Earnings Call Transcript - XPO Q1 2026

Operator, Operator

Welcome to the XPO Q1 2026 Earnings Conference Call and Webcast. My name is Kevin, 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 its earnings release. The forward-looking statements in the company's earnings release and on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, except to the extent required by law. During the call, the company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables or on its website. You can find a copy of the company's earnings release, which contains additional information, important information regarding forward-looking statements and non-GAAP financial measures in the Investors Section of the company's website. I will now turn the call over to XPO's Chairman and Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Mario Harik, Chairman and Chief Executive Officer

Good morning, everyone, and thank you for joining us. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. This morning, we reported record first quarter earnings with strong momentum across the business. Company-wide, we delivered adjusted EBITDA of $319 million, up 15% year-over-year, and our adjusted diluted EPS was $1.01, up 38%. In North American LTL, we increased adjusted operating income by 20%, and we delivered an adjusted operating ratio of 83.9%, that's an improvement of 200 basis points year-over-year, which is also well ahead of normal seasonality. These results mark a clear acceleration of outperformance driven by the disciplined execution of our strategy. It starts with customer service where we continue to make significant progress. In the first quarter, we reduced our damage claims ratio below 0.2% with damages at a record low. This is the service metric that matters most to LTL customers. We've developed new AI-driven technology that addresses damages by improving how we load our trailers. These tools evaluate load quality in real time and help us protect our customers' freight. We're also running one of the fastest networks in the industry with the largest number of standard 1-day and 2-day services. Our mix of speed, coverage and safe handling combined with reliable on-time performance is delivering a superior experience for our customers. And this is translating into better commercial outcomes, including stronger pricing and ongoing market share gains. We've also built our network to support growth by investing ahead of demand across our workforce, fleet and service centers. These are the three main components of capacity to move freight for our customers. On the real estate side, we've added density in growth markets, and we continue to operate with more than 30% excess door capacity. This allows us to run our network efficiently today and respond quickly as volumes recover. Another area where we invest to gain a competitive edge is in our rolling stock of tractors and trailers. We have one of the youngest fleets in the industry with an average tractor age of 3.9 years. This gives us an advantage with reliability, safety and lower maintenance costs. Trailers are just as critical to capacity because they enable more efficient freight flows across our network. We've manufactured more than 20,000 trailers since the start of the trade-down cycle. And from a labor standpoint, we have a proprietary workforce planning model that uses technology to flex labor hours as demand changes. This allows us to improve productivity while maintaining high service levels. Taken together, our investments in capacity are creating strong operating leverage that will enhance our bottom line as the cycle turns. Another strategic lever is pricing, where we saw continued momentum in the quarter, with underlying trends that improved each month. As demand recovers, customers place more value on carriers that they can rely on for both capacity and consistent service, and that translates into stronger pricing and continued share gains for us. One area where we're continuing to earn market share is with local customers. In the first quarter, we grew shipments in this high-margin channel by mid- to high-single digits, an acceleration from the prior quarter. We're also continuing to shift towards higher-quality freight, including shipments that used our premium services. The demand for our rollout offering was a key driver of our margin improvement in the first quarter. And we're seeing increased adoption in verticals like grocery and health care, where we fill a definite need as customers in these segments have service-sensitive freight. In short, we have multiple levers we can execute and a long runway to build on our momentum with a double-digit pricing opportunity over the years to come. And lastly, another important driver of our outperformance is cost efficiency. In the first quarter, our productivity improvement of 4% was well above our long-term target of 1.5%. We achieved this by ramping our technology to ensure that the benefits are both durable and scalable. Specifically, we're leveraging proprietary tools that use AI to improve planning, optimize trade flows and enhance day-to-day execution. This is especially valuable in linehaul and pickup and delivery operations where the savings can be significant. For example, we've rolled out our pickup and delivery tools for route optimization to about half the network, and we're seeing tangible efficiencies, including fewer miles and more stops per hour. We expect to have this fully implemented by the end of the year. And to bring down our purchased transportation costs, we've reduced outsourced miles to some of the lowest levels in our history. This has given us a more flexible cost structure that mitigates our exposure to rises in truckload rates. Importantly, these initiatives are driving structural improvements that will scale as volumes recover, creating further opportunities for margin expansion. In closing, our strong start of the year reflects the strength of our model and the consistency of our execution. We have a clear line of sight to achieving an LTL operating ratio in the 70s driven by ongoing service improvements, profitable share gains, above-market yield growth and robust cost efficiency across our network. Increasingly, all four of these drivers will be propelled by our proprietary technology and AI. We also see a significant opportunity to further compound earnings as we expect to generate billions of dollars of cumulative free cash flow in the coming years, accelerating share repurchases and debt reduction. This is how we're building our path to long-term value creation for our shareholders. With that, I'll turn it over to Kyle to walk through the financials. Kyle, over to you.

Kyle Wismans, Chief Financial Officer

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet and capital allocation. For the first quarter, total company revenue was $2.1 billion, an increase of 7% year-over-year. Revenue in our LTL segment grew 5% to $1.2 billion, primarily driven by higher yield and fuel surcharge revenue. On the cost side in LTL, we continue to operate more efficiently and with less reliance on purchased transportation. Our productivity gains in the quarter helped mitigate the impact of wage inflation, linehaul insourcing and volume growth. Our salary, wage and benefit expense increased year-over-year by 4% or $27 million. On purchased transportation, we enhanced our structural cost improvement by further reducing our use of third-party carriers. This will help us control linehaul costs as the cycle recovers and truckload rates rise. Depreciation expense increased by $8 million or 10% year-over-year, reflecting our continued investment in the network to support long-term growth. Turning to profitability. We increased adjusted EBITDA company-wide by 15% to $319 million. Our adjusted EBITDA margin was 15.2%, an improvement of 100 basis points from the first quarter of the prior year. In our LTL segment, we grew adjusted operating income by 20% to $198 million and adjusted EBITDA by 16% to $290 million. Our LTL adjusted EBITDA margin improved by 230 basis points to 23.6%. In our European transportation segment, adjusted EBITDA was $33 million. And in our Corporate segment, adjusted EBITDA was a $4 million loss. Returning to the company as a whole, we reported operating income of $174 million for the quarter, up 15% year-over-year, and we grew net income by 46% to $101 million, representing diluted earnings per share of $0.85. On an adjusted basis, diluted EPS was $1.01, an increase of 38% year-over-year. Moving to cash flow and CapEx. We generated $183 million of cash flow from operating activities in the quarter and deployed $104 million of net capital expenditures. We ended the quarter with $237 million of cash on hand after repurchasing $30 million of common stock and paying down $30 million on our term loan facility. Combined with available capacity under our committed borrowing facility, our total liquidity at quarter end was $837 million. Our net leverage ratio was 2.3x trailing 12 months adjusted EBITDA, down from 2.4x at year-end 2025, continuing the trend over the last two years. We expect a meaningful step-up in free cash flow generation this year with momentum building over the next few years. This should accelerate the pace of share repurchases and deleveraging. Before I wrap up, I want to highlight an update to our full year 2026 planning assumptions. We now expect our adjusted effective tax rate to be in the range of 23% to 24%. This is reflected in the latest investor presentation. Our other planning assumptions for the year remain unchanged. With that, I'll hand it over to Ali to walk through our operating results.

Ali-Ahmad Faghri, Chief Strategy Officer

Thank you, Kyle. I'll start with our LTL performance where we delivered another quarter of strong execution and outsized margin expansion. Shipments per day increased 3% year-over-year, while weight per shipment decreased 2.8%, resulting in tonnage per day turning positive by 0.1%. We're continuing to drive profitable growth in the business by increasing the number of shipments, improving network density and prioritizing both freight quality and mix to support yields and margins. Our mix has met specific objectives, including share gains with local customers and market penetration with our premium offerings, and we're showing that we can achieve these objectives in any environment. Looking at the first quarter trend year-over-year by month, January tonnage was flat. February was up 0.1%, and March was down 0.4%. Notably, shipments per day trended up each month. January was up 1.2%. February was up 3% and March was up 3.8%. For April, we estimate that tonnage will be down about 1 point compared with last year, outpacing typical seasonality, and that weight per shipment will improve sequentially and on a year-over-year basis versus March, also trending better than seasonality. Turning to pricing. We delivered another quarter of above-market performance with yield up 4% year-over-year, excluding fuel. Importantly, our strong pricing trajectory is continuing to trend up. We expect both yield and revenue per shipment, excluding fuel, to accelerate on a year-over-year basis and improve sequentially through the balance of the year. We're driving this internally through continuous improvement in service and externally with our local customer base and premium offerings. These channels are both gaining traction with customers. Looking at first quarter profitability in LTL, we reported a 200 basis point improvement in our adjusted operating ratio year-over-year. We also improved margins sequentially, outperforming normal seasonality by 100 basis points. This reflects our momentum with pricing as well as the application of our technology, which excels at productivity and cost control. Most recently, our AI tools are enabling precision planning and execution in driving operating efficiencies consistently across the network. Turning to Europe. We continue to generate strong results. First quarter revenue increased 11% year-over-year. This was our ninth consecutive quarter of growth on a constant currency basis and we delivered another quarter of adjusted EBITDA growth that was better than seasonality relative to the fourth quarter. Before we move to Q&A, I'd like to summarize the key drivers of our momentum in LTL. First is above-market pricing growth, which we support by ensuring our customers receive strong service. This dovetails with our focus on mix and freight quality. And as I mentioned, we expect our pricing trajectory to accelerate as we move through 2026. At the same time, we're creating structural cost advantages in our network through productivity gains, capacity investments and the ramping of our technology. Each of these levers has a sustainable impact on our best-in-class margin expansion and each represents significant upside as the cycle inflects. With that, we'll take your questions. Operator, please open the line for Q&A.

Operator, Operator

Our first question today is coming from Ken Hoexter from Bank of America.

Ken Hoexter, Analyst (Bank of America)

Congrats on strong performance here as we see some rebound. But Ali, maybe just — or Mario, talk about contract renewals. You talked about strong pricing. Should we see a deceleration in core pricing, given the acceleration of fuel? Maybe just talk about the mix there? And then, Ali, just given the impact on that, your thoughts on sequential operating ratio. If we're outperforming seasonality by a sizable amount here in the first quarter and you're getting that pricing, does that accelerate and continue to outperform seasonality as we look into the next quarter or two?

Mario Harik, Chairman and Chief Executive Officer

Yes, you got it, Ken. This is Mario. So our contract renewals in the first quarter accelerated from where we had them in the fourth quarter. They went up in the mid- to high-single digits in Q1 of this year. Now we also expect from a yield perspective an acceleration, as Ali mentioned earlier, both from a yield ex-fuel perspective and revenue per shipment perspective on a year-on-year and sequential basis in Q2 and through the rest of the year. In terms of an outlook, based on what we have seen so far here and what we delivered in Q1, we do expect another strong quarter of margin performance in the second quarter. If you look at seasonal trends over the long term, we typically see our OR improve 250 to 300 basis points sequentially from Q1 into Q2 and we expect to comfortably outperform the high end of that seasonal range in the second quarter. This would also mean that on a year-on-year basis, we expect to improve OR in the second quarter more than we did in the first quarter. That's a faster path for us to get to an OR in the 70s. Obviously, we'll see how the rest of the quarter rolls out, but this would be an overall strong outcome, given that we're still in the early innings of what could be a recovery year.

Operator, Operator

Your next question today is from Richa Talwar from Deutsche Bank.

Richa Talwar, Analyst (Deutsche Bank)

I guess I just want to better understand what's happening on the pricing and weight per shipment side. I believe revenue per shipment was expected to come in mid-single digit range for the year. Rate per shipment to be roughly flattish. We're starting the year below target on both. Also revenue per hundred was not as strong as I would have expected, despite the lower weight per shipment. So just trying to understand, obviously, Mario, you said you saw continued momentum in the quarter, and pricing should accelerate. I just want to make sure that those are still targets for the year, appropriate targets. And then obviously, comps are a factor. But just generally, what's going to get us back to the acceleration phase?

Kyle Wismans, Chief Financial Officer

Yes, Richa, it's Kyle. So I want to highlight a little bit on yield. For the first quarter, we had another strong quarter of pricing performance. I think as Mario mentioned, a lot of the strong pricing translated to our OR outperformance in the quarter. So for Q1, we were 100 basis points better than normal seasonality and on a year-over-year basis, we improved more than 200 basis points. Based on the price improvement we're seeing here in March and April, we would expect both yield and revenue per shipment ex-fuel to accelerate on a year-over-year basis in Q2 and through the rest of the year. I think what's important is reflecting an increasingly constructive price environment as well as our internal initiatives that help drive price further in the future.

Ali-Ahmad Faghri, Chief Strategy Officer

And then, Richa, on the weight per shipment side specifically. If you look at Q1, our weight per shipment was down 2.8% on a year-over-year basis. That was up about 2 points sequentially versus the fourth quarter, and that's very consistent with the typical step-up that we see as we move from Q4 into Q1. Now weight per shipment for us can bounce around from month to month. Specifically, if you look at Q1 for us, we did ramp out the rollout of some of our premium services throughout the quarter. We're also taking a lot of share with local customers. Both of those channels do come with a lower weight per shipment profile; however, they are very accretive to our margins. Ultimately, that's what drove that meaningful OR outperformance in the first quarter. More recently, what's encouraging is that weight per shipment trends have started to improve. So in April, per shipment was down about 1 point on a year-over-year basis. That was about 2 points better than typical seasonality. Usually, we see weight per shipment decline sequentially from March into April, and we actually saw an increase sequentially. Ultimately, that's what gives us confidence in the weight-per-shipment trend improving as we move through the balance of the year.

Operator, Operator

Our next question is coming from Scott Group from Wolfe Research.

Scott Group, Analyst (Wolfe Research)

With the tonnage update, it's helpful, but I feel like comps get a little easier as the quarter goes on. Obviously, we've got big tailwinds coming from fuel. Any sort of directional thoughts on how you guys are thinking about total rev per day trends for the quarter? And then just given Q1 and the Q2 guide, it feels like there should be good upside to the full year OR guidance of 100 to 150 basis points. Any sort of updated thoughts on how the full year OR could now look?

Ali-Ahmad Faghri, Chief Strategy Officer

So Scott, I'll start with the second quarter in terms of the moving pieces and then pass it to Mario on the full year. In terms of Q2, from a tonnage standpoint, if you just roll forward normal seasonality from here and keep in mind, we do have slightly tougher comps in the months of April and May, and then June gets much easier on a year-over-year basis, we would expect tonnage to improve in each month of the quarter, and that would put full-quarter tonnage flattish on a year-over-year basis. From a pricing standpoint, as Kyle noted, we do expect our yield ex-fuel and revenue per shipment ex-fuel to accelerate on a year-over-year basis here in the second quarter. We would expect our yield to be comfortable in that mid-single-digit range in the second quarter. So that should give you some of the moving pieces in terms of the top-line outlook.

Mario Harik, Chairman and Chief Executive Officer

And Scott, for the full year OR, as you mentioned, we delivered in Q1 a better-than-expected OR outcome versus when we started the year. We do expect Q2 to also be better than what we expected from the beginning of the year. As I mentioned earlier, we do expect to comfortably outperform the seasonal trend into Q2 from Q1 and improve on a year-on-year basis more than we did in the first quarter. So it's fair to say that we have a high degree of confidence in potentially outperforming our outlook of 100 to 150 basis points of margin improvement this year. Now there are also more things that can go well. From a volume perspective, so far, volume has tracked in line with our expectations, Q1 through April, but we are hearing more optimism from our customers. If we start seeing volume inflect as we head into the back half of the year, where underlying demand continues to pick up steam, then obviously, all of that would be upside to our forecast. On the pricing side, as Ali mentioned, we expect an acceleration in Q2 for both yield and revenue per shipment, and we expect that to continue through the balance of the year. On the cost side, our execution has been excellent. I'm very proud of the team in terms of delivering in a volatile environment, but coupled with fantastic AI and technology tools we've launched, we've already rolled out our P&D optimization AI tool to half our network, and we haven't even done the largest locations yet. In the first quarter, we improved productivity by 4 points. If that continues to compound through the rest of the year, all of that could be upside as well. So again, we started the year with a lot of momentum in Q1 and Q2. It's still early in the year, though, and as we make progress, we'll update on the full year as we continue to deliver those kinds of numbers.

Operator, Operator

Our next question is from Fadi Chamoun from BMO Capital Markets.

Fadi Chamoun, Analyst (BMO Capital Markets)

I think you touched on this a little bit, but I'm not clear. I understand the revenue per shipment year-on-year and quarter-over-quarter was the weakest performance that we have seen since 2023. You talked about mix and a few other things. I just want to make sure I understand why you've seen this deceleration in Q1. And obviously, you're talking about an acceleration going forward, I suppose that's driven by the yield. But my main question: can you talk a little bit about what you're seeing from the customers' conversations in terms of what the demand outlook looks like? Weight per shipment seems to kind of be moving a little bit in the other direction. Are we seeing more pallets? Or what are you seeing on the core organic demand environment with your customers?

Ali-Ahmad Faghri, Chief Strategy Officer

Sure, Fadi. From a revenue per shipment standpoint, as I noted, that can bounce around from quarter to quarter. Specifically for Q1, we did see a lot of progress with some of our mix initiatives around local growth and premium services which, again, do come at a slightly lower weight-per-shipment profile but are very accretive to our margins. That's what drove the strong margin outperformance in the first quarter. Encouragingly, we've started to see the pricing trend accelerate as we moved through the first quarter and that acceleration continued into the second quarter from an underlying yield standpoint. At the same time, we're also seeing the weight-per-shipment trend normalize on a year-over-year basis. So the acceleration in yield combined with that normalization in weight per shipment is what's driving the positive outlook on revenue per shipment accelerating into the second quarter, and that's consistent with what we've seen in April as well.

Mario Harik, Chairman and Chief Executive Officer

And Fadi, on the overall demand outlook, we are hearing more optimism from customers. Every quarter we survey our top customers about their expectations for the back half of the year, and we are hearing more optimism: double the number of respondents now expect an acceleration into the back half of the year relative to the first half, and nearly no customers expect a deceleration in the back half. We haven't seen survey results like this going back to 2021, which is encouraging. Retail has been positive and consistent. On the industrial side, we're hearing optimism but haven't yet seen it materialize in big volume swings. Since we've been in an industrial recession for about three years, volumes in the industrial economy are down in the mid-teens. What we're seeing now with ISM being over 50 for three months to kick off the year is encouraging. Sub-sectors like electrical, ag equipment, and chemicals are doing well, and in April we're also seeing some pickup. If ISM continues to show strength and the higher activity materializes over the next few months, we could see meaningful demand improvement in the back half of the year. So again, early innings, but we're hearing much more optimism than a quarter or two ago.

Operator, Operator

Our next question today is coming from Jonathan Chappell from Evercore ISI.

Jonathan Chappell, Analyst (Evercore ISI)

Mario, I want to touch on the productivity comment again and one of your previous answers about the potential for that to compound. 4% is obviously significantly greater than your long-term target. So can you help us understand how you did so much better in 1Q from a productivity perspective? And is there a bit of front-loading, so to speak, that compounding at such a level may be too high of a bar for the remainder of '26 as we think about the margin progression from here?

Mario Harik, Chairman and Chief Executive Officer

Well, overall, in the quarter, Jon, we launched our new AI tool for P&D optimization and it's now rolled out to half our network. We're seeing measurable results with fewer miles and more stops per hour in our P&D environment. We also implemented a number of linehaul solutions in the middle of last year and we are still seeing the wraparound effects of those improvements. We've launched updated models for dock efficiency and we'll continue to refine them as we roll out more changes. Technology improvements are not strictly linear: you launch something, get feedback from the field, and then keep improving it. AI learns from outcomes; for every algorithm we have, we compare outputs to ideal outcomes and refine over time. All of these tools plus strong execution by our operators contributed to the 4% productivity pickup in Q1. We do expect to be above our target of 1.5% for the full year, and the Q1 performance supports the potential for compounding. That said, we're taking a conservative view on full-year assumptions and will update as we progress. But AI is getting smarter and should continue to drive durable improvements.

Operator, Operator

Our next question today is coming from Jordan Alliger from Goldman Sachs.

Jordan Alliger, Analyst (Goldman Sachs)

Just curious, given some of your comments and the hopefully improved trend on the tonnage, can you talk to your excess terminal capacity — I think previously you were somewhere in the 30% range — has that started to move lower? And then tied into that, in terms of thinking about a sub-80% operating ratio over time, what would be required in terms of excess terminal capacity to get below that level?

Mario Harik, Chairman and Chief Executive Officer

Yes, you got it, Jordan. By the end of the first quarter, we had more than 30% excess door capacity, which is a sweet spot to be in as an LTL carrier in a softer freight environment while expecting demand to inflect at some point. Over the last three years, we added about 15% more door capacity, but not all capacity is created equal: we focused on markets where we were historically capacity constrained — think Atlanta, Texas, Columbus, Indianapolis, Minneapolis, Nashville — and added large breakbulk locations to support customers when the upcycle comes. On trailers, we've added more than 20,000 new regular trailers to our fleet over the last three years. These investments have impacted depreciation, yet we've still improved operating results over that period. In terms of getting to an operating ratio in the 70s, all of the things we're doing enable us to get there, but the biggest contributor is yield and yield performance. Today, we have a double-digit pricing opportunity to catch up with best-in-class peers, and that comes through three levers: continuous improvement in service to win premium freight, premium services expansion (accessorial revenue up from roughly 9-10% to 12-13% and a goal of 15%), and growing business with small- to medium-sized customers. For example, in Q1 we onboarded more than 2,600 new customers in the local channel. These actions give us a massive runway to improve margins even without a macro recovery. In Q1, our incremental margins were 58%, which underscores the leverage as volumes recover.

Operator, Operator

Our next question is from Stephanie Moore from Jefferies.

Stephanie Benjamin Moore, Analyst (Jefferies)

Mario, I think in the past you've talked about total volume declines in this freight down cycle to the tune of maybe 15% to 20%. As you think about XPO's ability to recover, if not the majority or even more of that volume compression that we've seen over the last several years, what gives you confidence you can recover that? And at the same point, can you talk about labor capacity? I think we talked a lot about door capacity, but where does your labor capacity stand today? And what would be required as you start to look at bridging that volume gap from the last couple of years?

Mario Harik, Chairman and Chief Executive Officer

Thanks, Stephanie. Industry volumes, as you noted, have been down in the mid-teens over the past three years due to cyclical factors; about a 16-point decline in that period. Two-thirds of our customers are industrial, so they've been meaningfully impacted. We are seeing a pickup in industrial demand, which could be the early innings of a recovery. The excess door capacity we have will comfortably handle a 15% increase in freight and potentially more, especially since we've added capacity in historically constrained markets. On the labor side, we make sure headcount is commensurate with volumes while maintaining buffers. If employees work more hours, that alone can give meaningful incremental capacity, but if demand sustains, we'll need to add headcount. We have driver training schools operating in about 130 terminals, which convert great dock workers into professional drivers. Over the last few years we have materially reduced turnover among drivers and dock workers by listening to employees and taking action on feedback. So first we hire to replenish turnover and then hire for growth, and we feel great about our ability to do that given where we are today.

Operator, Operator

The next question is coming from Chris Wetherbee from Wells Fargo.

Christian Wetherbee, Analyst (Wells Fargo)

As we think about the outlook for the back half of the year, you noted the customer sentiment improvement. I wanted to think about what productivity might look like in the context of improving volumes. You guys have done a wonderful job through a challenging freight environment. If we start to see tonnage and shipments grow more consistently, what do you think the productivity opportunity is relative to that 1.5% longer-term target? Can it be that 4% sustainably? Just want a sense of how that plays out.

Ali-Ahmad Faghri, Chief Strategy Officer

Chris, from a productivity standpoint, as volumes start to improve, we would expect productivity to accelerate. Historically, when we've been in a volume growth environment — for example, in the four quarters after Yellow went bankrupt — we were growing volumes in the low- to mid-single-digit range and improving productivity in the mid-single-digit range consistently. So as volumes improve, there's more upside to the 1.5% productivity target. In the first quarter, we drove 4 points of productivity in a flat volume environment, so clearly we have the capability to drive upside through our initiatives even without volume improvement. But volume upside gives us more confidence in delivering above the 1.5% target.

Christian Wetherbee, Analyst (Wells Fargo)

And just a quick clarification: each point of productivity is roughly how much incremental EBITDA? Should we think in that $20 million to $25 million range?

Ali-Ahmad Faghri, Chief Strategy Officer

Each point of productivity is somewhere in that $25 million to $30 million of incremental EBITDA.

Operator, Operator

The next question is coming from Tom Wadewitz from UBS.

Thomas Wadewitz, Analyst (UBS)

I wanted to ask a bit more about what's in your assumptions for Q2 and what your customer feedback points to. It seems like things aren't off to the races, but they're improving. In terms of what you bake into your commentary for Q2, is that essentially normal seasonality in your tonnage and shipments per day comments? And does customer feedback lead you to think there's a good chance that later in Q2 or the second half you actually see the market do better than normal seasonality and show some acceleration?

Kyle Wismans, Chief Financial Officer

In terms of the tonnage outlook, we are rolling forward normal seasonality. If you roll forward what we saw in April into May and June, that would put full-quarter tonnage flattish year-over-year. As the demand environment improves and we see above-seasonal volume performance continue, there could be upside to that outlook. But the appropriate way to model it today is to roll forward normal seasonality for the rest of the quarter. Our expectation is not only that OR improvement will accelerate year-over-year in Q2 versus Q1, but that we'll also see EPS growth accelerate year-over-year in Q2 versus Q1.

Thomas Wadewitz, Analyst (UBS)

Okay. So we should look at that as upside, and Mario's comments on the survey suggest the second half could be even better than the baseline you're using — that would be upside to your current way of looking at things.

Kyle Wismans, Chief Financial Officer

I think that's a fair way of thinking about it.

Operator, Operator

The next question is coming from Brian Ossenbeck from JPMorgan.

Brian Ossenbeck, Analyst (JPMorgan)

Mario, can you talk about the context around the accelerating price and yields? You mentioned the gap to core pricing, but rolling out better mix and accessorials and new markets — is there any way to put context around the relative change or rate of change and what's driving that from each of those buckets? And relatedly, you mentioned fuel impact in the press release. It looks like there was a net benefit this quarter. How are you thinking about that and modeling it into Q2 given current energy prices?

Mario Harik, Chairman and Chief Executive Officer

You got it, Brian. First, the levers for pricing: we see a multiyear, double-digit runway to catch up with best-in-class peers. About two-thirds of the opportunity comes from improving service, which lets us win premium and higher-quality freight. We expect this to drive outperformance versus industry yield by roughly one point per year. The second lever is premium services, where we see about three points of opportunity ahead of us. We expect roughly a one-point-per-year run rate of above-market pricing from growing market share in these services. For example, services like must-arrive-by, retail rollout, and other premium offerings currently represent a smaller share of our revenue relative to our broader market share, and we expect that to grow. Third is the local account channel: when we started our plan, local was about 20% of revenue and our goal is 30%. We're making strong progress there; in Q1 we onboarded over 2,600 new local customers, which accelerated our local growth cadence. Taken together, if the market is soft, industry yield may be up low single digits and we expect to outperform by 2-3 points. If the market normalizes, industry pricing will be mid-single digits and we expect to outperform by 2-3 points. If the macro inflects and industry pricing moves into mid- to high-single digits, we expect to outperform that as well. That is our cadence and where we see upside across Q2, Q3 and Q4.

Ali-Ahmad Faghri, Chief Strategy Officer

And Brian, on fuel specifically, there's been a lot of volatility recently. We'll see how diesel prices trend through the rest of the quarter. We would expect our fuel revenue to be up year-over-year in Q2. As fuel prices increase, our fuel revenue increases but so does our fuel procurement cost. When you zoom out, customers see prices inclusive of fuel; most LTL carriers have similar fuel surcharge structures. For Q2, our ability to outperform seasonality is being driven primarily by our operational execution, above-market pricing growth, profitable market share gains and the ramping productivity momentum.

Operator, Operator

The next question is coming from Jason Seidl from TD Cowen.

Jason Seidl, Analyst (TD Cowen)

There's been a big spike in truckload spot and contract renewal rates. Any potential upside this may provide to both your tonnage and pricing outlook as we move through Q2 and the rest of 2026?

Mario Harik, Chairman and Chief Executive Officer

Jason, truckload dynamics can influence LTL. When truckload rates were low, some shipments — especially heavy shipments — moved from LTL to truckload because the breakeven for using truckload dropped to around 15,000 pounds. We estimate that conversion to be about 0.5 to 1 point of industry volume. Another category is large customers optimizing via systems that can convert multiple LTL shipments into truckload when truckload is cheaper and still meets service requirements; combined, we estimate roughly 2 to 3 points of industry volume moved to truckload. As truckload capacity tightens and rates rise, some of that shipment mix can convert back to LTL. If that inflection accelerates in the back half of the year, you could see that 2 to 3 points come back to the LTL sector. Importantly, because we've insourced more linehaul over the past three years, we've reduced exposure to truckload rate increases: we use our own drivers and equipment for linehaul, so rising truckload rates have less impact on our costs and will support higher incremental margins in an upcycle.

Jason Seidl, Analyst (TD Cowen)

Just so I'm clear: any move of those 2 to 3 points back towards the LTL sector is upside to the guidance you're giving us?

Mario Harik, Chairman and Chief Executive Officer

That's correct. If those volumes come back to LTL, carriers including us will benefit and it will also put pressure on overall industry capacity, which over time supports higher industry pricing.

Operator, Operator

Next question is coming from Ari Rosa from Citigroup.

Ariel Rosa, Analyst (Citigroup)

Mario, thoughts on competitive dynamics across the industry. To what extent do competitors also have available capacity and does that impede your ability to take share? How much share gain do you expect to take as the cycle accelerates? Also, is there tension between winning share and pushing yield — how are you thinking about elasticity?

Mario Harik, Chairman and Chief Executive Officer

Ari, on industry capacity: comparing pre-pandemic and today, industry terminal counts are down in the high-single- to low-double-digit range, and overall door count is down roughly mid-single digits. While demand has been down about 15% over the last three years, the industry still has capacity to handle that reduced volume. As demand inflects, carriers with capacity will be positioned differently. We have planned for recovery, adding doors, equipment and capacity in constrained markets so we're well positioned to capture demand and serve customers. In terms of pricing versus volume, we focus more on yield performance through the three levers I mentioned earlier. We have multiple years of runway to improve yields and expect to outperform industry pricing by 2 to 3 points per year as we execute our strategy, regardless of macro environment. If demand rises and capacity tightens, industry pricing will increase and we expect to outperform that as well.

Operator, Operator

The next question is coming from Scott Schneeberger from Oppenheimer. Daniel Hultberg is filling in.

Daniel Hultberg, Analyst (Oppenheimer, filling in)

Could you discuss how you think about the top-line outlook for Europe and how you anticipate performing versus the market? And secondly, how do you think about opportunities to improve margin for that business?

Kyle Wismans, Chief Financial Officer

The European business continues to perform well in a soft macro environment. In Q1, we grew organic revenue for the ninth consecutive quarter and delivered another quarter of strong EBITDA growth outperforming seasonality. For margins, we have a plan to improve profitability in Europe this year and next by taking meaningful cost out, expanding the sales force, driving more premium services and growing in new verticals such as aerospace, luxury goods and expanding our warehouse offering. We're also evaluating pricing opportunities because the European team has a strong service product and they want to be appropriately compensated. So we're constructive on Europe and where that business is heading.

Operator, Operator

The next question is coming from Ravi Shanker from Morgan Stanley.

Ravi Shanker, Analyst (Morgan Stanley)

Two questions: first, entering an upcycle with much lower reliance on purchased transportation, how do you think about driver wage inflation, especially as the truckload market tightens and pressures spill into LTL? Second, a broader question: XPO today is the product of a larger breakup — do you feel the need to have a logistics operation within the company given the traction brokers are having and the direction the industry is going?

Mario Harik, Chairman and Chief Executive Officer

On the second question first: we're focused on being the best LTL carrier. Given the runway we have for margin expansion and earnings growth over the next several years, we don't see a need to add a logistics operation within the company. Our path to long-term value creation is through top-line growth, margin expansion and accelerating free cash flow, which will enable debt reduction and share repurchases. We also intend to consider a sale of the European business at the appropriate time to accelerate capital allocation. On driver and wage inflation: turnover among our drivers and dock workers is meaningfully lower than truckload peers and has improved over the years due to focusing on the frontline and acting on feedback. We have driver training schools — about 130 terminals can operate these programs — where we invest in employees, help them get CDLs and bring them into driving roles. We can graduate up to about 2,000 drivers per year through these programs. So in an upcycle, we'll leverage our training and retention programs to add capacity. In-sourcing linehaul and reducing purchased transportation also reduces our exposure to truckload wage inflation, which should help manage cost pressure in an upcycle.

Operator, Operator

Our next question today is coming from Eric Morgan from Barclays.

Eric Morgan, Analyst (Barclays)

I wanted to follow up on the Q2 OR comments in LTL. Mario, I think you mentioned a possibility of a 7-handle OR this quarter. Can you expand on what gets you there? Are you saying that if volume accelerates over the next couple of months that's a possibility, or can you do that with the flattish tonnage number you noted for the full quarter? And how does fuel play into that — does a decline in diesel prices make that less likely?

Mario Harik, Chairman and Chief Executive Officer

Eric, if you look at the quarter as a whole, April was slightly better than seasonal trends compared to March, with a pickup in weight per shipment as well. If you roll forward seasonality from April through May and June, that implies quarter tonnage would be flattish year-over-year. If tonnage does better than that, there's incremental upside. Importantly, in Q1 we were in line with our tonnage expectations and still outperformed on margin and earnings growth, so there's a path to get to a sub-80% OR even with flattish tonnage. Other levers include yield acceleration — which we're seeing — premium services growth, onboarding of new customers, and productivity gains from technology rollouts. We don't expect the same Q1 productivity improvement necessarily, although we are rolling solutions to more terminals. Diesel volatility can affect fuel surcharge revenue and costs, but our ability to outperform seasonality is driven primarily by operational execution, pricing momentum, profitable market share gains, and productivity ramp. We expect to comfortably outperform the high end of the seasonal range from Q1 to Q2, and the path to a 7-handle OR is possible depending on how these levers play out over the next two months.

Operator, Operator

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Chairman and CEO, Mario Harik. Please go ahead.

Mario Harik, Chairman and Chief Executive Officer

Well, thank you, operator, and thank you, everyone, for joining us today. We're off to a great start to the year with accelerating momentum, and we expect another year of strong margin improvement and earnings growth. We look forward to updating you on our performance next quarter. With that, operator, you may end the call.

Operator, Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.