FedEx Freight Holding Company, Inc. (FDXF) Q3 2026 Earnings Call Transcript

Hello, everyone, and welcome to the FedEx Freight Conference call. My name is Ryan, and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation. Yep, one moment. We will now begin the question and answer session. As a reminder, to ask a question, please click the raise hand icon at the bottom of your screen if attending via the webinar, or press star followed by five if dialing in by phone. Please also ensure your phone is unmuted locally when preparing to ask your question. And welcome to the FedEx Freight Conference call. My name is Ryan, and I will be coordinating the call today. If you'd like to ask a question at the end of the presentation, please use the following method based on how you are joining us today. If you are attending via the webinar, please click the raise hand icon at the bottom of your screen to be added to the question queue. If you are dialing in by phone, please press star followed by five on your telephone keypad. I will now hand the call over to Mary Rose, Head of Investor Relations, to begin. Mary, please go ahead.

Good afternoon, and welcome to FedEx Freight's Earnings Conference Call to discuss our results for the four-month transition period ended September 30, 2026. The accompanying earnings release and investor presentation are on our website at ir.fedexfreight.com, and this call is also being streamed from our website. Joining us today are John Smith, President and Chief Executive Officer of FedEx Freight, and Marshall Witt, our Executive Vice President and Chief Financial Officer. Following prepared remarks, John and Marshall will both be available to answer questions. Thank you. For additional information as well as reconciliations of the non-GAAP measures discussed today to the most directly comparable GAAP measures, please visit our website and refer to our press release and SEC filings. With that, I'd like to turn the call over to John for opening remarks.

Thanks, Mary, and good afternoon, everyone. Today marks an important milestone for FedEx Freight as we report our first operating and financial results as a standalone company. Leveraging the strength of North America's largest LTL network and the dedication of our talented team, we delivered a solid quarter marked by discipline execution across the organization and early progress against the strategic priorities we outlined at Investor Day. While we remain in the preliminary stages of our journey as an independent company, our first four months reinforce our confidence that the actions we're taking are strengthening the business and laying the foundation for long-term profitable growth, as well as cash generation. Beyond our operational and financial performance, we continue to make steady progress on what remains our most important priority. And that is safety above all. So far this calendar year, we have delivered positive trends across all key safety metrics, including countable injuries, lost time injuries, preventable accidents, and DOT preventable accidents. These improvements are a reflection of the commitment and accountability of our team and highlight our focus on operating a safer, stronger business. Now, we have a lot of ground to cover today, and in addition to discussing our quarterly results, we will provide an update on the progress we've made since the separation. We will highlight key accomplishments across our operational, commercial, and technology initiatives and share our expectations for the upcoming quarter. And as we look forward, we remain laser-focused on executing our clear and consistent strategy, strengthening our business, and creating long-term value for all our stakeholders. To achieve this, our objective is straightforward for each and every quarter. Deliver for our team, deliver for our customers, and in doing so, deliver profit for our shareholders. Starting with our team, FedEx Freight once again earned top honors at the transportation industry's premier driver and technician competitions, reinforcing our culture of operational excellence. In total, our drivers and technicians captured 10 podium finishes. This includes two national championships and seven top three finishes at the National Truck Driving Championships, while our technicians earned the TMC Super Tech Grand Champion title and swept all the top three overall spots. Also during the quarter, two FedEx freight drivers were selected to the Women in Trucking Image team, further recognizing the best-in-class team members we have at FedEx Freight. These achievements are about more than awards. They're about recognizing the exceptional people who help differentiate FedEx Freight each and every day. Also during the quarter, we launched our employee stock purchase plan in August, designed to drive collective ownership and responsibility across our organization. Participation has already exceeded our expectations, with nearly 14,000 eligible employees electing to become owners of this company. And finally, we further aligned our organization by bringing our technology and commercial teams together under Mike Rogers. His focus will be on creating an integrated, customer-focused organization while maintaining our commercial momentum. Turning now to our customers. We delivered for our customers with 98% pickup reliability and on-time service during the quarter. In addition to improving dependability, we continue to deliver better service quality with our claims ratio improving to just 0.43% during the quarter, and our claims filing frequency declining to 0.27%, both record lows. Customer feedback remains one of the most important measures of our progress, and the annual MASTEO survey, which was released earlier this month, provides important perspective into how customers view our service. While our net promoter score improved 150 basis points year over year, we recognize there is still substantial work to do. Despite significant transformation across the organization, this year's Mastio results demonstrate that we maintained a strong and reliable network and continue to make progress with customers. However, the survey also supports our belief that our greatest opportunity lies in further improving the customer experience. Building customer confidence and preference is a multi-year journey for us. Not a four-month effort, and we remain committed to making steady progress in the areas that matter most to our customers. Now, the momentum we're seeing across our customer, service, and operational metrics is important because these are the leading indicators of long-term financial performance and profit for our shareholders. During the four-month period, volume and base yield trends continue to stabilize, reflecting a significant moderation from prior year declines earlier in 2026. While broader freight conditions have shown signs of improvement, we are also encouraged that our commercial, service, and customer experience initiatives are also beginning to contribute positively to underlying performance. Additionally, the pricing actions we're taking should support future performance. Since June 1, we have successfully renewed approximately 25% of our contractual portfolio and achieved our strongest renewal pricing performance in recent years. Given that approximately two-thirds of our revenue is generated under negotiated customer pricing agreements, We believe our contractual renewal performance provides meaningful support for future yield improvement. Separately, in September, we announced a 6.9% general rate increase, or GRI. That will become effective January the 8th and apply to approximately one-third of our revenue base. And it is intended to appropriately align our pricing with the value of the service we provide, all while supporting continued investment in the business and our long-term growth objectives. Taken together, we generated $3.3 billion in revenue, up 9% year-over-year, and $510 million in adjusted operating income, which is an increase of 16% versus the prior year. This translated into an adjusted operating margin of 15.5% for the four-month period ended September 30. We also delivered adjusted earnings per share of $2.15 and generated approximately $239 million of free cash flow during this period. Now, before Marshall walks through our operational and financial results, I'd like to share an update on our progress and discuss several early indicators that demonstrate the impact of our strategic initiatives. At our April Investor Day, we outlined a roadmap to enhance the customer experience, improve profitability, and unlock significant opportunities we see across the business. As a reminder, our strategy is centered on four key priorities. Optimizing our network, strengthening our commercial offering, advancing our technology capabilities, and driving financial value creation. Collectively, these initiatives are intended to strengthen our market position, improve long-term profitability, and create durable value for all stakeholders. So beginning with the first pillar of our framework, our network, while our status as a standalone public company is new, the strengths that underpinned our business are not. We entered this next chapter as the largest LTL carrier in North America, supported by the industry's fastest published transit times and most dense network. We also have a highly experienced workforce and a proven operating model built over decades. And since becoming an independent company, our operations teams have been executing with a renewed focus on high-quality, efficient, and profitable service. One area where the focus is particularly evident is claims performance. As I noted earlier, we've made strong progress on improving our claims ratio. Since 2022, our claims ratio and claims filing frequency have each improved by approximately 20 basis points, reaching record performance levels of 0.43 and 0.27, respectively. These improvements reflect continued gains in freight handling and operational execution, particularly when you consider the high-value and mission-critical freight our customers entrust to us every day. Importantly, our claims metrics are not adjustable, providing a transparent view of the quality, consistency, and reliability of our service offering. Additionally, we continue to deliver strong service performance, achieving 98% pickup reliability and on-time service. These results reflect disciplined operational execution across the network and reinforce our commitment to delivering the dependable experience that our customers expect from us. While we're pleased with these outcomes, we recognize there is more work to be done and see additional opportunity to further strengthening our performance over time. Another area of focus has been driving network efficiency. During the quarter, CUBE utilization improved more than 3% year over year, reflecting our continued progress with improving asset productivity. A key enabler of this effort is our dim and motion technology, which captures dimensional data for more than 90% of the freight moving through our network. This capability allows us to manage operations not only based on weight, but also on capacity within our trailers. And as I'll touch on shortly, our technology modernization journey is embedding a more data-driven approach to all aspects of our operations, helping us make smarter productivity and capacity decisions across the business, and ultimately unlock even greater network efficiency. The second pillar of our framework is delivering a leading commercial offering, and this is an area where we're increasingly encouraged by the opportunities ahead now that we have a full control of our strategy. One of the most meaningful indicators of progress in this area is customer retention. During our first four months as a standalone company, we improved monthly net revenue churn compared to 2025, both with and without fuel. Now, that's a significant accomplishment, particularly given the scale and complexity of the separation. Our customers not only stayed with us through a complex transition, but did so at a higher rate, reflecting the strength of our service, network, and the actions we've taken to better serve their needs. While we saw pockets of early commercial momentum during the quarter, our priority was retaining customers, maintaining service levels, and successfully guiding customers through the separation. We view that effort as a necessary step and one that positions us well to pursue deeper penetration of attractive verticals and customer segments in the periods ahead. With the regional deployment of our sales organization now in place and greater control over our commercial strategy as a standalone company, we are increasingly focused on expanding in higher-value customer segments where our network capabilities and unique offerings are especially differentiated. Another valuable marker for progress comes from the annual Masseo survey released earlier this month. While we still have work ahead of us, we are encouraged to see year-over-year improvement in 17 of the 28 attributes measured. In particular, we saw improvement in areas such as transit time consistency and competitiveness, building accuracy, and trustworthiness. These results provide early external validation that our customer experience initiatives are gaining traction and that the investments we're making are beginning to be recognized by our customers. What we find especially promising is that these improvements occur during a period of significant change for our organization. The ability to maintain service levels, execute a successful separation, and make measurable progress in key customer metrics simultaneously speaks to the dedication of our nearly 40,000 team members. At the same time, we're approaching these results with an appropriate sense of urgency. So I want to be clear. We view this year's Mastio results as an important benchmark, not a destination. The third pillar of our framework is advancing our technology capabilities. Our focus is deploying tools and solutions that improve the customer experience, enhance productivity, and generate measurable returns on investments. One example of that progress is invoice accuracy. Looking at the most recent complete and comparable period, we delivered a roughly 200 basis point improvement in our first-time invoice accuracy over the prior year period. Driven primarily by process and structural simplification. Better invoice accuracy reduces friction, improves confidence in doing business with us, and lowers administrative cost and rework across the organization. We're also seeing encouraging results across our customer support function. First call resolution significantly improved at 92%, meaning more customers having their issues resolved on the first interaction. This improvement has been driven by several actions, including enhanced agent readiness, simplified call routing, streamlined processes, improved tools, and our transition to a dedicated nearshore support model. As a standalone company, our teams are now focused on a much more targeted customer base across three countries, rather than supporting a global network. This focus allows us to provide LTL-specific support, better align with our customers' operating schedules, and ultimately deliver a simpler and more responsive service experience. Looking ahead, we're equally excited about the opportunities technology creates across our operations. This month, we entered into a strategic alliance with Palantir, a leading provider of artificial intelligence and advanced analytics. This relationship is expected to expand our ability to leverage data and AI across our operations. Our goal is straightforward. Significantly improve customer experience, make even better informed decisions, further improve productivity, and enhance network efficiency. Importantly, working with proven technology leaders allows us to accelerate deployment while reducing development risk. Rather than building every capability internally, we're leveraging best-in-class platforms to speed up our modernization efforts and position FedEx freight to capitalize on the rapid advancements occurring in AI and analytics. While we are still in the early stages of these initiatives, we believe these investments gives us an opportunity not only to further modernize our technology stack, but to take meaningful steps forward in how we operate the business, serve our customers, and drive long-term productivity improvements. Our fourth pillar is financial value creation, where the benefits of our operational, commercial, and technology initiatives ultimately come together. To cover this, I'll turn the call over to Marshall, our Chief Financial Officer. He will discuss how these efforts are shaping our financial profile, review our quarterly performance in greater detail, and provide our outlook for the Fourth quarter and beyond. So, Marshall, over to you.

Thank you, John, and good afternoon, everyone. The operational, commercial, and technology progress that John discussed today is not occurring in isolation. Our objective is to translate those initiatives into stronger financial performance and, ultimately, greater long-term value for our shareholders. During the period, we generated $239 million of free cash flow. Demonstrating the strong cash-generating capabilities of the business in our first four months as an independent company, this cash generation provides us with flexibility and a strong financial position and puts us on a path to begin deleveraging sooner than originally anticipated. And with cash generated by the business, we reduce debt by $100 million during the quarter, bringing our gross leverage ratio to 2.8 times. This action reflects our disciplined approach to capital allocation and demonstrates our commitment to maintaining a strong balance sheet and investment-grade financial profile. As a result, we remain firmly on track to achieve our goal of approximately 2.5 times gross leverage within 12 months of the separation, as outlined at Investor Day in April. In addition, we continue to invest thoughtfully in our network and expect to complete the conversion of three service centers from leased to owned facilities in the coming days. These transactions will increase our ownership of strategic assets in important markets, which provides greater control over our network and enhance our long-term operating flexibility, all while maintaining Thank you. And as you know, this is a unique period as we transition to a calendar year reporting cycle. The results we're discussing today include the month of June, plus the quarter ended September 30th, creating a one-time or a month transition period. To make comparisons easier, we publish both an 8k and a stat book on our website that provide calendarized historical results, Giving you a consistent view of our quarterly performance across 2024, 2025, and now 2026. We believe this provides a clearer basis for evaluating the business going forward. Now turning to the results. During our first four months as an independent company, and excluding the impact of fuel, Our operating and financial performance was largely in line with the guidance and seasonality expectations we provided in June. From a revenue perspective, we were encouraged by several underlying trends. Average daily shipments were down only 1% from the prior year, reflecting continued improvement in demand trends and keeping us on the trajectory we previously outlined. In addition, revenue per shipment increased more than 10% year-over-year, benefiting from sustained higher fuel prices and modest improvements in both weight per shipment and base yield, providing further evidence of a stabilizing pricing in the operating environment. As a reminder, changes in diesel prices can have a meaningful impact on our reported financial results. In periods of rising fuel prices, our fuel surcharge mechanisms generally provide a benefit to earnings and revenue. Now, turning to adjusted operating income, strong revenue growth was partially offset by two key factors. First, approximately $50 million related to performance-based compensation for our people, and second, nearly $30 million from ongoing transition services agreements. Turning to our outlook for the rest of the year, our view of the underlying business remains broadly consistent with the framework and expectations we established following the separation. That said, we are raising our expectations relative to the adjusted outlook issued on June 25th, reflecting solid performance over the last four months and a handful of tailwinds That I'll touch on next. For the fourth quarter, we expect revenue in the range of $2.3 to $2.37 billion, reflecting a year-over-year growth rate of 13% at the midpoint and modestly above the expectations we provided in June due to the dynamic fuel environment and slightly higher volume. The majority of anticipated revenue growth is expected to come from yield, supported by sustained higher fuel prices, stronger pricing strategies, and focused sales efforts as a standalone company. Taking this revenue outlook into account, we expect to generate between $185 and $205 million of adjusted operating income during the fourth quarter of the calendar year, Implying an adjusted operating margin of approximately 8.4% at the midpoint, both significantly above our expectations provided in June. Higher yield is expected to contribute approximately 425 basis points, driven largely by fuel and to a lesser extent, early benefits from pricing improvements. We also anticipate a modest volume-related tailwind of approximately 25 basis points relative to prior year, keeping us on track to finish the year slightly higher. These gains are expected to be partially offset by several factors. First, we expect an approximate 270 basis point headwind related to performance-based compensation for our people. And second, we anticipate an approximately 85 basis point headwind from ongoing transition services agreements. As we think about the trajectory of the business for calendar year 2027, it's important to recognize that we continue to work through several moving pieces associated with becoming an independent company during a dynamic period for the LTL industry. These include the fuel price and related demand environment, our exits of TSAs, the productivity and efficiency initiatives that John spoke about, and offset by acceleration of standalone costs to support the business after TSA exits. Taking these factors together, we currently expect both revenue growth and adjusted operating margins in 2027 to remain broadly consistent with the medium-term framework we outlined out of yesterday. That means that our 2027 results would contribute positively to our 4% to 6% revenue CAGR and our 10% to 12% adjusted operating income CAGR, while remaining on track to achieve greater than $1 billion of free cash flow by 2029. We are finishing the review of our 2027 business plan and intend to quantify in greater detail when we discuss our thoughts regarding 2027 in January. And now, let me turn it back to John for closing remarks, and then we'll be happy to take your questions.

Thanks, Marshall. As we conclude our first earnings call reporting our results as an independent company, I'd like to take a moment to reflect on how far we've come in a relatively short period of time. Our strategy is not complicated. We are focused on delivering a superior customer experience, leveraging the scale and density of the industry's largest LTL network, and translating those advantages into stronger growth, enhanced margins, and attractive returns for shareholders. Since outlining that strategy, we've made modest but meaningful progress across our operational, commercial, and technology initiatives, and we believe the foundation we're building today positions us well for the future. At the same time, we recognize there is significant opportunity still ahead of us, and we're focused on building momentum and executing with speed and discipline. So, thank you to the employees of FedEx Freight for your continued dedication and hard work. We are excited about the opportunities ahead and remain confident that the best of FedEx Freight is yet to come. I want to thank you all for joining us today. Operator, please open the line for questions.

We will now begin the question and answer session. As a reminder, to ask a question, please click the raise hand icon at the bottom of your screen if attending via the webinar. Or press star followed by five if dialing in by phone. Please also ensure your phone is unmuted locally when preparing to ask your question. We please ask you to limit yourselves to one question. We'll wait one moment to allow the queue to form. Our first question will come from Brian Ossenbeck with J.P. Morgan. Your line is now unmuted.

Hey, good evening. Thanks for taking the question. Maybe just to touch on price and yield to start, kind of a two-parter, just to make sure Marshall understood we were talking about net yields going up 425 basis points in the fourth quarter. That sounded like it was mostly fuel. Wanted to make sure that was like a net impact and not just top line. It seems like it is. And then maybe, John, just the big picture on how you're pricing to the value of the service, which looks like it's improving now that we've got the historical data here. But if we look at slide six, it looks like yields have been on a downward trajectory and under pressure ex-fuel for a little while, and I don't think that's related to the wait for shipment. So maybe give a little bit more context around that and why it should start to inflate more positively here. Thanks, guys.

Thanks, Brian. I'll take the first part there. Brian, when you look at the chart that we put in the investor deck on the yield improvement, the majority of that is fuel related. We also have expectations that our wait for shipment will contribute to that as well as base revenue for hundred weight growth, but the vast majority of that improvement is fuel related.

And, Brian, when you think about, you know, why we feel good about the trajectory and how we're going up from a yield perspective, you know, it goes back to, you know, the LTL dedicated sales force. And I want to remind everybody, as we were going through and coming up to the spin, a lot of the time and effort was based on cultivating and making sure that we kept the business that we did have. And now we have transitioned into a hunting phase. And the other piece that we can talk more about it is the verticals that we are going after that we've never really focused on from a sales perspective from an LTL freight company. We're excited about the opportunity that we have in those verticals. So we feel like that, you know, now that we've repriced about 25% or so of our contracted business, we're already starting to see the progress from a yield perspective.

Our next question will come from Scott Group with Wolf Research. Your line is now unmuted.

Hey, thanks. Good evening. So a couple things for you, Marshall. Raised the adjusted operating income and margin guidance, but lowered the GAAP margin and EBIT guidance. Maybe just what's going on there? Is there any sort of shifting of costs between GAAP and adjusted? And then I just want to understand your comments about 27 being sort of in line with the long-term framework of double-digit sort of operating income growth. I know that's not like a hard guide, but like just what exactly you're trying to sort of say about that point? And can you just maybe, just so we're all on the same page, like, give us like a baseline based on, you know, the Q4 guide? Like, what is the base operating income for calendar 26? Just so we can all work off that.

Sure. No problem. I'll try my best to address those. In terms of the first question on adjusted OI to GAAP, the primary difference there is that we saw more IT-related expense that was not forecasted. So there's a forecast precision piece to that that widened that gap. And also, we had some additional acceleration of IT costs to accelerate our exiting up the TSAs. The combination of those leads to that difference in that widening of margin or off-income between non-GAAP and GAAP. In regards to the question you have on 2027 and my prepared remarks there, let me just give you a little bit of color on what we were thinking there. And currently, as I said, we do expect revenue growth and adjusted margins in 2027 to remain broadly consistent with our medium-term framework that we did lay out on Investor Day. So what does that mean? It means that we think 2027 will positively contribute towards reaching our medium-term guide that we gave, which is that 2029 perspective. We think there's going to be stronger operating leverage supported by continued pricing discipline and business mix. I think that's important with the leaning in of our highly efficient, dedicated local sales teams. We think that business mix of expanding the small-medium space, which currently we're under-indexed on, will continue to yield good results in terms of yield improvement and also operating margin improvement. Quite a bit of productivity assumptions are in place, touching on some of the things John mentioned around the investments we're making there. And then the overall improvement in growing and leveraging to improve customer experience and enhancements with that and the stickiness and benefits that will come from that. So one of the things we did say is we were given our medium-term guide that you probably remember me saying is that we have an assumption of a fall-through rate of roughly 30%. We expect right now that we're going to be at or slightly better than that in 2027. So hopefully that gives you a little bit of sense of where we're at there. And finally, just baseline, you think about Q4 guide, and it's difficult to remove fuel from the equation because it just has so much interplay with the entire P&L that it's really difficult to isolate that and look at overall performance. But what we can say is that the momentum that we experienced in quarter three, we expect to actually see that expand in quarter four, which means continued growth in volume, continued profitable growth in volume, and an expansion of revenue-prontered weight without fuel.

Our next question will come from Ken Hexter with Bank of America. Your line is now unmuted.

Bless you. And John and Marshall and team, welcome to the public markets. Thanks for taking the questions here at the start of your public life. John, I think in the prepared remarks, you mentioned some headwind on volumes at flat tonnage, slight decline in shipments per day. If you were priced 25% of the business and now there's still more to go, maybe talk about your view on what happens to volumes here. There's a lot of noise on fuel. I don't know if, Marshall, if you want to toss in the thoughts on profitability of fuel and normalized pricing. Thanks.

Again, I'll start it out. Again, I'll go back to why we feel good about our momentum from an ADS perspective. You know, when we talk about the LTL sales force that we have out there, and when we think about all of the opportunities that we talked about in these verticals that we, you know, we really haven't sold over the years. And as we get into this, we're already starting to see traction in some of these verticals. We're also seeing new business, and even though we're, you know, four months into the hunting phase, we feel really good about the opportunity to continue the momentum that we started building these first four months into the fourth quarter and beyond. And with that, I'll turn it over to Marshall.

Just one thing before I jump on the response to the last question you had there, Ken. It's important to note that our network is the best and the biggest in North America, and we're seeing quite a bit of traction and interest in what that means and can do for customers that are leveraging their supply chain and utilizing the backbone of our network to improve what they do for their customers. We think that we can actually see not only yield growth, but volume that comes with it. As you've heard us say, we are about generating profitable growth, and right now that medium-term thought is that's going to be a yield-based growth expectation, but volume is going to come with it. So we're not banking on significant volume to play in the equation to get where we need to go, but we're starting to see green shoots of customer wins where they're bringing in a significant amount of their supplier base into our portfolio, and with that does come potential incremental ADS. To your question around fuel and its profitability, again, really difficult to try to separate that. We did call out in our prepared remarks that you can see in the investor deck that we're really pleased to be able to pass back to our workers and our hourly workers about 95% of our variable comp increase, driven primarily by this higher fuel, is being passed and returned back to our employees. We think that's really important because you think about the overall market today, the capacity constraints, the ability to retain and attract and grow our employees, and having this be one reason that allows them to continue to be recognized for the work they're doing. And then to also piggyback that with what John said, the CSPP program is fantastic, having over 14,000 employees sign up. That's 40% of our workforce. Having employees that actually are owners of the company to us is just a great combination for the organization.

Our next question will come from David Vernon with Bernstein. Your line is now unmuted.

Hey, good morning. Hey, good afternoon, guys. Thanks for taking the question. So, John, you know, I appreciate the commentary around the strong pricing renewals, but when we look kind of at the numbers, kind of X fuel, revenue per hundred weight, only increased like 40 bps or so. When you think about, you know, kind of what's going on underlying their either weight or mix, you know, when do you think the strong renewals you're seeing in the field is they're going to show up actually in the reported results?

Well, thanks for the question, David. When you think about the timing, and I'll go back, you know, we're four months into this thing after the June 1 spin. And again, we're talking about the opportunities that we have in these verticals like retail, technology, industrial, aerospace, automotive, and data center related businesses. That's where we feel like that we're just getting our toe in the door and starting to penetrate these, you know, these verticals that we told you we were going to go after. Also, I think what's very important, too, is the small and medium business, which is our most profitable group that we haul. We're underpenetrated there, and we feel like that we've got a lot of opportunity there as well. So I feel like that we've built some momentum in the short amount of time in the third quarter, but we'll see that continue to improve as we go through the fourth and into 2027.

And David, I would just highlight to you on page six of our investor deck, there's a really good slide on the right-hand side that shows, I'll call it the demise of where we had been from a yield perspective from 2024 through 2026. And there's a slow decline of yield, so it took a while for us to lose it. It's going to take a while for us to gain it. We're back in a positive ground. It just will take some time to get that back. The other thing that I'll just touch on that John mentioned is our GRI that's coming out in January. There's something a little bit different this year, and that is that we've got a sales team that's embedded within the regions. And a lot of times the stickiness of GRI is when you have that interaction with the customer and the sales rep that begins that ability to have a conversation. We understand that the GRI doesn't completely stick and you lose traction over the period of months, but having that stickiness and ability to use that sales relationship to allow there to be a conversation to hold some of that yield for longer periods of time, I think, is going to be a benefit and does help further aid to our confidence in yield growth in 27.

Our next question will come from Stephanie Moore with Jeffries. Your line is now unmuted.

Hi, good afternoon. Thank you. Maybe you could talk a little bit about the early success you're seeing from the new sales force and the more targeted vertical strategy. Are there any particular verticals we are seeing the strongest traction? An update there would be great. Thank you.

Stephanie, I'll start and let Marshall clean me up here. When you think about some of the verticals where we see some improvement, one of them is in the aerospace. We've planted a few new accounts as well as on some of the existing accounts, and we're up through the first four months about 3%. That's one example. We're seeing, you know, movement in the food. We're seeing movement in some of the technology. Probably the one that we've seen the most success in is the retail space, and we continue to grow that. So, we feel pretty good about our plan and how we're going after and attacking these verticals. So, more to come, and I think you'll see more progress as we move forward on our next quarter and into 2027.

Our next question will come from Bruce Chan with Stiefel. Your line is now unmuted.

Hey, gentlemen, this is Matt Myles, gone for Bruce. Congrats. Thanks for taking the question. With regards to PT, can you remind us, you know, what percent of total miles that represents, maybe specifically rail? And as you look, you know, as a standalone network now, maybe what's the opportunity to sort of improve, you know, rail utilization, density, continue insourcing, and maybe how that might translate into the 350 bps of medium-term OR improvement that you've outlined over the next couple years? Thanks.

Thanks, Matt, for the question. Let me cover that a couple different ways. First, we just filed our queue as well, and in there you'll see a purchase tram line, about $235 million for the quarter. Let me just break that down for you. The headline is around 25% of that is our classic third-party motor, third-party PT that we're focusing on. But I want to give you the other elements of that, just to give an appreciation for the other portions and pieces. As you know, we have a significant rail within our network primarily to complement the economy product. That represents about 35% of that total PT spend. We have a unit called Custom Critical. They are a brokerage-based business in the cold chain and also white glove service. That's about 30% of the total PT. And then we also have an international business in Mexico and Canada that's about 10%. So stepping back and looking at our total line haul miles or line haul cost and looking at where we've come from over the last five years, a third-party PT motor was around 11% five years ago. It's now down to 7%. So back to your comment about where are we going to see some of this overall improvement, and we expect that that better balance and less reliance on third-party PT will aid us in that momentum to expand OR, or operating margin. The other thing, too, that we've done quite well is we've done a really good job of balancing and being more efficient on our network. Just to remind everyone, you have PT in place to basically complete that lap or complete that return back on an imbalanced lane. So the more we can balance our network, the better off we are. But that's the purpose for it. Just I'll leave you with, you think about PT for that 25% as a percentage of total revenue, it's 2.2% of revenue. So it's a pretty low number if you just think about PT expense, third-party motor relative to total revenue.

Our next question will come from Bascom Majors with Stevens. Your line is now unmuted.

Thanks for taking my question. Marshall, as we think about the transition off the TSA into sort of your long-term cost structure, you framed the TSAs in absolute terms prior as $9, $9.5 million per month. Is there a way we can talk about when that starts to fall more materially and just a worst-case landing of what the net replacement costs would look like, just to help people frame that in more precise terms? Sure.

Yeah. If we think about where we had started the sub-period, we had about $9, $9.5 million per month in the assumptions. That has come down to about $7 million per month, a combination of some real reduction in TSA costs as we've exited early. Baskin, there is a little bit of a movement between, we'll call it gap and non-gap, on some of the pro fees associated with the TSA. And then we do expect that that $7-ish million per month will play through into the first half of 2027. A lot of the TSAs that are in place, those dollars don't stop in terms of us funding it until the complete service is completed and we're transitioned off of that. And then just to the broader question you have on, like, where does that leave us in terms of overall expectations of replacement costs, standalone costs? And it goes back to the comment I made a little bit ago about just where do we see 2027 playing out? We certainly believe that there's going to be continued scale in our business and our people and our technology and capabilities that will allow us to continue to drive more productivity improvements and enhance the customer experience and generate efficiency gains. So even though that's a discreet comment about TSA, the collective outcomes, we're very positive about and think we're going to do quite well in 2027.

Our next question will come from Jeffrey Kaufman with Citizens Bank. Your line is now unmuted.

Thank you very much. Thank you. Well, first of all, congratulations on your first quarter as a standalone. I wanted to dig a little bit deeper into strategic alternatives that you were mentioning earlier. What do you need to see before you believe yourselves or the board are ready to recommend alternative uses of free cash? And then could you just help us understand priority dividend versus strategic versus a share repo? And you said during 27, you consider it. Obviously, that's not a promise. But what do you need to see before you think you're ready to move to that? And then what would your priorities be once that's on the table?

Yeah, good question. Appreciate it. So for us, first and foremost, what we shared at Investor Day and still is what's number one priority is reinvesting high return organic growth opportunities, which is back in the business. Jeffrey, we've got substantial return opportunities that are embedded within our strategy, which is doing what we're doing today, which is improving that customer experience, building platforms that are scalable, leaning on AI technology, looking at operations and using, call it, off-the-shelf software and platforms that enable us to quickly accelerate operational initiatives and P&D Line Hall and Doc. They're going to be important for us to achieve our outcomes. So that remains number one. We certainly are mindful of our outstanding debt. We started the spin with $4.3 billion of debt. We did have a very good four-month quarter in regards to cash flow generation. Very excited and happy about how the organization has produced such tremendous cash flow so early in our spinoff. So paying down our debt early was another feather in the cap of the organization and getting that leverage ratio down a little bit lower than what we had anticipated. And then finally, turning to where we want to be in terms of how do we return our capital back to our shareholders in a thoughtful way. You know, we, in my prepared remarks, we expect to come out in January to announce, we'll call it a formal capitalization or capital allocation program with the classic four pillars. We'll, at that point, address the dividend and see what that should represent. And initially, our thoughts on share repurchases that we wanted to be anti-dilutive or basically offset the shares that are issued. That's kind of our going in strategy. Clearly, if we generate incremental free cash flow, we will look at other means and mechanisms. And one of them could be further acceleration of share repurchases. But for the time being, that falls a little bit further down in the priority list.

Our next question will come from Jordan Allager with Goldman Sachs. Your line is now unmuted.

Yeah, hi, afternoon. Yeah, hello. So I just wanted to come back to the technology front again. Can you maybe talk to how smooth the transition has been going now that you have your own sort of tech stack and maybe sort of share some of what may be coming next from a productivity standpoint? And then I just want to make sure I might have missed something in terms of what Marshall was talking about, 2027 and the system with the medium-term outlook. Did you say something about 10% to 12% EBIT? I don't know if you're referring to EBIT margin direction, or anyway, those were the questions. Thanks.

Yeah, I'll take that one first. That's exactly right. OI is what we're referencing. So in our medium-term guide, we said, hey, we expect OI growth to be 10% to 12% on a CAGR basis.

John? And thanks for the question. You know, from a technology perspective, you know, we mentioned, you know, the relationship with Palantir and what we're doing from a platform-based perspective in order to modernize, you know, our legacy operating systems. And we believe, you know, they will help us improve the speed and quality of the decision-making, increase network efficiency, enhance the customer experience. And with Palantir, we'll focus on leveraging compute resources and enabling faster decisions across our line haul operations, which ultimately accelerate the realization of the value. We aim to combine our proprietary operational expertise and secret sauce and our business logic with Palantir's leading AI and their analytics platform. So the relationship is really exciting for us. And I want to reemphasize that that's going to create speed to value. That's very important for us. And that's why we mentioned that we're not going to build everything. We're going to utilize what's already out there and create that speed to drive that value quicker. So we feel really good about where we're at from a technology perspective going forward. And always remember, we're still, you know, working on getting off the TSAs as well. So we're balancing taking the TSAs down as well as building new. So we're excited about that.

Our next question will come from Ravi Shanker with Morgan Stanley. Your line is now unmuted.

Great. Thanks, everyone. I know there's been a few questions on the yield improvement and the pricing of the new contract, but just on the 25% that's been repriced so far, do you have a sense of what that contractual rating piece looks like for the formerly unbundled accounts versus accounts that were not previously unbundled?

I'll take that one. So not segregating the, we'll call it the bundle and the unbundled, but if you look at that chart I referenced on page six, which showed where we came from of that four to 6% yield growth, that's our aspiration is that when we renew these contracts, that's our ambition is to get back to what I'll call pure average. So ultimately, that will take a little bit of time, Gravi, but that is our expectation.

This concludes our question and answer session. I will now hand the call back to John Smith for any closing comments.

All right, thank you, and I appreciate everybody's time today and participation in our first standalone call. I just want to reemphasize that we are gaining momentum, and the progress we're seeing increases our confidence in executing the strategy that we've laid out. And again, I want to thank our 40,000-plus teammates that are making this happen, and I want to wish everybody a good day, and stay safe out there, and we'll see you at the next call. Thank you.