XPO Q3 2026 Earnings Call: LTL Margin Expansion and Stronger Free Cash Flow

Key Takeaways

• XPO reported Q3 2026 revenue of $2.4 billion, up 12% year over year. Adjusted EBITDA rose 27% to $433 million, while adjusted diluted EPS increased 59% to $1.70.
• North American LTL revenue grew 17%, and adjusted operating income reached a company record of $293 million, up 35%. The segment’s adjusted operating ratio improved by 260 basis points year over year.
• LTL shipments per day increased 5.8% and tonnage per day rose 5.0%. Yield excluding fuel improved 3.6%, supported by pricing and a greater mix of local and premium-service freight.
• XPO generated $291 million of free cash flow in the quarter. Net leverage declined to 1.9x trailing 12-month adjusted EBITDA after $150 million of share repurchases and $100 million of debt repayment.
• Management expects Q4 LTL adjusted operating ratio to remain below 82%, materially outperforming normal seasonal deterioration. Full-year operating-ratio improvement is now expected to reach at least 250 basis points.
• AI-based routing, workforce planning and loading tools are improving productivity. Management targets annual productivity gains of 1.5 to 2 percentage points over the longer term.

Key Financial Data

Business and Operating Performance

North American LTL

LTL revenue reached $1.5 billion, with revenue excluding fuel up 9%. Adjusted EBITDA increased 26% to $389 million, and adjusted EBITDA margin expanded 190 basis points to 26.4%. Adjusted operating income rose 35% to $293 million.

Shipments per day increased 5.8%, while weight per shipment declined 0.7%, producing 5.0% growth in tonnage per day. Preliminary October trends strengthened further, with shipments per day up in the mid-7% range and tonnage per day up in the mid-6% range year over year.

Management attributed roughly one-third of recent volume growth to market improvement and two-thirds to XPO-specific share gains. Local accounts and premium services remained central to the strategy. The company onboarded 30% more new local customers than in the prior-year quarter.

Service metrics also improved. The damage claims ratio remained below 0.2%, while damages declined 20% year over year. XPO has more than 30% excess door capacity and said its existing workforce can support low- to mid-single-digit additional shipment growth.

Pricing and Freight Mix

Yield excluding fuel increased 3.6% year over year. Management said shorter length of haul and heavier truckload-conversion freight weighed on the reported Q3 yield metric, while underlying core pricing accelerated from Q2.

In October, yield excluding fuel was tracking 5% higher and revenue per shipment was up 4%. XPO expects shipment mix to normalize in Q4 and contract pricing to continue strengthening.

The company said it is repricing truckload-like freight that does not produce an acceptable margin in the LTL network. Management continues to prioritize margin contribution over volume alone.

Cost Efficiency and AI

XPO’s outsourced line-haul miles fell to 5.6%, compared with approximately 25% when the insourcing strategy began. This reduced exposure to rising third-party truckload rates and gave the company greater control over service and trailer utilization.

AI-supported line-haul planning reduced freight rehandles by a mid-single-digit percentage to the lowest level in more than a decade. AI-based pickup-and-delivery optimization is operating on nearly two-thirds of routes and is expected to reach full deployment by early 2027.

Workforce-planning tools helped XPO handle nearly 6% shipment growth with only a low-single-digit increase in headcount. Management expects these technology initiatives to support 1.5 to 2 percentage points of annual productivity improvement over time.

European Transportation

European Transportation revenue increased 5% year over year on a constant-currency basis, marking the 11th consecutive quarter of growth. Adjusted EBITDA rose 26% to $48 million.

Management continues to view a sale of the European business as a strategic priority but said it will remain patient to maximize value. The company expects the segment’s Q4 EBITDA growth to accelerate to approximately 40% year over year.

Management Guidance

• XPO expects Q4 LTL adjusted operating ratio to be below 82%. Normal seasonality would imply an operating ratio closer to 83%, according to management.
• Full-year 2026 operating-ratio improvement is expected to be at least 250 basis points, up from the prior expectation of more than 200 basis points.
• If recent above-seasonal trends continue, management said Q4 tonnage growth could accelerate from Q3 and from October’s 6.5% year-over-year growth rate.
• Q4 yield and revenue per shipment excluding fuel are expected to improve sequentially and accelerate year over year.
• Management expects 2026 free cash flow to at least double from 2025, reaching approximately $800 million.
• XPO expects another year of earnings growth and margin expansion in 2027, supported by volume, pricing, AI-driven efficiencies and the reset of incentive compensation.
• Over the longer term, the company targets an annual trailing-12-month operating ratio in the low 70s or better.

Risks and Areas to Watch

• Salaries, wages and benefits increased 11% year over year, reflecting higher volume, approximately four percentage points of wage and benefit inflation, and about three percentage points from incentive compensation.
• Incentive compensation represented more than 100 basis points of full-year operating-ratio pressure in 2026, although management expects this expense to reset in 2027.
• Fuel, operating expenses and supplies increased 29%, or $66 million, primarily due to higher fuel prices. Management expects diesel prices to normalize during Q4 and fuel-surcharge revenue to remain roughly flat sequentially.
• Truckload-to-LTL freight conversion created shorter-haul and heavier shipment mix in Q3, weighing on reported yield. XPO is repricing freight that does not meet its margin requirements.
• Management’s Q4 outlook assumes recent above-seasonal volume trends continue and that shipment mix becomes more consistent with normal seasonality.

Analyst Q&A Highlights

Pricing and margin progression: Management said Q3’s 3.6% yield growth understated core pricing because shorter length of haul reduced the headline metric. October yield excluding fuel accelerated to 5%, supporting the expectation for stronger Q4 pricing.

Share gains: XPO said volume growth is concentrated in higher-margin local customers, premium services and newer verticals such as healthcare and grocery. Management estimated that two-thirds of recent growth came from company-specific market-share gains.

Free cash flow and capital allocation: The company expects approximately $800 million of free cash flow in 2026 and billions of cumulative free cash flow in the coming years. Excess cash is expected to fund both share repurchases and debt reduction.

2027 cost outlook: Management expects incentive compensation to reset, removing more than 100 basis points of 2026 operating-ratio pressure. AI, network optimization and labor-planning tools are also expected to provide further productivity gains.

Capacity: XPO said it has more than 30% excess door capacity, a trailer fleet expanded by more than 30%, and a tractor fleet expanded by more than 20% over recent years. Management believes the network can absorb further volume growth without proportionate headcount increases.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

Operator

Welcome to the XPO Q3 2026 Earnings Conference Call and Webcast. My name is Carrie, and I will be your operator for today's call. [Operator Instructions] Please note that this conference 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 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 conference, 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 those comparable GAAP measures is contained in the company's earnings release and the related financial tables or 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.

Mario Harik

Good morning, everyone. Thank you for joining us. I'm here with Kyle Wismans, our Chief Financial Officer; and Ali Faghri, our Chief Strategy Officer. In the third quarter, we delivered strong growth and margin expansion as we continue to convert more business into higher earnings company-wide. Revenue increased by 12% year-over-year to $2.4 billion. Adjusted EBITDA grew by 27% to $433 million, and adjusted diluted EPS increased by 59% to $1.70. In our North American LTL segment, we reported 17% revenue growth and 35% growth in adjusted operating income to $293 million. .

This is the highest level of adjusted operating income in our history. Our adjusted operating ratio improved by 260 basis points year-over-year, significantly outperforming normal seasonality. When executing a powerful strategy focused on service, investments in capacity, pricing and cost efficiency. Each component reinforces the others and together, they are driving an acceleration in our results -- you can see these connections most clearly at the core of our strategy, which is world-class service.

In the third quarter, we again delivered a damage claims ratio below 0.2%. For the shipper, damage-free delivery means fewer business disruptions, less time resolving claims and greater confidence that trade will arrive as expected. This is especially important to customers with time-sensitive or high-value shipments who place a premium on working with a trusted provider.

Our service record positions us to earn more of this trade and further improve our mix. We view every customer interaction as being central to our success, service quality earns on select shipment and continuous improvement maintains our advantage. There's a strong connection between our network capacity and our ability to support customer relationships as they grow. We're continuing to expand our presence in high-growth freight markets, most recently in Phoenix and Kansas City, where we opened 2 new locations this quarter.

Strategically, we've positioned our network to handle significantly more volume with more than 30% excess door capacity to support growth. We've also expanded and modernized our fleet and we continually invest in our workforce. Together, these investments strengthen our network and allow us to move freight more efficiently, benefiting both our customers and our bottom line. We're achieving a better balance of network density, utilizing more direct routes and reducing unnecessary freight handling.

And importantly, these investments lowered our cost to serve and build significant operating leverage into the business. The same strategy informs our commercial initiatives, including pricing. We want to make sure the price we secure reflects both the quality of our service and the resources required to provide a world-class customer. Our service quality puts our team in a stronger position to have these conversations. It also opens the door with customers whose freight requires great reliability careful handling or specialized support.

This is through our sales pipeline as well as with existing accounts. When customers see how consistently we deliver we have an opportunity to serve more locations and handle more of their freight. Local accounts and premium services remain important drivers to improve our revenue quality. These are areas where we continue to do lasting relationships and earn attractive margins by beating specific customer needs. As an example, in the local channel this quarter, we increased the number of new customers we onboarded by 30% versus last year.

The result is a strategic approach that connects pricing, mix and share gains to the value we provide to shippers and the value we create for our shareholders. And we have a large opportunity to build on this momentum over time. The final component of our strategy is cost efficiency, driven by our proprietary technology. Our company has always had a technology focus and now AI is accelerating that advantage. We're rolling out intelligent tools across our operations and seeing tangible results and how we route handle and deliver freight. Even in the early stages of these applications, we're moving more freight at lower cost and with improved service.

In line-haul that means improving how we outtrade and utilize trailer capacity -- we're also running the network with fewer empty miles and fill 3 handles. Since we rolled out a lending model that leverages AI, we've reduced 3 handles by mid-single digits to the most level in over a decade. In our pickup and delivery operations, our proprietary AI-based suboptimization tools are now being used on nearly 2/3 of routes.

The tech factors in customer appointment windows, distance and capacity to arrive at the optimal route. Our drivers are making more stops per hour while reducing miles per shipment. And our workforce planning technology provided valuable support in the quarter helping our service centers handle nearly 6% growth in shipment count with only a low single-digit increase in headcount. We're also using AI to give our dock workers real-time feedback on their tailored loading techniques before freight leads the dock. This contributed to a 20% reduction in damages in the quarter versus last year.

Overall, we see AI as having a long runway for ongoing efficiencies and margin improvement. And lastly, our insourcing initiative is working exactly as planned, reducing our exposure to rapidly rising rates from third-party carriers. We also had greater control over our line-haul operations when we move the freight within our network. In summary, our third quarter results highlight the earnings power of our business, supported by a highly disciplined approach to both growth and margin expansion.

We're building a business that can grow profitably and we expect to achieve an annual LTM operating ratio in the low 70s or better over the long term. We expect our free cash flow to accelerate going forward, allowing us to continue repurchasing shares and reducing debt. These actions strengthened our balance sheet while further funding our growth in earnings per share and enhancing shareholder value.

Now I'll turn the call over to Kyle for the financial results.

Kyle Wismans

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 third quarter, we grew total company revenue 12% year-over-year to $2.4 billion. In our LTL segment, revenue improved to $1.5 billion, reflecting a 9% increase in revenue ex fuel with meaningful growth in both yield and volume.

Turning to cost in LTL. We continue to drive efficiencies across our operations, helping to mitigate the impact of higher freight volumes, wage inflation, and increased incentive compensation tied to our strong performance. Our expense for salary wage and benefits increased 11% year-over-year or $72 million. Our cost for fuel operating expense and supplies increased 29% or $66 million primarily due to higher fuel prices.

And our purchase transportation cost increased by just $10 million despite higher volume and rising truckload rates. Our insourcing strategy has significantly reduced our reliance on third-party carriers mitigating those costs. Depreciation expense increased 3% or $3 million, reflecting our ongoing investments to expand network capacity and support long-term growth. Moving to profitability and company-wide. We grew adjusted EBITDA 27% year-over-year to $433 million.

Our LTL segment generated $389 million of adjusted EBITDA up 26%, and we improved margin by 190 basis points to 26.4%. LTL adjusted operating income was up 35% to $293 million. Our European Transportation segment increased adjusted EBITDA to $48 million. In our Corporate segment, adjusted EBITDA was unchanged from the prior year at a $4 million loss. Returning to our consolidated results. Operating income increased 76% year-over-year to $288 million. Net income was $181 million representing diluted earnings per share of $1.53.

On an adjusted basis, diluted EPS increased 59% year-over-year to $1.70. Turning to our third quarter cash performance. We generated $291 million of free cash flow. We ended the quarter with $260 million of cash on hand after completing $123 million of net capital expenditures accelerating our common stock repurchases to $150 million and making $100 million of debt repayments. Combined with available capacity under our committed borrowing facility, our total liquidity at quarter end was approximately $860 million.

Our net leverage ratio improved to 1.9x trailing 12 months adjusted EBITDA compared with 2.1x in the second quarter. We continue to drive meaningful growth in free cash flow for strong earnings performance and modern capital expenditures. We're on track to more than double our free cash flow this year compared to 2025, and we expect to continue increasing it in the years ahead. This gives us significant flexibility to return capital to shareholders while strengthening our balance sheet. In October, we paid down another $75 million on our term loan to start the fourth quarter, bringing our year-to-date debt paydown to $275 million.

And with that, I'll hand it over to Ali to walk through our operating results.

Ali-Ahmad Faghri

Thank you, Kyle. I'll start with our LTF business where we continue to capture profitable market share and deliver significant margin expansion. Compared with the prior year, shipments per day increased 5.8% in the quarter while weight per shipment declined 0.7%, resulting in 5% growth in tonnage per day. Volume growth remained consistently strong throughout the quarter, with shipments per day increasing 5.9% in July. 5.7% in August and 5.7% in September. Notably, we accelerated our shipment growth in the accretive local channel, which contributed not only to volume, but also to margin. Looking at tonnage per day on a monthly basis, we had year-over-year increases of 5.8% in July, 3.7% in August and 5.4% in September.

On a stack basis, volume growth accelerated and outperformed normal seasonality each month of the quarter. The momentum continued into October, where we estimate preliminary shipments per day will increase in the mid-7% range and tonnage per day will increase in the mid-6% range year-over-year with both metrics outperforming normal seasonality. More broadly, volume growth was driven by our differentiated service quality, our investments in capacity and our success in shifting mix toward higher-margin freight.

Pricing remained a key driver of margin improvement in the quarter. Yield excluding fuel, increased 3.6% year-over-year and improved sequentially revenue per shipment, excluding fuel, also improved sequentially and accelerated on a year-over-year basis. Importantly, our pricing is continuing to strengthen with year-over-year yield growth, excluding fuel, tracking up 5% in October and revenue per shipment growth up 4%. Given the momentum in our pricing trends, we expect both yield and revenue per shipment, excluding fuel, to improve sequentially and accelerate on a year-over-year basis in the fourth quarter compared to the third quarter.

Moving to profitability in LTL, we improved our adjusted operating ratio by 260 basis points year-over-year to 8.1%. The Notably, our margin improvement accelerated from the second quarter on a 2-year stack basis. We also outperformed normal third quarter seasonality by more than 200 basis points. These results demonstrate the strength of our LTL operating model and our ability to translate profitable volume growth and pricing gains into meaningful margin expansion.

Turning to Europe. We delivered another quarter of strong growth across the business. We increased revenue 5% year-over-year in our 11th consecutive quarter of growth on a constant currency basis. Adjusted EBITDA growth accelerated to 26% year-over-year, with positive contributions from each line of business. Based on current trends, we expect EBITDA growth to be even higher in the fourth quarter. In addition, we grew the sales pipeline by double digits, putting us in a strong position to capitalize on rising demand in key markets.

Before we move to Q&A, I'd like to close with a few thoughts on the momentum reflected in our results, particularly the gains we're making with mix and volume growth are favorable pricing trends and significant margin expansion. We're also continuing to strengthen our competitive position through superior service quality and expand the network and a margin-oriented approach to market share. At the same time, we're creating structural cost advantages through network optimization in the expanding use of AI across our operations, giving us additional levers to improve efficiency, customer service and profitability. Looking ahead, we see substantial opportunities to build on this momentum across the board, with meaningful upside as the freight market recovers.

With that, we'll take your questions. Operator, please open the line for Q&A.

Operator

[Operator Instructions] And our first question will come from Ken Hoexter from Bank of America.

Question-and-Answer Session

Ken Hoexter

Great. Great job on outperforming seasonality and strong margin gains. I just want to dig into the yield discussion, right, given a lot of debate on the underlying market and since that's a big focus on your ability to drive some of the outsized margin gains. So it looks like revenue per hundredweight decelerated to about 3.5%, 3.6%. Maybe just talk about the environment there. Ali, it sounds like you're talking about maybe some acceleration coming. And I guess maybe if you want to break that down. I know you've talked about whether it's SMBs or different types of focus to get you the additional points? Maybe where do we get that gains from here?

Mario Harik

Thanks, Ken. This is Mario. We delivered another quarter of soft pricing, where we improve both yield and revenue per shipment ex fuel sequentially, but we also accelerated our revenue per shipment on a year-on-year basis here in the third quarter from -- relative to Q2. Now at a high level, we always prioritize the yield flow through to margin. And if you look for us in the quarter, the year, we improved our operating margin by 260 basis points, which accelerated significantly on a 2-year stack and outperformed seasonality by more than 200 basis points. .

Now in the quarter itself, there were some mix factors that impacted us from a yield standpoint. If you look on a year-on-year basis, Q3 versus Q2, our weight per shipment improved by more than 1 point and our length of haul was down a few points. And both of these dynamics typically have a negative impact on yield. If you normalize for these shipment characteristics, our core pricing in Q3 accelerated relative to where we were in Q2.

And as Ali mentioned earlier, here in October, our yield growth ex fuel is tracking up 5% and revenue per shipment up 4% as we're seeing our bank of hub normalize this month, and we expect that for the rest of the quarter. Now if you look generally, you sum out just for Q4 as a whole, we do expect both yield and revenue per shipment as fuel to increase both sequentially and accelerate on a year-on-year basis as well.

Ken Hoexter

Great. And just a follow-up on the -- that seasonality and margins, right. Ali, I think you've always talked about maybe a 200 basis point deterioration in 4Q. I don't know if you want to kind of set your thoughts on where we see seasonality rolling on the operating ratio for the LTL side and maybe initial thoughts into '27.

Ali-Ahmad Faghri

Sure, Ken. So we do expect another strong quarter here for margin performance in the fourth quarter. Now normal seasonality for us 10 is for OR to increase 250 basis points from Q3 to Q4. So normal seasonality would put our OR closer to an 83%. However, we do expect to significantly outperform that we would expect our fourth quarter OR to be below an 82%. Now that's a very strong outcome overall. It does imply another quarter of significant year-over-year margin improvement, and that's going to be driven by a combination of accelerating price accelerating volume and cost efficiency. Now for the full year, if you recall last quarter, we had said that we expect north of 200 basis points of margin improvement this year based on our Q3 outperformance and the upside here in the fourth quarter, we now would expect our full year OR improvement of 250 basis points or better. So a very strong year as a whole.

Mario Harik

And for 2027, Ken, we do expect another strong year for improvement and for earnings growth. I will give more color on the expectations once we report the fourth quarter here in a few months. But at the high level, if you look at where we're ending the year here, One, we continue to see continued industry volume improvement. And as we have shown this year, we expect to outperform that, and that's driven by profitable share gains through the course of the year, and we expect that to continue in '27. We also expect another strong year of pricing performance. You look at the trend as we exit the year is looking solid, and we expect that to continue through 2027 and beyond. .

Then the last component on cost efficiency and our AI initiatives, all of these are in the early innings of delivering value for us in terms of efficiency and we're going to fly on those further in 2027. So if you take a step back, we do expect a strong year, both for earnings growth and margin expansion. And obviously, we'll give a bit more color on that once we for the fourth quarter.

Operator

Our next question will come from Chris Wetherbee from Wells Fargo.

Christian Wetherbee

Appreciate it. So I guess maybe just coming back to the yields for a moment in 3Q because I just want to make sure we understand sort of the dynamics there. How do you think about sort of the 3.6% relative to any mix that was going on? I know weight per shipment was maybe a little bit higher than at least we were looking for. So maybe you can unpack some of the dynamics there and if you did see anything whether it be from local accounts or other end markets that you're serving that impacted that? Because obviously, it's a nice acceleration. I just want to make sure we understand what's going on between 3Q and 4Q on the yield side.

Ali-Ahmad Faghri

Chris, this is Ali. I think the primary mix factor call out in the third quarter was length of haul, which was down a few points on a year-over-year basis. And that was worse than normal seasonality relative to the second quarter for us. What we saw, Chris, in the third quarter was that as truckload rates really started to sharply increase, we did see more conversion of freight from truckload to LTL that freight does tend to be heavier, but also more regional and it comes with a shorter length of haul.

For us specifically, we did reprice a lot of that truckload like business. It doesn't always operate well in an LTL network. As you know, we're always focused on what has the strongest flow through to margin. And the reality is we are seeing a lot more attractive opportunities in the market with local customers and premium services as example. I think encouragingly, as we've now cycled into October, we are seeing that mix impact from length of haul start to normalize and seeing our length of haul trend higher as and that is alleviating some of that impact on both yield and revenue per shipment and in addition, with accelerating core pricing what's driving our expectation for pricing to accelerate here into the fourth quarter.

So overall, from a mix standpoint, we would expect some of those factors that impacted us in the third quarter to be more in line with normal seasonality as we go into the fourth quarter.

Christian Wetherbee

Okay. Super helpful. And then just a quick follow-up on the tonnage side, yes, do we assume the sort of mid-6s that you see in October? Is it mid-single digits the way that you underpin the fourth quarter OR guide? Just want to get a sense of how you're thinking about some of the underlying dynamics within that OR guidance.

Unknown Executive

Sure, Chris. So October, for us, as I noted, tonnage was up in that mid-6% range on a year-over-year basis, and that did accelerate year-over-year. and on a 2-year stack basis relative to September was also better than seasonality relative to September as well. we see tonnage decline in that low to mid-single-digit range sequentially from September to October. And this year, October was a few points better than that. I'd also point out that September was also better than seasonality for us as well.

For the fourth quarter as a whole, if you just roll forward the above seasonal trends we've been seeing here more recently through the rest of the quarter. that would put our full quarter tonnage, not only accelerating from Q3's growth rate, but also accelerating from October, 6.5% growth on a year-over-year basis. And that does factor in easier comps that we have in both November and December.

Operator

We'll go next to Jordan Alliger from Goldman Sachs.

Jordan Alliger

Just sort of curious, you brought up or mentioned purchase transport in your opening remarks as hopefully volumes continue to get better here, which it seems like they are, -- can you maybe talk a little bit to PT and the in-sourcing? And obviously, there's elevated inflation out there and how you plan to use whatever levers you can to keep that line item in good shape and keep the in-sourced miles where you want them to be?

Mario Harik

Yes. Jordan, if you look at it, this has been a fantastic strategic plan for us over the last few years because if you think about it, this year was the year where we are seeing truckload rates starting to inflect and we spend effectively a good part of 4 years reducing that exposure on third-party carriers. But first, I'm talking numbers. So what we thought out plan, our outsourced miles were about 25% here this last quarter, we were in that mid-single-digit range with a 5.6% of miles being outsourced, and that's some of the lowest levels in our company's history. .

Now keep in mind, in some markets, you always need some purchase transportation if you have a head haul market where on your own equipment with your own drivers you would have too much empty miles coming out of that market. It's to make financial sense to still use a small reseal amount. But generally, we find that when we book the freight ourselves with our own drivers and on our own equipment, we typically also provide better service for the customer. We are more efficient with it. We can go trailers further in the network and the XO employees who are moving who are moving that freight. So we expect that number now as truckload rates go up, the breakeven point effectively that they keep on coming -- keep on coming down.

So effectively, we can -- or we can lower our overall miles even further. But currently, we feel good about where we are at the mid-single digits, but we don't see a need to increase that and potentially over time, reduce it by EBIT as we continue to execute on our plan. The biggest positive impact, if you think about an up cycle where both truckload rates go up and LTL rates go up, we're going to have a much lower headwind in our P&L for the rising impact of truckload rates, which leads to higher incremental margins in the up cycle and being able to have a higher flow through of our yield and volume increases to the bottom line versus if you had a higher exposure.

Operator

Moving on to Stephanie Moore from Jefferies.

Stephanie Benjamin Moore

Great. Good morning. Thank you for the question. Look, I don't -- I wanted to maybe touch on the free cash flow opportunity and others, I think 2026 is framing to be a pretty healthy free cash flow year. So any way you could magnitude just the free cash flow generation over the medium term. And as we think about your priorities of cash, any kind of update there would be helpful. And then if I could squeeze it in, thoughts on just the European sale. I think that's something that you talked about for some time, but any update there as well. And if that deal goes through same if a deal does go through, what would be the primary capital -- cash priorities.

Mario Harik

Thanks, I'll start first on the European side, and I'll turn it over to Kyle for the cash flow. But overall, on the European sale, we -- our intention and our goal is over the long term to be if you're a North American and TL that hasn't changed and selling that business as a strategic priority of ours. That's said we're patient. We want to make sure we are maximizing the return we have on that business. It is a business that has scarcity value in terms of being on either #1, 2 or 3 in the segments of business we operate in, whether it's supply chain, whether it's LTL, whether it's indicated solutions for customers, predominantly in Western Europe. .

And if you look here more recently, the results are trending very, very nicely. I mean this quarter here, we improved EBITDA by 26% in USD or 27% on a constant currency basis, and we expect that to meaningfully accelerate in the fourth quarter. In terms of growing EBITDA really by 40% on a year-on-year basis in that business. And that's driven by a strategy we are implementing to run the business more cost efficiently, but also focusing on overall pricing and how we price customer contracts for profitability and for the margin like we do here in the U.S.

And the third component is investing in sales. We've added more than 40% more salespeople in Europe are expanding at 4 new verticals with aerospace, luxury goods, health care, a lot of the similar plan that we executed here, the team in Europe is doing a phenomenal job in driving that and higher earnings and better results over time would be to us eventually selling that business for the right price.

And I'll turn it over to Kyle to discuss the cash and the cash from.

Kyle Wismans

Stephanie. So from a cash standpoint, we expect to at least double our free cash flow here in 2026. So I put us near probably near $800 million for the year. And that's far ahead of our initial expectations for the year, driven by really 2 primary factors. Obviously, we're seeing higher and higher flow-throughs Mark is talking about. We're also seeing lower CapEx. So over the long term, we expect our EBITDA conversion to accelerate both as earnings grow and given our lower CapEx needs.

So we're expecting to generate billions of free cash flow in the coming years. Now as far as what we're going to do with that, we'll use our excess cash to both buy back shares and pay down debt. Already this year, we've repurchased $250 million of our shares. We actually accelerated those here in the third quarter when the stock pulls back. That really reflects the confidence we have in the long-term value of our shares.

We've also paid down $275 million of debt, including $75 million here in October. These actions will both ramp moving forward as our free cash flow continues to accelerate. So we look forward to generating billings of free cash flow, and we're going to use that to generate the highest churn for our shareholders.

Operator

Our next question will come from Scott Group with Wolfe Research.

Scott Group

Can you just talk about the timing of your -- timing magnitude of your GRI this year? I don't know if there's a timing help that helps October? Or Ali, do you think that, that 5% yield ex fuel for October, that's a good run rate for the full quarter. And then maybe just if you can talk about net impact you saw for fuel in Q3 and sort of what you're embedding in the assumptions for Q4?

Kyle Wismans

Scott, this is Kyle. So concise with other carriers, we did take our GRI recently, similar magnitude to last year. It's important to note that impact the mid, call it, 20% of our book. For us, the contract renewals have a much larger impact on our overall yield. Where that impact is really the local channel. We've obviously been growing that a lot over the last couple of years, but we still see a long runway for growth, and the GRI is 1 way we can align pricing in that channel to the world-class service we provide.

I'll pass over to Ali.

Ali-Ahmad Faghri

And Scott, in terms of the pricing outlook for Q4, I mean, we do expect our yield ex fuel to accelerate on a year-over-year basis versus the third quarter improved sequentially on a quarter-over-quarter basis as well. Our comps do get tougher as we move through the quarter. I would point out. However, the fact that we expect weight for shipment to normalize on a year-over-year basis in Q4 and still expect a yield acceleration, I think, speaks to the underlying improvement we're seeing in core pricing and contract renewals, which are accelerating currently here.

Now in terms of the fuel impact for us, as you know, fuel has always been part of the economics, but for LTL carriers. Certainly, as fuel prices have gone up. We've seen our fuel surcharge revenue go up along with it. But obviously, we've seen our cost to procure that fuel also go up. And there are many different impacts from fuel across our P&L, including many line items outside of just a few operating expenses and supplies and an inflationary impact as well.

So some examples, Scott and food purchase transportation costs maintenance costs and even cartage. Now for the fourth quarter specifically, we do expect diesel prices to normalize meaningfully from where they are currently through the rest of the quarter. And as a whole, we would expect our LTL fuel surcharge revenue be flattish on a quarter-over-quarter basis relative to the third quarter.

Operator

Moving on to David Vernon with Bernstein.

David Vernon

So Mario or Ali, I guess sometimes in conversations with investors, I get the feeling that share gains are almost always thought of as coming at the expense of price. You guys are growing shipments about 6%, ODs down 2%. Fuel yields are slowing maybe to 3.6%. Could you compare the freight you're winning with the existing book on yield, cost to serve and margin and any color on where it's coming from sort of local national accounts, 3PLs or carriers that have lost service or capacity would be helpful. I'm just trying to differentiate between kind of the growth at the margin versus the improvements in the existing base.

Mario Harik

Well, David, we don't believe that price and volume are mutually exclusive. And the Q3 for us is a great example of that, where we are driving strong growth on both metrics, and we expect both price and volume to accelerate here in the fourth quarter. So -- and we are -- if you look at the combined ex-fuel numbers we are delivering some of the high 70 growth in the industry, which is contributing to our strong margin improvement, which is ultimately what we prioritize for as an NPL carrier. .

Now going back to your question of where do we see that because mix does impact overall what you're seeing both from a margin perspective and pricing growth perspective, and for us, a lot of our growth has been in by growing with the small- to medium-sized customers. So these are mom-and-pop shops typically ship a few shipments a week where service is essential. If you don't have a good service product, these customers don't want to do business with you.

And similarly, we're also growing with premium services. This is where the customer would effectively want to have shipment from point A to point B but then you're providing this increcal service for them as well and we're seeing dramatic growth in that part of the business as well. I mean just to give you a data point, and I mentioned it in my opening remarks, but when you look at the small to medium-sized customers, here in Q3 of this year.

We onboarded 30% more new logos than we did in the comparable period last year. And this tells you the momentum we are seeing in that channel where effectively it has a better operating margin, and it's a great relationship that we have with the customers. Now if you zoom out and you look at our opportunities, we have a double digit in the low teen, low to mid-teens opportunity in terms of catching up on pricing with our vesting last year and over the years to come through a combination of slightly higher pricing than market driven by service and those mix dynamics with premium and local accounts would enable us to grow yield over the years to come as we continue to gain market share in those highly profitable segments of business that we continue to grow.

David Vernon

So as you're going after that SMB channel then, I mean, is that business that would traditionally go through a broker and you guys are really kind of attacking that part of the market? Or how do I think about like where that SMB freight would normally have been serviced.

Mario Harik

It would have been served by other carriers. So we're gaining market share from other carriers. Typically, in that channel, they work carrier-direct, where they typically work with 1 carrier only because you can imagine if you're a small manufacturer in Ohio, you're going to -- you have 5 shipments a week going all over the country, you're going to use on NPL carrier to move that freight for you typically a national carrier because you want to be able to hit all the markets with your customers. to be buying the product from.

So the market share gains that we are seeing are across the sector. Here this last quarter as we saw some carriers also some on capacity we were able to also gain market share from this some of these carriers have not invested as much in capacity as we have as an example. But we are gaining market share again from the different carrier base based on us growing in the segment of business.

Operator

Our next question will come from Jonathan Chappell from Evercore ISI.

Jonathan Chappell

Ali lost in this OR improvement run that you've had the last few quarters, the cost inflation, especially in salaries, wages and benefits has been pretty elevated. I know you're trying to control more of your capacity. But are there any unique costs you can point to this year, maybe especially in the back half as it kind of leads to double-digit growth? And any kind of normalization of that cost inflation going forward?

Ali-Ahmad Faghri

So Jon, this is Ali. So we did manage variable labor costs very effectively in the third quarter, and that's largely through leveraging our AI-driven proprietary labor planning tools that are allowing us to manage labor on a real-time basis. If I point out that, for example, here in the third quarter, our shipment count was up 6% on a year-over-year basis. Relative to our headcount, which was only up in that low single-digit range. So our ability to drive that gap really speaks to the productivity we're driving here.

Now from a salary wages and benefits perspective, here in the quarter, they were up about 11% on a year-over-year basis. In terms of the building blocks of that, it was primarily driven by higher volumes, which are up in that mid-single-digit range. Then we had another 4 points of about wages and benefits cost inflation. And then there was about 3 points of growth in salary agent and benefits tied to higher incentive comp. But importantly, on the incentive comp piece, that does reset as we head into 2027 and essentially becomes a good guy for us as you're thinking about wage inflation into 2027.

Jonathan Chappell

Is there any way to judge the magnitude at this point of what kind of good guide that would be in '27 as it shifts to a tail end.

Ali-Ahmad Faghri

So from an OR standpoint, it's north of 100 basis points of full year OR impact for us in terms of incentive comp. So at a high level, the fact that we expect to deliver 250 basis points or better of full year margin improvement while absorbing north of 100 basis points of incentive comp impact, which again, resets as we head into 2027 really speaks to just how strong the underlying operating leverage of the business is currently.

Operator

We'll go next to Jason Seidl with TD Cowen.

Jason Seidl

Impressive results. Mario, you guys have been growing above seasonality here, as you mentioned. I wanted to see if we could parse it between how much is sort of customer demand may be improving? And how much of it is just market share gains from the excellent job you guys have done on service, whether it be in the SMBs or maybe some of your other service premium service offering gains.

Mario Harik

Well, Seidl, we estimate it to be roughly around 1/3 market and 2/3 us in terms of growth. First, starting on the demand outlook. What we are seeing here in the back half of the year, is continued positivity and year-on-year positive demand from the customers. As you know, we do a quarterly survey, and we also are hearing that from our customers where they further expect acceleration about as the customers expect a further acceleration in the first half of next year.

But if you look at the back half, again, we're seeing retail customers be positive, but slightly -- and we are also seeing the industrial on average being also slightly positive. You see the ISM having been in the mid-50s so far year-to-date, and we're seeing that materialize in higher tonnage in the industrial sector. But if you think about the outperformance, I mean, obviously, this last quarter, we grew a shipment count, call it by 6% and punished by 5%, which is a meaningful acceleration and we expect, as Avi mentioned earlier on, to further accelerate that in the fourth quarter.

And all of that is driven by those market share gains that we are seeing in those very accretive segments for us growing with the small medium sized customer. We're seeing a lot of success there and also growing premium services as well as some of the new verticals we've been targeting, whether it's health care or gross site consolidation, we're also seeing meaningful growth in some of these new segments of business where we were underrepresented in the past, and we continue to gain market share in those. But if I had to estimate it, I would say 1/3 market, 2/3 us is how I would think about the volume or market share gains here for us.

Jason Seidl

Mario, that's great color. When you look at some of your -- whether it be other premium services or sort of health care and grocery, where do you guys think you have the most opportunity from here on out in terms of growing your footprint?

Mario Harik

I think they are fairly well balanced overall. I mean if you think about it, some of these are things like must arrive where if you think of a small consumer package goods company shipping into a big box retailer or small manufacturer or shipping into a large manufacturing plant where they want the product to actually be dead within a certain time or date window. Today, we have a low to mid-single-digit market share in that segment of business and our overall market share in LTL is, call it, 10%.

So there's a lot of room for us to get just to our existing market share size. But given our service product, we see even the opportunity to be higher there in that example. When you look at grocery, when we started the year, we were at call it this 1% market share. We are up by year-end, we will be up to, call it, 3% to 4% market share of that segment of business, but that's a $1 billion market that we are still in the early innings of penetrating as well. So a lot of these -- the way we think about the almost every 1 of those categories has a big runway ahead of us, and we're going to keep on capitalizing on it then as we deliver great service for the customer and the care of their need and show them all the up that we can, that's kind of what it's all about to be able to grow in those segments of business.

Operator

And our next question comes from Richa Harnain with Deutsche Bank.

Richa Talwar

So my question is on the TL spillover mix that you're adding, very helpful to hear how that may be negatively impacted the headline pricing metrics. But -- you also mentioned that you're in the process of repricing that business and it doesn't neatly fit into your network right now. Is there an OR headwind from all of that, too, that's embedded in your results that can improve over time as you more efficiently kind of build it in? And then bigger picture on, I guess, from Mario. The massive survey this year, clearly, you guys made some great progress. You had the best improvement in overall perceptions across various attributes. But -- in absolute terms, you still rank more middle of the pack. And just what do you think needs to be done to move higher? What's next for enhancing your service offering -- you've already done so much? And how do you expect that to show up in financials?

Mario Harik

Richa, first, I'll start on the truckload business as Ali mentioned earlier on. So some of the truckload bank business doesn't always operate well in the LTL network, but it all depends on pricing. I mean some of it operate at a good margin, and we want that business, and some of it doesn't offer is at a good margin. and we typically don't want that business. But usually, whenever you have a heavy shipment that the factory is taking a big portion of a given line haul schedule run you really want to have a very high revenue per bill on that particular shipment to make sure you are offsetting your cost basis associated with that.

And this is where, again, we realized some of that business, it doesn't make any sense for us. And we're always going to keep on focusing on that. I don't think that's something we do in 1 quarter to something we do every quarter whenever we see business, whether it's light or heavy or long-haul or short-haul doesn't operate at the desirable margin, we're going to take the proper pricing actions on it to make sure we get it where we need to on the performance side and keep in mind, -- this is a cost inflationary business. We ultimately you got to make sure that we are getting paid fairly for the great service that we are offering our customers.

On the Mass front, we've obviously made a tremendous amount of progress on service. Our damage claims ratio here this last quarter was sub 0.2%. It's one of the best in the industry. We made significant progress on our on-time performance over the last 4 to 5 years, and we're seeing improvements in every single that touches the customer. We also this year since you appointed last year, we did receive the last year quality award as well, which is something we're proud of and the team has priop -- and they are ranking us as, I believe, being the second best national LTL carrier when it comes to performance.

But over time, we also do our own service with customers, and we do that on a weekly basis. And overall, we are looking at a company records every single week and every single month that we are driving those surveys as well. So high level, I think the trajectory on service is very good, and we're going to continue on improving it over time.

And we're not going to settle to we're not 1 on service. That's the goal here. The goal is that when a customer ships with us, they know we're going to take care of them as the interaction, whether how they interact with our employees, whether how we move the freight, whether how we deliver the damage free -- that's the goal here. It's going to take us not kind of get there overnight, and but over the years to come, I would go to become number one, sir.

Operator

Our next question will come from Tom Wadewitz with UBS.

Thomas Wadewitz

Yes. So I think -- I also want to acknowledge the good results in Mask. I know there's a bit of a time lag in that, but I'm sure you're pretty excited to see that really nice progress. I guess one question on that. Does that -- like, I'm sure customers see that pay attention. Does that give you kind of any more, I guess, firepower to ask for increases? Or it's like they see what they see and the external surveys don't necessarily kind of give you more juice with asking for the rate increases.

And then I guess just on capacity, so volume growth is great. It's great to have more shipments. And so that seems going really well. But then you also need more capacity. So pretty clear you're fine on doors. I know you bought a lot of trailers over the last couple of years in new tractors. But just what about like drivers and kind of how much flex up and how much growth you can handle or do you just need to kind of ramp employees up more than the, call it, whatever, 2%, 3% that Ali talked about in employee growth in 3Q?

Mario Harik

Thanks, Tom. Well, if you think about the service quality improvement, we don't think about them as being like a switch, whether you improve service quality over a number of years and you just tip a switch and you get 10% higher prices. The way we think about it is 2 components. As I mentioned earlier on, today, we have a double digit, call it, in that low to mid-teen opportunity of improving our pricing through a combination of core pricing improving as well as mix improvement.

But even the is improvements require high-quality service, as I mentioned earlier on, when you look at premium services or you look at small to medium-sized customers, -- it's not very hard to grow if your service quality is not in a very, very strong trajectory. And this is kind of how we think about it over the long term. But if you look at the double-digit opportunity, more than half of it is driven by our ability to keep on improving service and being able to get the slightly above market price improvement and roughly around, call it, 40% of it is in by our ability to improve mix in both premium services and small- to medium-sized customers growing with that.

So we already are seeing the impact because if you look over the last 3 to 4 years, we have been improving our yield above market, meaningfully above market, a couple 100 basis to 300 basis points above market per year, and that's driven by a combination of these 2 dynamics of being able to get a slight premium on a year-after-year basis given the service product and then being able to improve the next dynamic associated with that.

Now when you look at overall capacity, the way we think about it, there are 3 forms of capacity. One is what happens with your network with your towards where your excess capacity there, who is on rolling stock and pond drivers. The first effect, we see put on all of them. But effectively, when you think about the first one, which is the door side, that requires the longest lead time to be able to add it. And over the last 4 years, we've added effectively 15% more doors to our network. We have over 30% excess door capacity.

And we're feeling great about overall what our network is in terms of both the end-of-line markets as well as the core pipes in the network, making sure they are properly sized and they can handle a meaningful higher amount of trade as we move for our customers. The second is around rolling stock Similarly, we have expanded our trailer fleet by more than 30% and our tax of fee by more than 20% over the years, over the last 40 years that come at a higher depreciation expense on the P&L, but even with that, obviously, we're dramatically improving our operating margins.

And the third component is on our drivers and kind of what's happening on labor capacity. And we feel great there as well. If you look at our head count over the long term, it's been flat over the last few years as we've managed costs through productivity and labor hours in a softer volume environment through the freight recession and also our employee turnover, it's the best it's ever been. Our employee satisfaction is the highest it's ever been. And that's effectively mean you have to hire less people to backfill your churn before you hire for growth.

And with the existing workforce we have, we can handle, call it, in the ballpark of low to mid-single-digit more shipments with the existing people that we have with our workforce. And of course, we're going to be proactive as volume environment progresses from here. We're always going to add head count where we need it, but we feel footware we are right now.

Operator

We'll go next to Bruce Chan with Stifel.

J. Bruce Chan

Mario, you talked about the P&D routing tools now being deployed at 2/3 of your facilities. Maybe you can just give us an update on where you stand as far as those optimization initiatives, kind of the state of the union. When do you expect full deployment of the rest of that P&D routing opportunity? And -- are there any other big kind of efficiency initiatives that you have rolling out right now?

Mario Harik

Well, if you look at the overall proprietary tech and AI initiates we are driving, that's a lot of opportunity ahead of us. I mean, we look at this as being in the early innings us deploying these technology solutions. But if I break it down first on the efficiency side, on the cost side, the biggest category for us is around line haul first and how we line how here this last quarter, we rolled out an enhanced AI model that enables us to plan our golf doors, so how we organize what radar goes on a given door or another.

And as a result, we are able to effectively run fewer empty miles, and we have also reduced our rehandles by mid-single digits, and that's the lowest level of over a decade. Now if you think about that technology, obviously, one, we're going to have an impact or a benefit heading into next year for the repond effect. But we also are continuing to improve how without the freight within our network to improve that $1.6 billion of cost category in line call.

The P&D side, which is the 1 that you mentioned, -- so when new AI algorithms for that optimization are now rolled out to 2/3 of the route. We do expect to get the network fully rolled out by early next year. Now that technology like any AI solution effectively learns over time. So it's only going to get better. Currently, the improvements we are seeing out of it in those routes is called in that low to low to mid-single-digit improvement, but also we're seeing as the AI matures in given side, that number is going up to a dramatically higher number as well.

So we believe over the quarters succumb as we continue to tweak the technology and as the models continue to learn from existing data that will only improve over time as well. And then finally, on the DAS side, we did launch a update here this last quarter, AI model for how we do forecasting for volume to match the labor that we have in our locations to the volume that we are seeing inclusive of the forecast associated with that. And if you look here at this past quarter, we effectively our head count was up low single digits on our shipment count being up 6% in the network. But that's effectively on the operating side.

On the top line side, our AI algorithm for pricing or something we're really excited for, for next year? And then similarly, we launched new AI capabilities for our centers, and you're seeing that in some of the performance and the growth of our small- to medium-sized customer growth, along with a fantastic sales force driving those results. But when you give great people the right tools, we're obviously seeing a very strong momentum there on the results there as well.

J. Bruce Chan

Okay. That's super helpful. And just a quick follow-up. I know the math is complex, but is there a good way to think about how much of the above-seasonal OR progression is kind of tied to those proprietary tools?

Mario Harik

Well, high level, if you look at the long term, our expectation is to improve our productivity by 1.5 to 2 points per year is how we think about it over the years to come over a longer runway. And it's not always linear. Some quarters, you see us do a meaningful number higher than that, some quarters in line with that. So depending on the quarters over time, you're going to see it be that way. But the goal is 1.5 to 2 years productivity improvement per year, which would be -- which would help us offset some of the cost inflation that wears overall in wages or other cost categories.

Operator

We'll go next to Brian Ossenbeck with JPMorgan.

Brian Ossenbeck

So maybe just coming back to cost per shipment inflation next fuel at a high level you've got yields accelerating mix is normalizing a little bit. You got the extra capacity you just mentioned, Mario. So it looks like that line item is running LTL maybe 3.5%, 4% in the last couple of years, ex-fuel that sort of a good benchmark for the years ahead, given all the complexities we just talked about in terms of head count and productivity and whatnot. So any thoughts on that would be helpful. And then just to clarify the truckload spillover is that heavier weighted shipments just needing a home to essentially move at sort of the last minute or when capacity is tight? Or is this more of the consolidation that we've seen before starting to unwind given that truckload rates are quite a bit higher.

Kyle Wismans

This is Kyle. I'm going to start with the cost per shipping question. So over the long term, cost per shipment we expect to be up in the low single-digit range. And there's a few main drivers there. So Obviously, most of the P&L is really driven by labor. So our core wage inflation is in that, call it, 4% range. And we'd expect benefits to be another 1 to 2 points on top of that. Now we're going to offset with the cost at we have in some of the initiatives that Marty just talked about.

So that covers linehaul PandaDoc. I mean a lot of that ongoing labor productivity is really going to help us manage that cost impact. Now obviously, when you think about margins, there's a large impact from a rep per shipment basis. And we'd expect that to track above our cost per shipment. Again, it's going to be driven by our strong underlying pricing as we already talked about, as well as the weight for mintrends, which we're seeing here in this quarter. So that combination of really strong management of that inflationary pressure as well as strong pricing is going to help us drive strong margin outlook here and beyond.

Mario Harik

And when you look at the truckload spillover, typically, in LTL usually, as I mentioned earlier on, -- it's not about whether a shipment is heavier or lighter or it's all about the margin, what you're pricing is for. But generally, the reason why we're seeing some of that conversion come back from truckload into LTL is predominantly because truckload rates are up. So naturally, what you see in that environment is that whenever -- over the last call so far this year, you have seen truckload rates go up meaningfully.

And the conversion based on heavy LTLs that have gone from LTL to LTL to TL is coming back to LPL effectively. Now we do believe it's combination, primarily, it's rate driven the fact that truckload is not higher, but we also hear from some customers where they are dealing with tender rejections by truckload carriers where they would want to send that back to NPL for service reasons as well. But we do believe the primary reason is more great driven and then the secondary reason is capacity or tender rejections by food carriers.

Operator

Moving on to Bascome Majors with Stephens, Inc.

Bascome Majors

If we look back over the last 3 or 4 years, you've driven a lot of profit outperformance on a mix of yield outperformance and productivity in the network. But if we look back over this quarter and next, volumes are starting to move up more than yield, which is obviously a great issue to have. Can we talk about the next 2 or 3 years, what you think the biggest drivers of your growth will be between volume, yield and margin do those look any different than what we've seen from you over the last 3 or 4 years? And what financial metrics would you emphasize as investors to really track to see where we are in this stage of your growth cycle?

Mario Harik

Thanks, Bascome. Well, if you take a step back, the core of our strategy is more yield driven than it is volume driven. However, if you think of an up cycle, if you look at what happened through the freight recession over the last 3 to 4 years, you have an LTL environment, an industrial economy in this country that is down in the mid-teens from an overall demand perspective. Subsequently, LTM volumes were down on a mid-teen basis. But over that same period of time, you have capacity that exited the market if you compare the industry today relative to pre-COVID right after COVID, you have about 10% less service centers and about 5% less doors. So as the market -- and we invested in a lot of capacity.

And when you think about that market solid to a flat, you're going to have a situation where you have certain cars that will have the capacity like we do and others that won't have it. and we're going to be able to gain more market share over the years to come. However, if you think about overall the algorithm of how we think about it, pricing comes first, volume comes second. And over the years to come, as I mentioned earlier, we have a double-digit pricing opportunity for us to go capture through a combination of an improving service product and being able to support our customers where they need us for growth and a combination of onboarding new customers in segments of business that are typically higher margin, typically much more service-sensitive that we are seeing a lot of early innings success here, and we believe that's going to continue over the years to come.

But that's how we think about it over time. And ultimately, if you think from an OR perspective, I mean if you look at this year, obviously, as Ali mentioned earlier on, as the year improving our north up to 50 basis points, and this is still in a market that we are not seeing a material improvement in the macro -- if you roll that forward over time, our goal is to get our ore in the low 70s beyond as we execute on the strategy driven again by pricing supported through service, driven by gaining market share and also by gaining cost efficiencies along the way as well. It's a massive runway ahead of our pasta.

Bascome Majors

Mario, Kyle, if you could put a period on that with what you think is the best financial metric to track to really see you delivering on the progress you want to make over the next 2 or 3 years?

Kyle Wismans

As it really comes down to OR. I mean if you think about the way we look at the business and fundamentally what we need to do, it's really driving OR improvement in the business. So if you look at this quarter, we were improving 250 basis points year-on-year. We did better than seasonality by 200 basis points. That's really where we're focused. I mean the fact that we're able to improve our north of 250 basis points for the year, is a phenomenal number and represents all the efforts we've talked about so far on the call today.

Operator

This now concludes our question-and-answer session. I would like to turn the floor back over to Chairman and CEO, Mario Harik, for closing comments.

Mario Harik

Thank you, Kari, and thank you, everyone, for joining us today. As you saw from our results, we delivered another quarter of meaningful top and bottom line growth accelerating from the prior quarter. Our strategy continues to build momentum here in the back half of 2026 and is setting up 2027 to be another strong year of margin expansion and free cash flow growth.

With that, I'd like the operator to please end the call.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.