Executive Summary / Key Takeaways

• XPO is executing a multi-year LTL transformation strategy ("LTL 2.0") focused on service quality, network investment, yield growth, and cost efficiency, driving significant margin expansion even in a challenging freight market.
• Proprietary technology, including AI applications for linehaul optimization and labor planning, is a key differentiator enabling operational efficiency and productivity gains that outperform the industry.
• The company has achieved record service levels (0.3% damage claims ratio in Q1 2025) and is leveraging this to drive above-market yield growth (6.9% yield ex-fuel in Q1 2025) through pricing, premium services, and growth in higher-margin local accounts.
• Strategic network investments, including the integration of Yellow service centers, have created ~30% excess door capacity and enabled significant insourcing of linehaul (8.8% outsourced miles in Q1 2025), positioning XPO for strong incremental margins in a market recovery.
• Management expects continued strong performance in 2025, guiding for 150 basis points of adjusted operating ratio improvement (or ~100 bps in a downside volume scenario) and anticipates moderating CapEx and potential share repurchases, while navigating risks from macro uncertainty and legal proceedings.

The Blueprint for LTL Leadership

XPO, Inc. is a prominent provider of freight transportation services across North America and Europe, primarily operating through its North American Less-Than-Truckload (LTL) and European Transportation segments. The North American LTL business represents the largest component, serving as a critical link in supply chains with day-definite domestic and cross-border services across the U.S., Mexico, Canada, and the Caribbean. This sector is a foundational element of the economy, characterized by secular growth drivers and an established competitive landscape.

XPO's strategic journey has been marked by transformative acquisitions and focused divestitures, culminating in a clear emphasis on asset-based transportation. Since late 2021, the company has embarked on an ambitious LTL growth plan, dubbed "LTL 2.0," built on four pillars: elevating service quality, strategically investing in network capacity, driving profitable yield growth, and enhancing cost efficiency. This strategy is designed to create value and drive performance regardless of the prevailing macroeconomic conditions.

A cornerstone of XPO's strategy and a key competitive differentiator is its proprietary technology platform. This highly scalable, cloud-based ecosystem is deeply integrated into LTL operations, optimizing critical functions such as pricing, linehaul planning, labor scheduling, pickup and delivery routes, and dock operations. The company is actively investing in artificial intelligence (AI), identifying high-impact applications to enhance profitability through intelligent automation and improved decision-making. AI-driven models are being deployed to optimize linehaul, improving freight flows, load averages, and transit efficiencies. AI is also being beta-tested in pickup and delivery operations to optimize trailer and route assignments, factoring in complex logistics like appointment windows to boost on-time performance. This technological edge is seen as crucial for outperforming rivals in efficiency and profitability, particularly in a challenging market, and is expected to become an even greater advantage over time.

Within the competitive landscape, XPO operates as one of the largest LTL networks in North America, holding approximately 9% of the estimated $53 billion U.S. market in 2024. While competitors like Old Dominion Freight Line (ODFL) may exhibit superior operating ratios, XPO is actively working to close the gap. The company acknowledges a historical yield differential compared to best-in-class carriers, partly attributed to service levels and partly to mix (premium services and small-to-medium businesses). XPO's strategy directly targets these areas, leveraging its improving service and technology to earn higher pricing and capture market share. Unique assets like its in-house trailer manufacturing facility and truck driver schools provide self-reliance and a competitive advantage in sourcing equipment and drivers, differentiating XPO from many peers. The acquisition of Yellow Corporation (YELL) service centers has been pivotal, recycling capacity back into the market and positioning XPO with significant excess door capacity, a key advantage compared to many competitors in the current market trough.

Executing the Transformation: Performance and Efficiency Gains

The execution of the LTL 2.0 strategy is yielding tangible results, evident in both operational metrics and financial performance, even amidst a soft freight market. A primary focus has been on elevating service quality, which management views as directly linked to profitability and market share gains. The company has achieved remarkable progress in reducing damage claims, reaching a record low of 0.3% in the first quarter of 2025, a significant improvement from prior periods. On-time performance has also consistently improved, marking the 12th consecutive quarter of year-over-year gains. These service enhancements are not merely operational achievements but are strategically leveraged to support pricing initiatives and strengthen customer relationships.

Network investments are playing a crucial role in both service improvement and cost efficiency. The integration of the 28 service centers acquired from Yellow Corporation is nearing completion, with the majority operational by the end of Q1 2025. These additions, contributing to over 2,000 net new doors since late 2021, have helped XPO achieve its target of approximately 30% excess door capacity. This expanded footprint reduces freight rehandling, shortens transit miles, and improves efficiency in pickup/delivery and linehaul operations. Complementary investments in the fleet, including over 5,000 new tractors and 16,000 trailers since 2021, support operational needs and the strategic insourcing of linehaul. The average tractor age is now down to four years, contributing to lower maintenance costs and improved reliability.

Cost efficiency is being driven by significant progress in reducing reliance on third-party purchased transportation. Outsourced linehaul miles reached a company-best 8.8% of total miles in Q1 2025, a reduction of over 900 basis points year-over-year. This accelerated insourcing lowers costs, improves operational control, and is expected to insulate XPO's cost structure when truckload rates inevitably rise in a market upturn, enabling stronger incremental margins. Labor productivity is also improving, supported by proprietary technology that uses AI for demand forecasting and labor planning, allowing managers to flex staffing levels effectively in response to volume fluctuations.

These operational improvements are translating into strong yield growth, a primary lever for margin expansion. In Q1 2025, yield excluding fuel increased by 6.9% year-over-year, an acceleration from the prior quarter, reflecting the strength of XPO's commercial strategy and the value delivered to customers. Revenue per shipment has increased sequentially for nine consecutive quarters. Growth in higher-margin areas like premium services (e.g., retail store rollouts, trade show transport) and local accounts is contributing to this yield performance. The local channel, served by a sales force expanded by 25% over recent years, saw tonnage growth in the mid-to-high single digits in Q1 2025, accelerating to double digits in April, with a long-term goal to reach 30%+ of revenue from this segment.

Financially, XPO's consolidated revenue in Q1 2025 was $1.95 billion, a 3.2% decrease year-over-year, impacted by lower fuel surcharges and volume, as well as foreign currency movements. Adjusted EBITDA was $278 million, down 3% year-over-year. Despite the top-line pressure, net income increased 3% to $69 million, and diluted EPS rose to $0.58. Adjusted diluted EPS was $0.73. The North American LTL segment saw revenue decrease 4% to $1.17 billion and Adjusted EBITDA decrease 2% to $250 million, reflecting lower volume and fuel surcharge revenue partially offset by higher yield and cost efficiencies. The European Transportation segment's revenue decreased 1.9% to $782 million (though up 2% constant currency), with Adjusted EBITDA down 15.8% to $32 million, impacted by higher purchased transportation costs. Notably, the LTL segment achieved a sequential adjusted operating ratio improvement of 30 basis points to 85.9% in Q1 2025, outpacing normal seasonality and contributing to a cumulative 370 basis points of OR improvement over the past two years. Full year 2024 results highlighted significant progress, with record revenue of $8.1 billion, a 27% increase in Adjusted EBITDA to $1.3 billion, and 260 basis points of LTL OR improvement, positioning XPO as the only public LTL carrier to expand margin in 2024.

The balance sheet reflects a focus on managing liquidity and leverage. As of March 31, 2025, cash and cash equivalents stood at $212 million, contributing to total liquidity of $811 million, including $599 million available under the Revolving Credit Facility. Recent financing activities included refinancing term loans into new facilities totaling $1.1 billion and establishing a new $600 million Revolving Credit Agreement, enhancing capital structure flexibility. The net debt leverage ratio improved to 2.5 times trailing 12 months adjusted EBITDA in Q1 2025, down from 2.9 times a year prior, demonstrating progress towards the investment-grade goal.

Outlook, Guidance, and Risks

Management's outlook for 2025 reflects confidence in the continued execution of the LTL transformation strategy to drive further margin expansion and earnings growth, even if the soft macro environment persists. The company guides for full year 2025 adjusted operating ratio improvement of 150 basis points, assuming a stable macro backdrop. In a scenario where tonnage is down mid-single digits for the full year, XPO still anticipates achieving approximately 100 basis points of OR improvement, underscoring the impact of company-specific initiatives independent of volume. For the second quarter of 2025, sequential OR improvement is expected to be at or above the high end of the typical 250-300 basis point seasonal range, outperforming seasonality.

Key operational targets supporting this outlook include reducing outsourced linehaul miles further into the mid-single digits by year-end 2025 and expecting sequential improvements in revenue per shipment and yield throughout the year. Full year 2025 gross capital expenditures are projected to be between $600 million and $700 million, funded by cash from operations and available liquidity. This CapEx level is expected to moderate from 2024 as major network expansion projects are completed, contributing to higher free cash flow generation over time.

Other guidance figures for 2025 include interest expense between $220 million and $230 million, pension income of approximately $6 million, an adjusted effective tax rate of 24% to 25%, and a diluted share count of 120 million shares. The company's Board authorized a $750 million share repurchase program in March 2025, signaling potential for opportunistic return of capital with excess cash. The authorization to divest the European business remains in effect, which could further reduce leverage and provide capital, although the timing and terms are uncertain.

Despite the positive outlook driven by internal execution, XPO faces risks from the broader market and specific operational challenges. The macro environment remains fluid, and predicting demand, particularly with uncertainties like the impact of tariffs, is challenging. Customers are expressing a more cautious tone regarding the back half of 2025 demand compared to prior expectations for acceleration. While XPO's strategy is designed to perform in any environment, a significant downturn could pressure results. The company is also exposed to fluctuations in interest rates, foreign currency exchange rates, and commodity prices. Legal proceedings, including ongoing litigation related to insurance coverage for historical claims, present potential liabilities, though the company believes current accruals are adequate for probable losses and does not expect a material adverse effect from current matters, the outcomes are inherently uncertain. Mitigation strategies include managing variable costs, leveraging technology to adapt labor, and using insourcing to control transportation expenses.

Conclusion

XPO is executing a compelling transformation of its North American LTL business, leveraging strategic investments in network capacity and proprietary technology to drive significant operational efficiencies and service improvements. This focused approach is enabling the company to outperform the industry in margin expansion and yield growth, even within a soft freight market. The achievement of record service levels, coupled with a disciplined approach to pricing, premium services, and growth in higher-margin customer segments, underpins the company's confidence in its ability to continue delivering above-market performance.

While macroeconomic uncertainty and specific risks persist, XPO's proactive management of costs, particularly through accelerated linehaul insourcing and technology-enabled productivity, positions it favorably. The strategic build-out of excess capacity creates substantial operating leverage potential for an eventual freight market recovery. With a clear trajectory for continued OR improvement, moderating CapEx, and improving financial health, XPO's investment thesis centers on the successful execution of its LTL 2.0 strategy to unlock long-term value through sustained earnings growth and enhanced shareholder returns.