XPO continues to execute at the bottom of the cycle. The company again saw margin improvement in its less-than-truckload unit during the third quarter without the help of incremental revenue.
The Greenwich, Connecticut-based company’s LTL segment reported an 82.7% adjusted operating ratio (inverse of operating margin) in the quarter, 150 basis points better year over year and 20 bps better sequentially. (XPO normally sees 200 to 250 bps of OR degradation from the second to the third quarter).
XPO (NYSE: XPO) continues to pull a variety of pricing levers and has implemented several AI-driven optimization initiatives. It has delivered 350 bps of margin improvement over the past two years and still sees ample runway to continue posting industry-leading margin gains, almost regardless of the demand backdrop.
“In a soft macro we’re improving margin, and whenever the cycle starts turning, we’re going to improve it even more, CEO Mario Harik told analysts on a Thursday call.
Price, cost levers driving results
Less-than-truckload revenue was flat y/y in the third quarter, with higher yields (up 6%) offsetting weaker volumes (down 6%). The carrier continues to add local accounts (small and midsize shippers), which typically have better yield and margin profiles. It’s also expanding premium service revenue (shipments that incur accessorial charges) and closing the contractual pricing gap to best-in-class peers as its service offering improves.
Several AI-led productivity initiatives are removing operating costs.
Salaries, wages and benefits expenses (as a percentage of revenue) were up just 30 bps y/y in the quarter as labor efficiencies on the docks and in the pickup-and-delivery network largely offset higher wages.
Purchased transportation expenses declined 230 bps y/y as linehaul miles executed by third parties stood at just 5.9% of total miles in the quarter, down from 25% a few years ago. Linehaul miles have also been reduced (fewer empty miles and freight diversions) through AI optimization. The same tools are being used to drive better trailer utilization rates.
The average tractor age is now 3.6 years, down notably from the 5-year average age it was carrying. This has reduced maintenance cost per mile by 10%.
Q4 guide calls for more of the same
Management’s loose guidance for the fourth quarter calls for a similar pace of improvements.
Tonnage per day was down 6% y/y in the third quarter, with the declines lessening as the prior-year comps eased. July tonnage fell 8.7% y/y, with August and September both down 4.7%. October tonnage was off 3% y/y and in line with normal seasonality.
Tonnage is expected to be down y/y in the fourth quarter, but by a percentage closer to the third quarter’s exit rate. Yield was up 6% y/y in the third quarter and the unit should bank a similar increase in the fourth quarter, implying flattish to slightly higher revenue y/y.
XPO normally sees 250 bps of margin deterioration from the third quarter to the fourth quarter, but expects to materially outperform that change rate this year. Management didn’t issue a firm forecast but said its prior outlook of 100 bps of full-year margin improvement was still intact, implying an OR near 83.7% for the quarter, or 250 bps better y/y.
Management said many of its self-help initiatives have multi-year runways and that is has visibility into further operating improvement in 2026 even without a macroeconomic recovery.
Other Q4 takeaways
XPO reported adjusted earnings per share of $1.07 for the third quarter ahead of the market open on Thursday. That was 5 cents higher than the consensus estimate and the year-ago result. The adjusted EPS number excluded a previously disclosed $35 million charge tied to a subsidiary of Con-way, which XPO acquired in 2015. The adjusted result also excluded transaction and restructuring costs.
Consolidated revenue was up 3% y/y to $2.11 billion, which was ahead of the $2.07 billion consensus estimate.
XPO’s European transportation segment reported a 7% y/y increase in revenue to $857 million, but operating income was down $8 million y/y, resulting in a $2 million loss. Adjusted EBITDA of $38 million was down 14% y/y.
XPO generated $371 million in cash flow from operations during the quarter and reduced its net debt leverage to 2.4 times from 2.5 times in the second quarter. The company has already endured heavy capex years, acquiring terminals and reducing the fleet age. As annual capex steps down to 8% to 12% of LTL revenue (from 15%), it can focus on paying down debt and buying back stock.
With 30% excess door capacity, management believes it will be able to onboard volumes two-for-one when the market turns as many private carriers become capacity constrained and their service metrics slip.
Shares of XPO closed 9% higher on Thursday compared to the S&P 500, which was down 1% on the day.
