XPO (XPO) Q3 2026 Earnings Call Transcript
XPO (XPO) Q3 2026 Earnings Call Transcript
Motley Fool Transcribing, The Motley FoolThu, October 29, 2026 at 5:58 PM UTC
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Thursday, Oct. 29, 2026
CALL PARTICIPANTS -
Chairman and Chief Executive Officer - Mario A. Harik
Chief Financial Officer - Kyle Wismans
Chief Strategy Officer - Ali-Ahmad Faghri
TAKEAWAYS -
Revenue -- $2.37 billion, representing a 12.4% increase year over year driven by growth in both the North American LTL and European Transportation segments.
Adjusted EBITDA -- $433 million, a 26.6% increase compared to the prior year, reflecting yield growth and operational efficiencies.
Adjusted Diluted EPS -- $1.70, up 58.9% year over year, showing significant bottom-line leverage.
North American LTL Revenue -- $1.47 billion, growing 17.4% year over year due to higher volume and improved yield.
LTL Adjusted Operating Income -- $293 million, representing 35.0% growth and the highest level in company history.
LTL Adjusted Operating Ratio -- 80.1%, an improvement of 260 basis points year over year, significantly outperforming normal seasonality.
LTL Yield (Excluding Fuel) -- 3.6% increase, reflecting sequential core pricing strength and contract renewal acceleration.
LTL Shipments Per Day -- 5.8% increase, driven by market share gains in the local channel and premium service segments.
LTL Tonnage Per Day -- 5.0% increase, reflecting strong volume growth throughout the quarter.
European Transportation Revenue -- $900 million, a 5.0% increase year over year, or five consecutive quarters of growth on a constant currency basis.
European Transportation Adjusted EBITDA -- $48 million, increasing 26.3% year over year driven by cost efficiencies and improved contract pricing.
Free Cash Flow -- $291 million generated in the third quarter, part of an expectation to double full-year free cash flow compared to 2025.
Common Stock Repurchases -- $150 million completed in the quarter as part of the company's capital return strategy.
Debt Repayments -- $100 million repaid in the third quarter and $75 million in October, totaling $275 million in year-to-date paydowns.
Net Leverage Ratio -- 1.9 times trailing 12-month EBITDA, an improvement from 2.1 times in the second quarter.
Total Liquidity -- $860 million at quarter end, including $260 million of cash and cash equivalents.
October LTL Volume Guidance -- Shipments per day estimated to increase in the mid-7% range and tonnage per day in the mid-6% range year over year.
October LTL Pricing Guidance -- Yield excluding fuel tracking up 5% and revenue per shipment up 4% year over year.
LTL Damage Claims Ratio -- below 0.2%, supported by a 20% reduction in damages during the quarter due to AI loading feedback tools.
Outsourced Linehaul Miles -- 5.6%, reaching the lowest level in company history as a result of successful linehaul insourcing.
LTL Headcount -- low-single-digit increase, significantly trailing the 6% growth in shipment count due to AI-driven labor planning.
LTL Weight Per Shipment -- 1,293 pounds, a 0.7% decrease reflecting mixed impacts from truckload-to-LTL conversion.
Full-Year LTL Operating Ratio Guidance -- expected improvement of 250 basis points or better for 2026.
New Local Channel Customers -- 30% increase in onboarding versus last year, focusing on higher-margin small to medium-sized accounts.
Net Capital Expenditures -- $123 million, supporting fleet modernization and the opening of two new locations in Phoenix and Kansas City.
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RISKS -
Faghri noted that length of haul was "worse than normal seasonality relative to the second quarter" during the period, impacting headline pricing metrics.
Harik stated, "some of the truckload like business does not always operate well in an LTL network," regarding heavy shipments that require specific pricing to offset the cost basis.
XPO, Inc. (NYSE:XPO) reported significant year-over-year growth in the third quarter, driven by yield expansion and volume gains in its North American LTL segment. Management attributed the outperformance to a strategy focused on service quality, network capacity investments, and the implementation of proprietary technology across operations. The company reported record adjusted operating income in its LTL segment and improved its adjusted operating ratio by 260 basis points, surpassing typical seasonal trends. Capital allocation remains focused on deleveraging and share repurchases, with the company paying down $275 million in debt year to date and accelerating free cash flow generation. The company is also utilizing artificial intelligence to optimize linehaul routing and dock productivity, contributing to a company-record damage claims ratio.
Harik stated that the company's service record "positions us to earn more of this freight and further improve our mix," specifically targeting high-value and time-sensitive shipments.
Management identified a "low- to mid-teens opportunity" for pricing catch-up with its best-in-class peer over the long term through service and mix improvements.
AI-driven route optimization is now deployed on nearly two-thirds of pickup and delivery routes, with full network rollout expected by early next year.
The company maintains over 30% excess door capacity to support future volume growth without requiring immediate large-scale facility investments.
Harik indicated that a sale of the European transportation business remains a "strategic priority" for the company over the long term.
LTL volume momentum continued into October, with tonnage and shipments trending above seasonal norms.
INDUSTRY GLOSSARY -
LTL: Less-Than-Truckload shipping, where multiple shippers' freight is consolidated onto a single trailer.
Operating Ratio: A measure of efficiency calculated by dividing operating expenses by revenue; a lower ratio indicates higher profitability.
Yield (Ex-Fuel): Revenue per hundredweight excluding fuel surcharges, used as a primary measure of pricing discipline.
Basis Points: A unit of measure for percentages where 100 basis points equals 1 percentage point.
Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, adjusted for one-time or non-core items.
Linehaul: The movement of freight between two major cities or service centers.
P and D: Pickup and delivery; the local operations that collect freight from shippers and deliver it to final consignees.
GRI: General Rate Increase, a standard annual price adjustment applied to non-contractual business.
Tonnage: The total weight of freight transported, a key measure of volume.
Purchased Transportation: The cost of hiring third-party carriers to move freight when internal capacity is not used.
Full Conference Call Transcript
Operator: Welcome to the XPO Q3 26 Earnings Conference Call and Webcast. My name is Carrie, 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 1 on your telephone keypad. Please limit yourself to 1 question when you come up in the queue. If you have additional questions, you are welcome to get back in queue, and we will 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 security laws. Which by their nature involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of 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 are made on this call are made only as of today, and the company has no obligation to update any of these forward looking statements except to the extent required by law. During 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 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 A. Harik. Mr. Harik, you may begin.
Mario A. Harik: Good morning, everyone. Thank you for joining us. I am here with Kyle Wismans, our chief financial officer, and Ali-Ahmad 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 When executing a powerful strategy focused on service, investments in capacity, pricing, and cost efficiency. Each component reinforces the others and together, they are 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. Continuous improvement maintains our advantage. there is a strong connection between our network capacity and our ability to support customer relationships as they grow.
We are continuing to expand our presence in high growth freight markets most recently in Phoenix and Kansas City, where we opened 2 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 have 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 are achieving a better balance of network density, utilizing more direct routes, and reducing unnecessary freight handling. And importantly, these investments lowered 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 true in our sales pipeline as well as with existing accounts. When customers see how consistently we deliver, we have an opportunity to serve more locations handle more of their freight. Local accounts and premium services remain important drivers of improving 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 are 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 are moving more freight at lower cost, and with improved service, In linehaul, that means improving how we route freight, and utilize trailer capacity. We are also running the network with fewer empty miles and freight rehandles. Since we rolled out a planning model that leverages AI, we have reduced rehandles by mid single digits to the lowest level in over a decade.
In our pickup and delivery operations, our proprietary AI based route optimization tools, are now being used on nearly 2/3 of routes, This step 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 are also using AI to give our dock workers real time feedback on their failure 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 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 are building a business that can grow profitably and we expect to achieve an annual LTM operating ratio in the low seventies 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 and earnings per share and enhancing shareholder value. Now I will turn the call over to Kyle for the financial results.
Kyle Wismans: Thank you, Mario, and good morning, everyone. I will 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 cost in LTL, continue to drive efficiencies across our operations, helping to mitigate the impact of higher freight volumes wage inflation, 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 EBITDA, compared with 2.1 times in the second quarter. We continue to drive meaningful growth in free cash flow, through strong earnings performance and moderate capital expenditures. We are on track to more than double our free cash flow this year compared with 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 will hand it over to Ali-Ahmad Faghri to walk through our operating results.
Ali-Ahmad Faghri: Thank you, Kyle. I will 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, 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 August, and 5.4% in September.
On a 2 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 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. Yields, 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, 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 2 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 our ability to translate profitable volume growth and pricing gains 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 eleventh 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, 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 would like to close with a few thoughts on the momentum reflected in our results. Particularly the gains we are making with mix and volume growth our favorable pricing trends, and significant margin expansion. We are 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, 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 will take your questions. Operator, please open the line for Q&A.
Operator: Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1. You may press 2 if you would like to remove your question from the queue. If you have additional questions, you are welcome to get back in the queue and we will take as many as we can. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * keys. And our first question will come from Ken Hoexter with Bank of America.
Ken Hoexter: Great. Good morning. Mario and team, great job on outperforming seasonality and strong margin gains. Just want to dig into the yield discussion, right, given a lot of debate on the underlying market and since that is a big focus on your ability to drive some of the outsized margin gains, it looks like revenue per hundredweight decelerated to about 3.5%, 3.6%. Maybe just talk about the environment there. Ali-Ahmad, it sounds like you are talking about maybe some acceleration coming.
And I guess maybe if you want to break that down, I know you have you have talked about you know, whether it is SMBs or different types of focus to get you the additional points, where do we get that gains from here. Thanks.
Mario A. Harik: Thanks, Ken. This is Mario. We delivered another quarter of solid pricing where we improved both yield and revenue per shipment ex fuel sequentially. But we also accelerated our revenue per shipment on a year-over-year basis here in the third quarter relative to Q2. Now 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 60 basis points, which accelerated significantly on a on a 2 year stack and outperformed seasonality by more than 200 basis points. Now in the quarter itself, there were some mixed factors that impact. Impacted us from a yield standpoint.
If you look on the year-over-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-Ahmad mentioned earlier, here in October, our yield growth ex fuel is tracking up 5% and revenue per shipment is up 4% as we are seeing our length of haul normalize this month, and we expect that for the rest of the quarter.
Generally, if zoom out just for Q4 as a whole, we do expect both yields and revenue per shipment ex fuel to increase both sequentially and accelerate on a year-over-year basis as well.
Ken Hoexter: Great. And just a follow-up on the that seasonality in margins, right? Ali-Ahmad, I think you have always talked about maybe a 200 basis point deterioration in 4Q. I do not 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 2027?
Mario A. Harik: Sure. 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 is a very strong outcome overall. It does imply another quarter of significant year over year margin improvement, and 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 at the high level, if you look at where we are 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 is 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 are looking at the at the trend as we exit the year is looking solid. We expect that to continue through 2027 and beyond. Then the last component on cost efficiency with our AI initiatives.
So all of these are in the early innings of delivering value for us in terms of efficiency, and we are 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 will we will give a bit more color on that once we report the fourth quarter.
Operator: And our next question will come from Chris Wetherbee with Wells Fargo.
Chris Wetherbee: Yes. Hey, thanks guys. 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 there. Do you think about sort of the 3.6% relative to any mix that was going on? I know per shipment was maybe a little bit higher than what 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, say, local accounts or other end markets that you were serving that impacted that? Because obviously, it is a nice acceleration.
Just want to make sure we understand what is going on between 3Q and 4Q on the yield side.
Ali-Ahmad Faghri: So, Chris, this is Ali-Ahmad. I think the primary mix factor to call out in the third quarter was length of haul, which was down a few points on a year over year basis. And 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 and it comes with a shorter length of haul. For us specifically, we did reprice a lot of that truckload like business. It does not always operate well in an LTL network.
As you know, we are always focused on what has 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 have now cycled into October, we are seeing that mixed 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 is what is 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 Wetherbee: Okay. Super helpful. And then just quick follow-up on the tonnage side. I guess, do we assume the sort of mid-6s that you are seeing in October as, like, a mid single digits the way that you underpin the fourth quarter OR guide? Just want to get a sense of how you are thinking about some of the underlying dynamics within that OR guide?
Ali-Ahmad Faghri: 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 2 year stack basis relative to September 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 would also point out that September was also better than seasonality for us as well.
For the fourth quarter as a whole, if you just move forward the above seasonal trends we have 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 and a percent growth on a year over year basis. And that does factor in easier comps that we have in both November and December.
Operator: We will go next. To Jordan Alliger with Goldman Sachs.
Jordan Alliger: Yes. Good morning. Just sort of curious you have brought up or mentioned purchased transport 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 is 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 A. Harik: Yeah. Well, Jordan, if you look at it, this has been a fantastic strategic plan for us over the last few years because 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 4 years reducing that exposure on third party carriers. But first, I am talking numbers. So when we started our plan, our outsourcing miles were about 25% Here, this last quarter, we were in that mid single digit range. We are at 5.6% of miles being outsourced, and that is 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 with 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 still use a small residual amount. But, generally, we find that when we book the freight ourselves with our own drivers and 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 it is actually your employees who are moving that freight. So we expect that number.
Now as truckload rates go up, the breakeven point effectively keeps on coming-- keeps on coming down. So, effectively, we can-- or we can lower our overall miles even further. But currently, we feel good about where we are at the mid single digits, but we do not see any 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 you think about in an upcycle, where both truckload rates go up and LTL rates go up, we are gonna have a much lower headwind on our p and l from the rising impact of truckload rates, which leads to higher incremental margins in an upcycle and being able to have a higher flow through of our yield and volume increases. To the bottom line versus if you had if you had a higher exposure. Got it. Thank you very much.
Operator: Moving on to Stephanie Moore with Jefferies.
Stephanie Moore: Great. Good morning. Thank you for the question. look. I do not I wanted to maybe touch on the free cash flow opportunity and others. I think 2026 is framing to be a pretty healthy free cash flow year. So any way you could give the magnitude of just the free cash flow generation over the medium term And as we think about your priorities of cash, 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 is 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 A. Harik: Yes. Thanks, Stephanie. I will start first on the European side, and I will turn it over to Kyle for the cash flow. But overall, on European sale, we our intention and our goal is over the long term to be a pure-play North American LTL carrier that has not changed, and selling that business is a strategic priority of ours. That said, we are 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 number 1-- Either number 1, 2, or 3 in the segment of business we operate in, whether it is supply chain, whether it is the LTL, whether 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 US dollars 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-over-year basis in that business.
And that is driven by the 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 U.S. And the third component is investing in sales. We have added more than 40% more salespeople in Europe, we are expanding at 4 new verticals with aerospace, luxury goods, health care, So a lot of the similar plan we executed here. The team in Europe is doing a phenomenal job in driving that. And higher earnings and better results over time would lead to us eventually selling that business for the right price.
And I will turn it over to Kyle to talk about the cash and the cash front.
Kyle Wismans: Hey, Stephanie. So from a cash standpoint, we expect to at least double our free cash flow here in 2026. That would put us, you know, probably near $800 million for the year. And that is far ahead of our initial expectations for the year driven by really 2 primary factors. Obviously, we are seeing higher income higher flow throughs Mario's talking about. We are 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 are expecting to generate billions of free cash flow in the coming years.
Now as far as what we are gonna do with that, you know, we will use our excess cash to both buy back shares and pay down debt. Already this year, we have we have repurchased 250 million of our shares actually accelerated those during the third quarter when the stock pulled back. Really reflects the confidence we have at the long term value of our shares. We have 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 we are gonna use that to generate the highest return for our shareholders.
Operator: Our next question will come from Scott Group with Wolfe Research.
Scott Group: Hey, thanks. Good morning. Can you just talk about the timing of your timing and magnitude of your GRI this year. I do not know if there is a timing change that helps October or Ali-Ahmad, do you think that 5% yield ex fuel for October, that is a good run rate for the full quarter. And then maybe just if you can talk about you know, net impact you saw from. For fuel in Q3 and sort of what you are embedding in the assumptions for Q4.
Kyle Wismans: So, consistent with other carriers, we did take our GRI recently. Similar magnitude to last year. it is important to note that impacts the mid, call it, 20s percent of our book. For us, the contract renewals have a much larger impact on our overall yield. Where that impact is really the local channel, we have obviously been growing that a lot over the last couple of years. But we still see a long runway for growth. And the GRI is 1 way we can align pricing in that channel to the world-class service we provide. I will pass it over to Ali-Ahmad.
Ali-Ahmad Faghri: And, Scott, in terms of the pricing outlook for Q4, I mean, we do expect our yield ex fuel to accelerate on a year over year basis versus the third quarter, also improved sequentially on a quarter over quarter 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 are 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 have seen our fuel surcharge revenue go up along with it, but, obviously, we have seen our cost procure that fuel also go up, and there are many different impacts from fuel across the. Across our p and l, including many line items, not just the fuel operating expenses and supplies and an inflationary impact as well. So some examples, Scott, include purchase transportation costs, maintenance cost, 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. Thank you, guys. Appreciate it.
Operator: Moving on to David Vernon with Bernstein.
David Vernon: Hey, good morning, guys. Thanks for taking the question. So Mario or Ali-Ahmad Faghri, I guess, sometimes in conversations with investors, I get the feeling that share gains are almost always thought of as coming at the expensive price. You guys are growing shipments about 6%, while Old Dominion is down 2%. Your yields are slowing maybe to 3.6%. Could you compare the freight you are winning with the existing book on yield, cost to serve and margin? And any color on where it is coming from sort of local national accounts, 3PLs or carriers that have lost service or capacity would be helpful.
Just trying to trying to differentiate between kind of the growth at the margin versus the improvements in the existing base?
Mario A. Harik: Well, David, we do not believe that price and volume are mutually exclusive, and the Q3 for us is a great example of that. We are driving strong growth on both metrics, and we expect both price and volume to accelerate, even in the fourth quarter. So If you look at the combined ex fuel numbers, 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 a. As an NPL carrier. Now going back to your question of where do we see that?
Because mix does impact overall what you are 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. Service is essential. If you do not have a good service product, customers will not wanna do business with you. And similarly, we are also growing it with premium services. This is where the customer would effectively wants to have your shipment-- moving shipment from point a to point b. But then you would provide them this incremental service for them as well.
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And we are seeing dramatic growth in that in that part of the business as well. I mean, just to give you a data point, and I mentioned this 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, this tells you the momentum we are seeing in that channel where effectively it has a better operating margin, and it is a great relationship that we have with the customers.
Now if you zoom out and you look at our opportunities, we have we have a double-digit in the low- to mid-teens opportunity terms of catching up on pricing with our best in class peer. And over the years to come through a combination of slightly higher pricing than market driven by service, and those mixed dynamic with premium and local accounts would enable us to grow yield over the years to come as we continue to gain market share in those high. Highly profitable segments of business that we have to continue to grow.
David Vernon: So as you are 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 like, where that SMB freight would normally have been serviced?
Mario A. Harik: No. It would have been serviced by other carriers who were gaining market share from other carriers. Typically, for that channel, they work carrier direct where they typically work with 1 carrier only. You can imagine if you are a small manufacturer, in Ohio, you are gonna. you have 5 shipments a week going all over the country. You are gonna use 1 LTL carrier to move that freight for you. Typically, a national carrier because you wanna be able to hit all the markets with your customers. Could be buying the product from.
So the market share gains that we are seeing all 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 this. So some of these carriers have not invested as much capacity as we have as an example, but we are gaining more share again from the different carrier base based on us growing in that segment of the business.
Operator: And our next question will come from Jonathan Chappell with Evercore ISI.
Jonathan Chappell: Thank you. Good morning. Ali-Ahmad lost in this OR improvement, run that you have had the last few quarters, the cost inflation, in salaries, wages, and benefits has been pretty elevated. I know you are 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 kinda leaps to double digit growth? And any kinda normalization of that cost inflation going forward?
Ali-Ahmad Faghri: So, John, this is Ali-Ahmad. So we did manage variable labor cost very effectively in the third quarter, and that is largely to leverage our AI driven proprietary labor planning tool that are allowing us to manage labor a real time basis. I point out that, for example, here in the third quarter, our ship count was up 6% on a year over year basis. Relative to our headcount, which was only up in that low single range. So our ability to drive that gap really speaks to the productivity we are 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.
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 4 points of about wages and benefits cost inflation. Then there was about 3 points of growth in salary, wage, 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 guide for us as you are thinking about wage inflation. Into, into 2027.
Jonathan Chappell: Is there any way to judge the magnitude at this point of what kind of good guy that would be in 2027 as a shifts to a tail end?
Ali-Ahmad Faghri: So from an OR standpoint, it is 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 points or better a full year margin improvement while absorbing north of a 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.
Operator: And we will go next to Jason Seidl with TD Cowen.
Jason Seidl: 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 may be improving and how much of it is just market share gains, you know, from the job you guys have done on service, whether it be in the SMBs or maybe some of your other service, premium service offering gains.
Mario A. Harik: Well, Jason, we estimate it to be roughly around 1 third market and 2 thirds us in terms of growth. First, starting on the demand out what we are seeing here in the in the back half of the year is continued positivity and year on year positive demand from the from the customers. As you know, we do a quarterly survey, and we also are hearing that our customers where they further expect acceleration about half the customers expect a further acceleration in the mid-single digits. About 56%, polish by 5%, which is a meaningful acceleration. And we expect, as Ali-Ahmad mentioned earlier on, to further accelerate that in the 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, again, the small, medium sized customer. We are seeing a lot of success there and also growing premium services. As well as some of the new verticals we have been targeting, whether it is health care or grocery consolidation. We are also seeing meaningful growth in some of these new segments of business where we were underrepresented 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: Well, Mario, that. that is great color. When you look at some of your. Whether it is be other premium services or sort of health care and grocery, where do you guys think you have the most opportunity from here on out in terms of, you know, growing your footprint?
Mario A. Harik: I think they are fairly well balanced overall. I mean, if you think about it, some of these are things that must arrive by date, where if you think of a small consumer tech good company shipping into a big box retailer or a small manufacturer shipping into a large manufacturing plant. They want the product to actually be there within a certain time or date window. Then we have a low to mid single digit market share in that segment of business, and our overall market share in LTL is, you know, call it 10%.
So there is a lot of room for us to get just to our existing market share size But given our service product, we see even the opportunity to be higher there in that example. When you look at grocery, when we started the year, we would have call it 1% market share. We are up by year end. We would be up to, call it, 3 to 4% market share of that segment of business. But let's say, billion dollar market we are still in the early innings of penetrating as well. So a lot of these.
The way we think about them, almost every 1 of those categories has a big runway ahead of us, and we are gonna keep on capitalizing on it. And as we deliver great service for the customer and take care of their needs and show them all the love that we can, that is kinda what it is all about to be able to grow in those segments of business.
Operator: And our next question comes from Richa Talwar with Deutsche Bank.
Richa Harnain: Hi. Good morning. Thank you. So my question is on the TL flip spillover mix that you are 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 does not neatly fit into your network right now. There an OR headwind from all of that too that is embedded in your results that is can improve over time as you more efficiently kind of build it in. And then you know, bigger picture 1, I guess, for Mario, the mass geo survey this year, clearly, you guys made some great progress.
You had best improvement in overall, you know, perceptions across various attributes. But in absolute terms, you still rank more middle of the pack. And just what do you think needs to be done to move higher? what is next enhancing your service offering? You have already done so much. And how do you expect that to show up in financials?
Mario A. Harik: Michelle, first, I will start on the truckload business that Ali-Ahmad Faghri mentioned earlier on. So some of the truckload like business does not always operate well in the LTE and network. But it all depends on pricing. I mean, some of it operate at a good margin, and we want that business, and some of it does not operate at a good margin. And we typically do not 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 wanna have a very high revenue per bill on that particular shipment to make sure you are off offsetting your cost basis associated with that.
And this is where, again, we resize some of that business that did not make any sense for us, and we always gonna keep on focusing that. I do not think that is something we do in quarter. that is something we do every quarter whenever we see business, whether it is light or heavy or long haul or short haul, it does not operate at a desirable margin. We are gonna take the proper pricing actions on it to make sure that it get. We get it where we where we need to on the on the side. And keep in mind, this is a cost inflationary business. We ultimately.
You gotta make sure we are getting paid fairly the great service that we are offering our customers. On the on the mass CEO front, we have obviously made a tremendous amount of progress on service. And our damage claims ratio here this past quarter was sub 0.2%. it is 1 of the best in the industry. We made significant progress on our on time performance over the last 4 to 5 years, and we are seeing improvements in every single KPI that touches the customer. We also did see here since you appointed Matt. Last year, we did receive the last year quality award as well, which is something we are proud of and the team is proud of.
And they are ranking us as, I believe, being the second national LTL carrier when it comes to performance. 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, those, as well. So high level, I think the trajectory on service very good, and we are gonna continue on improving it over time. And gonna settle the number 1 on service. that is the goal here.
The goal is that when it customer ships with us, they know we are gonna take care of them every interaction, whether they interact with our employees, whether how we move the freight, whether how we deliver it damage free, the goal here. And it is gonna take us. We are not gonna get there overnight. And. But over the years to come, our goal is to become number 1 in service. Thanks.
Operator: Our next question will come from Tom Wadewitz with UBS.
Tom Wadewitz: Yes. Good morning. So I think, well, I also want to acknowledge the good results in Massey. I know there is a bit of a time lag in that, but I am sure it is you are pretty excited to see that really nice progress. I guess 1 question on that, does that like I am sure customers see that pay attention Does that give you kinda any more I guess, firepower to ask for increases? Or it is like they see what they see and the external surveys do not necessarily you know, kinda give you more, more juice with asking for the rate increases.
And then I guess just on capacity, so volume growth is great. it is great to have more shipments, and so that is. Seems to going really well. But then you also need more capacity. So, you know, pretty clear you are fine on door I know you bought a lot of trailers over the last couple of years. And new tractors. But just what about, like, drivers and kind of how much flex up and how much growth you can handle? Or do you just need to, you know, kinda ramp employees up more than the, call it, whatever, 2, 3% that, Ali-Ahmad talked about in employee growth in, 3 q. Thank you.
Mario A. Harik: Thanks, Tom. If you think about service quality improvements, we do not think about them as being like, 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. We. The way we think about it with 2 components. As I mentioned earlier on, today, have a double-digit, call it, in that low to mid opportunity of improving our pricing through a combination of core pricing improving as well as mix improving. But even the mix improvement require high quality service.
As I mentioned earlier on, when you look at premium service, 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. This is kinda how we think about it over the long term. But if you look at the double digit opportunity, more than half of it is driven by, our ability to keep on improving service being able to get the slightly above market price improvement and roughly around, you know, 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 3 to 4 years, we have been improving our yield above market, meaningfully above market, couple 100 basis points to the 300 basis points above market per year. And that is driven by a combination of these 2 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 the mix dynamic associated with that. Now when you look at overall capacity, the way the way we think about it, there are 3 forms of capacity.
1 is what happens with your network, with your doors, where you access capacity there. 2 is on rolling stock, and 3 is on drivers. The first. In fact, we feel good on all of them, but effectively, when you think about the first 1, which is the door side, that requires the longest lead time to be able to add it. And over the last 40 years, we have added effectively 15% more doors to our network.
We have over 30% excess door capacity, and we are feeling great about overall where our network is, in terms of both the end of line markets as well as support pipes in the network, making sure they are properly sized and they can handle a meaningful. A higher amount of freight we move it to our customer. The second area is around rolling stock. Similarly, we have expanded our trailer fleet by more 30% and our tractor fleet by more than 20%, over the years, over the last 40 years, that did come at a higher depreciation on the p and l. But even with that, obviously, we are dramatically improving our operating margins.
And the third component is on our drivers and kind of what is happening on labor capacity, and we feel great, there as well. If you look at our headcount over the long term, it is been flat over the last few years as we manage cost through productivity and labor hours in a softer volume environment through the freight recession. Also, our employee turnover, it is the best it is ever been. Our employee said it is satisfaction is the highest it is ever been, and that effectively mean you have to hire less 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 are be proactive as volume environment progresses from here. We are always gonna you know, add our headcount where we need it. But we feel pretty much where we are right now.
Operator: We will go next to Bruce Chan with Stifel.
Bruce Chan: Hey. Thanks, and good morning, gents. Mario, you talked about the p and d routing tools now being deployed at 2 thirds of your facilities. Maybe you can just give us an update on you know, where you stand as far as those optimization initiatives you know, kind of the state of the union you know, when do you expect full deployment of the rest of that you know, PND routing opportunity and you know, are there any other big kind of efficiency initiatives that you have rolling out right now?
Mario A. Harik: Well, if you look at the overall proprietary data, I would pro. Tech and AI initiatives we are driving, that saves a lot of ahead of us. I mean, we look at this as being in the early innings, of us deploying these technology solutions. But if I 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 enables us to plan our dock doors, so how we organize what radar 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 is the lowest level of over a decade. If you think about that technology, obviously, 1, we are gonna have an impact or a benefit. Heading into next year for the for the wraparound effect, but we also are continuing to improve how we how we route the freight within our network to improve that $1.6 billion of cost category in blind call. On the P and D side, which is the 1 that you mentioned, our new AI algorithms for that optimization are now rolled out to 2 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 only gonna get better Currently, the improvements we are seeing out of it in those route is in called in that low to low to mid single digit improvement. But, also, we are 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, will only improve over time as well.
And then finally, on the dock side, we just launched a here this past quarter AI model for how we do forecasting for volume to match the labor that we have in our locations, the volume that we are seeing inclusive of the forecast associated with that. If you look here this past quarter, we effectively. Our head count was up low single digits rather than our shipment count being up 6% in the in the network. But that is effectively on the on the operating side. On the top line side, our UAI algorithm for pricing are something we are really excited for next year.
Then similarly, we launched new AI capabilities for our sellers, and you are seeing that in some of the performance and the growth of our small to medium sized customer growth along with a fantastic sales force driving those results. But when you give great people the right tools, we are obviously seeing a very strong momentum there on the on the results there as well.
Bruce Chan: Okay. that is super helpful. And, you know, just a quick follow-up. I know the, you know, math is complex, but is there a good way to think about how much of the above seasonal OR progression is tied to those proprietary tools?
Mario A. Harik: Well, high level, if you if you look at the long term, our expectation is to improve our productivity by 1-2 points per year. Is how we think about it over the years to come, over a longer runway. And it is not always linear. Some quarters, you see us do a meaningful number higher than that, some quarters in line with that. So depending on the on the quarters over time, you are gonna see it be that way. But the goal is a point and a half to 3 years of productivity of productivity improvement per year which would be.
Which would help us offset some of the cost inflation that we are seeing overall in wages or other cost categories.
Operator: We will go next to Brian Ossenbeck with JPMorgan.
Brian Ossenbeck: Hey, good morning. Thanks for the question. So maybe just come back to cost per shipment. Inflation ex fuel at a high level. You have got yields accelerating Mix is normalizing a little bit. You got the extra capacity you just mentioned, Mario. So it looks like that line item is running LTL maybe 3.5-4% the last couple years ex fuel. Is that sort of a good benchmark for the years ahead given all the complexities we just talked about in terms of headcount and productivity and whatnot. So any thoughts on that would be helpful.
And then just to clarify the truckload spillover, is that heavier weighted shipments just needing a home to, to essentially move at, you know, sort of last minute or when capacity is tight, or is this more of the consolidation, that we have seen before starting to unwind given that truckload rates are quite a bit higher. Thanks.
Kyle Wismans: Hey, Brenda. This is Kyle. I am gonna start with the, the cost per shipment So over the long term, cost per shipment we expect to be up in the low single digit range. And there is a few main drivers So obviously, of PNL is really driven by labor, so our core wage inflation is in that, call it, 4% rate. And we would expect benefits to be another 1-2 points on top of that. Now gonna offset with the cost and niches that we have in some of the AI initiatives that Mario just talked about. So that covers, you know, linehaul, p and d, doc.
Mean, a lot of that ongoing labor productivity is really gonna help us manage that cost impact. Now, obviously, when you think about margins, there is a there is a large impact from a rep per shipment basis. And we would expect that to track above our cost per shipment. Again, it is gonna be driven by our strong underlying pricings we already talked about as well as the way per shipment trends, which we are seeing here in this quarter. So that combination of really strong management of that inflationary pressure as well as strong pricing is gonna help us drive strong margin outlook. Here and beyond.
Mario A. Harik: And when you look at the at the truckload spillover, typically, in LTL, usually, as I mentioned earlier on, it is not about whether a shipment is heavier or lighter or it is all about the margin, what your pricing is for. But, generally, reason why we are seeing some of that conversion come back from truckload into NPL is predominantly because truckload rates are up. So, naturally, what you see in that environment is that when. Whenever, you know, over the last call so far this year, you have seen truckload rates go up meaningfully, and the conversion based on heavy LTLs that have gone from LTL to l t. To TL that is coming back to LTL effectively.
We do believe it is combination. Primarily, it is rate driven. The fact that truckload rates are higher, but we also hear from some customers where they are competing with tender rejections by truckload carriers they would wanna send that back to LTL for service reasons as well. But we do believe the primary reason is more rate driven, and then the secondary reason is capacity or tender rejection by truckload carriers. Okay. Thanks very much.
Operator: Moving on to Bascome Majors with Stephanie Inc.
Bascome Majors: If we look back over the last 3 or 4 years, you have driven a lot of profit out on a mix of yield outperformance and productivity in the network, but if we look back over this quarter and next, you know, volumes are starting to move up more than yield, which is obviously a great problem to have. Can we talk about the next 2 or 3 years? what do you think the biggest drivers of your growth will be between volume yield and margin? Do those look any different than what we have seen from you over the last 3 or 4 years?
And, you know, what financial metrics would you emphasize as investors to really track to see where we are in this stage of your growth cycle. Thank you.
Mario A. Harik: Thanks, Bas. Well, if you if you take a step back the core of our strategy is more yield driven than it is volume driven. However, if you think of an up cycle, if you look up at what happened through the freight recession over the last 3 to 4 years, you have an LTL environment, an industrial economy in this country that is down in the mid teens from an overall demand perspective. Subsequent PLTM volumes were down on a mid teen basis. But over that same period of time, you have capacity that left the market.
If you compare the industry today relative to pre COVID or right after COVID, you have about 10% fewer service centers, about 5% fewer doors. So as the markets. And we invested in a lot of capacity, And when you think about that market starting to inflect, you are gonna have a situation where you have certain carriers that would have the capacity like we do and others that will not have it. We are gonna be able to gain more market share over the years to come. However, if you think about overall the algorithm of how we think about it, pricing comes first, volume comes second.
And over the years to come, as I mentioned earlier, have a double-digit pricing opportunity for us to go capture through a combination of improving service product and being able to support our customers where they need us for growth and a combination of onboarding new customers in segments of business that are typically higher margin, typically much more service sensitive If we are seeing a lot of early inning success here, and we believe that is gonna continue, over the years to come. But that is how we think about it over time.
And, ultimately, if you think from an OR perspective, perspective, I mean, you look at this year, obviously, as Ali-Ahmad mentioned earlier on, another year improving OR north up to 50 basis points. And this is still in a market that we are not seeing a material improvement in the macro. If you roll that forward over time, our goal is to get our OR in the low seventies and beyond as we execute on the strategy driven again by pricing, supported through service, driven by gaining market share, and also by gaining, cost efficiencies along the way as well. it is a massive runway ahead for us as a system. Mario, thank you for that.
Bascome Majors: And, you know, Kyle, if you could put a period on that with, you know, what you think is the best financial metric to track to really see you delivering on the progress you wanna make over the next 2 or 3 years?
Kyle Wismans: It really comes down to OR. I mean, if you think about the way we look at the business, and fundamentally what we need to do, it is really driving OR improvement in the business. So if you look at this quarter, we improved OR 2 hundred and 2 hundred and 50 basis points year on year we did better than seasonality by 200 basis points. that is really what we are focused on. I mean, the fact that we are able to improve OR north of 250 basis points for the year, is a phenomenal number and represents all the efforts we have talked about so far on the call today.
Operator: And this now concludes our question and answer session. I would like to turn the floor back over to Chairman and CEO, Mario Harik, for closing comments.
Mario A. Harik: Thank you, Carrie, and thank you, everyone, for joining us today. As you saw from our results, we delivered another quarter of meaningful top and bottom line growth, accelerating from the prior quarter. Our strategy continues to build momentum here in the back half of 26, and is setting up 2027 to be another strong year of margin expansion and free cash flow growth. With that, I will let the operator to please end the call.
Operator: Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.
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