XPO Inc (XPO) 2025 Q4 法說會逐字稿

Welcome to the XPO fourth-quarter 2025 earnings conference call and webcast. My name is Shamali, and I will be your operator for today's call. (Operator Instructions) 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 to the extent required by law.

During this 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 important information regarding forward-looking statements and non-GAAP financial measures in the Investors section on the company's website.

I will now turn the call over to XPO's Chairman and Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

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 another quarter of strong execution to close out the year. Company-wide, we delivered fourth quarter adjusted EBITDA of $312 million and adjusted diluted EPS of $0.88. Excluding real estate gains in both periods, adjusted EBITDA increased 11% and adjusted EPS increased 18% year over year.

In North American LTL, we generated adjusted operating income of $181 million, which was up 14% from the prior year. And we improved our adjusted operating ratio by 180 basis points, significantly outperforming normal seasonality. We've now expanded our LTL margin by 590 basis points since 2022, which marked the start of one of the most prolonged freight downturns in history. This speaks to the resilience of our strategy, and it will continue to serve us well this year and in the long term regardless of the cycle.

The key components of our strategy are fully within our control, and I'll start with our most important lever: customer service. In 2025, we reduce damages and improved service quality to new company records, reflecting our focus on providing a superior customer experience. We're achieving this by balancing our network more precisely, reducing the number of freight rehandles and implementing tighter operating processes at the service center level.

And critically, our stronger service performance is translating directly to better commercial outcomes. As a result, we've been able to earn higher prices and gain market share by providing consistent world-class service.

When we make ongoing investments in the business, we're strengthening the connection between service quality and value creation. For example, we've deliberately invested in the network ahead of the off cycle to create more than 30% excess load capacity. This has given us the flexibility to operate more efficiently in the current environment, and we're positioned to respond quickly in a recovery.

On the equipment side, our average tractor age at year end was 3.7 years, giving us one of the youngest fleet in the industry. This improves reliability and safety while reducing our maintenance cost per mile to the lowest level in our history. From a labor standpoint, we're (inaudible) to support any near-term increases in demand while maintaining our high service levels.

Combined with lower employee turnover and the national scale of our driver training schools, we're well positioned to flex labor efficiently as volume grows. Each component of our capacity has the role in making sure we realize significant upside of our operating leverage when demand recovers.

Next is pricing, which has a direct correlation to margin performance. Throughout 2025, we saw customers place more value on our service as reflected in the pricing gains we earn. For the full year, we grew yield excluding fuel by 6%. It was also the third consecutive year that we improved revenue per shipment for every quarter.

In addition, the expansion we're driving with local customers and premium services is contributing to our above market pricing growth. These revenue streams come with higher margins, and we see long runways for both as core parts of our business.

Another highlight of 2025 that contributed to margin was our improved cost efficiency. This was underpinned by productivity gains and a lower reliance on purchased transportation. Productivity improved roughly 1.5 points for the year with the ramp in the second half from our latest technology rollouts. It's our proprietary applications that use AI for planning, freight flow management, and network operations.

Importantly, we've completed a successful pilot of our AI-driven route optimization tools for pickup and delivery. And now we're expanding this internally developed technology to nearly half of our service centers this quarter. We expect this to further reduce overall miles and improve stops per hour across a cost category of nearly $900 million.

And on purchased transportation, we exited the year with the lowest level of outsourced miles in our company's history at 5.1% of total miles. This has given us greater control over service quality and a more flexible cost structure. These cost efficiencies will scale with volume, and we expect the benefits to margin to grow over time.

To sum it up, we've entered 2026 from a position of strength following a year of significant progress in our performance. While we are pleased to have reported above-market results for another four quarters, we have multiple drivers to improve our LTL operating ratio well into the 70s in the years to come as a substantial expansion of our operating margin.

Number one is pricing when we see a double-digit opportunity to surpass the market and pricing growth over time by continuing to enhance service quality and revenue mix. Another key is our investment in capacity ahead of the cycle.

We've built excess capacity across our network, positioning us for profitable share gains and operating leverage as demand recovers. And we have a long runway to improve cost efficiency and productivity through network applications of AI at scale. These are all high-impact initiatives that are already driving results.

Importantly, our progress will be amplified by the billions of dollars of cumulative free cash flow we expect to generate in the coming years, starting with a meaningful acceleration in 2026. This will fund an increase in share repurchases and debt reduction to further compound our earnings growth.

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 walk through the fourth quarter financial results, followed by our balance sheet, liquidity and capital allocation. For the total company, revenue increased 5% year over year to $2 billion. Revenue in our LTL segment was $1.2 billion, up 1% from last year as the increase in yield more than offset the decrease in volume.

Turning to cost, we continue to make progress in key areas that relate directly to margin. On a year-over-year basis, our salary, wage and benefits expense decreased 1% or $7 million, driven by strong productivity gains. And our purchased transportation expense decreased 46% or $20 million as we continue to in-source linehaul miles and optimize the network.

This is a structural cost reduction that will help support stronger incremental margins as truckload rates rise when the freight market recovers. Depreciation expense increased 11% or $9 million, reflecting our ongoing investments in equipment and capacity to support long-term growth.

Moving to profitability. Total adjusted EBITDA was $312 million for the quarter, with $285 million generated by our LTL segment. Excluding gains on real estate transactions, adjusted EBITDA increased year over year by 11%, both for the company as a whole and for the LTL segment. In Europe, adjusted EBITDA was $32 million, while Corporate adjusted EBITDA was a loss of $4 million.

For the total company, fourth-quarter operating income was $143 million. Net income was $59 million and diluted earnings per share was $0.50. Net income includes $14 million of gains on real estate and equipment as well as $33 million of restructuring expense. This was primarily from previously granted equity awards related to the transition in Board leadership. On an adjusted basis, diluted EPS was $0.88. Excluding $0.08 per share of real estate gains in the fourth quarter of 2025 and $0.21 per share in the fourth quarter of 2024, adjusted EPS increased 18%.

Turning to cash flow and CapEx. We generated $226 million of cash flow from operating activities in the quarter and deployed $84 million of net capital expenditures. We ended the quarter with $310 million of cash on hand after repurchasing $65 million of common stock and paying down $65 million on our term loan facility.

Combined with available capacity under our committed borrowing facility, total liquidity at year end was $910 million. Our net leverage ratio at year-end was 2.4 times trailing 12 months adjusted EBITDA for 2025, down from 2.5 times for 2024 and significantly lower than the 3 times reported for 2023.

As we look ahead, we expect to meaningfully increase free cash flow generation this year and over the years to come. This will enable us to accelerate share repurchases while also continuing to strengthen the balance sheet through debt pay down.

Before I close, I'll summarize this year's planning assumptions to help you with your models. For 2026, we expect total company gross capital expenditures of $500 million to $600 million, interest expense of $205 million to $215 million, pension income of approximately $14 million, an adjusted effective tax rate of 24% to 25%, and a diluted share count of approximately 118 million shares. These assumptions are included in our latest investor presentation.

And with that, I'll turn it over to Ali to cover the operating results.

Thank you, Kyle. I'll begin with our LTL operating performance where we continue to execute well and expand margins despite the challenging freight environment. On a year-over-year basis, our shipments per day declined 1.6% and weight per shipment was down 3%, resulting in a 4.5% decrease in tonnage per day. These trends reflect ongoing softness in the industrial sector. But importantly, we're continuing to take share in the most attractive parts of the market.

We're growing our business with more profitable local customers and by expanding our premium service offerings. Local shipments now represents approximately 25% of revenue, up from 20% just a few years ago, while premium services are now about 12% of revenue, up from less than 10% previously. These are deliberate shifts in our mix that will make increasing contributions to volume, price, and margin performance.

Looking at the quarter month by month compared with the prior year, October tonnage was down 3.8%, November was down 5.4%, and December was down 4.5%. On shipments per day, October was down 1.4%, November was down 2.2%, and December was down 1%.

In January, however, we saw an improvement. Our January tonnage was roughly flat year over year, which outperformed normal seasonality. We saw this positive trend even with the impact of the major winter storm at the end of the month which we estimate had about a 3-point impact on tonnage.

Turning to pricing, our yield performance in the fourth quarter continued to be strong, increasing 5.2% year over year excluding fuel. Both yield and revenue per shipment improved from the third quarter, and revenue per shipment has now increased sequentially for the 12th consecutive quarter. We're gaining price through value delivered supported by strong service quality, continued growth in the local channel and our premium offerings.

Moving to profitability, our fourth-quarter adjusted operating ratio in LTL improved by 180 basis points from the prior year, accelerating from the third quarter and significantly outperforming normal seasonal patterns. We're driving this margin expansion through a combination of pricing, cost initiatives, and productivity improvements enabled by our proprietary technology. Even in a soft demand environment, these structural advantages are allowing us to outperform our peers and keep elevating that performance over time.

Turning to our European business. Our results continued to trend favorably. On a year-over-year basis, revenue increased 11%, supported by our eighth consecutive quarter of revenue growth in Europe on a constant currency basis. Adjusted EBITDA increased 19% year over year, and performance tracked better than normal seasonality relative to the third quarter.

To wrap up, our fourth-quarter performance highlights the strength of our strategy. We're managing through a soft freight market while continuing to improve mix, deliver consistent pricing gains, and expand margins. We're also making targeted investments in the network to generate high returns over time, and our proprietary technology is leveraging AI for cost and productivity improvements. Together, these capabilities position us to outperform in the current environment and accelerate results as demand recovers.

With that, we'll take your questions. Operator, please open the line for Q&A.

(Operator Instructions) Ken Hoexter, Bank of America.

I guess you mentioned, Ali, there at the end, ex storm, it sounds like tonnage would have been up about 3%, and you're outperforming seasonality. Given the thoughts on ISM, maybe your initial thoughts on how significant we can see this outperformance or versus your normal trends, talk about what your normal trends are for first quarter for both revenues and OR and what do you think that indicates for the year if you keep this seasonal outperformance?

Ken, this is Mario. So when you look at January, for us, tonnage was flat on a year-on-year basis, and shipments were up by about 1 point for the month. And when you look at that on a relative basis compared to December, this was a couple of points better than normal sequential seasonality from December into January. And this was after December being roughly about a couple of points also better than seasonality relative to November as well.

Now as you mentioned and Ali mentioned earlier, we did see an impact from the winter storm. But we do estimate that to be 3 points for the full month. So that outperformance would have been even higher versus seasonal trends.

Now what's driving that, we are seeing, both from a demand perspective, a bit more strength, especially on the industrial side in the month of January. But a lot of it was the company-specific initiatives that we have been driving in terms of gaining market share and higher margin and accretive business. From one perspective, we continue to grow in our local accounts segment or the small to medium-sized businesses that we are growing. Through the course of 2025, we added about 10,000 of these customers to our book of business.

And similarly, we are growing in new verticals that, in the past, we were not growing in. Examples are gross reconsolidation, where through the back half of last year we nearly tripled shipments in that segment of business. And we're also growing in areas like healthcare where we onboarded two large customers in that space as well, are very service sensitive, and obviously they're seeing all the great progress that we are making there as well.

So it's a combination of underlying strength and market share gains in more multiple segments of the business, is what we're seeing here. In terms of OR outlook, if you look at typical seasonality for us from the fourth quarter to the first quarter, if you look over the long term, we typically see OR deteriorate by about 50 basis points sequentially. And we do expect to outperform that normal seasonality here in the first quarter.

And we do expect to -- our OR -- for our OR to improve sequentially from Q4 into Q1, which is a strong overall outcome driven by all of our initiatives in pricing and cost efficiency and AI and, obviously, the volume environment here being a bit better as well.

Great. Thank you, Mario.

Scott Group, Wolfe Research.

So Mario, helpful color on Q1. I know last year you gave some thoughts about how to think about full-year margin improvement. I'm wondering if you have similar thoughts this year on the LTL side. And then maybe if you can just give us an update on where we are on the local penetration and where you think that can go.

Scott, first of all, for the full year, we do expect another strong year for both margin improvement and earnings growth in 2026. Starting with OR, we'd expect our OR to be in the 100 to 150 basis points of improvement for the full year, which of course would be an acceleration relative to what we saw last year. And that's without a meaningful macro recovery.

So this is assuming that, again, we're not going to see the market pick up, although we obviously -- with ISM earlier this week, if that strength continues, that would change the outcome. So if we do see the macro recover, we would expect to drive upside to our results. And the primary drivers for that is that we do expect another year of above-market yield growth driven by all the initiatives that we are driving in that arena.

And similarly, we also expect another strong year in cost efficiencies, and that's driven by our AI initiatives. I mentioned earlier that we are in the process now of launching our new internally developed AI optimization technology for pickup and delivery, and we expect to roll out half our network year in quarter. And so as these build momentum through the course of the year, we do expect more cost efficiencies as well. And a lot of these are still early innings.

On the volume side, it's still tough to predict. Again, there are good signals here, good signs as we get off the year, but we'll see how this kind of progresses from here. In terms of local accounts, we -- so last year, we've added approximately 10,000 new local accounts to our book of business.

If you recall, Scott, initially when we started targeting that segment of business, we were at 20% of the total book was small to medium-sized customers. And our goal was to get to about 30% in a period of roughly five years. And that's equivalent to about 2.5 points of yield, about 0.5 point a year of outperformance driven by that segment of business. And we are currently at 25% of the book is small to medium-sized customers.

We're about halfway to our target of 30%, and we expect that to continue over the years to come as we continue to onboard more of these customers.

Appreciate it. Thank you, guys.

Fadi Chamoun, BMO Capital Markets.

Mario, I wanted to go back to the comment that you made about the cost efficiency. I think you said 1.5 points of productivity gains, I think it was, last year. And you talked about technology and AI optimization and some of the things you're implementing affecting $900 million of cost base. I just wanted to kind of dive into what kind of productivity target, like we want to think about cost savings opportunity as we go into 2026, what does this envelope look like?

And just one clarification on the prior couple of question discussion. It seems like you're attributing a lot of the kind of January improvement or your volume performance to the XPO initiatives that you are doing and not necessarily to any meaningful improvement in the end market or in the demand environment.

We saw one of your peers talk a little bit more favorably about the demand and talked a little bit more favorably about the progress in the weight per shipment, which we didn't see in your numbers. I'm just wondering if there's more clarification you can provide on that.

Yeah. So Fadi, when you look -- I'll start with the second question and then come back to AI and cost efficiency. On the volume side, we did see both. So when you look at our outperformance in January, it was a component where -- if you take a step back, in December, we did see more strength on the retail side and we had a few projects with customers like retail roll out through the course of December that also helped our results outperform sequential seasonality from November into December.

And the outperformance in January was a combination of both. From our perspective, we saw a switch in a better demand environment for the industrial economy, but it's still overall early innings really. So if you look at the ISM, when new orders were at 57, the ISM itself was a 52, these are very strong numbers. We are somewhat seeing that level of ISM performance materialize in the underlying demand. However, industrial demand in the month of January has strengthened compared to where we were in the fourth quarter, and that's a very positive sign.

Now on top of the performance of the ISM and the industrial complex, beyond that, we were able to drive all of these initiatives, which we have been working on through the course of all of 2025 and prior, to be able to continue to onboard a highly profitable business to the overall mix. I think the outperformance was driven by a combination of both, company specific, but also early signs of life in the industrial economy, which is very positive.

In terms of your first question on technology and AI, we are very excited about the opportunity ahead of us. And if you look at last year and over the last few years, but last year specifically, we were able to improve productivity by about 1.5 points for the full year, and that was driven by our tech initiatives. And that accelerated in the back half of the year to above 2 points of productivity improvements.

Now when you look at '26 and beyond, there are multiple levers where we are using AI to improve our cost structure. The first one is around linehaul efficiency. We've discussed this in the past, where for every point of improvement in linehaul, we get approximately $16 million of profits for the full year.

Therefore, every point of P&D efficiency improvement, it's now slightly higher than what we discussed in the past about $900 million worth of cost, and this is where we piloted our new technology across 12 service centers in our network last quarter, and we're going to be accelerating the rollout here in 2026. And for every point, it's $9 million to the bottom line for the year. Then on the [dock] side for every point, it's about $4 million of improvement for the year. So this kind of gives you the magnitude of impact.

Now in terms of our expectation, what we currently expect for 2026 is a low-single-digit improvement in productivity as well. Based on what we're seeing with these initiatives and what the run rate we're exiting at last year, there is a case where the upside could be all the way up to mid-single digit, but we're still early innings at this point, and we'll see how these start compounding over time as we launch those capabilities.

And of course, we're using AI in pricing and in supporting our sales force as well. So we have multiple other initiatives to continue to improve our operating performance through technology as well.

Thank you.

Jonathan Chappell, Evercore ISI.

Mario or Ali, on the revenue per shipment side, 12 straight quarters of sequential improvement, which is obviously really good. It feels like the year-over-year rate of change is starting to decelerate. Now we're down to 3% in 4Q.

Can you help us think about what you're assuming for '26? And also, is that a commentary, maybe that slowing rate of change on, now that you've reached 12% accessorials, it's maybe a little bit harder to get incremental accessorial impact or is that more indicative of maybe a pricing environment that doesn't have the same momentum as it may have had last year?

Sure, John. This is Ali. So we expect a strong year from a pricing improvement standpoint here in 2026. For revenue per shipment specifically, we expect revenue per shipment to be up somewhere in that mid-single-digit range, similar to our expectation for overall yield growth. From a weight per shipment standpoint, we'd expect weight per shipment to be roughly flattish on a year-over-year basis. So that's going to help drive an improving trend year-over-year for our revenue per shipment here in 2026.

The other way you can think about it, Jon, as you mentioned, the 12 consecutive quarters that we've improved revenue per shipment during the fourth quarter, we expect that trend to continue here through 2026. So we expect to continue to grow revenue per shipment sequentially each quarter as we move through the year. And that's going to be driven by all of the initiatives that we're executing on the pricing side.

In particular, there's a lot of runway for us on local customers. Mario talked about it earlier in terms of getting those local customers up to 30% of our overall book of business and a similar trend on premium services. A few years ago, we were about 10% of our book of business was premium services. We're at 12% currently, where we see a path to 15%-plus over time. So there's a long runway there for us to continue to expand our offering and continue to drive that above market yield growth and pricing growth here in 2026 and beyond.

Thank you.

Jordan Alliger, Goldman Sachs.

Just sort of curious, obviously, you guys are doing a good job from an XPO perspective. I'm thinking though, out over the next several years or a couple of years, if we do -- if some of these demand indicators do wind up becoming more fulsome and we get an inflection across the LTL industry, can you talk a little bit about overall LTL industry capacity relative to what sort of price or yield reaction would occur if the industry itself went from down volumes to positive volumes? And again, in the context of overall industry capacity.

Yeah. Well, if you look at overall industry capacity, it has been relatively flat over the last decade. And while there were a few carriers besides us who have added capacity, others have been also reducing LTL footprint. And you also couple that with the bankruptcy of Yellow a few years ago, you tend to see that capacity has gone down quite a bit.

Now in terms of how much has it gone down by, if you look -- if you compare pre-COVID, so 2019, to where we are today on overall service center count, the industry is down 11 points over that period. And on dual count, it's down 6 points. if you compare it to pre-COVID -- post-COVID where we are -- I mean, pre-Yellow to post-Yellow, so if you go 2022 to 2025, both service center count and door counts are down 6 points over that period.

Now when you compare that to what volume has done over the same period, keep in mind, we have been in a tough seasonal industrial environment now for three years with ISM being sub-50 for the most part, that has caused LTL volumes to be down in the mid to high teens, give or take, in terms of shipment count across all public and private carriers over the same period of time.

So as volume -- if what we're seeing here in the ISM continues to gain steam, which at some point it would -- and usually the ISM is inversely correlated with the Fed fund rate, so we start seeing the Fed fund rate continues to decline, and you see the ISM start to pick up again, at some point you won't have enough capacity in the sector compared to what we're seeing -- to what you see from the demand recovery.

There is also another dynamic that has happened over the last few years, and that's between public and private carriers. When Yellow went bankrupt, a lot of that freight ended up going -- or more of that freight ended up going to the private carriers and the public carriers. So the private carriers are currently more strapped on capacity than the public carriers. And obviously, in our case, we have more than 30% excess load capacity to be able to support that recovery whenever that recovery comes.

So it's very fair to assume that when we start seeing the watermark of overall demand go up and as capacity starts to dry up, you're going to see more and more customers go to the carriers that do have that capacity. And naturally, you will see the pricing dynamic of the overall industry continue to raise on average. And as Ali mentioned earlier on, we have multiple initiatives to catch up with our best-in-class peer where we see a double-digit opportunity of incremental pricing growth just to catch up to those pricing levers with the three levers that we mentioned earlier on.

So it will be not only positive for the tonnage environment, but definitely very positive for the yield and pricing environment as well.

Thank you.

Stephanie Moore, Jefferies.

I guess I appreciate color so far for January and your thoughts for the quarter. But clearly, you guys have invested quite a bit through Network 2.0 and the like. So maybe as we think about what your incremental margins could look like in an up cycle, that might be helpful, because clearly, I don't think looking at historical results would be probably that relevant given the investments that have been made over the last several years.

So any help you can give us, Mario, on incremental margins would be appreciated.

Stephanie, it's Kyle. So if you think about incremental margins, we'd expect to be comfortably above 40%. And if you think about the contributors to that, the biggest is yield. So we're talking about that earlier, but if you think about yield, it's going to have a really strong flow-through to the bottom line. And we're going to have a lot of our initiatives really just coming through (inaudible).

So you think about local shipments continue as Mario mentioned, you think about (inaudible) continue to grow, that's really going to help us drive really strong incrementals from a yield perspective. And then if you think about where we are from a demand and capacity standpoint, as Mario just talked about, we're in a great position to continue to deliver. You think about the structural improvements we made, not only in the count of service centers and our tractor trailers, but also a reduction in structural costs.

So again, we've been able to really improve our third-party linehaul spend and get that down to 5%. And you think about the AI initiatives that continue to help us drive more productivity, both from a P&D standpoint as well as in the dock, we're in a great position to not only capture more of that revenue, but also do it with a high amount of proclivity. So from our standpoint, we should be easily in the 40% range when you think about incremental margins in an up cycle.

Thanks, Kyle. Appreciate it.

Chris Wetherbee, Wells Fargo.

Maybe one quick clarification question, Mario. You talked about the assumptions for the operating ratio in 2026. And you noted no macro improvement. Just wanted if we could get a sense of what the actual tonnage sort of underlying tonnage assumption is in the 100 to 150 OR for '26. And then maybe zooming out a little bit and thinking about CapEx and cash flow.

And so given the capacity that you have, you noted the tractor age is on the lower side, maintenance per mile is low as well. How do you think about that going forward? And then as you balance that kind of cash out relative to returns to shareholders, how you think about that, would be great.

Chris, it's Ali. I'll answer the first part and pass it over to Kyle. In terms of the tonnage assumptions, if you just roll forward normal seasonality from January, that would put full year tonnage roughly flattish year over year, and that would be supportive of that 100 to 150 basis of OR improvement that we expect for the year.

Now to the extent that you see that above seasonal volume performance that we've seen in the last couple of months continue through the rest of the year, there would be meaningful upside to that OR outlook that we've talked about. So ultimately, it depends how volume trends through the rest of the year. But overall, we expect a strong year of margin improvement with or without a macro recovery.

And then, Chris, if you think about CapEx, so when you think about CapEx for last year, we spent about -- on the LTL business, about 12.4% of revenue on CapEx. And if you think about what we'll do this year, that's going to moderate a couple of points. So we're obviously lapping a year of significant network expansion. If you think about the service centers we brought online.

In addition, we had a lot of fleet additions that brought our third-party linehaul down to 5.1%. So you think about this year, that number will come down probably more towards the midpoint of our long-term guided range of the 8% to 12%. What that's going to do for us from an overall free cash flow standpoint, it's really going to increase our free cash flow.

So if you think about '26 for us from a free cash flow standpoint, we should be up north of 50% year over year. And that's going to be a combination of both lower CapEx spend as well as our continued improvement from an income base, as Mario talked about OR growth. So when you think about what that can do for us, that's going to give us a lot of flexibility going to this year to do really two things. So not only will we be able to continue the effort on buying back shares.

So last year, we repurchased about 125 million of shares. That will accelerate as the free cash flow continues. But then we're also going to have the flexibility to help continue to pursue our long-term target of being 1 to 2 times leverage. We would pay about $115 million of Term Loan B this year. Again, that will accelerate as well.

So we're going to have a lot of cash that's (inaudible) us a lot of flexibility moving forward to have -- find the highest return for our shareholders from that cash.

Got it. Thanks very much. Appreciate it.

Richa Harnain, Deutsche Bank.

One quick clarification for me and then a general question. But the clarification is, the outlook for the quarter, Q1, to achieve margin expansion sequentially, what are you baking in as the assumption for tonnage? Do we expect this better than seasonal that we saw in January to continue for the rest of the quarter? Are you assuming more like seasonal trends for February and March?

And then the bigger picture question, Mario, in the past, I believe you suggested that in the next up cycle, price is going to lead. Just wanted to get an update on that. If you have this double digit, I think you said 30% excess capacity on a door level, why wouldn't you improve pricing consistent with what you've been doing, but have sort of volumes lead in driving revenue growth to effectively soak up that excess capacity, drive strong incrementals, which you guys started speaking about?

And then that 30%, if you can translate that to us in terms of what that means in terms of how many shipments you can absorb, how many more shipments you can take on, I should say, without further investment in real estate, or maybe how much you can do without taking on more trailers and people, that would be helpful.

Richa, this is Ali. I'll start on Q1 then pass it to Mario. So for Q1 from a tonnage perspective, if you just roll forward normal seasonality off of January through the rest of the quarter, that would imply full quarter tonnage being flattish on a year-over-year basis. And keep in mind, that does also factor in the tougher comps to the rest of the quarter. And that's really what's underpinning the OR outlook that we've talked about in terms of outperforming normal seasonality and also improving OR sequentially from Q4 to Q1.

Ultimately, it is still early in the quarter. March does have the largest impact on the quarter as a whole. So ultimately, that will be the biggest swing factor and probably a better indicator of whether this better than seasonal volume performance we've seen here in January is sustainable.

Richa, when you look at the overall pricing and in the context of an up cycle, so generally, in our business and our industry, it's a capacity-constrained industry. So obviously, for the last three years, we have been in a depressed industrial demand environment, which had -- they made the industry has enough capacity for the volume that we are seeing. But when that volume in the industrial economy starts recovering, you won't have enough capacity.

And when you think about an LTL network, profitability and margin generally comes from yield, comes from pricing in terms of how we think about it. So naturally, typically in a down cycle, you tend to see the industry be up low-single digit on pricing. In a good cycle, you would see it in the mid-single digit. And whenever you are in an up cycle, you could tend to see that being in that mid to high-single-digit type increases in pricing.

Now given that we have initiatives to be able to bridge the gap from us -- from where we are today to where our best-in-class year, we have a double-digit pricing opportunity to go capture. And that's when you normalize our shipment characteristics in terms of weight per shipment and length of haul compared to our best-in-class year.

So our goal, through the initiatives we just mentioned, the premium services, whether it's small to medium-sized customers, whether it's continue to get a more profitable mix of business, we're going to be driving those pieces to get a few points above market pricing to all of these components on top of the industry's pricing going up.

Now in terms of our ability to gain more tonnage, obviously, in an up cycle, we will also gain more tonnage, but we, generally, we would want to get more price because that's going to have a higher flow-through to the bottom line as well.

Now when you look at the volume side and how much we can handle, so typically in an LTL network, you need approximately in the mid-teens excess capacity to be able to handle the up and down cycles related with beginning of month versus end of month type volume fluctuations, or what a Monday would do versus a Friday we do, or what beginning of the quarter versus end of the quarter would do. So that fluctuation.

Typically, you need about 15 points or so of excess door capacity so you can handle those up and down. So we see anywhere between the mid-teens to the low 20% range of incremental volume we can get with our current door capacity. And beyond that, we would be expanding further and adding more physical capacity.

Now there are also other forms of capacity like holding stock and obviously people as well. And on the rolling stock side, we feel that in a great, great position. Over the last three, four years, we have added more than 19,000 new trailers to our fleet, and we have added more than 6,000 new trucks to our fleet, giving us today one of the youngest fleets in LTL. Our average fleet age is 3.7 years as we exited the year.

So we're feeling great about being able to capitalize on that. And importantly, to be there for our customers when that up cycle starts, to be able to move that freight and provide great service for them along the way.

Thank you.

Tom Wadewitz, UBS.

Congratulations on the momentum in the business. I wanted to see if you could talk a little bit about underlying inflation. It sounds like you got some pretty helpful productivity opportunities related to the tech and AI initiatives. OD had their call yesterday, they kind of talked about higher inflation, I think 5% to 5.5%, so maybe a bit higher versus '25. So maybe a thought on how you see underlying inflation.

And then when you weave in productivity, does your kind of -- you get maybe more overall cost benefit into the margin in '25, or excuse me, in '26, or just how do we look at those different pieces together?

Yeah. If you think about it in the long term, so we do think cost per shipment is going to be up somewhere in the low single-digit range. And the way to think about that, so for us, core wage inflation is in that 3% to 4% range. And then on top of that, we see higher benefit costs of maybe 1 point or 2. But as you imply, I mean, we intend to offset that with our productivity initiatives.

So from an AI standpoint, that's going to help us, whether it's line-haul, pickup delivery, to drive further improvements there. And then I think from a labor standpoint, just more broadly, in the fourth quarter, we delivered 2 points of labor productivity. We expect that to continue. So if you think about it on a net basis, once you account for that productivity, we would expect our cost per shipment to be in that low single-digit range despite having that core wage inflation in higher -- or higher increase for benefit costs.

So do you think underlying inflation is much different from last year or kind of similar?

I think it's going to be similar. So if you think about wage inflation, it's going to be similar. I think what we're seeing and I think others in the broad space are seeing, some of the benefit costs, insurance costs are a bit higher this year than prior. But I think on that basis, you're pretty similar on a cost per shipment.

Okay. Thank you.

Brian Ossenbeck, JPMorgan.

I just want to see if you can give a little bit more color on two areas in the market. First would be just call it the vertical or industry expansion into things like grocery and healthcare. What's the rate of change you expect in '26? And does that fall under the premium services or something else?

And then just given the move in spot truckload market and worries about capacity getting a little bit tighter, have you started to see any truckload spillover any sort of degree? I know it's not necessarily a big part of your business, but curious to see if that's starting to happen.

Thanks, Brian. Well, first starting with grocery, we see that as being a large market that we're going to continue to ramp in. We estimate the size of that market, Brian, to be in the $1 billion market size range. And it does come with very good margins.

Now it's a small part of our business as we continue to grow our market share in it. And predominantly, there are two carriers that manage the majority of grocery consolidation business in the industry, and we're starting to make now more and more inroads into that part of the business.

We have achieved preferred carrier status now with a number of large grocers and we have nearly 200 incremental customers in our pipeline that we want to go after. But if you look at it, again, today, we are in the low-single-digit percentage of total industry size of the $1 billion worth of grocery, and our goal to continue to grow through that 2026 and beyond as we continue to gain market share.

Now in terms of -- it is a premium service from the perspective that you do get the base charges for the actual freight, but then there is a service on top of that, which is your consolidation service that you are offering to the grocers.

The way that business works is once you achieve preferred carrier status with a large grocer, and we have a lot of smaller companies that are shipping into the grocer, and we consolidate that freight at a destination terminal before we actually do a trader drop to that particular grocer where they can optimize their own docks by not having to deal with multiple shipments coming in through the course of the day as an example. So this has a benefit both on the overall volume side as well as on the premium side given its charge through a accessorial mechanism as well.

The second component on the truckload to LTL shift, we do think that as truckload rates go up, you will see some of that freight that's left the LTL segment to go to truckload come back to LTL. But we've always thought that this is a small number. When you look at direct conversions, between heavy shipments that are, call it, 14,000, 15,000, 16,000 pounds, this is where it's usually sub-1% of an LTL network. So we see some of that would be coming back to LTL with heavier weight per shipment as truckload rates go up.

The second component is typically customers who are using a transportation management system, they can optimize multiple LTL shipments into truckload granted if the service can be -- serve requirements can be met. We estimate that when truckload rates are lower, you see a bit more of that conversion. But we only estimate that to be a couple of points. So when you look at it on a on a full numbers basis, we estimate somewhere in the low to mid-single-digit range of tonnage that has gone to truckload would be coming back to the industry.

Now with LTL, 2 to 3 points of industry volume, that's a decent amount that we would expect to come back into LTL whenever truckload rates are recovering. But one also -- one last thing, Brian, I would say, and that's more of a -- that will help us with higher incremental margins in the next up cycle, is the fact that we have reduced our reliance meaningfully on purchased transportation.

So you can imagine as truckload rates eventually recover by 20%, 30%, that's going to be a much lower headwind on our P&L because only mid-single digit of our linehaul miles at this point are outsourced. And we're planning on taking that number even further down here in 2026, which would further isolate our P&L from any truckload rate increases through the course of the year or '27.

All right. Thanks, Mario. Appreciate it.

Jason Seidl, TD Securities.

I think a lot of questions have been sort of directed or dancing around sort of the longer-term outlook. The last time you gave an update, it was from '21 to '27, and you looked at an OR improvement of at least 600 basis points, and you're tracking quite nicely to that.

Given sort of your productivity initiatives, given hopefully an industrial recovery and a greater push into sort of your premium as well as your local services, how do you see sort of the next couple of years in terms of your OR improvement? You just had Old Dominion come out and not give a date around it, but talked about sort of a longer-term sub-70 OR. So I was wondering where you think XPO's North American targets could sit?

Well, overall, on the long term, if you compare us to our best-in-class peer, I mean, we have all the levers to be able to get there from an OR perspective. It's just going to take time as we continue to execute. And as you said, Jason, and what was over the last three years a historic freight recession, we were able to improve our operating margin by nearly 600 basis points while the rest of the industry took a meaningful step backwards on overall margin performance.

So when you look at that, we do expect our OR over the years to come -- eventually get in the low 70s from an overall margin perspective. And it's all the levers we have discussed in the past. From one perspective, we still have a double-digit pricing differential between us and the best in last peer.

Through the three levers that we mentioned, a better service product over a longer to time has led to some of that outperformance. And I would go to effectively get an incremental point per year on that over the years to come to continue to bridge the gap.

On the accessorial side, when we started our plan three, four years ago, we were at 9% to 10% of our revenue was accessorial revenue. We're up to 12% now, and our goal to get to 15%. So that's an incremental point per year over the next three, four years.

And then on the small- to medium-sized customers, when we started our plan, 20% of the book was effectively those kind of customers. And our goal is to get that to 30%. And we're halfway through, so we have another two to three years to be able to bridge that gap. So these are the kind of levels on the yield side.

When you look at the cost efficiency side, we have been able to improve effectiveness, our efficiency overall, productivity across our network quite a bit a combination of technology and AI as well as the investments in capacity by having larger service centers, we can operate our network more effectively. And we still see a big runway ahead of us. I mean, we are assuming in our plan a low single-digit productivity improvement for the year, but when you look at what AI is doing these days, I mean, there's more upside there as well.

Then you couple that with -- as the volume environment recovers and our ability to take market share in some of these new verticals like health care or grocery consolidation, that's going to further give us incremental tonnage as well. So if you add all these things up -- again, we will see whether these are early signs of an up cycle or not, it's very tough to call the cycle, but without the cycle, we've been able to improve margin and have a long runway of margin improvement.

And obviously, if we have help from the cycle, that's only going to accelerate our plans, and sure, we want to get our OR well into the 70s. And eventually, at some point, in the 60s as well.

And Mario, following up to your comments on what AI can do to your productivity measures, I mean, how meaningful do you think that could be? Could it sort of double your expected productivity gains?

Well, overall, as we roll them up, still in our expectation because every time you roll out a new technology solution, you have certain targets, but then as you roll it out and you keep on doing changes to it and you train the AI further, and as it learns from the actual changes and the real freight it's seeing in the network, it keeps on evolving. And our current expectation, it's 1.5 points.

Back half of last year, we had gotten to above 2 points of productivity. And some of these early solutions could have more upside, as I mentioned earlier on. But we'll see how these kind of get rolled out. We take them a step at a time, and we keep on investing in them and our team iterates on them. And we -- the 1.5 points could be conservative, but we'll see kind of how that materializes here over the quarters and year to come as we launch some of these solutions.

That's fair. Appreciate the time and color.

Ravi Shanker, Morgan Stanley.

Just a quick follow up on the local accounts. Can you just remind us again kind of who do you compete with for those local accounts? And how does the cyclicality or seasonality of those accounts maybe differ from national accounts, or maybe they don't?

Great question, Ravi. If you look at the local accounts, generally, we estimate that the industry, roughly a third of LTL shippers in the industry, so about 30%, are small- to medium-sized customers. So they are -- and think of a small- to medium-sized customer as being, say, a small manufacturer that is shipping five pallets a week, as opposed to a large company that could be out of one location shipping 200 shipments in a given week.

Usually, they have less density, and usually, they operate at a higher margin because, effectively, as an LTL carrier, we don't get the same density that you get with a large customer where you might be doing things like trader pools or swaps that effectively make your cost structure a bit more efficient. Now in terms of who -- where we -- as I mentioned earlier on, we're halfway through our plan to catch up with the rest of the industry, and we have more runway to go.

In terms of who we compete with, it's every carrier out there, both the regional guys and the large national networks. We are competing with every other carrier, like we've always had, on capturing that market share for these local accounts.

Now growing with them is usually easier said than done, and the reason why you need a great service product and you need great relationships with the customers. And this is where our local sales force are doing a fantastic job growing that segment of business. We have increased the size of the sales force by about 25% over the last few years.

And as they ramp in productivity, they are being able to be out there meeting customers face to face and onboard more of that business, again onboard the 10,000 new accounts through the course of 2025, which I couldn't be more proud of.

Now in terms of the cycle and how it impacts small- to medium-sized customers versus larger customers, usually, the larger the customer, they'll use a TNS system to optimize their freight flow. So naturally, what you tend to see in the down cycle, larger accounts, their weight per shipment stays relatively flat, it might still come down a bit, but you see the shipment count come down more.

For local customers, what you tend to see is a higher impact on weight per shipment because, naturally, if they had a customer was buying three pallets worth of fasteners, now maybe they're buying two pallets worth of fasteners, subsequently having a lower weight per shipment.

So typically, their seasonal changes, when the cycle is down, weight per shipment is down; when the cycle is up, weight per shipment is up. Versus the larger the customer, you tend to see when the cycle is down, you can see shipment count is down; and then when the cycle up, you see shipment count being up.

Very helpful. Thank you, Mario.

Bruce Chan, Stifel.

Helpful commentary on the different target end markets so far. I was wondering if you can maybe give any comments on pricing trends or negotiating behavior at this point in the cycle between them, like renewals or bid frequency for SMBs versus enterprise, for example?

Yeah. So if you think about renewals, what we're seeing in the fourth quarter is pretty similar to what we saw in the third quarter. So we've been pretty consistent from that standpoint. And you think about the cadence of renewals, so typically, we have about a quarter of book that renews every quarter.

But one thing to keep in mind is that when you think about local accounts, many of those are on our standard tariff, so they get impacted by the GRI. That's about a quarter of the book that gets impacted by the GRI versus individual negotiations.

Thank you. And we have reached the end of the question-and-answer session. I would like to turn the floor back over to Mario Harik for closing remarks.

Thank you, operator, and thanks, everyone, for joining us today. As you saw from our results, we're outperforming the market based on our own initiatives and disciplined execution. Even without a recovery in the demand environment, we expect strong margin expansion and earnings growth this year. And if the recent pickup in demand continues, we're well positioned to capitalize on it and accelerate our results even further.

With that, operator, please end the call.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.