re seeing our length of haul normalize this month, and we expect that for the rest of the quarter.

Now if you look generally, if you zoom out just for Q4 as a whole, we do expect both yield and revenue per shipment ex fuel to increase both sequentially and accelerate on a year-on-year basis as well.

Ken Hexter (Analyst at Bank of America)

Great. And just a follow-up on that seasonality in margins, right? Ali, I think you’ve always talked about maybe a 200 basis point deterioration in 4Q. I don’t know if you want to kind of set your thoughts on where we see seasonality rolling on the operating ratio for the LTL side and maybe initial thoughts in the ’27.

Kyle Wismans (Chief Financial Officer)

Sure, Ken. So we do expect another strong quarter here for margin performance in the fourth quarter. Now normal seasonality for us, Ken, is for OR to increase 250 basis points from Q3 to Q4. So normal seasonality would put our OR closer to an 83%. However, we do expect to significantly outperform that, and we would expect our fourth quarter OR to be below an 82%. Now that’s a very strong outcome overall. It does imply another quarter of significant year-over-year margin improvement and that’s going to be driven by a combination of accelerating price, accelerating volume and cost efficiency. Now for the full year, if you recall last quarter we had said that we expect north of 200 basis points of margin improvement this year. Based on our Q3 outperformance and the upside here in the fourth quarter, we now would expect our full-year OR improvement of 250 basis points or better.

So a very strong year as a whole. And for 2027, Ken, we do expect another strong year both for OR improvement and for earnings growth. I will give more color on the expectations once we report the fourth quarter here in a few months. But at the high level, if you look at where we’re ending the year here, while we continue to see continued industry volume improvement, and as we have shown this year, we expect to outperform that, and that’s driven by profitable share gains through the course of the year and we expect that to continue in 2027.

We also expect another strong year of pricing performance. You look at the trend as we exit, the year is looking solid and we expect that to continue through 2027 and beyond. Then the last components on cost efficiency and our AI initiatives, all of these are in the early innings of delivering value for us in terms of efficiency and we’re going to capitalize on those further in 2027. So if you take a step back, we do expect a strong year both for earnings growth and margin expansion.

And obviously we’ll give a bit more color on that once we report the fourth quarter.

Kerry (Operator)

And our next question will come from Chris Weatherby with Wells Fargo.

Chris Weatherby (Analyst at Wells Fargo)

Yeah, hey, thanks guys. Appreciate it. So I guess maybe just coming back to the yields for a moment in 3Q because I just want to make sure we understand sort of the dynamics. How do you think about sort of the 3.6% relative to any mix that was going on? I know weight per shipment was maybe a little bit higher than at least we were looking for. So maybe you can unpack some of the dynamics there. And if you did see anything, whether it be from local accounts or other end markets that you were serving, that impacted that, because obviously it’s a nice acceleration.

Just want to make sure we understand what’s going on between 3Q and 4Q on the yield side.

Ali Faghri (Chief Strategy Officer)

Chris, this is Ali. I think the primary mix factor callout in the third quarter was length of haul, which was down a few points on a year-over-year basis. That was worse than normal seasonality relative to the second quarter for us. What we saw, Chris, in the third quarter was that as truckload rates really started to sharply increase, we did see more conversion of freight from truckload to LTL. Now that freight does tend to be heavier but also more regional and it comes with a shorter length of haul.

For us specifically, we did reprice a lot of that truckload-like business. It doesn’t always operate well in an LTL network. As you know, we’re always focused on what has the strongest flow-through to margin, and the reality is we are seeing a lot more attractive opportunities in the market with local customers and premium services as examples. I think, encouragingly, as we’ve now cycled into October, we are seeing that mix impact from length of haul start to normalize and seeing our length of haul trend higher as a result. And that is alleviating some of that impact on both yield and revenue per shipment. And in addition, with accelerating core pricing, it’s what’s driving our expectation for pricing to accelerate here into the fourth quarter.

So overall, from a mix standpoint, we would expect some of those factors that impacted us in the third quarter to be more in line with normal seasonality as we go into the fourth quarter.

Chris Weatherby (Analyst at Wells Fargo)

Okay, super helpful. And then just quick follow-up on the tonnage side, I guess. Do we assume the sort of mid-sixes that you’re seeing in October? Is it like a mid-single digits the way that you underpin the fourth quarter or guide? Just want to get a sense of how you’re thinking about some of the underlying dynamics within that OR guide.

Ali Faghri (Chief Strategy Officer)

Sure, Chris. So October for us, as I noted, tonnage was up in that mid-6% range on a year-over-year basis, and that did accelerate year over year and on a two-year stack basis relative to September. It was also better than seasonality relative to September as well. Normally we see tonnage decline in that low- to mid-single-digit range sequentially from September to October, and this year October was a few points better than that. I’d also point out that September was also better than seasonality for us as well.

For the fourth quarter as a whole, if you just roll forward the above-seasonal trends we’ve been seeing here more recently through the rest of the quarter, that would put our full-quarter tonnage not only accelerating from Q3’s growth rate but also accelerating from October 6.5% growth on a year-over-year basis, and that does factor in easier comps that we have in both November and December.

Kerry (Operator)

We’ll go next to Jordan Alliger with Goldman Sachs.

Jordan Alliger (Analyst at Goldman Sachs)

Yeah, hi. Morning. Just sort of curious, you brought up or mentioned purchase transportation in your opening remarks as hopefully volumes continue to get better here, which it seems like they are. Can you maybe talk a little bit to PT and the insourcing, and obviously there’s elevated inflation out there, and how you plan to use whatever levers you can to keep that line item in good shape and keep the insourced miles where you want them to be? Thanks.

Mario Harik (Chief Executive Officer)

Jordan, if you look at it, this has been a fantastic strategic plan for us Over the last few years. Because if you think about it, this year was the year where we are seeing truckload rates starting to inflect and we spent effectively a good part of four years reducing that exposure on third-party carriers. But first, I’m talking numbers. When we started our plan, our outsourced miles were about 25% here. This last quarter we were in that mid-single-digit range. We’re at 5.6% of miles being outsourced and that’s some of the lowest levels in our company history.

Now keep in mind in some markets you always need some purchased transportation. If you have a headhaul market where on your own equipment with your own drivers, you would have too much empty miles coming out of that market, it still makes financial sense to use a small residual amount. But generally we find that when we move the freight ourselves with our own drivers and on our own equipment, we typically also provide better service for the customer.

We are more efficient with it. We can load trailers further in the network and the employees who are moving that freight. So we expect that number. Now as truckload rates go up, the break-even point effectively keeps on coming down. So we can lower our overall miles even further. But currently we feel good about where we are at the mid-single digits where we don’t see a need to increase that and potentially over time reduce it by a bit as we continue to execute on our plan.

The biggest positive impact, if you think about an upcycle where both truckload rates go up and LTL rates go up, we’re going to have a much lower headwind on our P&L from the rising impact of truckload rates, which leads to higher incremental margins in the upcycle and being able to have a higher flow-through of our yield and volume increases to the bottom line versus if you had a higher exposure.

Kerry (Operator)

Moving on to Stephanie Moore with Jefferies.

Stephanie Moore (Analyst at Jefferies)

Great. Good morning. Thank you for the question. You know look, I don’t. I wanted to maybe touch on the free cash flow opportunity and others. You know I think 2026 is framing to be a pretty, pretty healthy free cash flow year. So any way you could magnitude just the free cash flow generation over the medium term. And as we think about your priorities of cash, you know any kind of update there would be helpful. And then if I could squeeze it in. Thoughts on just the European sale?

I think that’s something that you talked about for some time. But any update there as well. And if that deal goes through, same if a deal does go through, what would be the primary capital cash priorities? Thank you.

Mario Harik (Chief Executive Officer)

Yes, thanks, Stephanie. I’ll start first on the European side and I’ll turn it over to Kyle for the cash flow. But overall on the European sale, our intention and our goal is over the long term to be a pure-play North American LTL carrier, that hasn’t changed, and setting that business as a strategic priority of ours. That said, we’re patient. We want to make sure we are maximizing the return we get on that business. It is a business that has scarcity value in terms of being, one, either number 1, 2 or 3 in the segments of business we operate in, whether it’s supply chain, whether it’s LTL, whether it’s dedicated solutions for customers, predominantly in Western Europe.

And if you look here more recently, the results are trending very, very nicely. I mean this quarter here we improved the EBITDA by 26% in USD or 27% on a constant currency basis. And we expect that to meaningfully accelerate in the fourth quarter in terms of growing EBITDA nearly by 40% on a year-on-year basis in that business. And that’s driven by a strategy we are implementing to run the business more cost efficiently but also focusing on overall pricing and how we price customer contracts for profitability and for margin like we do here in the US. And the third component is investing in sales. We’ve added more than 40% more salespeople in Europe, are expanding in four new verticals with aerospace, luxury goods, healthcare. So a lot of the similar plan that we executed here, the team in Europe is doing a phenomenal job in driving that and higher earnings and better results over time with the, to us, eventually selling that business for the right price.

And I’ll turn it over to Kyle to discuss the cash or the cash front.

Kyle Wismans (Chief Financial Officer)

Hey Stephanie. So from a cash standpoint, we expect to at least double our free cash flow here in 2026. That would put us near, probably near, $800 million for the year. And that’s far ahead of our initial expectations for the year, driven by really two primary factors. Obviously we’re seeing higher income and higher flow-through as Mario was talking about. We’re also seeing lower CapEx. So over the long term we expect our EBITDA conversion to accelerate both as earnings grow and given our lower CapEx needs.

So we’re expecting to generate billions of free cash flow in the coming years. Now as far as what we’re going to do with that, we’ll use our excess cash to both buy back shares and pay down debt. Already this year we’ve repurchased $250 million of our shares. We actually accelerated those here in the third quarter when the stock pulled back. That really reflects the confidence we have in the long-term value of our shares. We’ve also paid down $275 million of debt including $75 million here in October. These actions will both ramp moving forward as our free cash flow continues to accelerate.

So we look forward to generating billions of free cash flow and we’re going to use that to generate the highest return for our shareholders.

Kerry (Operator)

Our next question will come from Scott Group with Wolfe Research.

Scott Group (Analyst at Wolfe Research)

Hey thanks. Good morning. Can you just talk about the timing of your timing magnitude of your GRI this year. I don’t know if there’s a timing help that helps October or, Ali, do you think that that 5% yield ex-fuel for October, that’s a good run rate for the full quarter? And then maybe just if you can talk about net impact you saw for fuel in Q3 and sort of what you’re embedding in the assumptions for Q4.

Kyle Wismans (Chief Financial Officer)

Hey Scott, this is Kyle. So consistent with other carriers we did take our GRI recently, similar magnitude to last year. It’s important to note that impacts, call it, 20% of our book. For us the contract renewals have a much larger impact on our overall yield. Where that impact is really in the local channel. We’ve obviously been growing that a lot over the last couple years but we still see a long runway for growth and the GRI is one way we can align pricing in that channel to the world-class service we provide.

I’ll pass it over to Ali and Scott.

Ali Faghri (Chief Strategy Officer)

In terms of the pricing outlook for Q4, we do expect our yield ex-fuel to accelerate on a year-over-year basis versus the third quarter. Also improves sequentially on a quarter-over-quarter basis as well. Our comps do get tougher as we move through the quarter. I would point out, however, the fact that we expect weight per shipment to normalize on a year-over-year basis in Q4 and still expect a yield acceleration I think speaks to the underlying improvement we’re seeing in core pricing and contract renewals which are accelerating currently here.

Now in terms of the fuel impact for us, as you know fuel has always been part of the economics for LTL carriers. Certainly as fuel prices have gone up, we’ve seen our fuel surcharge revenue go up along with it, but obviously we’ve seen our cost to procure that fuel also go up and there are many different impacts from fuel across our P&L including many line items outside of just a few operating expenses and supplies and an inflationary impact as well.

So some examples, Scott, include purchase transportation costs, maintenance costs and even cartage. Now for the fourth quarter specifically we do expect diesel prices to normalize meaningfully from where they are currently through the rest of the quarter. And as a whole we would expect our LTL fuel surcharge revenue to be flattish on a quarter-over-quarter basis relative to the third quarter.

Scott Group (Analyst at Wolfe Research)

Thank you guys, appreciate it.

Kerry (Operator)

Moving on to David Vernon with Bernstein.

David Vernon (Analyst at Bernstein)

Hey good morning guys. Thanks for taking the question. So Mario or Ali, I guess sometimes in conversations with investors I get the feeling that share gains are almost always thought of as coming at the expense of price. You guys are growing shipments about 6%. OD is down 2 ex-fuel, yields are slowing maybe to 3.6. Could you compare the freight you’re winning with the existing book on yield, cost to serve and margin and any color on where it’s coming from?

Local, national accounts, 3PLs or carriers that have lost service or capacity would be helpful. Just trying to differentiate between kind of the growth at the margin versus the improvements in the existing base.

Ali Faghri (Chief Strategy Officer)

Well David, we don’t believe that price and volume are mutually exclusive and the Q3 for us is a great example of that where we are driving strong growth on both metrics and we expect both price and volume to accelerate here in the fourth quarter. And we are, if you look at the combined ex-fuel numbers, we are delivering some of the highest revenue growth in the industry which is contributing to our strong margin improvement which is ultimately what we prioritize for as an LTL carrier.

Now going back to the question of where do we see that? Because mix does impact overall what you’re seeing both from a margin perspective and pricing growth perspective. And for us a lot of our growth has been driven by growing with the small- to medium-sized customers. So these are mom-and-pop shops, typically ship a few shipments a week where service is essential. If you don’t have a good service product, these customers don’t want to do business with you.

And similarly we’re also growing with premium services. This is where the customer would effectively want to have you moving shipment from point A to point B, but then you’re providing this incremental service for them as well. And we’re seeing dramatic growth in that part of the business as well. Just to give you a data point, and I mentioned it in my opening remarks, but when you look at the small- to medium-sized customers here in Q3 of this year we onboarded 30% more new logos than we did in the comparable period last year. And this tells you the momentum we are seeing in that channel where effectively it has a better operating margin and it’s a great relationship that we have with the customers.

Now if you zoom out and you look at our opportunity, we have a double-digit, in the low-teens, low- to mid-teens opportunity in terms of catching up on pricing with our best-in-class tier and over the years to come through a combination of slightly higher pricing than market driven by service and those mix dynamics with premium and local accounts will enable us to grow yield over the years to come as we continue to gain market share in those highly profitable segments of business that we’re going to continue to grow.

David Vernon (Analyst at Bernstein)

So as you’re going after that SMB channel then I mean is that business that would traditionally go through a broker and you guys are really kind of attacking that part of the market or how do I think about where that SMB freight would normally have been serviced?

Ali Faghri (Chief Strategy Officer)

It would have been serviced by other carriers. We are gaining market share from other carriers. Typically for that channel they work carrier direct where they typically work with one carrier only. Because you can imagine if you’re a small manufacturer in Ohio, you know, you have five shipments a week going all over the country, you’re going to use one LTL carrier to move that freight for you, typically a national carrier, because you want to be able to hit all the markets where your customers could be buying the product from.

So the market share gains that we are seeing are across the sector here. This last quarter as we saw some carriers also struggle on capacity, we were able to also gain market share from some of these carriers that have not invested as much in capacity as we have, as an example, but we are gaining market share again from the different carrier

Mario Harik (Chief Executive Officer)

Base based on us growing in that segment of business.

Kerry (Operator)

And our next question will come from Jonathan Chappelle with Evercore ISI.

Jonathan Chappelle (Analyst at Evercore ISI)

Thank you. Good morning, Ali. Lost in this improvement run that you’ve had the last few quarters, the cost inflation, especially in salaries, wages and benefits, has been pretty elevated. I know you’re trying to control more of your capacity, but are there any unique costs you can point to this year, maybe especially in the back half as it kind of leaps to double-digit growth, and any kind of normalization of that cost inflation going forward?

Ali Faghri (Chief Strategy Officer)

John, this is Ali. So we did manage variable labor costs very effectively in the third quarter, and that’s largely through leveraging our AI-driven proprietary labor planning tools that are allowing us to manage labor on a real-time basis. I point out that, for example, here in the third quarter our shipment count was up 6% on a year-over-year basis relative to our headcount, which was only up in that low single-digit range. So our ability to drive that gap really speaks to the productivity we’re driving here.

Now from a salary, wages and benefits perspective, here in the quarter they were up about 11% on a year-over-year basis. In terms of the building blocks of that, it was primarily driven by higher volumes, which are up in that mid single-digit range. Then we had another four points about wages and benefits cost inflation, and then there was about three points of growth in salary, wages and benefits tied to higher incentive comp. But importantly, on the incentive comp piece, that does reset as we head into 2027 and essentially becomes a good guy for us.

Jonathan Chappelle (Analyst at Evercore ISI)

As you’re thinking about wage inflation into 2027, is there any way to judge the magnitude at this point of what kind of good guy that would be in ’27 as it shifts to a tailwind?

Ali Faghri (Chief Strategy Officer)

So from an OR standpoint, it’s north of 100 basis points of full-year OR impact for us in terms of incentive comp. So at a high level, the fact that we expect to deliver 250 basis points or better of full-year margin improvement while absorbing north of 100 basis points of incentive comp impact, which again resets as we head into 2027, really speaks to just how strong the underlying operating leverage of the business is currently.

Kerry (Operator)

And we’ll go next to Jason Seidl with TD Cowen.

Jason Seidl (Analyst at TD Cowen)

Thank you very much. Good morning, gentlemen. Impressive results, Mario. You guys have been growing above seasonality here, as you mentioned. Wanted to see if we could parse it between how much is sort of customer demand maybe improving and how much of it is just market share gains from the excellent job you guys have done on service, whether it be in the SMBs or maybe some of your other premium service offering gains.

Mario Harik (Chief Executive Officer)

We estimate it to be roughly around 1/3 market and 2/3 us in terms of growth. First, starting on the demand outlook, what we are seeing here in the back half of the year is continued positivity and year-on-year positive demand from the customers. As you know, we do a quarterly survey, and we also are hearing that from our customers where they further expect acceleration. About half the customers expect a further acceleration in the first half of next year.

But if you look at the back half again, we’re seeing retail customers be positive, but slightly, and we are also seeing the industrial on average being also slightly positive. You see the ISM having been in the mid-50s so far year to date, and we’re seeing that materialize in higher tonnage in the industrial sector. But if you think about the outperformance, I mean obviously this last quarter we grew shipment count, call it by 6%, and tonnage by 5%, which is a meaningful acceleration. And we expect, as Ali mentioned earlier on, to further accelerate that in the fourth quarter. A lot of that is driven by those market share gains that we are seeing in those very accretive segments. For us, growing with a small to medium-sized customer, we’re seeing a lot of success there, and also growing premium services, as well as some of the new verticals we’ve been targeting, whether it’s health care or grocery consolidation.

We’re also seeing meaningful growth in some of these new segments of business where we were underrepresented in the past, and we continue to gain market share in those. But if I had to estimate it, I would say 1/3 market, 2/3 us is how I would think about the volume or market share gains here for us.

Jason Seidl (Analyst at TD Cowen)

Well, Mario, that’s great color. When you look at some of your, whether it be other premium services or healthcare and grocery, where do you guys think you have the most opportunity from here on out in terms of growing your footprint?

Mario Harik (Chief Executive Officer)

I think they are fairly well balanced overall if you think about it. Some of these are things that must arrive by dates, where if you think of a small consumer packaged goods company shipping into a big-box retailer or a small manufacturer shipping into a large manufacturing plant, where they want the product to actually be there within a certain time or date window. Today we have a low to mid single-digit market share in that segment of business, and our overall market share in LTL is, call it, 10%.

So there’s a lot of room for us to get just our existing market share size. But given our service product, we see even the opportunity be higher there. When you look at grocery, when we started the year we were at, call it, 1% market share. By year-end we will be up to, call it, 3% to 4% market share of that segment of business. But that’s a billion-dollar market that we are still in the early innings of penetrating as well. So a lot of these, the way we think about them, almost every one of those categories has a bigger runway ahead of us, and we’re going to keep on capitalizing on it. And as we deliver great service for the customer and take care of their need and show them all the love that we can, that’s kind of what it’s all about to be able to grow in those segments of business.

Kerry (Operator)

Our next question comes from Risha Harnain with Deutsche Bank.

Risha Harnain (Analyst at Deutsche Bank)

Hi, good morning. Thank you. So my question is on the TL spillover mix that you’re adding. Very helpful to hear how that may be negatively impacted the headline pricing metrics. But Ali, you also mentioned that you are in the process of repricing that business and it doesn’t neatly fit into your network right now. Is there an OR headwind from all that too that is embedded in your results that can improve over time as you more efficiently kind of build it in?

And then a bigger-picture one, I guess for Mario. The Mastio survey this year, clearly you guys made some great progress. You had the best improvement in overall perceptions across various attributes, but in absolute terms you still ranked more middle of the pack. And just what do you think needs to be done to move higher? What’s next for enhancing your service offering? You’ve already done so much, and how do you expect that to show up in financials?

Mario Harik (Chief Executive Officer)

First, I’ll start on the truckload business that Ali mentioned earlier on. Some of the truckload-like business doesn’t always operate well in the LTL network, but it all depends on pricing. Some of it operates at a good margin and we want that business, and some of it doesn’t operate at a good margin and we typically don’t want that business. But usually whenever you have a heavy shipment that effectively is taking a big portion of a given linehaul schedule run, you really want to have a very high revenue per bill on that particular shipment to make sure you are offsetting your cost basis associated with that.

And this is where, again, we repriced some of that business that didn’t make any sense for us, and we’re always going to keep on focusing on that. I don’t think that’s something we do in one quarter. That’s something we do every quarter. Whenever we see business, whether it’s light or heavy or long haul or short haul, that doesn’t operate at the desirable margin, we’re going to take the proper pricing actions on it to make sure that we get it where we need to on the performance side.

And keep in mind, this is a cost-inflationary business. We ultimately have to make sure that we are getting paid fairly for the great service that we are offering our customers. On the Mastio front, we’ve obviously made a tremendous amount of progress on service. Our damage claims ratio here this last quarter was sub 0.2%. It’s one of the best in the industry. We made significant progress on our on-time performance over the last four to five years, and we’re seeing improvements in every single KPI that touches the customer. We also this year, since you appointed Matthew, we did receive the last-year quality award as well, which is something we’re proud of and the team is proud of, and they are ranking us as, I believe, being the second-best national LTL carrier when it comes to performance.

But over time we also do our own surveys with customers, and we do that on a weekly basis, and overall we are ranking at company records every single week and every single month that we are driving those surveys as well. So high level, I think the trajectory on service is very good, and we’re going to continue on improving it over time, and we’re not going to settle through number one on service. That’s the goal here. The goal is that when a customer ships with us, they know we’re going to take care of them.

Every interaction—whether how they interact with our employees, whether how we move the freight, whether how we deliver damage-free—that’s the goal here. And it’s going to take us—we’re not going to get there overnight—but over the years to come our goal is to become number one in service.

Kerry (Operator)

Thanks. Our next question will come from Tom Wadewitz with UBS.

Tom Wadewitz (Analyst at UBS)

Yeah, good morning. So I think I also want to acknowledge the good results in Mastio. I know there’s a bit of a time lag in that, but I’m sure you’re pretty excited to see that really nice progress. I guess one question on that: does that—like I’m sure customers see that, pay attention—does that give you kind of any more, I guess, firepower to ask for increases, or it’s like they see what they see and the external surveys don’t necessarily kind of give you more juice with asking for the rate increases?

And then I guess just on capacity. So volume growth is great—great to have more shipments—and so that seems to be going really well. But then you also need more capacity. So pretty clear you’re fine on doors. I know you bought a lot of trailers over the last couple years and new tractors, but just what about drivers and kind of how much flex up and how much growth you can handle, or do you just need to kind of ramp employees up more than the, call it, whatever 2%, 3% that Ali talked about in employee growth in 3Q?

Thank you.

Mario Harik (Chief Executive Officer)

Thanks, Tom. If you think about service quality improvements, we don’t think about them as being like a switch where you improve service quality over a number of years and you just flip a switch and you get 10% higher prices. The way we think about it is through two components. As I mentioned earlier on, today we have a double-digit—call it in that low- to mid-teen—opportunity of improving our pricing through a combination of core pricing improving as well as mix improving.

But even the mix improvements require high-quality service. As I mentioned earlier on, when you look at premium services or you look at small to medium-sized customers, these are very hard to grow if your service quality is not in a very, very strong trajectory. And this is kind of how we think about it over the long term. But if you look at that double-digit opportunity, more than half of it is driven by our ability to keep on improving service and being able to get the slightly above-market price improvement. And roughly around, call it, 40% of it is driven by our ability to improve mix in both premium services and small to medium-sized customers growing with that. So we already are seeing the impact because, if you look over the last three to four years, we have been improving our yield above market, meaningfully above market, a couple hundred basis points, two to three hundred basis points above market per year. And that’s driven by a combination of these two dynamics of being able to get a slight premium on a year-after-year basis given the service product and then being able to improve the mix dynamic associated with that.

Now when you look at overall capacity, the way we think about it, there are three forms of capacity. One is what happens with your network, with your doors, where you accept capacity there. Two is on rolling stock and three is on drivers. The first—effectively we feel good on all of them. But effectively, when you think about the first one, which is the door side, that requires the longest lead time to be able to add it. And over the last four years we’ve added effectively 15% more doors to our network.

We have over 30% excess door capacity and we’re feeling great about overall where our network is in terms of both the end-of-line markets as well as the core pipes in the network, making sure they are properly sized and they can handle a meaningfully higher amount of freight as we move for our customer. The second area is around rolling stock. Similarly, we have expanded our trailer fleet by more than 30% and our tractor fleet by more than 20% over the years. Over the last four years, that did come at a higher depreciation expense on the P&L. But even with that, obviously we’re dramatically improving our operating margins.

And the third component is on our drivers and kind of what’s happening on labor capacity, and we feel great there as well. If you look at our headcount over the long term, it’s been flat over the last few years as we’ve managed costs for productivity and labor hours in a softer volume environment through the freight recession. And also, our employee turnover—it’s the best it’s ever been. Our employee satisfaction is the highest it’s ever been, and that effectively means you have to hire fewer people to backfill your churn before you hire for growth.

And with the existing workforce we have, we can handle, call it in the ballpark of low to mid-single-digit more shipments with the existing people that we have with our workforce. And of course, we’re going to be proactive as volume progresses from here. We’re always going to add our headcount where we need it. But we feel right now.

Kerry (Operator)

We’ll go next to Bruce Chan with Stifel.

Bruce Chan (Analyst at Stifel)

Hey, thanks and good morning, gents. Mario, you talked about the P&D routing tools now being deployed at two-thirds of your facilities. Maybe you can just give us an update on where you stand as far as those optimization initiatives. Kind of the state of the union. When do you expect full deployment of the rest of that P&D routing opportunity? And are there any other big efficiency initiatives that you have rolling out right now?

Mario Harik (Chief Executive Officer)

Well, if you look at the overall proprietary tech and the AI initiatives we are driving, there’s a lot of opportunity ahead of us. I mean, we look at this as being in the early innings of us deploying these technology solutions. But if I break it down first on the efficiency side, on the cost side, the biggest category for us is around linehaul first and how we improve linehaul here. This last quarter we rolled out an enhanced AI model that enables us to plan our dock doors—so how we organize what trailer goes on a given door or another—and as a result we are able to effectively run fewer empty miles. And we have also reduced our rehandles by mid-single digits, and that’s the lowest level in over a decade.

Now if you think about that technology, obviously one, we’re going to have an impact or a benefit heading into next year for the wraparound effect. But we also are continuing to improve how we route the freight within our network to improve that $1.6 billion of cost category in linehaul. On the P&D side, which is the one that you mentioned, our new AI algorithms for route optimization are now rolled out to two-thirds of the routes. We do expect to get the network fully rolled out by early next year. Now that technology, like any AI solution, effectively learns over time, so it’s only going to get better. Currently, the improvement we are seeing out of it in those routes is in that low to low-to-mid single-digit improvement. But also, we’re seeing as the AI matures in given sites, that number is going up to a dramatically higher number as well.

So we believe over the quarters to come, as we continue to tweak the technology and as the models continue to learn from existing data, that will only improve over time as well. And then finally on the dock side, we did launch—updated here this last quarter—an AI model for how we do forecasting for volume to match the labor that we have in our locations to the volume that we are seeing, inclusive of the forecast associated with that. And if you look here this last quarter, effectively our headcount was up low single digits, rather than our shipment count being up 6% in the network. But that’s effectively on the operating side.

On the top line side, our AI algorithms for pricing are something we’re really excited for for next year. And then similarly, we launched new AI capabilities for our sellers, and you’re seeing that in some of the performance and the growth