Welcome to the XPO Q3 2025 Earnings Conference Call and Webcast. My name is Stacy, and I will be the operator for today's call. [Operator Instructions] Please note that this conference call is being recorded. Before the call begins, let me 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 applicable security 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 risk 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 or 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 Chief Executive Officer, Mario Harik. Mr. Harik, you may begin.

Good morning, everyone, and thank you for joining our call. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. This morning, we reported another quarter of strong execution. Company-wide, we generated adjusted EBITDA of $342 million and adjusted diluted EPS of $1.07, both exceeding expectations. Excluding a nonrecurring benefit in the third quarter last year, adjusted EBITDA grew by 6% and adjusted diluted EPS by 11%. In our North American LTL business, we grew adjusted operating income year-over-year by 10% to $217 million and improved our adjusted operating ratio by 150 basis points to 82.7%, significantly outperforming seasonality. We've now achieved 350 basis points of margin expansion over 2 years in a soft trade market, underscoring the power of our operating model. Importantly, we grew LTL adjusted EBITDA to the highest level of any quarter in our history at $308 million. The consistency of our performance highlights 2 inherent strength of our business. First is our ability to drive above-market yield growth. And second, to optimize our network with high-impact proprietary AI and other technology. The foundation of our operational strength is our world-class service and it's the most powerful catalyst of customer loyalty and margin expansion. In the third quarter, we reduced damage frequency to the best level in our history, and we improved on-time performance year-over-year for the 14th consecutive quarter. These improvements reflect the importance we place on delivering consistently for customers as a core tenet of our culture and the pride our team takes in meeting that goal. We're also optimizing our network so that our facilities, fleet and technology work together to reduce 3 handles, shorten transit times and increase productivity. These operational gains are being supported by the investments we've made in our network and equipment, which…

Thank you, Mario, and good morning, everyone. I'll take you through our key financial results, balance sheet and liquidity. For the third quarter, total company revenue was up 3% year-over-year to $2.1 billion. In our LTL segment, revenue was also up to $1.3 billion. Excluding fuel, LTL revenue grew 1% year-over-year, supported by ongoing strength in our yield. On the cost side, our salary wage and benefit expense increased just 1% year-over-year due to productivity improvements. Our AI-driven tools helped to offset the impact of inflation and the added labor cost from our in-sourcing initiative. We also drove additional efficiency gains across the network, including a 48% decrease in third quarter purchase transportation expense as we in-source more linehaul miles. Strategically, the in-sourcing we're doing now should significantly mitigate costs later when the cycle recovers, and third-party carriers raise their rates. Depreciation expense in the LTL segment increased 11% or $9 million, consistent with our strategy of investing in capacity and equipment to support long-term growth. Turning to profitability. Company-wide adjusted EBITDA increased 3% year-over-year to $342 million. In LTL, adjusted EBITDA was up 9% to $308 million and adjusted operating income was up 10% to $217 million, both for company records. We also expanded our LTL adjusted EBITDA margin by 180 basis points to 24.5%, reflecting strong pricing and operational execution. In our European Transportation segment, adjusted EBITDA was $38 million, and corporate adjusted EBITDA was a loss of $4 million. For the total company, operating income was $164 million and net income was $82 million. Diluted earnings per share decreased to $0.68, reflecting a $35 million charge related to a legal matter dating back to Con-way in the 1980s before we acquired the company. On an adjusted basis, diluted EPS was $1.07, up 5% year-over-year. And lastly, we generated $371 million of cash flow from operating activities in the quarter and deployed $150 million of net CapEx. Moving to the balance sheet. We ended the quarter with $335 million of cash on hand after repurchasing $50 million of common stock and paying down $50 million on our term loan facility. Combined with available capacity under our committed borrowing facility, this gave us $935 million of total liquidity at quarter end. Our net leverage ratio was 2.4x trailing 12 months adjusted EBITDA compared with 2.5x in the prior quarter. Looking ahead, while we remain committed to investing in initiatives that support long-term growth, we expect our CapEx to moderate and free cash flow conversion to increase. This positions us with greater flexibility in continuing to return capital to shareholders while strengthening our balance sheet. And with that, I'll hand it over to Ali to walk you through our operating results.

Thank you, Kyle. I'll start with a review of our LTL operating performance where we continue to expand margins and deliver record third quarter adjusted EBITDA despite a soft freight market. Shipments per day were down 3.5% year-over-year and weight per shipment declined 2.7%, resulting in a 6.1% decrease in tonnage per day. Notably, both shipments and tonnage per day improved year-over-year versus the second quarter, a positive trend we expect will continue for the fourth quarter. One key driver of this improvement in shipments per day was our local channel where we continue to take profitable share. High-margin local shipments now represent 25% of our total, up from 20% just a few years ago. This reflects the success of our targeted sales initiatives for these desirable customers and the strong appeal of our service quality. Looking at monthly trends compared with the prior year, July tonnage was down 8.7%, August tonnage was down 4.7% and September was also down 4.7%. Moving to shipments per day. July was down 5.6%, August was down 3.4% and September was down 1.5%. For October, tonnage is estimated to be down in the 3% range, in line with normal seasonality compared with September. Turning to pricing. We delivered another quarter of above-market yield performance with 5.9% growth excluding fuel versus the prior year as well as a sequential improvement. Revenue per shipment, excluding fuel, also increased sequentially for the 11th consecutive quarter, underscoring the momentum of our pricing initiatives. We expect to improve pricing sequentially again in the fourth quarter supported by our premium services and growth in the local channel. Underpinning this, our data analytics and proprietary technology are becoming increasingly adept at aligning pricing with the value we provide to customers. Turning to profitability. Our LTL margins were exceptionally strong as we…

[Operator Instructions] First question has from Ken Hoexter with Bank of America.

Great. Ali and Mario and Kyle, I guess just a great job on operations and in-sourcing. I mean just continued cost controls. But the key here, I guess, is the October tonnage you just noted was down 3%. Industry leader is, I guess, 4x worse than that. Maybe, Mario, if you want to talk a little bit about is that the system is now enabling you to address customers faster, better on pricing? And then maybe talk about how you expect to outperform seasonality. And then carry that over to your thoughts on margins into fourth quarter?

Thanks, Ken. Well, if you look at October tonnage for us, that would be down in the 3% range, which we still have a few days here to close out the month, but this is where we expect it to be. And that's largely in line with typical seasonality from the month of September into the month of October. Now if you think about the reasons of the outperformance, a lot of that goes back to our strategy is firing on all cylinders. I mean, from one perspective, our service product has never been better. We are onboarding more small- to medium-sized customers than we've had in the past. So far, year-to-date, we have added 7,500 local customers. And here this last quarter, we added another 2,500 local customers, and that's paying the dividend. And when you look at premium services that we are launching, customers are taking advantage of that. We want to be there for them, and these are services that customers are asking for. And they come at a higher yield, they come at a higher margin, but they also check the box where these are things we were not doing in the past for our customers. Over the last 1.5 years, we launched a half a dozen of these services. Here, the latest one was grocery consolidation in the second quarter. And we're seeing more momentum accelerate in those premium services as well. So these are some of the factors why we're seeing, again, in outperformance when it comes to the volume side. When it comes to the margin outlook, typically for us, in the fourth quarter, we see a sequential increase of OR of 250 basis points from Q3 to Q4. And we do expect to continue to materially outperform that seasonality here in the fourth quarter, and this implies that OR will also improve meaningfully on a year-on-year basis and accelerate versus where we were in the third quarter on a year-on-year basis is our current expectation. And that will put us on the path towards delivering on our full year outlook of 100 basis points of OR improvement. Now keep in mind, Ken, this is the second year in a row where we meaningfully outperformed the industry, and that's our expectation. And we're still in the early innings. I mean, if you roll forward, obviously, at some point in a cycle in the cycle -- in a soft macro, we're improving margin and whenever the cycle starts turning, we're going to improve it even more.

Next question, Scott Group with Wolfe Research.

Mario, just to follow up, I know you said you expect to outperform seasonality on OR in Q4. But any sort of color magnitude? And then I think any way you look at it, right, you're exiting Q4 with a lot of year-over-year margin improvement. I know it's early, but any way to think about -- any early thoughts on how to think about margin improvement into next year?

Yes. I'll start with next year, just trying to give some color on it, and then I have Ali just cover more details on the fourth quarter. But if you look at next year, obviously, we do expect a strong year of both OR improvement and earnings growth in 2026. And this is even in the current soft macro environment. So without assuming any macro recovery yet, which is not what we're hearing from customers, by the way, customers are starting -- we're hearing more and more from customers that they do expect a recovery in 2026, but we'll see what the macro has absorbed. But even without a macro recovery, we do expect to improve both OR meaningfully and the earnings as well. Now we will talk more about the specifics of 2026 once we report the fourth quarter. But at a high level, just from a building block perspective, we're going to continue to benefit from another year of above-market yield growth. As you know, Scott, we with on a trajectory, the bridge the gap between us and best-in-class on yield and we still have 11 points to go get over the years to come. In premium services, we're still, I would say, in the early to middle innings in terms of getting to the 15% target of assessorial as a percent of revenue on -- if you look at -- and if you think of our local accounts or small to medium-sized businesses, we are currently in the, call it, 25% range of the book is those kind of customers and our goal is to get up to 30%. It's going to take a number of years for us to get there. So we still have a lot of runway in terms of all the initiatives that we are driving to deliver that above-market yield growth. And the second category, which we're very excited about, is on the cost side with AI. We've launched multiple capabilities here in the second and third quarter that have paid dividends and all of these are incremental to what we're doing. And we have another number of initiatives that are currently in pilot that are also showing very early signs of great numbers here that we're going to be able to improve our productivity even further as we head into '26 and '27 and beyond as well. So all of these are the levers that are -- that will enable us to drive the stand-up performance, and this is without a macro recovery.

And Scott, this is Ali. On the fourth quarter from a margin perspective, as Mario noted, we do expect to materially outperform seasonality here in the fourth quarter. If you just take the 100 basis points of OR improvement, we expect for the full year that would imply a modest sequential increase in our OR as we go from Q3 to Q4, but obviously, much better than the typical 250 basis points of seasonal increase that we normally see as we go to the fourth quarter. And I think, more importantly, Scott, what that implies is a pretty meaningful acceleration in our year-over-year go our expansion relative to the 150 basis points we just delivered here in the third quarter.

Okay. So in the ballpark of like 250 basis points of year-over-year improvement?

That's in the right range, Scott.

Next question, Jonathan Chappell with Evercore ISI.

It sounds like as we look past the fourth quarter, yield is going to be -- continue to be one of the biggest drivers, especially if we're not expecting much of a macro improvement. Can you walk through some of these cost line items and how we should think about the cadence going forward? It seems like PT is maybe getting to about as low as it can get to, correct me if I'm wrong. So a lot of these AI initiatives, productivity, et cetera, does that mostly come out of maybe some of the bigger cost line items, salaries and wages, et cetera? Just as a helpful framework to think about OR improvement potential next year without any volume.

You got it, Jonathan. So first, Jonathan, when you think about the PT in-sourcing, that's only a modest cost benefits for us in 2025 even. And the reason why when we in-source third-party linehaul, we've hired people, so that would show up in the salary, wages and benefits line. And we also added equipment, sleeper cab trucks for our Road Flex operation, and that shows up in both depreciation and a higher set of miles from a maintenance perspective, the cost per mile there goes up as well. On a net basis, if you look at the reduction in purchase transportation expense on the [ P&L ] and the addition of these incremental costs, that's only a very small cost benefit that we had in 2025 and here in the third quarter as well. The outperformance on the cost side have been coming from a better productivity. So if you think about it in the third quarter, we improved productivity, which we measure as shipments -- hours or labor hours per shipment has improved by 2.5 points despite shipments being down about 6 points, and that's the biggest -- the bigger part of the outperformance. Now we're still in the early innings of delivering on these improvements. If you take a step back and you look at all the things we're doing from a technology perspective, from a field execution perspective, our operators in the field are just killing it and you think about being able to manage and giving them the tools to be able to be more successful as well, we do expect that to compound over time and will go up further on the cost side. But the best way to think about it would be we have wage increases obviously caused our overall cost to go up and other cost inflation and then we offset that with productivity and how we're operating and moving freight across the network as well.

Next question, Jordan Alliger with Goldman Sachs.

Just sort of -- so sir, continuing out, maybe just thinking longer term and let's say we get to the point of inflection on tonnage with all that you've done on PT and in-sourcing and these productivity benefits you're talking about and technology, et cetera. When we get to that point of inflection, can you maybe talk to how you're thinking about incremental margins whenever that churn actually is, whether it be next year or whenever? And what can we see? Or how do you feel that leverage will look on incremental?

Sure, Jordan. It's Kyle. So if you think about incremental margins, we'd expect those to be comfortably above 40%. And if you think about the major drivers for that, yield is obviously going to be the biggest contribution to the top line growth. And that's going to support a really strong flow-through to the bottom line. And as Mario talked about from the yield initiative standpoint, we're still in the early innings and there's a lot of run rate of growth, whether it's growing premium as we've talked about, increasing local channel or otherwise. And you think about as demand recovers, again, we're in a great position to deliver those based on the structure we've put in place. So obviously, the PT coming down is going to insulate us from rising truckload rates. That's going to give us strong operating leverage and you couple that with having world-class service and 30% excess capacity, we'll be in a great position to capitalize on the demand recovery in the market.

Next question, Stephanie Moore with Jefferies.

I wanted to talk a little bit about -- maybe we think about the multiyear pricing opportunity. Clearly, you've made a lot of strides this year that will also create what will be more difficult comps in 2026 as well. So barring, we still don't see a major improvement in the volume environment, what's your degree of confidence that you can continue to see strength on the pricing front as we think out over the next 12 months?

Thanks, Stephanie. Well, if you take a step back and you think longer term, today, the pricing -- when we started our plan a few years ago, the price differential between us and best-in-class was 15 points. And that this is obviously ex fuel and normalized for their network versus our network. And today, although we are in the trough of the freight cycle, that differential is at 11%. Now we've always said it's going to take us 5-plus years for us to bridge the entire gap. And that's what kind of gets us excited about the future is that the run rate on a lot of these initiatives are -- again, we're either in the early or middle innings depending on the initiative for us to be able to continue to drive that above-market yield growth. Now if you think in the current market, the way we think about it, when we started our plan, we had roughly around 9% to 10% of our revenue came from what we call accessorial revenue. So these are premium services. Well, let's say you're moving a shipment for a customer in and out of a trade show as an example, you would be charging a small incremental charge associated with that. And our goal is to go from 9% to 10% up to 15%. As of last quarter, we were at 12%. So we have another 3 points to go, and we expect to get that roughly about 1 point a year over the next 3 years. If you look at small to medium-sized businesses, when we started our plan, we were under-clubbed in that area, we were about 20% of the book was those type of customers and how we've been able to add more and more of these customers with…

And just one quick follow-up. I know you gave some commentary about moderating CapEx. And if we kind of put the pieces together in terms of your expectations on what we just talked about on yield and expectations to continue to grow margin through 2026. Can you talk about what that means from a free cash flow standpoint?

Yes. Stephanie, so if you think about free cash flow, just starting with CapEx for this year. So I mean from a CapEx standpoint, we're going to moderate a couple of points when you think on a percent of revenue basis. So last year, about 15%. This year, that will come down a couple of points. And again, we're lapping a year significant expansion from a service center standpoint, and that's really a onetime spend in nature as well as some of the fleet investments will come down as we've made a lot of progress on our linehaul in-source. So if you think beyond this year, that CapEx number is probably closer to the midpoint of our long-term guidance range. We said 8% to 12%. We're probably somewhere in the middle of that. So what that's going to do for us is really help us drive even more cash flow when you think about next year. I mean, this year, I think we're going to grow north of $400 million from a free cash perspective. And again, we're generating higher income. We'll get some benefit from lower cash taxes and the lower CapEx coming through. And I think in the long term, as EBITDA continues to accelerate and earnings grow and we have a lower CapEx profile, we're going to generate much more cash in the future.

Next question, Fadi Chamoun with BMO Capital Markets.

Yes. I wanted to see if you can give us some kind of guideline of how to think about your pricing for the fourth quarter. You said that it would improve quarter-over-quarter. Are we still looking at something in that 5% to 6% range? And as we go into 2026, like are you seeing 150 basis points? I suspect that you're like 100 to 150 basis point kind of premium pricing. Do you think that continue to be sustained as we go into 2026 based on some of these levers that you just talked about, Mario, as far as what's driving that premium pricing?

Yes. I'll talk on 2026 and the long term, Fadi. So we do expect to continue, as I mentioned, if you look at it on the assessorial side, we had a point on the small- to medium-sized businesses, we have a 0.5 point. So all of these would be incremental to what the market is doing. Now obviously, as you know, if the market goes up and down, we're going to -- whatever the market does, I would also outperform it based on the company specific levers that we are driving is how we think about it.

Yes, Fadi, if you think about it from the fourth quarter on a year-over-year basis, we'd expect yield ex fuel to be in a similar growth range on a year-over-year basis what we saw in the third quarter.

Next question, Chris Wetherbee with Wells Fargo.

Maybe 2 quick questions here. First, as you think about tonnage in the fourth quarter, obviously in line or maybe I guess the third -- 3% decline in October, can you think -- can you talk a little bit about what normal seasonality might mean for the full quarter in 4Q? And then if you think about just sort of the pricing environment, maybe more broadly, there's been some concern about pricing in LTL, particularly given where TL is now. I don't have any thoughts there, maybe contract renewals. It seems like the pricing environment is still fairly stable for you. You're getting better than sort of industry level, just maybe some comments broadly on how you think the competitive environment looks today.

Chris, I'll start with the fourth quarter volume. So October, as you know, for us, tonnage was down in that 3% range year-over-year. Now if you just roll forward normal seasonality for the rest of the quarter, that would imply full quarter tonnage being down in a similar range year-over-year as the month of October, perhaps a little bit higher when you factor into tougher comps in November and December. But for the quarter as a whole, we would expect it to look similar as what we saw here in the month of October.

And on the pricing discipline, Chris, so we continue to see a constructive industry pricing impediment. Going back to your question on contract renewals for us is accelerated in the third quarter versus where we were in the second quarter. And at a high level, I mean, although we have been in a soft freight market, customers and we've been in a freight recession now for 3 years, yet to continue to see that very strong industry pricing. And there's a few reasons for that. I mean, if you take a step back, this business is a cost inflationary business. We have to invest in equipment. We have to give our employees more wage increases. We have to invest in service centers. And customers do understand that for us to be able to provide that great service, we need to be able to invest in our network. And on the industry capacity side, we -- if you look over the last few years, there has been a significant amount of capacity exited the market. But when you look at pre-COVID levels compared to where we are today, you have 10% less industry terminals, and you have roughly around 5%, 6% less doors. And if you compare it to [ pre-Yellow ] bankruptcy to where we are today, both terminal count in the industry as well as door count is down in that mid-single-digit range. So a lot of the conversations that we're having with our customers, you can tell there are concerns when that cycle starts turning, they want to make sure they're working with the carrier that has the capacity to be able to support them while delivering a great service product for them as well. And all of these things lead to that, again, very disciplined industry where pricing stays steady. And again, we have to invest and that kind of manifest itself in the pricing pattern there as well.

Next question, Richa Harnain with Deutsche Bank.

So just piggybacking off that last question. Maybe, Mario, you can just flesh out a little more around the competitive environment in terms of like maybe what your customers are saying. Any -- down 3%, something very special is happening at XPO, but it seems like the broader industry is struggling a bit more. So maybe you can talk about, like, again, just what customers are saying regarding overall macro trends and when maybe we could look forward to coming out of this malaise? And then -- yes, in terms of like you just said that certain customers are leaning more into quality. Just talk about who's really struggling out there? Is it like on the private side, are you noticing more service disruption? And are you benefiting from that and taking share from that category to the market?

Thanks, Richa. Well, if you look at the customer demand outlook, as you know, every quarter, we do a survey with our top customers, and we just wrapped up here the third quarter one last week. And what we're hearing from customers for the fourth quarter has been consistent with what we've been getting from a trade recession perspective, where demand is still soft. We're not seeing the underlying tone from customers for the fourth quarter. So as we close the year, be bullish or bearish is kind of somewhat in the middle. It's fairly neutral on the demand side. Now we are seeing differences between customers. Some customers are doing better than others, depending on the segment of what industry they are in as well. Now that said, for 2026, we are getting more optimism in terms of the overall demand outlook. A large number of customers now expect an acceleration in 2026, which is encouraging to hear. Now if you take a step back, in our industry, typically LTL volumes are correlated with the ISM Manufacturing Index, which has been, as you know, subseasonal now sub-50 for the better part of 3 years. However, when you look at periods of change in the Fed fund rate, there is an inverse correlation between the ISM manufacturing index and the Fed fund rate. So you can imagine a declining rate environment that is going to, over time, drift up the ISM and lift back up the industrial manufacturing economy here in the country. The second area is around the big, beautiful build that's stimulating customers thinking about pulling forward that capital or stop delaying that capital deployment to a certain extent to make sure they can take a benefit of that. You also hear about the stability around tariffs. I…

Next question, Tom Wadewitz with UBS.

So Mario, I wanted to get your thoughts on the next upturn and how important volume growth or share gain is. It does seem like whether you're the private players like whatever SCs are now or whether you're kind of OD sitting there with 35% excess capacity, there are a number of players that are like, "Yes, hey, when the market is stronger, we're going to take share" and then you got FedEx Freight is kind of a wildcard. I'm just wondering, you're improving service, getting a lot of price, which is great. Do you need to take share in a freight upturn to kind of make your plan work? Or is it just like, hey, you can grow the market, and you continue to get better pricing and you really do very well from a financial kind of margin and earnings perspective, even if you're not growing above the market. So just thinking about kind of how important that volume lever is and beyond market growth when you think about the next upturn?

If you take a step back, I mean, we -- for us, in the next cycle upturn, obviously, as Kyle mentioned earlier on, the incremental margins would be off the charts. And in a volume growth environment, you would have effectively earnings growing also at a very, very fast clip. Now how we get there, there are 3 dynamics at play. There is a pricing dynamic or a yield dynamic. There's a volume dynamic and there's a cost dynamic. And the beauty of it is that in the up cycle, all of these actually go in the right direction. If you think about it last year, even in a declining tonnage environment, with improved margins by 260 basis points. This year, we punished being down, call it, in that mid-single-digit plus range. We're improving margins meaningfully as well. So you can only kind of -- if you roll that into a model what tonnage increases, yield increases and cost improvements would do, you have mega increases in terms of earnings and margin expansion. Now in terms of how we get there, first, starting with yield, if you look at our industry, since the bankruptcy of [ Yellow ] and since COVID, you've had the private care years have been up on tonnage over that period of time. While the public carriers are more down on tonnage, and the industry as a whole is down in the mid-teens, and that's pretty close to what you see if you look at the U.S. census data for industrial companies, that we service in LTL, they have a similar amount of volume decline over the same period of time, about 16 to 17 points, not revenue decline because they offset that with pricing, but volume decline. So as the industrial economy starts coming back,…

Do you have a quick thought just a follow-up within that on what your kind of productivity metric is we should really focus on? You've got a lot of things going on with AI and productivity, and then you got the operating leverage. But what metric or 1 or 2 metrics we should look at just to kind of see the tracking on productivity?

Well, overall, every quarter, we kind of give an update on -- we typically count it because we want to combine it all together as labor hours per shipment, and this is what improved over the last quarter by 2.5 points and accelerated from where we were in the first half of the year. But internally, we use 3 predominant KPIs. One is that how many pallets per person per hour are we moving on our docks. What is the stops per hour we're seeing in how a pickup and delivery operation in our city operation. And in linehaul, it's a combination of what we call load average, which is how much weight are we putting in a pump equivalent of a trailer and what we call load factor, which is a component of miles and tons. But ultimately, when you combine all of these things, we look at them on a -- eventually, you see it in the salary bridges and benefits line that would offset the cost inflation we will be seeing in wage inflation, but we typically give a hours per shipment as a proxy to these KPIs.

Next question, Brian Ossenbeck with JPMorgan.

Maybe just 2 quick ones on the demand side. Are you seeing anything from the government shutdown from a direct or indirect effect? And I know you guys talked more about grocery and we got this SNAP funding running out in a couple of days here. So do you think that would have any sort of meaningful impact? And then just maybe more broadly, truck market has got some optimism here that it might be recovering or stabilizing? Any updated thoughts on how that's affected your book of business currently either from a consolidation or direct competition perspective?

Thanks, Brian. I'll try to cover all that, if I missed one, just let me know. But first, starting on the government shutdown, we don't expect that as being impactful overall to LTL volumes. I mean usually, at least for us, we don't do much government freight as any. And I believe most of our peers fall in the same category. So there's no direct impact from that on LTL overall demand. On the -- some of the company-specific items that you mentioned, like grocery reconsolidation, that's a great opportunity for us because when you look at that market as a whole, it's a note of 1 billion of size what we estimated to be. It's an attractive market. It's a high-margin market because effectively, we use our network to help grocers consolidate freight from multiple inbound shippers and to their locations so they can free up that docks and have a more organized operation. And obviously, in our case, because you get that density at delivery, that kind of helps quite a bit in how we operate that business. And historically, we've been under club in that market -- part of the market. We had a very small share compared to our overall market share in the industry. And we did enhance this offering in the second quarter. And so far, here last quarter, we achieved preferred carrier status with 6 large grocers, and we have a pipeline of an incremental 100-plus customers that we are going after in that space. So we do expect that to be a growth market for us because we haven't been participating in the past, as an example. In terms of the truckload capacity impact to the LTL industry, we've historically said, Brian, that we -- if you think of the direct conversion, it's small, it's sub-1% of LTL freight typically is over that 15,000 pound mark. Where it make -- it might make sense in the trough of the truckload cycle to move it to truckload. When capacity exits, that would be a modest improvement, you will get to see that point come back into LTL. The second area is that we estimate that customers use TMS systems to consolidate LTL to truckload where it makes sense and we estimate that to be in the low to mid-single-digit range, a couple of points of volume that would have less LTL and went to truckload. And as truckload rates recover, that's going to convert back to LTL as well. So you're talking, call it, in the low to mid-single-digit range of incremental tonnage that would come with truckload rate coming back into LTL.

Next question, Jason Seidl with TD Cowen.

Mario and team, congrats on the very solid quarter. You guys mentioned utilizing AI a bunch to sort of help improve your place in the LTL market. Can you maybe dive into that a little bit more, talk about some of the things that you guys -- that you sort of maybe have in the works now for the future? And then where do you think you are versus the rest of the peer group in terms of your adoption of AI in the marketplace?

Well, first is, Jason, for us, it's a very, very exciting area of development. And it first starts, I mean, as you know, for the better part of a decade, we have been investing in our technology infrastructure. So unlike other carriers, we don't use mainframes, for example. We don't use all school systems. They're all cloud-based and all posted with Google Cloud. And this enables us to actually move quicker on being able to embed AI capabilities within the frameworks, within the applications that we are launching. But going to your question, there are 5 areas where we are applying AI and at different levels of maturity, some are still in pilot that we're in the process of rolling out and some have already rolled out. But 2 of the 5 areas are top line revenue generating. And then 3 of the areas are cost savings related. On the top line, we are rolling out AI pricing bots that effectively you can crunch tens of millions of data points and be able to provide better pricing for customers at the lane level and do this in a very, very effective way. We're still in pilot in that capability. And that would help us continue to ensure our above market yield growth as we get smarter at how we price. Number two is assisting our salespeople through AI tools. For example, we built our own AI lead scoring set of algorithms where effectively the AI analyzes, again, in that case, hundreds of thousands of customers of who would be a good shipper with XPO. So to give you an example, today, if you have a shipper whose location is 2 miles down the road from one of our terminals that is an industrial manufacturer that obviously is going to have…

I appreciate all that great color. I guess my follow-up would be something we haven't talked about much, which is Europe and maybe you can give sort of the backdrop and the outlook for Europe. And are there any countries that are showing some strength that you talked about some of the positivity from your customers in the U.S?

Jason, this is Ali. So our European business continues to outperform in a soft macro environment. Here in the quarter, we grew organic revenue for the seventh consecutive quarter. Specifically, we're seeing outperformance in the U.K., and we've also accelerated pricing growth for the second quarter in a row. And all of that translated to adjusted EBITDA here in Q3 outperforming normal seasonality and we'd expect that to continue here into the fourth quarter as well. I think typically, what we see as we move from Q3 to Q4 is that EBITDA steps down, call it, in that $10 million range sequentially. However, similar to the third quarter, we would expect to outperform that normal sequential step down in the fourth quarter, driven by the outperformance of the business.

Next question, Bascome Majors with Susquehanna International Group.

Maybe to follow up on Jason's questions, bigger picture. When we look at Europe, it's, call it, 5% of your earnings and operating income, 10% of EBITDA, but it's over 40% of consolidated operating expenses. And if we take a step back and think about cost takeout and profit improvement opportunities, like what's directed specifically at Europe? And is there an opportunity to really move the profit contribution up a lot higher on that low base, but -- of profit but high base of expenses?

Thanks, Bascome. Well, similar to what we -- obviously, the lion's share of our focus is on our North American LTL business, given the profit contribution as you highlighted, to the overall company. But for Europe specifically, there are multiple levers that we are pursuing for growth. As I mentioned -- as Ali mentioned earlier, we're obviously outperforming seasonality on profit growth from Q2 to Q3 and same thing with growing our overall revenue in that business as well. But there are multiple cost takeout opportunities as well associated with that business and higher efficiency. Today, we're either #1, 2 or 3 in LTL and truckload and in warehousing in Western Europe and we also have a plan to expand margins. Now I don't think the margin expansion in that business is going to be anywhere we are the magnitude of what you see here in the North American LTL business. It just has different costs. But at the same time, we are working on similar initiatives. And you can see it here, we're performing better than seasonality on the profit line. And we do expect it to better in a good split in 2026 as well despite the softer freight macro in Europe. As I said, ultimately, our goal is to sell that business. Our goal is to be a pure-play North American LTL carrier. We're patient, we want to make sure we get the right price for it. And whenever the time is right, we're going to sell that business and become a pure-play North American LTL.

Next question, Christopher Kuhn with The Benchmark Company.

Just thinking longer term, I mean, your shipments have exceeded best-in-class. It seems like the pricing opportunity could be even beyond the time frame you've given, and the service levels have been good. I mean, is there any reason over the long term that your OR can't actually exceed best-in-class?

Well, today, if you look at the OR differential, more than the lion's share is driven by price and a combination of mix and price through the 3 levers I mentioned, Chris, earlier on. But if you break it down, I mean, when we started our plan, I think the margin differential was about 15, 16 points, and now that's down to about half of that, about 800 basis points, which is the remaining runway that we have. But as I mentioned earlier on, our price differential on a normalized basis is 11 points, and that goes back to actually operating our network more cost efficiently given some of the AI tools and the optimization if we use machines for to be able to optimize our cost structure. Now if you think over time, as we bridge the pricing gap, there's no reason why our OR first going to get down to the 70s and the mid-70s and the low 70s kind of our expectation over the years to come is how we think about it over the longer term.

I would like to turn the floor over to Mario for closing remarks.

Well, thank you, Stacy, and thanks, everyone, for joining us today. As you saw in our results, our strong execution extended our track record of continuous improvement. And while expanding margins in the trough of the cycle, and we're positioning the business for years of outperformance going forward as well. With that, operator, please end the call.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.