XPO Logistics, Inc. (XPO) Earnings

Management highlights

### Overall Financial & Strategic Performance - The company posted record Q2 results, with all-time highs for revenue, adjusted EBITDA, and adjusted diluted EPS; adjusted diluted EPS rose 56% year-over-year to $1.64 excluding real estate gains - Long-term strategy is focused on delivering profitable market share gains through superior customer service, network capacity investments, and proprietary technology to drive structural operating leverage and margin expansion ### LTL Operational Performance - Daily shipments increased 2.8% year-over-year, while daily tonnage grew 1% year-over-year; volume growth accelerated sequentially through the quarter: daily shipments rose 0.2% in April, 3.3% in May, and 5.1% in June, with July tracking above 6% year-over-year growth for both daily shipments and daily tonnage, all outperforming normal seasonal trends - The damage claims ratio fell below 0.2% for the second consecutive quarter, hitting an all-time company best, driven by operational excellence and technology investments - Contract renewal pricing accelerated during the quarter; ex-fuel yield increased 4.4% year-over-year, with sequential improvement, and ex-fuel revenue per shipment also grew both year-over-year and sequentially ### Technology Progress - Workforce planning technology improved productivity by nearly 2.5 percentage points year-over-year, exceeding the 1.5 percentage point quarterly target - Route optimization technology is now used for more than two-thirds of pickup and delivery operations, delivering measurable improvements including fewer miles driven and more stops per hour - An AI-powered trailer loading technology pilot delivered 40% higher load quality and 50% lower damages at pilot sites; full network rollout is scheduled for the second half of 2026 ### Capital & Balance Sheet - Net capital expenditures totaled $101 million in Q2; the company repaid $70 million in term debt and repurchased $70 million in common stock during the quarter - Net leverage improved to 2.1x trailing twelve months adjusted EBITDA, down from 2.3x at the end of Q1 2026; total liquidity at quarter end was approximately $898 million, with $298 million in cash on hand - An additional $100 million in term debt was repaid in early Q3, bringing year-to-date debt paydown to $200 million ### European Business Performance - The European business continues a transformation strategy mirroring the company's U.S. approach, including cost control, sales expansion, and entry into new high-value verticals such as luxury goods, aerospace, and healthcare; 9% year-over-year adjusted EBITDA growth is expected to accelerate to high-teens growth in the second half of 2026

Guidance

- Full-year 2026 free cash flow is now expected to more than double compared to 2025, up from the prior expectation of 50% year-over-year growth, driven by stronger earnings and moderating capital expenditures; the company targets generating billions of dollars in cumulative free cash flow over the coming years - Full-year 2026 adjusted operating ratio improvement is now expected to be at least 200 basis points, up from the prior initial target of 100-150 basis points - Q3 2026 adjusted operating ratio is expected to be below 81%, significantly outperforming the normal seasonal 200-250 basis point sequential increase from Q2 that would result in an OR above 82%, and implies another strong year-over-year margin improvement - Q3 2026 tonnage is expected to grow mid-single-digits year-over-year, representing a meaningful acceleration on a two-year stacked basis compared to Q2; ex-fuel yield and revenue per shipment are expected to increase sequentially in both Q3 and Q4, with ex-fuel revenue per shipment growth accelerating more than previously expected - Long-term, the company targets an annual LTL adjusted operating ratio in the low 70% or better, expected to be achieved over the next five+ years, driven by a double-digit cumulative pricing outperformance opportunity, with 2-3 percentage points of yield outperformance versus the market annually - European adjusted EBITDA growth is expected to accelerate to the high teens in the second half of 2026; Q2 2026 European restructuring costs will step down for the remainder of 2026

Segment performance

For Q2 2026, total company revenue grew 13% year-over-year to $2.4 billion. The LTL segment generated revenue of $1.4 billion (representing 58.3% of total company revenue), up 15% year-over-year. The LTL segment delivered $390 million in adjusted EBITDA, with a 27.3% adjusted EBITDA margin (310 basis points of year-over-year improvement); adjusted operating income grew 36% year-over-year to $287 million, and the adjusted operating ratio improved 300 basis points to a record 79.9%. The European transportation segment generated $48 million in adjusted EBITDA, up 9% year-over-year, and achieved record constant currency revenue (its 10th consecutive quarter of growth). The corporate segment reported an adjusted EBITDA loss of $4 million. Company-wide adjusted EBITDA was $434 million, which rose 25% year-over-year excluding $9 million in Q2 real estate gains. Free cash flow for the quarter was $207 million.

Risks & headwinds

- Forward-looking results are inherently uncertain, and actual outcomes may differ materially from projections due to general economic conditions, freight demand volatility, and industry competitive dynamics, as outlined in the company's SEC filings - Inflationary pressure, particularly for wages and employee benefits (the company's largest expense category), could increase operating costs if productivity gains do not fully offset higher labor expenses - The driver hiring market has tightened, driven by increased hiring from truckload carriers, which could create headwinds for scaling labor to meet accelerating demand - Fuel price volatility could impact operating results, though the company has hedged and structured its business to mitigate this exposure - A slower-than-expected economic or industrial recovery could limit volume and pricing growth momentum - The European economic environment remains sluggish, which could impact the timing and valuation of a potential sale of the European business

Analyst Q&A

• Q: Management was asked to frame the expense reduction opportunity from the new AI loading technology, and to clarify the third quarter operating ratio outlook. /

  A: Management confirmed Q3 adjusted operating ratio is expected to be below 81%, significantly outperforming normal seasonal trends and putting the company on track to exceed full year margin targets. The AI trailer loading technology, which achieved 40% higher load quality and 50% lower damages in the pilot, will roll out across the entire network in the second half of 2026. Combined with other existing technology tools for labor planning and route optimization, the company sees massive long-term productivity runway, having already beaten the Q2 productivity target by a full percentage point.

• Q: What is the timeline for reaching the long-term low 70s LTL operating ratio target, and what drives that margin improvement? /

  A: Management reaffirmed the low 70s OR target will be achieved over the next five+ years. The improvement is driven by a double-digit cumulative pricing opportunity: 1 percentage point of annual yield outperformance from better service, 1 percentage point from growing high-margin premium services (on track to grow accessorial revenue from ~9-10% to 15%+ of total revenue), and 0.5 percentage points from growth with higher-margin small and medium-sized local customers. Volume momentum has also outperformed earlier expectations, with July tonnage growth tracking above 6% year-over-year, pushing full year tonnage growth up several points from the start of the year outlook.

• Q: What competitive dynamics are driving the stronger-than-seasonal volume growth in Q2 and July? /

  A: Management outlined three key drivers: industry capacity has shrunk 10% for service centers and mid-single-digits for doors since 2021, pent-up industrial demand is starting to recover as manufacturing builds momentum for the first time in over three years, and XPO is consistently gaining market share. The company is seeing early signs of freight moving back from truckload to LTL as truckload rates have risen more than 40% year-to-date, and is gaining share through expansion into new premium service verticals and accelerated growth with small and medium-sized customers, all of which are driving the volume inflection.

• Q: What is the company's capacity position to handle accelerating volume growth, and how will headcount scale? /

  A: Management noted that after adding more than 30% more trailers and more than 20% more tractors since 2021, and adding 15% more network doors, the company has ample excess capacity to handle low to mid-single-digit volume growth with existing headcount, by increasing work hours. The company has already proactively started hiring in constrained markets, with strong traction given low employee turnover and in-house driver training programs, and can quickly scale hiring further if demand accelerates more than expected. New terminals added in high-growth regions have already delivered clear improvements in line haul and pickup/delivery efficiency and added needed capacity.