XPO Logistics' Q3 2025 Earnings Call: Contradictions Emerge in Tonnage Trends, Pricing Strategies, and AI-Driven Efficiency

Date of Call: October 30, 2025

Financials Results

• Revenue: $2.1B, up 3% YOY
• EPS: $1.07 adjusted diluted EPS, up 5% YOY; GAAP diluted EPS $0.68 (decrease, includes $35M legal charge)
• Operating Margin: North American LTL adjusted operating ratio 82.7%, improved 150 bps YOY; company operating income $164M

Guidance:

• Q4: expect adjusted OR to materially outperform typical seasonality and improve sequentially and year-over-year (supports full-year ~100 bps OR improvement)
• Q4 yield ex fuel expected similar to Q3 (~5.9% YoY) with sequential improvement
• 2026: expect meaningful OR improvement and earnings growth even without macro recovery; incremental margins comfortably above 40% on recovery
• CapEx to moderate (down a couple points vs prior year; long-term midpoint of 8–12%); free cash flow >$400M this year with higher conversion next year

Business Commentary:

* Financial Performance and Growth: - XPO reported adjusted EBITDA of $342 million for Q3, exceeding expectations, with adjusted diluted EPS of $1.07. - The North American LTL segment grew adjusted operating income by 10% year-over-year to $217 million and improved the adjusted operating ratio by 150 basis points to 82.7%. - Growth was driven by above-market yield growth, effective AI-driven optimization tools, and strategic in-sourcing of line-haul miles.

• Pricing and Operational Efficiency:
• XPO achieved a 5.9% year-over-year and 3.1% sequential increase in yield excluding fuel.
• The company reduced maintenance cost per mile by 10% through fleet optimization and enhanced service quality.

• These improvements were enabled by advanced technology, strategic pricing initiatives, and rigorous operational execution.

• Cost Management and Productivity:

• XPO's salary, wage, and benefit expense increased by just 1% year-over-year, with AI-driven tools offsetting inflation impacts.
• The company improved productivity, measuring shipments per labor hour, by 2.5 points despite a 6.1% decrease in tonnage per day.

• This was achieved through AI-driven optimization in linehaul, dock, and pickup and delivery operations.

• European Transportation Growth:

• The European transportation segment increased revenue by 7% year-over-year, with a growing sales pipeline and improved adjusted EBITDA performance.
• Growth was driven by strategic execution in operations and disciplined pricing strategies, allowing the company to expand market share in a challenging macro environment.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'adjusted EBITDA of $342 million and adjusted diluted EPS of $1.07, both exceeding expectations,' LTL adjusted EBITDA 'highest level of any quarter in our history at $308 million,' and '350 basis points of margin expansion over 2 years,' signaling strong execution and optimism.

Q&A:

• Question from Ken Hoexter (Bank of America): October tonnage down ~3% — why are you outperforming seasonality and what do you expect for Q4 margins?
  Response: October tonnage ~-3% (in line with seasonality); outperformance driven by service, 7,500 local customers YTD and premium services; expect Q4 to materially outperform typical OR seasonality and drive full-year ~100 bps OR improvement.

• Question from Scott Group (Wolfe Research): Any color on magnitude of Q4 OR outperformance and thoughts on margin improvement into next year?
  Response: Expect meaningful Q4 OR outperformance (Ali cited ~250 bps YoY range) and anticipate further OR and earnings improvement in 2026 even without assuming macro recovery.

• Question from Jonathan Chappell (Evercore ISI): How should we think about cost cadence and where AI/productivity benefits accrue given PT insourcing?
  Response: In-sourcing yields only modest net cost benefit in 2025 because of added wages/depreciation; the primary cost gains are productivity improvements (labor hours per shipment improved 2.5 points) driven by AI.

• Question from Jordan Alliger (Goldman Sachs): What do you expect incremental margins to look like when demand recovers?
  Response: Incremental margins expected comfortably above 40%, driven largely by yield and reduced exposure to third-party truckload costs.

• Question from Stephanie Benjamin Moore (Jefferies): Confidence in sustaining pricing over next 12 months given tougher comps in 2026?
  Response: High confidence: price differential to best-in-class has narrowed (15pp→11pp), accessorials at 12% (target 15%), SMB mix expanding (25%→target 30%), providing multi-year runway for above-market yield.

• Question from Stephanie Benjamin Moore (Jefferies): Impact of moderating CapEx on free cash flow?
  Response: CapEx will moderate a couple points from ~15% this year toward midpoint of 8–12% long-term, supporting free cash flow north of $400M this year and stronger cash generation next year.

• Question from Fadi Chamoun (BMO Capital Markets): Q4 pricing guidance — still in the 5–6% range? Will premium pricing sustain into 2026?
  Response: Q4 yield ex fuel expected similar to Q3 (~5.9% YoY); management expects premium pricing to be sustained into 2026 via accessorials, mix and contract renewals.

• Question from Christian Wetherbee (Wells Fargo): What does normal Q4 seasonality suggest for quarter tonnage, and how stable is the pricing environment competitively?
  Response: Full-quarter tonnage expected roughly in line with October (~-3% YoY, possibly slightly worse due to comps); pricing environment remains constructive/stable aided by reduced industry capacity and necessary investment needs.

• Question from Unknown Analyst (Deutsche Bank): What are customers saying about macro trends and who is struggling competitively?
  Response: Customer surveys show neutral near-term demand but increasing optimism for 2026; performance varies by segment (retail and some industrials stronger); XPO is benefiting from customers valuing higher service quality amid regional carrier disruptions.

• Question from Thomas Wadewitz (UBS): In an upturn, how important is volume/share gain versus improving pricing and costs?
  Response: All three levers (yield, volume, cost) compound in an upturn; company expects outsized earnings on recovery but prioritizes profitable share growth (not simply being largest); track labor hours per shipment as key productivity metric.

• Question from Brian Ossenbeck (JPMorgan): Any impact from government shutdown or grocery funding; any truck market effects on your book?
  Response: No material impact from government shutdown; grocery consolidation is a notable growth opportunity (preferred status with 6 large grocers); truckload normalization could return low- to mid-single-digit incremental tonnage to LTL.

• Question from Jason Seidl (TD Cowen): Can you dive into AI initiatives and where you sit versus peers?
  Response: AI deployed across five areas (two revenue: lane-level pricing, sales enablement; three cost: linehaul, P&D, dock); cloud-native systems enable faster rollouts; examples include >80% reduction in diversions and low-to-mid single-digit linehaul miles reduction.

• Question from Jason Seidl (TD Cowen): Outlook for Europe and any country-level strength?
  Response: Europe continues to outperform in a soft macro with consecutive organic revenue growth (UK particularly strong); expect to outperform typical sequential EBITDA decline into Q4.

• Question from Bascome Majors (Susquehanna International Group): Can Europe move profit contribution materially higher given large expense base?
  Response: Europe has multiple growth and cost-efficiency levers and is outperforming seasonality, but management does not expect margin expansion to match North American LTL; sale of Europe remains an option when economics are right.

• Question from Christopher Kuhn (The Benchmark Company): Over the long term, can XPO's OR exceed best-in-class?
  Response: Management expects to continue closing the gap (price differential down to ~11pp) and believes there's no reason not to reach OR in the low- to mid-70s over time as pricing and AI-driven cost optimization progress.

Contradiction Point 1

Tonnage Trends

It involves differing expectations for tonnage trends, which directly impact revenue predictions and operational planning, leading to potential discrepancies in investor expectations.

What caused the 3% October tonnage decline, and how does it relate to service quality and pricing? - Ken Hoexter(Bank of America)

2025Q3: October tonnage was down in the 3% range, aligning with typical seasonality from September to October. - Mario Harik(CMO)

What's your outlook for tonnage and operating rate in Q3 based on June/July trends? - Jonathan Chappell(Evercore ISI)

2025Q2: We anticipate tonnage to moderate as we move through Q3, with easier comps towards the end of the quarter. - Ali-Ahmad Faghri(CSO)

Contradiction Point 2

Yield and Pricing Expectations

It involves varying expectations for yield and pricing improvements, which are critical for revenue growth and profitability, impacting investor decisions and market confidence.

What is your pricing guidance for Q4 and beyond? - Fadi Chamoun(BMO Capital Markets)

2025Q3: Pricing to exceed market improvements driven by premium services, local customer growth, and AI capabilities. This will continue into 2026. - Mario Harik(CMO)

Will sequential yield improvements occur in H2? Can local channel growth sustain high single-digit rates? - Stephanie Moore(Jefferies)

2025Q2: We expect Q3 yield ex fuel to grow at or above the level in Q2. Local channel growth supports yield improvement, aiming for 30% of revenue, currently in the low to mid-20s. - Kyle Wismans(CFO)

Contradiction Point 3

AI Initiatives and Cost Efficiency

It involves differing expectations for the impact of AI initiatives on cost efficiency and operational improvements, which are crucial for maintaining competitive advantage and financial performance.

How should we assess OR improvement potential next year excluding volume growth? - Jonathan Chappell(Evercore ISI)

2025Q3: AI tools are improving efficiency, offsetting wage and inflation costs. Focus is on reducing costs per mile through optimization. - Mario Harik(CMO)

How will labor productivity trends change in the second half of the year? - Chris Wetherbee(Wells Fargo)

2025Q2: AI initiatives are a significant driver of margin outperformance, with continued investment in technology enhancing productivity. - Mario A. Harik(CEO)

Contradiction Point 4

Volume Decline and Market Pricing Strategy

It involves differing explanations for the decline in tonnage and the company's pricing strategy in relation to the market, which directly impacts investor understanding of the company's competitive position and financial performance.

Can you explain the 3% decrease in October tonnage and its relationship to service quality and pricing? - Ken Hoexter(Bank of America)

2025Q3: October tonnage was down in the 3% range, aligning with typical seasonality from September to October. Factors contributing to this include better service quality, onboarding of small- to medium-sized customers, and premium services. - Mario Harik(CMO)

What caused the industry's volume decline, and is it due to declining demand or share losses to other modes, particularly truckload? - Fadi Chamoun(BMO Capital Markets)

2025Q1: The decline is primarily due to underlying demand, especially in the industrial sector. There's no significant structural change in how LTL trade is being moved. While truckload is cheaper, our average shipment length and weight make it much more costly to convert to truckload. The industry is capacity-constrained, and when the cycle turns, LTL should see significant volume growth. - Ali Faghri(CSO), Mario Harik(CEO)

Contradiction Point 5

Pricing Strategy and Market Advantage

It involves differing explanations for the company's pricing strategy and market advantage, which directly impacts investor understanding of the company's competitive position and financial performance.

What are your pricing expectations for Q4 and beyond? - Fadi Chamoun(BMO Capital Markets)

2025Q3: Pricing to exceed market improvements driven by premium services, local customer growth, and AI capabilities. This will continue into 2026. - Mario Harik(CMO)

How are pricing dynamics shaping up in the market, particularly for local SMBs? - Ken Hoexter(Bank of America)

2025Q1: We are achieving above-market pricing through improved service quality and premium offerings. Our pricing is supported by a 15-point differential to best-in-class due to better service. - Mario Harik(CEO), Ali Faghri(CSO)