XPO (NYSE: XPO) significantly exceeded analyst expectations for the second quarter, driven by an improved freight mix and multiple AI-powered efficiency initiatives that yielded record operating performance in its less-than-truckload (LTL) division. LTL carriers consolidate freight from multiple shippers into single trailers, serving customers whose shipments are too large for parcel carriers but don't require a full truckload.

The Greenwich, Connecticut-based company described the industry as still being in the "early innings" of a multiyear cycle of double-digit rate growth. That view stands in contrast to the broader U.S. freight market, which has been working through a prolonged downturn characterized by excess capacity and weak demand — conditions that have pressured many carriers' margins. XPO expects to secure rate increases outpacing competitors by two to three percentage points, reflecting the investments it has made in its service offerings. The company is also capturing a growing share of freight from small and medium-sized businesses (SMBs) and shipments that carry accessorial charges, both of which have contributed to the outperformance.

XPO is one of the largest assets remaining from the former XPO Logistics conglomerate, which separated into three publicly traded companies beginning with the spin-off of GXO Logistics (contract logistics) in 2021 and RXO (brokered transportation) in 2022. The current XPO is focused exclusively on its North American LTL network and European transportation operations.

XPO reported second-quarter adjusted earnings per share of $1.70, topping the consensus estimate by 23 cents and rising 65 cents year over year. The adjusted EPS figure excluded transaction and restructuring costs, among other items, and included a 6-cent benefit from real estate sale gains.

Consolidated revenue reached $2.36 billion, up 13% year over year and $85 million above expectations.

LTL Segment Performance

LTL revenue climbed 15% year over year to $1.43 billion. Excluding fuel surcharges, revenue was 5% higher, as diesel prices were approximately 50% higher year over year during the quarter.

Tonnage rose 1% year over year, while yield increased 14% (4% higher excluding fuel surcharges). A 3% increase in daily shipments combined with a 2% decline in weight per shipment produced the tonnage growth. A 1% increase in length of haul, along with lighter shipment weights, served as tailwinds to the yield calculation (revenue per hundredweight).

Tonnage trends strengthened as the quarter progressed, with management noting "a lot of positivity from customers." On a year-over-year basis, tonnage was down 1.5% in April, up 0.5% in May, and up 4% in June. July tonnage has risen more than 6%. Daily tonnage increased 4.5% from the first quarter to the second. XPO expects better-than-normal seasonality to drive volume up by a mid-single-digit percentage year over year in the third quarter.

XPO has been gaining market share among local accounts (SMBs), which typically generate lighter shipments but deliver stronger margins. Both yield and revenue per shipment (excluding fuel) improved year over year and sequentially, consistent with management's guidance. The LTL industry is more concentrated than the truckload market, with a handful of national carriers — including Old Dominion Freight Line, Saia, and Estes Express Lines — dominating the segment. XPO has been the most aggressive among publicly traded peers in expanding its network capacity since acquiring tens of millions of dollars in real estate and equipment from the former Yellow Corporation's bankruptcy.

The LTL unit posted an adjusted operating ratio of 79.9% — the inverse of operating margin, where lower is better — representing a 300-basis-point improvement year over year and a 400-basis-point improvement from the first quarter. The result came in 100 basis points better than management's guidance. Revenue per shipment outpaced adjusted cost per shipment by nearly 400 basis points during the quarter.

Outlook and Guidance

The carrier typically experiences 200 to 250 basis points of operating ratio degradation from the second to the third quarter, which would imply a third-quarter result "north of 82%." However, improved pricing and other company-specific initiatives are expected to produce an adjusted operating ratio below 81% for the period.

XPO raised its full-year margin improvement expectation from 100 to 150 basis points of year-over-year gains to "at least 200 basis points" of improvement. The company now sees a longer-term path to annual operating ratios in the low-70s "or better." It has already improved the operating ratio by roughly 800 basis points through the freight downturn.

European Transportation Segment

XPO's European transportation segment reported a 10% year-over-year revenue increase to $927 million. Adjusted EBITDA of $48 million was 9% higher year over year. The company has added sales associates to expand into select verticals while reducing certain structural costs. XPO still intends to divest the unit to become a pure-play LTL company, a move that would complete its multiyear transformation from a diversified logistics conglomerate into a focused North American trucking operator.

Stock Performance

Shares of XPO were down 0.2% at 12:59 p.m. EDT on Thursday, compared to the S&P 500, which was up 1.3%. The stock has gained 43% year to date.

XPO is one of the few publicly traded LTL carriers, and its quarterly results provide a rare window into a trucking subsegment where limited public data is available.

Source: FreightWaves