Executive Summary / Key Takeaways

• Strategic Outperformance in a Soft Market: XPO, Inc. is demonstrating exceptional operational execution, consistently expanding its North American Less-Than-Truckload (LTL) margins and growing adjusted EBITDA even amidst a prolonged freight recession, significantly outpacing industry seasonality.
• Technological Edge with AI: Proprietary artificial intelligence (AI) is a core differentiator, actively enhancing profitability through optimized linehaul, labor planning, and pickup-and-delivery operations, yielding quantifiable benefits like reduced empty miles and increased trailer utilization.
• Robust Network and Service Quality: Strategic investments in a modern fleet (average tractor age 3.6 years) and expanded network capacity (30% excess door capacity, including 28 acquired Yellow Corporation service centers) are driving world-class service levels and positioning XPO for accelerated growth in an eventual market upturn.
• Sustainable Yield Growth and Cost Control: XPO is achieving above-market yield growth through superior service, a richer mix of high-margin local accounts, and premium service offerings, while rigorous cost management, particularly through linehaul in-sourcing, insulates its financial performance.
• Compelling Financial Outlook: Management anticipates continued strong OR improvement and earnings growth in 2025 and 2026, even without a macro recovery, supported by moderating capital expenditures and increasing free cash flow, which will be deployed for debt reduction and opportunistic share repurchases.

The Unfolding Narrative: XPO's Strategic Foundation in Freight

XPO, Inc. stands as a prominent force in the freight transportation sector, leveraging its extensive network and proprietary technology to move goods efficiently across North America and Europe. The company's core business is anchored by its North American Less-Than-Truckload (LTL) segment, which commands approximately a 9% share of the estimated $53 billion U.S. LTL market. This segment provides critical geographic density and day-definite services across the U.S., Mexico, Canada, and the Caribbean. Complementing this, XPO's European Transportation segment offers a diverse portfolio of services, including dedicated truckload, LTL, and multimodal solutions, holding leading positions in key European geographies like France, Iberia, and the U.K.

The company's strategic trajectory has been significantly shaped by its history. The 2015 acquisition of Con-way marked a pivotal moment, integrating substantial LTL capabilities, though it also brought a legacy environmental legal matter that resulted in a $35 million charge in the third quarter of 2025. More recently, XPO Logistics, Inc. rebranded to XPO, Inc. in December 2022, signaling a refined focus. A defining strategic initiative, the LTL growth plan launched in 2021, has seen aggressive capital deployment into network expansion and fleet modernization. This includes the strategic acquisition of 28 service centers from Yellow Corporation in December 2023, a move that has bolstered XPO's capacity in key markets and enhanced operational efficiency.

XPO operates in an industry characterized by high capital requirements, stringent regulatory compliance, and the need for established networks, all of which act as significant barriers to entry. The broader freight market has endured a prolonged recession, with the ISM Manufacturing Index remaining below 50 for the better part of three years. Despite this challenging backdrop, XPO's overarching strategy centers on delivering world-class service, driving above-market yield growth, and achieving rigorous cost efficiencies, particularly through technological differentiation and network optimization.

Technological Leadership: The AI-Powered Moat

XPO's commitment to technological innovation is a cornerstone of its competitive strategy, particularly its investment in proprietary artificial intelligence (AI) technology. This advanced technology is not merely a buzzword; it is actively integrated across high-impact applications to directly enhance profitability and operational efficiency. XPO views AI as playing a major role in how it operates, competes, and creates long-term value.

The company's core differentiated technology lies in its cloud-based, scalable ecosystem that deploys software consistently across its operations. This infrastructure enables the seamless integration of AI capabilities. For instance, AI-driven optimization models analyze massive datasets, including volume, capacity, and dimensions, to maximize trailer utilization, reduce costs, and enhance service. These intelligent route-building capabilities have demonstrably reduced empty miles by 12% and freight diversions by over 80%, while cutting overall linehaul miles for the same amount of freight by a low to mid-single-digit range. Automated mapping for door loading, a recently rolled-out AI feature, has already increased shipments per trailer by low single digits versus the prior year.

XPO's R&D initiatives extend to several critical areas:

• AI Pricing Bots: Currently in pilot, these bots are designed to crunch tens of millions of data points to provide more precise and effective lane-level pricing, supporting XPO's goal of above-market yield growth.
• AI Sales Tools: The company has developed AI lead scoring algorithms to identify high-propensity shippers and launched tools that organize sellers' days and optimize customer visit routes, boosting sales force productivity.
• AI Pickup-and-Delivery (P&D) Optimization: In early pilot stages across four terminals, these enhanced route optimization algorithms are showing promising early results in improving stops per hour and overall P&D efficiency.
• AI Dock Efficiency: XPO has made significant progress with AI-driven labor forecasting models that provide real-time visibility into demand shifts, allowing managers to adjust staffing levels dynamically and improve dock productivity.

The "so what" for investors is clear: these technological advancements are not just incremental improvements; they are foundational to XPO's competitive moat. By leveraging AI, XPO can achieve superior operational efficiency, lower its cost structure, and enhance its service quality beyond what many competitors can offer. This directly contributes to higher margins, strengthens its market positioning, and provides a clear roadmap for long-term growth, even in challenging market conditions. While some AI capabilities like route optimization are transferable to its European operations, others, such as linehaul optimization and pricing models, are tailored to the unique characteristics of the North American LTL market.

Competitive Dynamics and Strategic Positioning

XPO operates in a highly competitive landscape, facing off against industry giants like UPS (UPS), FedEx Corporation (FDX), J.B. Hunt Transport Services (JBHT), and Old Dominion Freight Line (ODFL). Each competitor presents unique strengths and strategic focuses.

UPS, a global logistics behemoth, excels in package delivery and international reach, often leading in technological integration for real-time tracking. XPO differentiates itself with specialized LTL and cross-border services, emphasizing geographic density and regional expertise in North America. XPO's focus on cost-effective, region-specific solutions allows it to compete effectively in day-definite regional freight, potentially offering faster delivery times in specific corridors. However, UPS's diversified revenue streams historically contribute to stronger cash flow generation.

FedEx, known for its speed and reliability in global shipping, particularly in express and ground networks, is a formidable rival. XPO's specialized LTL and brokerage services offer materially lower costs for non-express freight. XPO's strategy emphasizes inter-regional LTL and cross-border U.S. services, potentially providing better integration for e-commerce clients, particularly in Mexico and Canada. While FedEx may lead in processing time-sensitive shipments, XPO's operational execution for LTL density and its emphasis on omnichannel retail logistics provide a distinct advantage.

J.B. Hunt, a leader in intermodal and truckload services, benefits from cost leadership and efficient asset utilization. XPO's comprehensive LTL network and broader service mix offer greater flexibility for mixed freight solutions. XPO's growth rates in brokerage services appear comparable to J.B. Hunt, but the latter's asset-light intermodal model often leads to superior profitability and cash flow.

Old Dominion Freight Line, a pure-play LTL provider, is renowned for its premium service quality, network reliability, and high profitability margins. XPO directly competes in North American LTL, where its broader service mix and international reach offer diversified options. XPO's geographic density for transcontinental routes can be a strength, but Old Dominion's consistent service execution often translates to stronger financial performance.

XPO's competitive advantages are rooted in its extensive network effects, cost leadership in LTL services, and unique distribution channels for cross-border logistics. The company's 30% excess door capacity, a significant improvement from previous years, positions it to respond quickly to demand surges and accelerate profitable growth in an up-cycle. This capacity, coupled with a young tractor fleet (average age 3.6 years) and an in-house trailer manufacturing facility, provides a structural advantage in controlling equipment costs and availability.

The industry has seen significant capacity exit the market, with terminal and door counts down mid-single digits since the pre-Yellow bankruptcy era. This capacity constraint, combined with customers' concerns about reliable service in a turning cycle, reinforces XPO's value proposition. The company's focus on high-margin local accounts, now representing 25% of total shipments (up from 20% a few years ago, with a goal of 30%), and the introduction of premium services like grocery consolidation, further differentiate its offerings and drive yield growth.

Financial Performance and Liquidity: A Story of Resilient Growth

XPO's recent financial performance underscores its ability to generate resilient growth and expand margins even in a challenging macro environment. For the third quarter of 2025, consolidated revenue increased 2.8% year-over-year to $2.11 billion, while for the first nine months of 2025, revenue was flat at $6.15 billion. After accounting for foreign currency movements, Q3 2025 revenue was flat, and the first nine months saw a decrease, primarily due to lower fuel surcharge revenue and reduced shipments per day in the North American LTL segment. Despite these headwinds, the North American LTL segment demonstrated robust profitability. Adjusted operating income grew 10% year-over-year to $217 million in Q3 2025, and the adjusted operating ratio (OR) improved by 150 basis points to 82.7%, significantly outperforming typical seasonality. This marks a cumulative 350 basis points of margin expansion over two years in a soft freight market. LTL adjusted EBITDA reached a historical high of $308 million in Q3 2025, an 8.5% increase year-over-year. The LTL adjusted EBITDA margin expanded by 180 basis points to 24.5%, driven by strong pricing and operational execution.

Yield, excluding fuel, has been a consistent driver of performance, growing 5.9% year-over-year in Q3 2025 and sequentially for the 11th consecutive quarter. This above-market yield growth is a direct result of XPO's superior service quality and strategic pricing initiatives. On the cost side, productivity improvements, largely enabled by AI-driven tools, were the largest contributor to strong cost performance. Salaries, wages, and employee benefits increased by only 1% year-over-year in Q3 2025, as AI tools offset inflationary pressures and insourcing labor costs. Purchased transportation expense saw a significant 48% decrease in Q3 2025, as outsourced linehaul miles were reduced to a company-low of 5.9% of total miles. This strategic insourcing insulates XPO's cost structure from rising truckload rates in an eventual market recovery.

The European Transportation segment also contributed, with revenue increasing 6.7% year-over-year to $857 million in Q3 2025. While adjusted EBITDA for the segment decreased 13.6% year-over-year to $38 million in Q3 2025, it still outperformed typical seasonal patterns.

From a liquidity perspective, XPO maintains a strong position. Cash and cash equivalents stood at $335 million as of September 30, 2025, with total liquidity reaching $935 million, including available borrowing capacity. The net leverage ratio improved to 2.4x trailing 12 months adjusted EBITDA, down from 2.5x in the prior quarter.

Operating cash flow for the nine months ended September 30, 2025, increased by $141 million to $760 million, reflecting improved operational efficiency. Net cash used in investing activities decreased due to planned reductions in capital expenditures. In March 2025, the Board authorized a $750 million common stock repurchase program, with $50 million already executed in Q3 2025, demonstrating a commitment to returning capital to shareholders.

Outlook and Strategic Trajectory

XPO's management provides a compelling forward-looking perspective, anticipating continued strong performance despite ongoing macro uncertainties. For the full year 2025, XPO expects to deliver 100 basis points of OR improvement, even if full-year tonnage declines in the mid-single-digit range. This guidance underscores the company's confidence in its operational levers.

Looking ahead to 2026, XPO projects another strong year of OR improvement and earnings growth, notably without assuming a macro recovery. This outlook is predicated on several key strategic pillars:

• Sustained Above-Market Yield Growth: XPO aims to continue bridging the 11-point yield gap with best-in-class carriers over the coming years. Premium services are targeted to reach 15% of revenue (from 12% currently), adding approximately one percentage point per year for the next three years. The local customer base is expected to grow from 25% to 30% of the business, contributing an incremental 0.5 percentage points of yield per year over the next 2.5 years. Contract renewals are also expected to continue scaling, adding about one percentage point of incremental price per year for the next five years.
• Accelerated Productivity through AI: New AI initiatives, currently in pilot, are expected to further enhance productivity in 2026 and beyond. These tools, which have already demonstrated significant cost savings in linehaul and dock operations, are anticipated to drive even greater efficiencies as demand recovers.
• Moderating Capital Expenditures: Gross capital expenditures for 2025 are projected to be between $600 million and $700 million, a moderation from 2024 levels. Beyond 2025, CapEx is expected to normalize closer to the midpoint of XPO's long-term guidance range of 8% to 12% of revenue. This, combined with lower cash taxes due to recent legislation, is expected to significantly boost free cash flow generation (projected to exceed $400 million in 2025).

• Strategic Divestiture of European Business: XPO's long-term strategic goal is to divest its European Transportation segment to become a pure-play North American LTL carrier. While the timing and terms are uncertain, this move would further streamline the company's focus and capital allocation.

Management's long-term aspiration is to drive the LTL adjusted operating ratio into the "70s and the mid-70s and the low 70s," a testament to the significant runway for margin expansion.

Risks and Challenges

While XPO's outlook is compelling, investors should consider several risks. The ongoing soft freight market, characterized by a subdued ISM Manufacturing Index, could persist longer than anticipated, impacting tonnage and revenue. Although XPO has demonstrated resilience, a prolonged downturn could pressure even its robust operational model.

The company is also exposed to market risks related to changes in interest rates, foreign currency exchange rates, and commodity prices, particularly fuel. While its reduced reliance on purchased transportation mitigates some fuel price volatility, it remains a factor. Furthermore, the $35 million charge related to the pre-Con-way acquisition environmental matter highlights the potential for legacy legal liabilities, though management believes the ultimate resolution of current legal matters will not materially adversely affect financial results.

Competitive pressures remain intense. While XPO's technological advantages and network capacity are strong, rivals continue to innovate. The potential spin-off of a competitor's freight business could also introduce new dynamics into the LTL market.

Conclusion

XPO, Inc. is charting a compelling course through a challenging freight environment, demonstrating a powerful combination of strategic vision, operational excellence, and technological innovation. The company's relentless focus on world-class service, coupled with its proprietary AI-driven optimization tools, is translating directly into above-market yield growth and significant margin expansion in its core North American LTL business. This disciplined approach, evidenced by record-low damage frequencies, consistent on-time performance, and a substantial reduction in outsourced linehaul miles, positions XPO as a leader in efficiency and customer value.

With a robust network, including 30% excess door capacity and a modern fleet, XPO is not merely weathering the current freight recession but actively strengthening its competitive moat. The company's clear roadmap for sustained yield growth, driven by premium services and an expanding local customer base, combined with the accelerating impact of AI on cost efficiency, underpins a strong financial outlook for 2025 and 2026. As capital expenditures moderate and free cash flow generation increases, XPO gains further flexibility to enhance shareholder value through debt reduction and opportunistic share repurchases. While macro uncertainties and competitive dynamics persist, XPO's strategic execution and technological leadership offer a compelling investment thesis for discerning investors seeking long-term growth in the evolving freight transportation sector.