管理層發言
Welcome to the XPO Q2 2026 Earnings Conference Call and Webcast. My name is Sachi, and I will be your operator for today's call. I will now 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 the 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 the 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 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 may also refer to certain non-GAAP financial measures as defined under applicable SEC rules. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables are 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 record second quarter results that demonstrate the increasing strength of our earnings power. Company-wide, we reported revenue, adjusted EBITDA and adjusted diluted EPS at the highest levels in our history. Excluding real estate gains, our adjusted EBITDA was up 25% year-over-year to $425 million, and adjusted diluted EPS was $1.64, up 56%. In North American LTL, we grew adjusted operating income by 36% on a 15% increase in revenue, highlighting the scalability of our network and the operating leverage in the business. We also brought down our adjusted operating ratio below 80%, which is a new record for us. That's a 300 basis point improvement from the second quarter last year and has significantly outperformed normal seasonality.
The foundation of our outperformance continues to be the superior customer experience we deliver through disciplined execution amplified by our technology. Notably, we achieved a new service milestone with our damage claims ratio, bringing it below 0.2% for the second quarter in a row and to the best level in our history. This is a product of operational excellence, investments in capacity and proprietary technology working together to build customer satisfaction and trust. Another example is our reputation as one of the fastest and most reliable LTL networks in the industry with broad geographic coverage and consistently high service levels. This ties directly to our gains in market share. In short, world-class service is the gateway to expanding our business and translating customer value into shareholder value. To accomplish this, we've engineered our network to support long-term growth while running efficiently across different demand environments.
Since 2021, we've increased our trailer fleet by more than 30% and tractor count by more than 20% and expanded our network capacity with 15% additional doors. We've also invested in our workforce, improving retention while maintaining the ability to scale labor hours with demand. This gives us the capacity to take on substantially more volume in the recovery while maintaining service quality. Each of these investments strengthens our operating leverage, enabling us to grow efficiently now and over time. They also reinforce our commercial performance by creating more opportunities to increase wallet share, earn price and win new business. In the second quarter, our service quality helped us accelerate contract renewal pricing. And we're continuing to expand revenue streams with high-margin local customers and premium services where we have a meaningful competitive edge. These are all structural advantages inherent to our business.
We're building our network for years of above-market pricing growth and profitable market share gains. Before I close, I'll spend a few minutes on our proprietary technology and its broad impact across the business. In the second quarter, we used our workforce planning technology to improve productivity by nearly 2.5 points versus last year, which outperformed our quarterly target of 1.5%. Another example is route optimization, which we discussed on our prior calls. Currently, more than two-thirds of our operations are using this technology for pickup and delivery, and we're seeing measurable results with fewer miles and more stops per hour. We're also seeing encouraging results from the pilot of our trailer loading technology. This application uses AI to assess images of freight placed inside the trailers and provide our dock workers with actionable feedback in real time. In the second quarter, at the pilot sites, load quality improved by more than 40%, while damages were reduced by 50%, contributing to both service quality and operating efficiency.
As we grow the business and expand the use of our technologies, the financial, operational and competitive advantages will increase as well. In closing, the levers we executed on in the second quarter are firmly established as a foundation for outsized value creation. We'll continue to enhance our service, invest in capacity, drive above-market pricing growth and scale our proprietary technology to operate more efficiently. Our results reinforce our confidence in the strategy and the significant value it can create. And that value creation is underpinned by two key objectives: achieving an annual LTL operating ratio in the low 70s or better and generating billions of dollars of cumulative free cash flow in the coming years. 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 our financial results, followed by our balance sheet, liquidity and capital allocation. For the second quarter, we grew total company revenue 13% year-over-year to $2.4 billion. In our LTL segment, revenue increased 15% to $1.4 billion, reflecting an acceleration in both yield and volume growth. Turning to costs in LTL, our expense for salary, wages and benefits increased 7% year-over-year or $46 million. Our productivity initiatives continue to help mitigate the impact of higher inflation and freight volumes. Our cost for fuel, operating expense and supplies increased 24% or $53 million, primarily due to higher fuel prices. While industry truckload rates trended up significantly throughout the quarter, our purchase transportation costs increased by just $8 million. This is because our in-sourcing strategy is performing as planned, reducing our exposure to truckload rate volatility.
Our depreciation expense increased 5% or $4 million, consistent with our continued investments in the network to support long-term growth. Moving to profitability company-wide, we delivered $434 million of adjusted EBITDA. Excluding $9 million of real estate gains in the quarter, adjusted EBITDA increased 25%. Our LTL segment generated $390 million of adjusted EBITDA and improved margin by 310 basis points to 27.4%. Excluding real estate gains, LTL adjusted EBITDA increased 27%. Lastly, in LTL, we grew adjusted operating income 36% to $287 million. In our European transportation segment, adjusted EBITDA was $48 million. And in our Corporate segment, adjusted EBITDA was a $4 million loss. Returning to the company as a whole, operating income increased 37% year-over-year to $271 million. Net income was $162 million, representing diluted earnings per share of $1.36. On an adjusted basis, diluted EPS was $1.70.
Excluding $0.06 per share of real estate gains in the quarter, adjusted diluted EPS increased 56%. Turning to our second quarter cash performance, we generated $207 million of free cash flow, and we had $298 million of cash on hand at quarter end after completing $101 million of net capital expenditures, $70 million of common stock repurchases and $70 million of term loan repayments. Combined with available capacity under our committed borrowing facility, total liquidity at quarter end was approximately $898 million. Our net leverage ratio improved to 2.1x trailing 12 months adjusted EBITDA compared to 2.3x at the end of the first quarter. We're driving meaningful increases in free cash flow generation through a combination of strong earnings growth and moderating capital expenditures. We now expect to more than double our free cash flow for the full year compared with 2025. This gives us greater flexibility in accelerating share repurchases while continuing to strengthen the balance sheet through debt paydown.
In July, we paid down another $100 million on our term loan to start the third quarter, bringing our year-to-date debt paydown to $200 million. And with that, I'll hand it over to Ali to talk through our operating results.
Thank you, Kyle. I'll begin with our LTL performance, where we delivered another quarter of profitable growth and record margins. For the full quarter, shipments per day increased 2.8% year-over-year, while weight per shipment declined 1.8%, resulting in 1% growth in tonnage per day. Importantly, volumes strengthened as the quarter progressed. Shipments per day increased 0.2% year-over-year in April, 3.3% in May and 5.1% in June. Tonnage per day followed a similar trajectory, improving from down 1.5% in April to up 0.5% in May, followed by a 4% increase in June. We saw the improvement continue in July with an estimated increase above 6% in both shipments per day and tonnage per day on a year-over-year basis and with weight per shipment roughly flat. All three metrics outperformed normal seasonal patterns. These trends reflect our ability to consistently earn profitable market share through world-class service in any economic backdrop.
In the second quarter, this was amplified by a steady improvement in freight demand. Pricing remained a source of strength throughout the quarter. Yield, excluding fuel, increased 4.4% year-over-year and improved sequentially, supported by an acceleration in our contract renewal pricing. Revenue per shipment, excluding fuel, also improved both year-over-year and sequentially. We expect both metrics to continue improving sequentially in the third and fourth quarters as we align more of our pricing with the value we deliver and expand the mix of accretive business. Notably, given the improving trend we've seen in weight per shipment, we now anticipate revenue per shipment growth, excluding fuel, to accelerate more than we previously expected in the third and fourth quarters. This is a benefit to both revenue growth and profitability. Turning to our adjusted operating ratio in LTL, we improved OR in the second quarter by 300 basis points year-over-year to a new company record of 79.9%, outperforming normal seasonality by more than 100 basis points.
Over the past three years, through a historic freight recession, we've improved OR by nearly 800 basis points with plenty of runway ahead. Our European business also delivered another strong quarter of growth on both the top and bottom lines. We reported record revenue in Europe, marking our 10th consecutive quarter of growth on a constant currency basis. Adjusted EBITDA increased 9% year-over-year, and we expect that growth to accelerate in the second half of the year. Before we move to Q&A, I leave you with three key takeaways from the quarter. First, we're consistently earning profitable market share with an expansive network differentiated by superior service and a commitment to continuous improvement. This is the basis of our value proposition. We're also driving above-market pricing growth while unlocking structural productivity gains through AI and other initiatives for network optimization.
And finally, we expect our second quarter outperformance to accelerate as freight demand recovers. This is the latest validation of our ability to significantly expand margins over time. With that, we'll take your questions. Operator, please open the line for Q&A.
分析師問答
The first question is from Ken Hoexter from Bank of America.
Great. Really great job and congrats on breaking sub-80% and outperforming seasonality again. Great to see. I guess maybe just talking about the outlook going forward. Ali, you're talking about accelerating earnings. I don't know if you want to put some parameters on that, if you're talking about levels of operating ratio performance or revenues. And then Mario, just at the end, you kind of ran through some of the AI stuff you're running — rolling out and it reduced damages 50%, load quality increased 40%. These are massive numbers. Maybe put some numbers or frame the opportunity here for expenses going forward?
You got it, Ken. First, starting on outperformance, I'll start with the third quarter OR. We do expect another strong quarter for margin performance here in the third quarter. And as you know, Ken, normal seasonality for us is for OR to increase 200 to 250 basis points from Q2 to Q3, which would put OR for the quarter north of 82%. But we do expect to significantly outperform that and for our OR to be below 81% here in the third quarter. And that's a strong outcome overall, and it implies another very strong quarter of year-on-year margin improvement and it's driven by a combination of price, accelerating volumes and cost efficiency, and it puts us firmly on track to outperform our full year target for margin improvement. In terms of technology, as you know, we've always been very tech forward in our thinking. The solution you referred to was a new solution we piloted in the second quarter for all of our dock workers, where every time a dock worker is loading a trailer, they actually take photos of each tier of the trailer.
AI analyzes that photo in real time and tells them what they're falling short on loading, whether a certain pallet needs to be strapped to the wall of the trailer, where they're going to use an airbag or if they're not using safe stack bars. So all of that happens in real time so the dock workers can actually correct what is happening as they are loading the trailer. And we have seen tremendous success in the pilot so far, and we expect to roll this out across the entire network through the back half of the year. But similarly, all the other solutions around pickup and delivery, around dock efficiency, about labor planning, all of these have a massive runway ahead of us here. In the quarter, we improved productivity by nearly 2.5 points versus an expectation of 1.5. And again, the runway is massive ahead of us for all of these solutions.
The next question is from Scott Group from Wolfe Research.
So it seems like you're clearly going to exceed the margin target for the year. I don't know if you have an updated view on that. And then maybe just more importantly, longer term, Mario, I thought I heard you say in the prepared comments like a low 70s OR. I don't know that I've heard you say that specifically before. So what's your — how do you think about the timeline to get there that's, give or take, another 1,000 basis points of margin improvement? What are the incremental margins assumed with that or pace of margin improvement you think you can do the next bunch of years?
You got it, Scott. So first, I'll start for the full year margin outlook. Based on what we delivered so far in the first half of the year and our expectation for the third quarter, we do expect to outperform our initial outlook, which was to improve OR for the full year by 100 to 150 basis points. And we now expect full year margin improvement to be at least 200 basis points. And obviously, we'll see what the back half has in store for us. But first, Scott, if you look at the volume side, it has tracked well above seasonality here more recently. And we're seeing both our initiative in gaining market share as well as the positivity we're hearing from our customer translate into more freight on our trucks. As Ali mentioned in the opening remarks, we expect July to be above 6% of tonnage growth here. And that means that for the full year, we now expect tonnage to be up a few points relative to when we started the year where it was more of a flattish expectation.
On the pricing side, the trends have been favorable, and we expect our pricing trend to continue through the rest of the year. And on the cost side, also our execution has been very strong through productivity, what I mentioned earlier about the AI initiatives as well. So if you break it down, a lot of great momentum across all of these pieces, and that's going to enable us to outperform our initial full year expectation on margin improvement. In terms of getting to a low 70s and beyond OR, and this is what really gets us excited about the years ahead. If you look at it, today, we have a low-teens pricing gap and opportunity that we're going to go get above-market pricing growth. And if you look at it over the last three years, we have been outperforming the market on yield by almost 2 to 3 points, sometimes a bit more per year. And that's driven through the combination of — from one perspective, our service product continues to improve, and we expect we can get a point of extra yield associated with that over a long runway, five-plus years.
And then the other two components are around premium services and continuing to grow with our small- to medium-sized customers. On premium services, if you recall, when we started our plan, we had 9% to 10% as a percent of revenue being accessorial revenue, and our goal was to get to 15% plus, and we're currently halfway through that, and we see a massive amount of opportunities as we onboard new customers on these services. And similarly, on local accounts, we are actually accelerating the growth with small- to medium-sized customers here in the — both as the quarter progressed in Q2 and July, we've seen a further inflection and improvement there. We're onboarding more of these customers who value service and value relationship. Our goal is to give them a delightful experience every time they ship with us, and we're seeing growth there as well. So that's the big opportunity, Scott: that double-digit pricing opportunity is what would get us there and beyond over the next, call it, five-plus years.
The next question is from Jonathan Chappell from Evercore ISI.
Ali, you said you expect the 2Q outperformance to accelerate and then Mario insinuated something for 3Q without putting a pin on it. I wouldn't think you expect tonnage and shipments to continue to increase by 6% as per July. But if you play out the string on seasonality for August and September from where you're exiting July, what are we looking for from a volume perspective? And I get the revenue per hundredweight and revenue per shipment increasing sequentially. And where would that put you relative to kind of the normal seasonal trends on 3Q OR progression?
Sure, Jon. So from a volume perspective, as Mario noted, July for us was up over 6% tonnage on a year-over-year basis. And that was about, call it, 4 points better than normal seasonality relative to the month of June. Typically, what we see is tonnage is usually down in that low to mid-single-digit range sequentially as you move from June into July. This year, it was flattish and so much better than normal seasonality. Now if you just roll forward that above seasonal trend we've been seeing through the rest of the quarter, that would put full quarter tonnage for us up somewhere closer to that mid-single-digit range on a year-over-year basis. And keep in mind, Jon, this does account for a comp dynamic we have in Q3 where August and September are tougher comps on a relative basis. However, if you zoom out that mid-single-digit tonnage growth we expect in the third quarter does imply a meaningful acceleration on a two-year stack basis relative to the second quarter.
And ultimately, that speaks to the momentum we're seeing from a demand perspective. Similarly, from a pricing standpoint, as Kyle noted, we do expect both yield and revenue per shipment ex fuel to increase sequentially here, both in Q3 and Q4. On a year-over-year basis, we would expect our yield to be up in a similar range as Q2. That's even with the improving weight per shipment trend we're seeing here more recently, as we noted, July weight per shipment was flat on a year-over-year basis. That's a great outcome as it points to an improvement in underlying core pricing. And ultimately, that improvement in weight per shipment is a benefit to revenue per shipment, which is why we do now expect our revenue per shipment ex fuel to accelerate year-over-year here in the third quarter to a greater degree than we initially expected. And ultimately, that's going to be accretive to both revenue and profit growth.
And all of that, Jon, is what underpins the OR outlook that Mario referenced earlier, where we would expect our OR to meaningfully outperform seasonality in the third quarter to be below 81% here. Ultimately, how much below 81% is going to depend on how demand trends through the rest of the quarter. But we do expect another very strong quarter of margin outperformance here in the near term.
The next question is from Richa Talwar from Deutsche Bank.
I was hoping you could talk about the competitive dynamic a bit more. The strong July performance definitely stands out. And I'm wondering if that's — there's some validation in your outlook that as things start to heat up, maybe the smaller regional players you compete with struggle a bit more because they've already been operating at really high utilizations and you're getting that spillover freight? Or is this truckload coming back into LTL? Is that becoming a more prominent trend that you're seeing in your weight per shipment kind of improving? Or what's going on in the competitive backdrop that's allowing the strong outperformance?
Yes, Richa, so if you look at a few dynamics. First, industry capacity has been down over the last few years. Since the last peak in 2021, we estimate service center count to be down about 10% as an industry and door count to be down mid-single digits over that same period of time. When that industry capacity was shrinking, it was at a time when industry demand was meaningfully down. It was down in the mid-teens through the industrial recession that we have seen over the last three years. What we're seeing this year is a few dynamics. The first one is a pent-up demand for the industrial sector. Companies have not deployed enough capital in industrial goods across the country, and that's starting to come back. It's still not yet a full recovery because ISM has been in the low to mid-50s year-to-date, expansionary, which is really good. But we haven't seen the over-60 numbers, which is when the market is fully in upswing scenario.
On the demand side, we are getting a lot of positivity from customers. We run a survey before every earnings call, and we have now doubled the number of customers relative to the beginning of the year that do expect an acceleration in the back half of the year, which is very exciting. We're starting to see that in existing customer demand. On the retail side, retail continues to be positive. On the industrial side, what changed from last quarter is that we are seeing manufacturing starting to build momentum, and we haven't seen that in more than three years, which is fantastic to see. On truckload to LTL conversion, we are in the early innings of seeing some of that. Truckload rates year-to-date are up more than 40% so far. We estimate low- to mid-single-digit total tonnage moved from LTL to truckload, and we expect that to come back in the back half of the year or into next year if truckload rates stay consistently high.
Lastly, we are taking market share for two reasons. One, many of the premium services we are offering historically we were not participants in, so we had low market share and we're growing those — grocery consolidation, must-arrive-by date, trade show shipping, new store rollouts. These are ramping over time and helping us gain market share. And on local small- to medium-sized customers, we continue to grow that book of business as well. All of these are contributing to the inflection in volume and the meaningful step-up versus seasonal trends.
The next question is from Stephanie Moore from Jefferies.
Maybe touching on just the overall pricing environment. One, maybe I just misheard it, but I believe you said contract renewals have accelerated. So if you could just touch on that, again, apologies if I missed that. But in general, help us maybe bifurcate pricing actions that are more so driven by actions that are within your control and then pricing that's driven by the underlying environment and what seems to be an overall stronger freight environment.
Sure, Stephanie. This is Kyle. So you're right. When you think about contract renewals, they did accelerate. We're up in the mid- to high single-digit range. And I think what's important when you look at renewals and you look at the results is the strong flow-through we're seeing. If you look at the second quarter as an example, that strong pricing that was above market really translated to strong OR outperformance. In the quarter, we were 100 basis points better than normal seasonality, and we improved year-over-year by over 300 basis points. So I think what we're seeing right now is really a productive pricing environment. And we think that's going to continue as the market continues to improve. As Mario said, we have a lot of different strategies that we're deploying to continue to drive strong pricing here in the remainder of the year.
The next question is from Jason Seidl from TD Cowen.
Mario, team, nice job in the quarter and sort of impressive outlook here. A couple of questions. Given the better trends that you're seeing in terms of the demand side, and if we extrapolate them for 3Q and 4Q, where are you guys going to exit the year in terms of available capacity? And also, how should we look at head count given these better trends?
Great question, Jason. On capacity for doors and equipment, starting with rolling stock, we're feeling great. We've added more than 30% more trailers and more than 20% more tractors, which gives us runway for the next few years as we continue to invest in our fleet. A similar dynamic exists for the door side. In a down cycle, having in excess of 30% door capacity is helpful because it enables you to take on more volume in an up cycle and support existing customers while gaining profitable market share. We're feeling great about where we are. Not all capacity is equal — in a network business, you can have markets where you are short. We invested in markets where we historically had capacity constraints. Many of our investments in the South, Southeast and Southwest were designed to address those constraints. For markets like Nashville, Atlanta, Texas and the Midwest, we've added mega facilities to support customers in an up cycle.
On the labor side, we feel very good about where we are. We continue to improve productivity, which gives us incremental labor capacity to do more with existing headcount by ramping up hours. Over the last few years, we are only down slightly on headcount. Relative to July, we can handle another low- to mid-single-digit more shipments with the existing workforce and by ramping up hours. We've also been proactive in hiring and have seen very good traction in markets where we've increased hiring. If industry demand accelerates further and we see a hockey-stick demand recovery, we're confident in our ability to further expand the workforce. Our employee turnover is the best it's ever been, and we can spin up more than 130 driver training schools to support growth. So on all aspects of capacity, we're feeling great and ready to support our customers and grow with them.
The next question is from Jordan Alliger from Goldman Sachs.
So it's been a while since weight per shipment, I think, got back to flat or positive. I'm just curious if you could give some thoughts from here. Is your expectation that that will move into the positive at this point in time? And then just real quickly on just a price follow-up. If we do have that broadening industrial recovery that we're hoping for, given you're already seeing very strong pricing, can price be pushed up even further from here?
Sure, Jordan. I'll start on weight per shipment and then pass it to Mario on pricing. From a weight per shipment standpoint, we are seeing encouraging trends. In the second quarter, our weight per shipment improved by about 1 point year-over-year relative to the first quarter, and it outperformed seasonality as we moved from Q1 into Q2. More recently, in July, weight per shipment was flat year-over-year, which was better than typical seasonality for July and is being driven by improvement in the underlying industrial demand backdrop. If you roll forward what we've been seeing, it would put weight per shipment down year-over-year in the third quarter, factoring in a tougher comp in August that gets easier in September. However, we expect weight per shipment to be down less year-over-year in Q3 versus Q2. As you cycle into the fourth quarter, we see a scenario where weight per shipment starts to inflect positive on a year-over-year basis entering 2027. That will be driven by the demand environment and how much further it improves, but we expect weight per shipment to start to inflect positive on a sustainable basis over the next few months and as we enter the end of the year.
And Jordan, on industry pricing overall, we're starting to see a more constructive environment. You have demand in the early innings of picking up combined with capacity that has left the market. We believe you'll see industry pricing recover over quarters and years to come. Today, we expect to outperform the market by roughly 2 to 3 points of yield on a consistent basis. In a soft macro environment, LTL pricing is typically up in the low single digits; we expect to outperform that by 2 to 3 points. As the environment strengthens and industry pricing moves to mid-single digits, we'd expect to continue to outperform. Eventually, when industry pricing reaches mid- to high-single digits in a full recovery, we'd expect to outperform that by a few points as well. We believe we're in the early innings of a multiyear recovery with industry pricing going up, demand increasing, and constrained capacity among carriers who haven't invested in growing capacity.
The next question is from Christian Wetherbee from Wells Fargo.
I wanted to ask about productivity. So you outperformed the productivity target again in the second quarter, and you've done that a number of the last several quarters. I guess as we think forward, what seems to be different is that tonnage is inflecting more positively here, so you're able to get the productivity without the help of volume. I'd imagine productivity is probably a bit easier as we go with the volume growth. But maybe you could help sort of lay out what you think is the right way to think about productivity. Is it still sort of 1.5 points on a year-over-year basis? Do you think it can be better in a more favorable demand backdrop?
You're spot on, Chris. When you see higher volumes, you tend to be more productive because you have more density in your network. These improvements are not linear, but our target is 1.5 points over the next number of years based on the solutions we're deploying, our AI capabilities and field execution. We've been outperforming that number. After the Yellow bankruptcy, when freight volumes increased above seasonality, we improved productivity meaningfully higher. While it's not linear, our expectation is 1.5 points annually, and over a multiyear trajectory we expect to outperform that given our proprietary technology and disciplined field execution.
The next question is from Thomas Wadewitz from UBS.
I wanted to see if you could offer a little bit of a thought on how inflation may affect the business. Obviously, you're seeing good price, good tonnage, great operating leverage. But how do you think about where maybe there is some inflationary pressures? I'm thinking comp and benefits in particular, that's your big expense line and maybe how that affected in 2Q and how you look forward with that. Also, related to that is just in the driver market. I think we've heard some feedback that some of the tightening in LTL aside from terminal-driven issues is drivers getting a little tight. I don't know if you see that or if that's a factor in how you look at inflation.
Sure, Tom. Overall inflation we see in the mid-single-digit range. The core of that is wage inflation. Beyond that, you'll see a point or two from health insurance, as you would expect. In the second quarter, we saw some inflationary pressure in the salary, wages and benefits line. Also, higher volumes impact that line. We had some incentive compensation this quarter, but the important point is productivity. Having 2.5 points of productivity in the quarter really helped us manage those pressures. So while the core inflationary pressure is on labor, we're effectively managing labor and ensuring it adjusts to the freight we have on the dock.
I was just going to ask: you mentioned some of the incentive comp or other pressure in 2Q. Is that something we'd expect to see in 3Q as well or was some of that temporary in 2Q?
I think in the back half you'll see some similar components. Wage and benefit inflation will be present, and higher incentive comp will be there as well. The important point is that we've already contemplated these components in our outlook for the back half of the year. When you think about the overall OR improvement of more than 200 basis points for the year, that's already factored in.
On the driver market, we are seeing the hiring market tighten. Part of that is dynamics in truckload where larger fleets are hiring drivers as well. Given our benefits and compensation packages, and our relatively young fleet with an average truck age under four years, we've been successful adding drivers in markets where we needed to and have seen good traction. But the hiring market is tightening.
The next question is from Brian Ossenbeck from JPMorgan.
Maybe just real quick, first, commentary on fuel. Obviously, still swinging around a little bit, probably still a little impact on the current quarter and how you think about that in the outlook? And then just more broadly, maybe for Mario, can you just talk about the mix shifting a little bit based on the weight per shipment trends inflecting more positive? Can you just talk more about the 3PL layer or that part of the structure? Because it seems like others are having problems with that in terms of their pricing. It looks like you're getting more industrial flow-through than maybe some other companies. Anything you can point to in terms of why there's a relative difference with some of your peers to the extent you have visibility on that?
Sure, Brian. On fuel, while fuel helps, the second quarter's outperformance and 300 basis points of year-over-year improvement really goes back to strong operational execution tied to accelerating pricing, profitable market share gains and above-target productivity. Over the last three years, we've delivered nearly 800 basis points of OR improvement even when fuel was down for much of that period, which speaks to the operational execution. For the third quarter, based on diesel prices, we expect diesel prices to be down quarter-over-quarter and for our fuel revenue to be down quarter-over-quarter. Even with lower fuel, we expect to meaningfully outperform normal seasonality in Q3 and deliver very strong performance for the full year. On the 3PL side, transactional 3PL mix is the smallest part of our business. Carriers tend to work more with 3PLs in softer volume environments like we've been in. As demand improves, that mix typically declines, and that's what we're seeing. As our volumes accelerated through Q2 and into Q3, our 3PL mix declined sequentially. Overall, we're focused on OR-accretive freight that fits our network, and we'll pursue freight that checks those boxes.
The next question is from Ariel Rosa from Citigroup.
Congrats on some nice results here. Guys, I wanted to ask about the performance in Europe. It seems like it continues to improve. Just maybe if you could speak to the sustainability of that, what you're doing differently there? And then I noticed the transaction and integration costs were somewhat elevated or maybe it was restructuring costs in the quarter. Maybe just speak to what that is and if that continues.
You got it. High level in Europe, we are driving a similar plan to what we drove in the U.S.: cost control, leaning into sales and hiring more salespeople, and growing into new verticals. For example, verticals like luxury goods, aerospace, healthcare, medical, and technology are areas we're actively pursuing. We are on a very good trajectory of growth. As Kyle mentioned earlier, EBITDA in Europe grew in the high-single-digit range in the second quarter, and we expect EBITDA growth to accelerate to the high teens in the back half of the year. We're seeing very good momentum driven by the execution of our plan. Ultimately, our goal is to sell that business, but we're patient and want to get the right price. When the time is right, we'll sell based on the strong operating momentum and use proceeds to further capital returns to shareholders.
In terms of restructuring costs, the majority of costs in the quarter relate to restructuring in Europe. We're taking structural costs out, focusing on salary and functional support that will streamline the operation moving forward. You're seeing that flow through in the results: up 9% year-over-year growth in the second quarter, and we expect that growth to accelerate in the back half of the year for Europe. Sales restructuring spend seen in Q2 will step down for the remainder of the year.
The next question is from Bascome Majors from Stephens Inc.
You've given us a bit of a look forward with the longer-term margin target quantified and talking about the yield spread that you expect to maintain and where the market might go if it continues to remain tightened. Can you give us a big picture look at what the cash flow and incremental margin algorithm might look like for the business over the next couple of years? I know you don't want to guide demand that far, but with the changes and acceleration and productivity we've seen today, just update us on the long-term algorithm in the business?
I'll start with free cash flow and talk about this year first. For 2026, we started the year thinking we would improve free cash flow by 50% year-over-year. At this point, we're far ahead of that expectation. As we said in the prepared remarks, we now expect to at least double free cash flow year-over-year, driven by two major factors: continued ability to drive higher income and moderation of CapEx. Looking long term, we think EBITDA conversion will continue to accelerate as earnings grow, and our CapEx profile will moderate versus the last couple of years. This means we expect to generate billions of dollars of free cash flow over the coming years with compounding earnings growth and the ability to accelerate both share repurchases and debt paydown. From an incremental margin standpoint, over the cycle we think we can generate 40% incremental margins, and we've demonstrated that so far. It will depend on the mix of volume and price, but long term we expect yield to be the bigger driver of top-line growth, which will have strong flow-through to the bottom line. Our yield initiatives — growing local, growing premium services — are early innings with a long runway, so we expect strong incremental margins forward, at least in the 40% range through the cycle.
The next question is from J. Bruce Chan from Stifel.
Just want to come back to some of the comments on demand. Mario, you mentioned that part of the volume outlook is coming from market share, which makes sense with your service levels and sales force investments. Any sense for how much of that volume outlook is idiosyncratic versus what's coming from the market? And maybe as part of that, any color on what you're seeing by end market would be helpful, too.
You got it, Bruce. It's coming from a combination of three things: market share gains, early truckload-to-LTL conversion, and strengthening industrial demand as we head into the back half of the year. It's tough to precisely estimate the split because all three can be in play in any month. Currently, the bigger component is our idiosyncratic market share gain levers, but the other two are starting to contribute. There's a scenario where these levers could accelerate materially in the back half, which is not yet contemplated in our outlook. On market share gains, for small- to medium-sized customers, last year our run rate was roughly 2,500 new logos a quarter; in Q2 we were at 2,700 to 2,800 new customers, a step up. Premium services also have strong momentum. On end markets, retail has been consistently but modestly positive. On the industrial side, last quarter we saw strength in electrical, chemicals, agricultural equipment and heavy equipment. In Q2 and into July, manufacturing started to build momentum — something we haven't seen in more than three years — and if manufacturing continues to strengthen, we could see further improvement in the back half of the year.
The next question is from Ravi Shanker from Morgan Stanley Investment Management.
Just a couple follow-ups. Mario, I think you said you're going to have a double-digit pricing opportunity in the next five years. Can you just talk about what the slope of that looks like? And remind us what the expected pricing lag in terms of timing might be relative to truckload? Also, I think you said that you think the network can absorb about mid-single-digit volumes before you start bringing resources back. It sounds like you might get there next quarter. When and how much do you think resource additions might actually start to show up?
You got it, Ravi. On the pricing opportunity, we expect fairly consistent outperformance. We expect our outperformance to be steady in that 2 to 3 points higher than market average over the next five-plus years. That will be driven by the three levers I mentioned: improved service quality, premium services, and growth with small- to medium-sized customers. We estimate roughly 1 point of incremental yield per year from better service, about 1 point from premium services as we grow those offerings, and about 0.5 points from the small- to medium-customer segment — as rough run-rate contributions. On the network absorbing more volume, we already started ramping hiring in Q2 and have had good success. We can handle additional low- to mid-single-digit volume increases with existing workforce and by ramping hours. If industry demand accelerates further into double-digit tonnage growth, we'll lean into hiring in markets where it's needed and add personnel accordingly.
The next question is from Christopher Kuhn from StoneX.
I'm just curious how the newer terminals you've opened in the past couple of years have performed and how that might be benefiting your overall performance?
Overall, the new terminals have been fantastic. We already operate in the regions where we added those terminals. About half were relocations from smaller to larger terminals and the other half were incremental adds in existing markets. An example is Nashville: we used to break about 4 million pounds of freight in an overnight shift at a smaller location without enough door or yard capacity. We opened a 250-door break-bulk location west of Nashville on 50 acres, one of the largest terminals in the city, which expanded capacity and improved line-haul efficiency. We also added a new location in Goodlettsville that improved pickup and delivery efficiency. In markets where we've opened new terminals, we've seen quick ramps in productivity and operational performance improvements, and these sites give us the runway to handle much more customer freight.
The next question is from Eric Morgan from Barclays.
Maybe just a couple quick ones. On line haul in-sourcing, I think your slides showed a slight uptick sequentially. I realize it's small, so maybe just noise, but curious if there's anything to call out there and where you might see that going from here? And on Europe, given the momentum in that business, any update or progress on strategic alternatives you'd call out?
I'll start on Europe. As I mentioned earlier, our goal is to eventually sell that business, but we are patient to get the right price. Although our business is outperforming in Europe, the broader European economy is more muted. Through our execution — market share gains, pricing, cost control and efficiency — we've outperformed. When we get the right price, we'll sell the business and use proceeds to accelerate capital returns to shareholders.
On line haul in-sourcing, our outsourced miles were in the mid-single-digit percentage range of total miles, which is the lowest level we've had in company history. Looking forward for the remainder of the year, we expect that level to hold for the rest of 2026. This reflects what we've done to insulate the P&L from truckload rate volatility. We feel like we're in a great spot for the remainder of the year.
There are no further questions at this time. I would like to turn the floor back over to Mario Harik for closing comments.
Thank you, operator, and thank you, everyone, for joining us today. As you saw, our strategy has delivered another quarter of strong results, driving outsized value creation. Looking forward, we'll continue to grow the business, expand our margins and deliver higher free cash flow for years to come. With that, I'll ask the operator to please end the call.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.