XPO, Inc. Q2 FY2025 Earnings Call

Welcome to the XPO Second Quarter 2025 Earnings Conference Call and Webcast. My name is Melissa, and I'll be your operator for today's call. 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 meaning of applicable securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release. The forward-looking statements in the company's earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, except by the extent required by law. During the call, the company will also refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and in the related financial tables 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'll now turn the call over to XPO's Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone, and thank you for joining our call. I'm here with Kyle Wismans, our Chief Financial Officer, and Ali Faghri, our Chief Strategy Officer. Earlier today, we reported strong second quarter results. We generated $2.1 billion of revenue and adjusted EBITDA of $340 million. Our adjusted diluted EPS of $1.05 exceeded expectations. Our North American LTL business continued to outperform the industry, building on our momentum across the network. Over the past 2 years, we've improved our adjusted operating ratio by 470 basis points in a soft freight environment, underscoring the strength of our operating model. In the second quarter, we outpaced both the industry and normal seasonality on margin expansion. This was underpinned by above-market yield growth, ongoing cost efficiencies, and, most importantly, the superior service that supports our customers. Additional highlights of the quarter include our strategic investments in the network and the technology that differentiates our value proposition. I'll speak to our recent progress, starting with customer service. In the second quarter, we achieved year-over-year improvement in damage frequency and a damage claims ratio of 0.3%. This reflects the discipline we bring to our service culture. We also continue to raise the bar with on-time performance with our 13th straight quarter of year-over-year improvement. Our network speed and reliability are key differentiators for customers. We're continuing to elevate our world-class service levels with a customer-focused mindset across our organization. A significant network expansion and technology-driven operating excellence. The ongoing investments we're making in the network support both long-term growth and efficiency. Since launching our LTL growth plan in 2021, we've added nearly 6,000 tractors and more than 17,000 trailers to our fleet. Our average tractor age is now less than 4 years, which improves reliability and reduces maintenance costs. On the real estate side, we're seeing strong contributions from the growth of our footprint. In recent quarters, we've opened some of the largest LTL service centers in North America, including 2 additional break bulk locations in Carlisle, Pennsylvania, and Greensboro, North Carolina. These facilities sit in key freight corridors and are ramping up fast, helping us move more direct loads by building density in the network. Our customer shipments are flowing more efficiently end-to-end, and we're reducing both rehandles and miles while also enhancing our pickup and delivery operations. Almost all of the acquired facilities are now open, and we've met our target of 30% excess door capacity. This positions us to capture profitable share in the freight market rebound and unlock more operating leverage. Now let's turn to pricing, which continues to be a key driver of our outperformance. Our strong service levels are enabling us to earn above-market yield growth and win new business. In the second quarter, we increased yield, excluding fuel, by 6.1% year-over-year with sequential growth from the first quarter. We see a long runway to further align our pricing as we enhance our value to customers. We're also seeing a benefit to mix from local accounts and premium services, which now represent a larger share of our revenue and carry higher margins. Demand continues to grow for our premium offerings, including our grocery consolidation service, which we expect to ramp in the coming months. It's an attractive end market with significant growth potential, and our differentiated service offering uniquely positions us to gain share in this vertical. Cost efficiency is another area of the business where we made meaningful progress in the quarter, most notably with labor productivity and linehaul. Our proprietary labor planning platform gives our managers visibility into volume flows with the ability to adjust staffing to demand in real time. We're seeing significant benefits, including a second quarter improvement in labor hours per shipment versus the prior year. This is just one example of how our best-in-class technology helps us improve margins even when demand is down. It's a competitive advantage that will compound as industry volumes recover. On the linehaul side, we reduced outsourced miles to just 6.8% of total miles, which brought down our purchase transportation expense by 53% year-over-year. That's more than 900 basis points lower than last year and the best level in our history, with more opportunity ahead. Our new AI-powered linehaul models are driving additional savings, reducing normalized linehaul miles by 3%, empty miles by over 10%, and freight diversions by more than 80%. Recently, we started piloting AI-driven functionality for trailer and route assignments and pickup and delivery operations. The early results are encouraging with positive trends in stops per hour and trailer utilization. We're excited about what AI can mean for our operations and our customers, and we expect it to become increasingly important to our strategy over the long term. In closing, we reported another quarter of outperformance that showcased the operating momentum we've built across every part of the business. We delivered strong yield growth, realized cost savings throughout the network, and deepened our competitive edge through world-class service and technology. Our AI initiatives are already generating measurable returns, and our investments in the network are unlocking new levels of efficiency and flexibility. We're operating from a position of strength with a clear plan to deliver sustained margin expansion and long-term value creation. With that, I'll turn it over to Kyle to walk through the financials. Kyle, over to you.

Thank you, Mario, and good morning, everyone. I'll cover the company's financial performance along with our balance sheet and liquidity position. Total company revenue was $2.1 billion, in line with last year and up 6% sequentially from the first quarter. In our LTL segment, revenue declined 3% on a year-over-year basis, largely due to a reduction in fuel surcharge revenue tied to the price of diesel. Excluding fuel, LTL revenue was down 1%. On a sequential basis, LTL revenue increased 6%. On the cost side in LTL, we continue to make meaningful progress in reducing our purchase transportation expense. Our third-party carrier expense declined 53% year-over-year as we in-source more linehaul miles. This resulted in $36 million in savings for the quarter. With labor, we held our cost of salary, wages, and benefits roughly flat year-over-year by improving productivity, which offset inflationary pressures. Our technology has been the key to realizing steady productivity gains across our network. In terms of equipment, our maintenance cost per mile improved 6%, supported by the addition of newer tractors to our fleet. LTL depreciation expense increased 13% or $10 million, consistent with our strategy investing in the network, including our rolling stock. Next, let's turn to adjusted EBITDA. Company-wide, we generated $340 million of adjusted EBITDA, down 1% from a year ago. In our LTL segment, we grew adjusted EBITDA by 1% to $300 million and expanded this margin by 90 basis points to 24.2%. These results speak to the strength of our operating model. We have the ability to deliver strong yield growth and cost discipline in a soft environment, as we did in the second quarter. This helped offset headwinds from lower fuel surcharge revenue, tonnage, and pension income. For our European Transportation segment, we reported adjusted EBITDA of $44 million, while the Corporate segment had a $4 million loss. For the total company, second quarter operating income was $198 million, which is a 1% increase from the prior year. Net income was $106 million, which equates to $0.89 of diluted earnings per share. On an adjusted basis, EPS was $1.05 compared with $1.12 a year ago. Lastly, we generated $247 million of cash flow from operating activities in the quarter and deployed $191 million of net CapEx. Moving to the balance sheet, we ended the quarter with $225 million of cash on hand. Combined with available capacity under our committed borrowing facility, this gave us $824 million of liquidity at quarter end. Our net debt leverage ratio improved to 2.5x trailing 12 months adjusted EBITDA compared with 2.7x a year ago. Looking ahead, while we remain committed to investing in initiatives that support long-term growth, we expect our CapEx to moderate and our free cash flow conversion to increase going forward. This positions us with greater flexibility to return capital to shareholders over time and pay down debt. Regarding share buybacks, we initiated our program with $10 million of common stock repurchased in the second quarter, and we plan to scale up our buyback activity as free cash flow increases. This reflects our confidence in the long-term value of our shares. With that, I'll hand it over to Ali to walk through our operating results.

Thank you, Kyle. I'll begin with a review of our operating results for the LTL segment, where we continue to execute well despite a soft freight environment. Total shipments per day declined 5.1% compared with the prior year. We drove meaningful growth in our local channel with shipments up by high single digits, which is an acceleration from the prior quarter. We're capturing share in this high-margin segment through targeted outreach and a value proposition that clearly resonates with our customers with weight per shipment down 1.6%. Tonnage per day declined 6.7%, largely in line with normal seasonal trends. Importantly, we improved both tonnage and shipments per day on a year-over-year basis from the first quarter, a positive trend we anticipate will continue in the second half. Looking at the monthly numbers compared with the prior year, for tonnage, April was down 5.5%, May was down 5.7%, and June was down 8.9%. For shipments per day, April was down 4.1%, May was down 5%, and June was down 6.2%. For July, we estimate that tonnage will be down in the 8% range, which is slightly better than normal seasonality compared to June. Turning to pricing, we delivered another quarter of strong yield performance. Yield, excluding fuel, was up 6.1% year-over-year, and revenue per shipment increased 5.6%. Both underlying metrics also improved from the first quarter, marking our 10th consecutive quarter of sequential increase in revenue per shipment. We expect our sequential pricing gains to continue through the rest of the year, supported by our high service levels, premium offerings, and growth in the local channel. Our approach to pricing is highly disciplined and managed with our proprietary technology to ensure a fair price for the value we deliver. This is a key driver of our margin improvement. Moving to profitability, we improved our adjusted operating ratio by 300 basis points sequentially to 82.9% in the second quarter, outperforming normal seasonality and delivering on our outlook. On a year-over-year basis, this is an improvement of 30 basis points, making us the only public LTL carrier to expand margins. We achieved these strong results through a combination of disciplined yield management, cost efficiencies, and productivity gains, all enhanced by our technology. Looking at our European transportation business, we made solid progress despite the tough macro backdrop. We increased revenue 4% year-over-year and delivered a 38% sequential increase in adjusted EBITDA, ahead of seasonal expectations. We also grew adjusted EBITDA year-over-year in several key markets, including the U.K. and Central Europe. This demonstrates the strength of our execution and customer relationships. Another encouraging sign is the value of prospective business in our sales pipeline, which is trending higher than the prior year. We're seeing increased demand across Europe as customers respond to the quality and range of our service offerings. To wrap up, I'd like to highlight the levers that are driving our industry-leading margin expansion in LTL. First, we're consistently delivering above-market yield growth, and we expect to sustain that going forward as our pricing initiatives continue to gain traction. We're also making further improvements to our cost structure, realizing significant savings from in-sourcing linehaul miles and becoming more productive across our network. Our proprietary technology is a key factor in these gains as it helps us extract more value from every shipment. The structural advantages underlying our strategy enable us to drive margin expansion even as industry volumes are down. We're uniquely positioned to outperform in any part of the cycle and deliver long-term earnings growth. Now we'll take your questions. Operator, please open the line for Q&A.

Our first question comes from the line of Scott Group with Wolfe Research.

Maybe you can just give us a little bit of color on the OR for the third quarter. And I know you talked about 100 basis points of improvement for the year. How are we thinking about that? And then maybe just big picture, the grocery stuff sounds new. Maybe, Mario, just talk a little bit about what the opportunity of that is and why that's an attractive market?

You got us, Scott. So first, starting with the third quarter OR outlook. We do expect another strong quarter for margin performance. Now typically, normal seasonality for us on OR sequentially increases by 200 to 250 basis points from Q2 to Q3. But given what we're seeing so far, we expect our Q3 OR to be at a similar level to Q2, so call it flattish on a quarter-over-quarter basis, which represents, Scott, both a very strong year-on-year improvement and a significant outperformance to seasonality on a sequential basis. That's going to be driven by our continued strength in yield and our effective cost management as well. When you look at the full year's OR, given how volume trended in the first half of the year and what we expect in the third quarter, we expect full-year tonnage to be down in that mid-single-digit range. Obviously, nobody can predict the macro, so we'll see how the year plays out. But as we said last quarter, this would be supportive of 100 basis points of year-on-year OR improvement, which is a very strong outcome in a soft freight environment, and we'll be the only LTL carrier improving margins again year-on-year after improving them by 260 basis points last year. In terms of the new offering on the grocery consolidation side, it's a great business. This is a business where you have a grocer that has suppliers shipping product into their docks, and then we help them effectively consolidate that freight in our terminals and then be able to get all of that freight all at once at a grocer. It's an attractive market. We estimate it to be around $1 billion in market size, and it comes with a very good margin. Today, we are underrepresented in that segment of business. We are in that low single-digit range, and we expect to grow in it over time. Our service product has never been better, so we can support our customers there on those services. We've had early success here in the second quarter onboarding a few customers, and we expect that to ramp in the back half of the year as well.

I guess I'm going to jump over to the side that we don't talk about much, but Europe really posted some pretty stronger-than-expected results. Maybe talk a little bit more about what was the surprise drivers there? What can we expect as we move into the rest of the year? And then on the core side, just how low is purchase transportation? Are we testing the limits of what you want to do? And I guess, Mario, what's the next leg of operational improvement to continue to drive you toward the upper 70s?

Yes, you got it. I can start on the linehaul side and the cost levers for OR improvement, and I'll turn it over to Ali to discuss Europe. But when you look at the starting with the linehaul in-sourcing, we were down to a new record 6.8% here in the second quarter, and we expect to continue to bring that down to that mid-single-digit range through the course of the back half of the year. That will be a lever for us as we think of 2026 because our entry point in 2025 was higher than the exit point. We'll still get a comp dynamic of a good cost guide in 2026. Now keep in mind, though, for us, the biggest improvement in that cost category is around making sure that we are insulated from truckload rates coming up. In the next up cycle, when volume is up, and yield is even higher than it is today, we would be able to face less of a headwind from truckload rates going up, and that's going to be a meaningful improvement compared to prior up cycles. The other two levers of costs that we're very excited about moving forward. The first one is around AI capabilities and technology. We have launched many capabilities here in the second quarter, and we're going to continue to launch these in the back half of the year going into 2026. If you think about it, even in the trough of the cycle, we are improving productivity across our network, so when you see that cycle turn, we expect to meaningfully improve productivity as well. In the second quarter, we launched new AI enhancements to our linehaul models that enabled us to reduce total linehaul miles we're driving for the same volume in that low to mid-single-digit range, which is a great benefit for us. We're also piloting now P&D incremental capabilities in AI that will make our P&D costs even lower. So we're excited about the outlook of these technologies we're launching across the network. The other lever is around the new break bulk locations that we have launched over the last year. Typically, in LTL, the larger the service center, the more efficient you are. So when you think about the first half, we launched two of the largest service centers in North America in Greensboro, North Carolina, and in Carlisle, Pennsylvania. This allows us to build density in our linehaul network, reduce rehandles, and enables a much more efficient network in how we operate, improving service quality as well. These are all the cost levers we expect to compound over time here beyond 2025 and into '26, '27, and '28 as we launch those capabilities.

And then, Ken, on the Europe side, you're right, the second quarter was a strong quarter for us in what was a challenging environment. We grew year-over-year organic revenue for the sixth consecutive quarter. If you look at adjusted EBITDA sequentially, it was up nearly 40%, and that was much better than normal seasonality. We saw strength in the U.K. and Central Europe on the EBITDA side; both markets for us were up in that low to mid-single-digit range on a year-over-year basis. As you think about the second half of the year and the third quarter in particular, typically, EBITDA in our European segment steps down sequentially from Q2 to Q3 by about mid-single-digit million dollars. However, we would expect to outperform that as we move into the third quarter from a seasonality perspective.

Mario and team. So I have kind of a big picture question. So you've highlighted some of the cost and especially focusing on the revenue levers that you're executing on to drive this revenue per shipment performance. My question is kind of we're in the third year of this muted freight market right now. If we have another year of this performance kind of end market being muted and tough, are you experiencing a change in the conversation with your customer? Does it get harder to achieve the type of leverage from the initiatives that you're doing on the service side, the initiatives that you're doing on penetrating the local channel? Does it get harder as you go into another year potentially of weak end market demand? I'm just wondering how we should think about going into 2026 about the momentum that is very self-help driven here on that revenue per shipment if we have another year of muted backdrop for freight demand?

Well, Fadi, if you take a step back, we've been delivering yield performance that is meaningfully above market for a number of years. A lot of that, if you take a step back when we started our plan, the yield differential between us and the best-in-class carrier normalized for weight per shipment and length of haul was about 15 points. Through the course of the last few years, we took that gap from about 15 points down to the low double digits, low teens. We have another double-digit percentage to go above market over the next five years to bridge the gap with the best-in-class carrier. There's a massive runway ahead of us for these improvements. High-level breakdown of that delta when we started our plan, about half of it was driven by better service that led that carrier to have better pricing over time. About 500 basis points were these premium services that were a gap for us; we didn't have them in our portfolio of offering customers, and about 2.5 points of yield differential were driven by our local channel, which represented 20% of our book of business compared to 30%, which is the target. By going from 20% being small to medium-sized businesses to 30%, that's equivalent to about 2.5 points of yield. Our goal for the first category on service leading to better pricing is to bridge that gap 1 point a year incremental to what the market is doing. This is effectively what we've been doing in recent years. If you look at accessorial revenue, we launched a half a dozen or so premium services last year. These are resonating very well with our customers, especially when paired with a great service product. So more and more customers are signing up for these services. When we started our plan, our accessorial revenue as a percentage of revenue was 9% to 10%, and we can go up to 15% as our target. We're currently a couple of points better than where we started, and we still have runway for three years of outperformance. Same situation with local channel growth. When we started, we were at 20% as a percent of total; we're now in the low to mid-20% range. Last quarter, we grew the local segment, the small- to medium-sized businesses, by high single digits on a tonnage basis, which is an acceleration from the first quarter. Our goal is to bridge that gap by 0.5 points a year, and we're two years into a five-year runway for that. So when you think of our yield initiatives, all of them have a long runway for years ahead of us.

Ali, you gave a message on monthly tonnage that was kind of similar to some of your peers, who reported earlier. June was much weaker than expected, with a pretty big deceleration, then July was still weak but slightly better than normal seasonality. As we think about what Mario had said about a flat OR from Q2 to Q3, with comps getting easier on tonnage in August and September, do you expect that 8% to kind of whittle its way down to a mid-single-digit decline? Or are we starting from such a low point in June that even better than normal seasonality would relate to kind of a high single-digit tonnage decline in the third quarter?

Sure, John. So you're right; July was down somewhere in that 8% range, and that was slightly better than what we saw in June on a year-over-year basis and also better than normal seasonality relative to June. As you think about Q3 as a whole, the comps do get easier as we move through the quarter. If you recall, John, back in August of last year, industry demand did soften as a whole, and that continued into September. We would expect those year-over-year tonnage declines to moderate as we move through the third quarter; for the full quarter, tonnage should be down less on a year-over-year basis than what you saw in July.

Yes, sort of taking things a different direction. Let's just say that we finally get some manufacturing expansion, whenever that is, next year or what have you. Can you maybe talk through how, with all the stuff that you've done in the last 2 or 3 years, what sort of incremental margins you think you could produce over the course of the start of the next up cycle and through it?

Yes, you got it, Jordan. So we're incredibly excited about the up cycle when it comes. Here, even in a freight soft market in the down cycle, we're delivering margin improvement, two years in a row is the expectation. In an up cycle, we're off to the races. I'll walk you through a couple of items. In terms of incremental margins, we do expect to be comfortably over 40% on incrementals. If you go back to late last year in the fourth quarter, the last quarter of revenue growth before the soft first half of the year, our incrementals were in the 70% range, our EBIT incrementals. Obviously, we'd love for it to be 70% in the up cycle, but we don’t want to set too big an expectation, so we're comfortably in that 40% range. Now what are the drivers? I just mentioned earlier our yield initiatives driving above-market yield growth. Typically, in the up cycle, we see LTL yield across the industry go up meaningfully. If the industry is going to high single digits, we expect to outperform that by a few points in terms of overall yield performance. If you break it down, all the levers that we have in terms of growing with the small- to medium-sized businesses, year-to-date, we've onboarded more than 5,000 new local customers. This gives you an example of the momentum we've built in an up cycle with these types of customers. Similarly, think about the premium services; all of these have been launched and are gaining momentum. We're building pipelines on each one of them. In an up cycle, carriers that don't have capacity might face service issues. In that case, we'll be able to onboard more of these premium services and grow them at a higher clip. Moving to the cost side, historically, we had a bigger headwind from purchased transportation, typically truckload rates go up in an up cycle. Our exposure now is much lower, which means higher incremental margins. Similarly, on the productivity side, after Yellow's bankruptcy, when tonnage was up, we improved productivity for the two quarters after the cessation of operations by 7% in one quarter and 4% in the following quarter. We're currently improving productivity by about 1 point a quarter. You can see that fast forward with the compounding effect of the AI initiatives; our technology enables us to improve productivity at a much higher rate as well. Lastly, we have larger locations with 30% excess capacity, a fleet that's in fantastic shape, and service quality is also excellent. When the up cycle comes, it will mean significant expansion and meaningful incremental margins as well.

Congrats on some of the improvements in a tough freight market. Mario, I was curious to get your thoughts. There's an industry disruption event happening next year with the separation of the largest player from its parent. I'm curious if you're seeing any impact on the market or the competitive dynamics from that? And just if you could talk about the overall competitive environment and the extent to which you're seeing maybe people being a little more aggressive on pricing than what we've seen in the past.

Overall, for FedEx separating the freight business, I think it would be good for the industry because it will continue to ensure that focus on price discipline and margin expansion. As a standalone entity, being an LTL carrier, one of the biggest drivers for profit growth over time is driven by margin expansion, and every LTL operator understands that the #1 lever to improve margins is around pricing. So we believe that's going to help the industry overall. They're a great company and a great competitor today and will remain one tomorrow. I don't see any changes in that, whether they are a standalone entity or part of a bigger FedEx.

Congrats on the good results. My question is how we should think about pricing into the back half? You've talked about consistent above-market yield. But in terms of the sequential improvement in yield we've seen, can we expect to see that kind of pace continue into the second half? And then just obviously, the growth in the local channel is a big driver of that. So can you sustain that high single-digit type quick growth in the local channel?

When you think about Q3 yield excluding fuel, we would expect to continue to improve sequentially from Q2, and that improvement would continue into Q4 as well. On a year-over-year basis, we'd expect Q3 yield excluding fuel to grow at or above the level we saw in Q2. In terms of pricing, we also expect revenue per shipment to increase sequentially in both Q3 and Q4 this year. To put that in context, that's building on 10 consecutive quarters of sequential improvement we've delivered. We feel very confident in our pricing initiatives. Specifically, regarding the local channel, as Mario mentioned, we started our initiative at around a 20% share and are now in the low to mid-20s. Our goal is to get to 30%, which should help us continue to grow yield in the back half as well as in the coming years.

I want to ask about labor productivity and get a sense of how you think that plays out in the back half of the year. Obviously, you're guiding to better than normal seasonality on the operating ratio, so potentially this plays into that. Do you need to see a better volume environment to make further progress on that? Are there levers you can pull in the near term, even in a down volume environment?

If you think about our ability to drive labor productivity in the quarter, even with tonnage being challenged, we were able to improve productivity by 1% on a labor cost per shipment basis. So we expect to improve that further. Our initiatives are tech-enabled, and we expect to see further improvements both on the dock and for pickup and delivery. Mario mentioned this, but when you think about linehaul cost and how to integrate some of those larger service centers, that's going to help us drive even more labor productivity when those breaks come up to speed. So we feel very good about our ability to gain momentum on the labor front.

I wanted to ask a little more about the revenue environment and what exactly happened in June. You’re the second LTL carrier now that's talked about a pretty steep deceleration that happened in June, followed by a snapback in July. Can you discuss the dynamics of what happened and then, as we think about the full year, what risks should we consider in the guide, and how do you intend to offset that if the tonnage environment continues to be shaky?

When we think about our shipment trends throughout the second quarter, they were very consistent and also in line with seasonality. However, we did see softer weight per shipment in the month of June, and there were two dynamics driving this. First, macro and tariff uncertainty impacted weight per shipment for some of our small to medium-sized customers. We believe this impact is transitory. This is a channel where we’re seeing strong growth and is OR accretive for us. We also faced a tougher comp in June on a weight per shipment standpoint. If you look at it on a 2-year stack basis, that helps normalize for some of that dynamic. In the third quarter, we've seen some normalization in the weight per shipment decline versus year-over-year as we move through the quarter. While we’re not immune to the macro environment, we have multiple levers to pull on both the yield and cost sides to mitigate the impact of lower volumes. In the first half of the year, and in Q2 particularly, our decremental margins were 9% in that quarter. Our ability to grow yield above market will help support our operating ratio outlook.

Wanted to ask about the grocery again. I know you had a question on this area and discussed it a bit. Is that something where a couple of players are big in that, and it’s kind of specialized? You’ll likely take some share from a few players, as that’s kind of unusual for big LTL to participate in that area. Can you comment on the competitive dynamic there? And how many areas are there left in the pipeline like that that you might look into?

When you look at the grocery business, it is a more consolidated business in the LTL segment. The reason for that is that great service is a prerequisite to deliver on those expectations for customers. With our service improvements, our on-time performance has improved for the 13th consecutive quarter. We also have one of the best claims ratios in the industry, as well, and that resonates with customers. We're seeing actually some of these customers come to us and ask us to onboard them. It is a more consolidated market today, and we expect to grow in it over the quarters and years to come. Recall last year, we launched several premium services, such as must-arrive-by-date services, which require timely deliveries and services for retail store rollouts or trade show offerings. These come at a higher yield because customers pay extra for the incremental service they request. Once we launch these services, we train our sales force on how to sell them, thereby building a pipeline of opportunities which grow further over time. With grocery specifically, we’re building the pipeline and will start converting more accounts in the back half of the year and into 2026. Other services we are considering include expedited service and security dividers in our trailers; there are another three to four premium services we are looking into for the next couple of years. We're early innings with these initiatives. I’d say we are about a third of the way to our goal by 2027 or 2028. In terms of accessorial revenue, when we started, it was 9% to 10% of our revenue, and we're now up a couple of points from that number, with a path to reach our target of 15% as a percentage of revenue in the next few years.

First, I want to follow up on Arie's question about FedEx. We noticed the announcement regarding their delay, pushing it out to December, while everyone else has adopted the new structure. I wanted to understand whether this presents an opportunity or a challenge for them and how it impacts XPO. Additionally, could you provide some broader insights on cash flow and capital deployment? Kyle, what do you expect for CapEx going into 2026 and beyond? What leverage targets should we consider regarding deleveraging? Also, what type of buyback deployment should we contemplate?

Let's start with the changes. FedEx implemented changes on how freight is classified, primarily reclassifying products based on their density. We don’t expect this to materially impact pricing any different. Our main focus is on proactive communication with our customers so they understand how freight is properly classified and rated. Different carriers implement changes differently; for us, we dimension over 90% of our freight and communicate the information needed to drive pricing. Thus far, from the implementation on July 19, we have not seen significant changes. Regarding free cash flow and capital, we expect CapEx to moderate. Last year, we spent nearly 15% of revenue on CapEx in the LTL space, which will come down a few points this year. We discussed our reduced need for bringing new facilities online and our fleet reaching sub-7% outsourced linehaul miles, which minimizes future CapEx needs. Additionally, we will see decreased cash taxes in the back half of the year and into the next year, while continuing to grow EBITDA. From a cash flow standpoint, we expect to generate significant cash this year and next. In terms of capital allocation, we want to fund necessary CapEx and aim to drive towards our long-term leverage targets of 1x to 2x. After paying down $50 million of our Term Loan B, we will have more flexibility to repurchase shares as cash continues to build, accelerating share buybacks in the latter part of this year and into the next. The tax legislation, specifically the 100% bonus depreciation, will help to mitigate cash taxes in the back half of this year and into next year. Other aspects, such as the interest expense deduction and the deduction for R&D investments, will also help positively impact cash taxes.

Can you talk philosophically about how you're thinking about the buyback? You're only $10 million in, but I'd be curious if this is more opportunistic, driven by excess cash, and how value-sensitive you are. Can you provide some thoughts about how we might size that up as a driver of your growth moving forward?

As Kyle just discussed, when it comes to capital allocation, our goal is to maximize shareholder value. In the back half of this year, we expect to generate a significant amount of free cash flow. With capital stepping down and earnings growing, we anticipate meaningful cash growth as we move into next year. We plan to consider both debt paydown and share buyback, and the ratios depend on valuations and our acceleration of debt repayment. This will be an important part of our strategy for shareholder value creation as free cash flow grows over time.

If we look at the restructuring and transaction costs added together, the add-backs were $100 million a couple of years ago, down to $80 million last year. They're run-rating at maybe $50 million or so in the first half of this year. That's encouraging. Do you think that the earnings quality will continue to improve going forward? What's the cash flow impact of that?

If you look at those lines, we were significantly lower in the second quarter. Most of these expenses relate to restructuring, focusing on salary and some functional support teams. This will contribute to earnings growth moving forward. It will help with OR outperformance in the back half of this year and will additionally impact next year.

First, just a quick follow-up on Arie’s question about FedEx. Can you quantify how getting to that 2% in-sourcing goal for linehaul would translate to the bottom line and costs? Also, you referenced utilizing AI and early successes. How should we think about cost-saving opportunities with AI over the next few years?

For linehaul in-sourcing, when we in-source third-party linehaul miles, we do so to our own equipment and drivers. Even in the current truckload rate environment, we save around 5% per mile using our own resources. That's a mile-for-mile comparison. We improve load averages with internal resources, which also increases efficiency. In the future, we anticipate an improved ability to control costs from higher truckload rates during up cycles, mitigating headwinds compared to previous environments, with several cost efficiencies we expect to continue to enhance. Discussing AI, we’ve made strides in linehaul as well. We’ve reduced normalized linehaul miles by a low to mid-single-digit percentage, with double-digit reductions in empty miles and reductions in diversions over 80%. These factors are a tremendous impact that aids in service, efficiency, and cost productivity now and in the future. As we continue to roll out AI and maintain technical enhancements, we expect cost savings to accelerate as it becomes more ingrained in our operational processes.

Kyle or Ali, maybe one on the pricing side. You mentioned you expect yields to step up sequentially in the back half. Can you quantify how much of that acceleration in pricing is coming from core pricing, accessorial attachment, or easier comparisons? Should we still expect the 2-year stack increase to decelerate through the back half of the year, just based on comparisons?

When you think about core pricing, our contract renewals have been strong. The second quarter was similar to previous quarters, and we expect Q3 renewals to be stronger than Q2. Core pricing will help us drive yield in the back part of the year. Specifically, regarding accessorials, as we've mentioned, our goal is to reach 15% of revenue. We're currently in the low double digits and expect to continue this upward trend. Overall, we see a very positive outlook for pricing in the back half, backed by strong renewals.