RXO, Inc. Q1 FY2023 Earnings Call

Welcome to the RXO Q1 2023 Earnings Conference Call and Webcast. My name is Laura, and I will be your operator for today's call. Please note that this conference is being recorded. During this call, the company will make certain forward-looking statements within the meaning of federal securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those 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. You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional important information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures that the company uses when discussing its results. I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may begin.

Good morning, everyone. Thanks for joining today's earnings call. Joining me today in Charlotte are Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. RXO delivered solid results in the first quarter of 2023 despite the tough economic backdrop. The Q1 results were driven by another quarter of year-over-year brokerage volume growth and best-in-class brokerage profitability. Overall, our company-wide adjusted gross margin remained strong at 18.8%, up 80 basis points year-over-year. Our tech-enabled brokerage business continued to significantly outperform the industry. We took share and achieved best-in-class gross margin. Brokerage volume was up 6% year-over-year. The most important driver of our growth was contractual volume. We also grew synergy loads from our managed transportation business, cross-border loads and other modes in the quarter, including LTL. Brokerage gross margin was 16.3%, flat year-over-year. To give some more color, year-over-year volume growth was consistent throughout the quarter. From a vertical perspective, there have been some improvements in the inventory positions at our retail and e-commerce customers. We have seen increased brokerage volumes from home furnishing, building products and technology customers. Last quarter, we highlighted our robust sales pipeline, and we're pleased with our conversion in the first quarter. Our pipeline conversion resulted in our contractual volume growing 19% year-over-year. As a result, our contract business now represents 77% of our brokerage volume. We also saw continued momentum with bids. And in the first quarter, annual bids were up 11% sequentially, as measured in revenue. This is the hardest part of the cycle to grow volumes. And we were able to do so because of our customer relationships, service, technology and scale. We are confident that when the market inflects, we are in a great position to win. Our complementary services also continued to execute well in the quarter and complementary services adjusted gross margin expanded by 160 basis points year-over-year. Managed Transportation significantly increased the number of synergy loads provided in our truck brokerage business. Managed Transportation continues to benefit from the outsourcing trend. The world's largest companies are turning to RXO to handle their freight transportation needs. In fact, for the fifth straight year, General Motors named RXO Supplier of the Year. This is an honor to work with global powerhouses like GM and to help provide consistent, reliable solutions for their shipping needs. We're also capitalizing on the near-shoring trend. In the first quarter, RXO's cross-border brokerage loads increased by more than 30% year-over-year. We're supporting our customers' efforts through our new cross-border facility in Laredo. We're in the contracting process with several large customers who want to utilize the wide array of services the site offers. Turning to our Last Mile business, RXO is the largest provider of big and bulky services in the U.S. Our customers tell us we offer the best service in the industry. Our recent pricing actions reflect the premium service that we provide, and we now expect to grow EBITDA within Last Mile year-over-year for the full year 2023. We also had a very good cash flow quarter, converting 100% of adjusted EBITDA to adjusted free cash flow. I'm also pleased to announce that our Board of Directors has authorized a $125 million share repurchase program. This program fits into our balanced capital deployment approach, which Jamie will expand on later. Our business results were underpinned by the adoption of our best-in-class technology, which helps customers and carriers make sound decisions and improve productivity. In the first quarter, 96% of loads were created or covered digitally. And we also hit a milestone for the RXO Drive-out, which surpassed 1 million downloads in the quarter. As RXO continues to grow, we remain focused on developing our people. We have a strong bench of talent, and I wanted to highlight two leadership changes we made in the quarter. Paul Boothe, who has led our managed transportation business for the last three years, has been named the President of our Last Mile business. Under Paul's leadership, we successfully onboarded several high-profile customers and freight under management more than doubled to $4 billion. Paul brings operational expertise that will help us improve the structural profitability of Last Mile. I'd like to thank Fernando Rabel, who served as interim Last Mile President. Fernando will work closely with Paul to ensure a smooth transition and will continue to deliver results for our largest customers. Brian Dean has been promoted to lead RXO's Managed Transportation business. Brian has been with RXO for more than 20 years, and most recently served as Vice President of Operations for Managed Transportation. Brian has been a key driver in designing and delivering solutions for our customers that help them optimize their transportation spend. I'm thrilled that we have been able to fill these roles internally, and I'm looking forward to continuing to work closely with Paul and Brian on my leadership team. Looking ahead, we still anticipate a tough macro environment in the second quarter, similar to what we saw in the first quarter. We again expect to grow brokerage volumes on a year-over-year basis, but continue to anticipate further moderation in gross profit per load. While April started off slow, in the last two weeks, we have seen volumes improve. Jared will provide more detail about our expectations in a few minutes. We are executing our playbook and remain focused on profitable growth. Our playbook proves its value in terms of chaos and disruption. It positions us well for the long term. Customers continue to consolidate the number of carriers they work with and our service, best-in-class technology and financial stability have led many to choose RXO as a strategic partner. As a stand-alone company, that's more fit for purpose, everyone at RXO is focused on delivering results for our customers and shareholders. With our accelerating market share gains and best-in-class profitability, we are positioning the business to deliver significant returns when the market inflects. And now over to Jamie.

Thank you, Drew. Good morning to everyone. In the first quarter, we generated $1 billion in revenue compared to $1.3 billion in the first quarter of 2022. The revenue decline was primarily due to lower freight rates year-over-year. Profitability remained strong with an adjusted gross margin of 18.8%, up 80 basis points year-over-year, primarily driven by our ability to bring down the cost of purchase transportation as the market softened. Additionally, adjusted gross margin within Complementary Services expanded by 160 basis points year-over-year driven by Managed Transportation and freight forwarding. Our adjusted EBITDA was $37 million in the quarter compared to $75 million in the first quarter of 2022. And our adjusted EBITDA margin was 3.7%, down 200 basis points from the prior year. These declines were primarily due to the lower year-over-year freight rates, the resulting moderation in brokerage gross profit per load and the incremental corporate costs of being a stand-alone public company. Below the line, our interest expense for the quarter was $8 million. Our income taxes were favorable for the quarter driven by discrete nonrecurring tax items. Adjusted diluted earnings per share for the quarter was $0.11. You can find a raise to the adjusted EPS on Slide 8 of the earnings presentation. Importantly, we continued to outperform the industry. Despite the difficult macro economy, we grew brokerage volume by 6% year-over-year. Profitability in brokerage remained best-in-class with gross margins of 16.3%, flat year-over-year. It was a very strong cash quarter. Please refer to Slide 9, which has a walk from adjusted EBITDA to adjusted free cash flow. We ended the quarter with $121 million of cash versus $98 million at the end of the fourth quarter. Our adjusted EBITDA converted to adjusted free cash flow at 100% in the quarter, a great result. Please note that the quarter's adjusted cash flow results included the payment of 2022 incentive compensation. The quarter also included several timing-related items that had positive impacts during the quarter. These items included earlier-than-expected collection of some accounts receivable, zero interest payments on our bonds during the quarter. We paid interest on a semiannual basis in the second and fourth quarters. We incurred minimal cash taxes in the first quarter based on normal regulatory timing. Most of our cash taxes for Q1 and Q2 will be paid in the second quarter. As we look to the second quarter, these items will normalize, and we expect our cash conversion for the first half of 2023 to be approximately 50%. Over the long term, across market cycles, we remain comfortable with our cash conversion at a rate between 40% and 60%. I also want to spend some time discussing spend-related and restructuring costs. Last quarter, we communicated approximately $10 million to $15 million for the full year 2023, of which $10 million were expected cash outflows. We continue to optimize our cost structure as a stand-alone entity. Since our spin-off, we have launched several initiatives to ensure that we have the appropriate cost structure and processes in place to improve profitability and support our growth. Given the weak freight environment, we moved expeditiously in the quarter and achieved annualized run rate savings of approximately $20 million. These savings helped us offset some of the reduction in brokerage gross profit per load in the quarter. We incurred $8 million of restructuring charges to achieve the $20 million in savings, a significant return. Looking ahead, we're proactively optimizing our cost structure and our position in the organization for incremental operating leverage when the freight cycle inflects. As a result, we now expect 2023 spend-related and restructuring costs to be closer to $35 million, with approximately $30 million of expected cash outflows. On Slide 10, we have provided an update on our balance sheet. We have $621 million in liquidity, including our $500 million revolver, which remains undrawn. We have a strong balance sheet and our net leverage at quarter end was approximately 1.2x trailing 12 months adjusted EBITDA. This remains at the low end of our stated range of 1x to 2x. As Drew mentioned, our Board of Directors authorized a $125 million share repurchase program. Given our strong balance sheet and free cash flow generation, we are pleased to have this authorization as a formal part of our capital allocation framework. We will opportunistically repurchase shares through a balanced approach that will include relative market value, leverage, free cash flow and overall macroeconomic conditions. At a minimum, we plan to buy enough shares to cover dilution from restricted stock grants on an annual basis. Additionally, as you saw this quarter, we will continue to settle tax withholding obligations for the vesting of a pre-spin RSU grant in cash. Using cash in lieu of selling shares to settle these tax reporting obligations will help to minimize dilution. For the first quarter, this was a $7 million cash outflow. We estimate an additional $10 million for the balance of the year for a total 2023 estimate of approximately $17 million. You can find an update to our 2023 modeling assumptions on Page 13 of the presentation. We now expect capital expenditures between $60 million and $65 million. This includes $15 million of strategic investments in real estate to accommodate growth in our brokerage business. We remain committed to spending approximately 1% of revenue on capital expenditures over the long term, in line with our guidance at Investor Day. Stock-based compensation expense is expected to be between $20 million and $22 million. Depreciation and amortization is expected to be between $70 million and $75 million. Interest expense will be between $32 million and $34 million, $1 million lower than our prior forecast, and we expect our adjusted effective tax rate will be approximately 25%. These should also model an average diluted share count of approximately 120 million shares. Please note that this does not include any impact associated with potential share repurchases. Overall, given the current macroeconomic backdrop, we are pleased with our financial results. We are operating well, have solid cash flow generation and a strong balance sheet. Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk more about our outlook.

Thanks, Jamie, and good morning, everyone. I'd like to start with the structural profitability of our business. We again outperformed the market this quarter with best-in-class brokerage volume growth and profitability enabled by our technology. Brokerage gross margin of 16.3% was flat year-on-year despite the difficult freight cycle dynamics, a testament to our technology and pricing algorithms. Our driver app, RXO Drive, surpassed 1 million downloads in the quarter, up 45% year-over-year. Average weekly users increased 25% year-over-year in Q1. Importantly, 7-day carrier retention was strong at 79%. Q1 active network carriers declined 3% sequentially as carriers began to exit the market during the quarter, which will ultimately lead to more balanced supply and demand dynamics. In the first quarter, 96% of our loads were created or covered digitally versus 87% last quarter and 74% in the first quarter of 2022. This was the result of continued adoption of our technology in addition to the full quarter impact of the platform capability within RXO Connect that was discussed last quarter. Over the next few quarters, while we expect the percentage of loads created or covered digitally to stabilize around the current level, we are not stopping there. Increasing the number of fully digital loads on the platform is a top strategic priority for the business. We've done an excellent job on the customer side with digital integration, but there's still plenty of white space ahead of us on the carrier side. The value proposition of RXO Drive and Connect is clear, and helps drive engagement and stickiness with our customers and carriers, as evidenced by our 7-day carrier retention rate. Importantly, as the percentage of digital loads increases, we would anticipate higher contribution margins. This quarter, we again were in an enviable position with contractual volume representing 77% of our business, up 200 basis points sequentially and 900 basis points when compared to the first quarter of 2022. RXO continues to benefit from ongoing carrier consolidation across our customer base. Even though freight demand is weakening, we are viewed as a strategic carrier and we are gaining share given our exceptional technology, service, and deep customer relationships. RXO's top 10 customers have been with us for 16 years on average. From a vertical perspective, retail and e-commerce volumes declined in the quarter, as expected, but the rate of decline moderated relative to the fourth quarter as customers' inventory positions improved. Additionally, we saw significant volume growth in our other verticals, including homebuilding, health care, biotech and technology. Last quarter, I told you that our fourth quarter brokerage gross profit per load was roughly in line with our 3-year average. I thought it would be helpful to share current trends relative to prior freight cycles, and I'll refer you to Slide 12, which details our historical volumes and gross profit per load trends. We are now approaching our 5-year gross profit per load volume. More specifically, we are within 10% of our trough gross profit per load over the last 5 years, excluding the low of the COVID-19 pandemic. Since that trough, our brokerage volume has grown by more than 55%. This is our playbook for this very important part of the rate cycle, increasing share with best-in-class profitability, while we strategically invest in the business positions us well for the next inflection and the road to $500 million in EBITDA. I'd now like to look forward and give you some more color on what we are expecting in the second quarter. We do not anticipate any major changes in the state of the economy or the freight cycle. Both will remain challenging. We do continue to expect a moderation in gross profit per load as the second quarter will reflect the full run rate impact of new contract rates. However, our brokerage sales pipeline remains robust, up 50% and 84% on a 2- and 3-year stack, respectively. Retail and e-commerce volume declines are moderating, and our non-retail verticals are still growing year-over-year. We ended in April with strong brokerage volume momentum, giving us confidence that we will again move brokerage volume on a year-over-year basis in the second quarter. Putting it all together, we expect company-wide second quarter adjusted EBITDA to grow sequentially when compared to the first quarter. Turning to the full year, our brokerage business continues to have momentum supported by year-over-year volume growth in the first quarter and our expectation for second quarter year-over-year volume growth significantly outperforming the industry. I mentioned that the inventory position of some customers within the retail and e-commerce sectors has improved. This may lead to restocking activity in the second half. However, visibility remains limited. Within Last Mile, we continue to work on operational improvements, execution, service and pricing. Given the success of our strategic pricing actions, we are confident that 2023 Last Mile EBITDA will grow versus 2022 levels, helping to partially mitigate brokerages moderating gross profit per load. Our asset-light business model generates significant free cash flow. Prospectively, we remain confident that we will continue to achieve a strong adjusted free cash flow conversion relative to adjusted EBITDA. We will thoughtfully deploy capital through a balanced capital allocation approach including the $125 million share repurchase program that we announced this morning. We believe that growth of free cash flow on a per share basis is a primary driver of long-term value creation. I'll leave you with why we remain so excited about our business despite the challenges of the current freight cycle and the economy. We operate in a $750 billion market with plenty of room to grow. Our financial profile can generate meaningful free cash flow and our strong balance sheet and new share repurchase authorization provides us with flexibility to deliver returns to our shareholders. We have a small share of an enormous market, a proven team, a winning strategy and a long runway for profitable growth. With that, I'll turn it over to the operator for Q&A.

Your first question comes from Ken Hoexter from Bank of America.

Maybe just dig into the outlook a little bit, your solid performance in terms of the 6% volume growth, maybe thoughts on that thought of continued volume growth with in the face of softening margins that you talked about. You're still outpacing your peers on margins. You noted the last 2 weeks showed some improvement. I think the market is still trying to understand what that means in terms of is that a seasonal bounce, if there's any insight you can provide in and obviously, maybe compare and contrast that with the conflicting data of margins still coming in. So if you could just walk us through maybe a little bit more detail on that second quarter outlook and the turnaround you're seeing in the last few weeks?

Yes, absolutely. Good morning, Ken. This is Drew. I'll start with the second quarter outlook. When you look at what we saw as April started off, April started off fairly slow coming off of quarter end, coming out of Easter holiday. The first 2 weeks were a lot slower than what we had hoped. But the back half of April in the last 2 weeks picked up fairly well, and we saw good returns, enough returns that we were comfortable enough to be able to endorse volume growth for the full year. As you look a little bit further out, we've got signs of some things that we like that we're seeing overall in the market. Retail, e-commerce inventory levels are much better than what they were last year. Growth in technology, health care and home furnishing has been really strong for us, and we expect that to be able to continue through the back half of the year. And we started to see, for the first time, in the first quarter, we started to see more capacity exit the market than what's entering the market. And that's the first thing that you see before tender rejection start to increase. And so for us, that's something that's got us excited looking as we look forward. But with that, there's a lot unknown in the overall macro for the rest of the year. So very happy with where we sit right now and the playbook that we've got to be able to continue to build the foundation, take market share and do it profitably.

And Ken, this is Jared. Just building on what Drew was saying with respect to volume growth, we feel comfortable with respect to Q2 volume growth on a year-on-year basis. And to give you some puts and takes as it relates from Q2 to Q1, Q2 is seasonally a better quarter for us from a RXO standpoint. That's across our businesses, including within Last Mile, we'll have the benefit of seasonality as it relates to Last Mile as well with respect to also benefiting from the strategic pricing actions that we took in the quarter. We'll also have the full run rate impact of the cost takeouts that we talked about in Q1, benefiting Q2, giving us comfort that company-wide adjusted EBITDA will grow sequentially from Q1 to Q2.

Just to clarify before I get to my second question, Drew, you mentioned that you are confident in supporting volume growth for the full year, and then Jared added that there will be volume growth through the second quarter. I want to confirm whether you are referring to Q2 or something else.

I was discussing the second quarter on a year-over-year basis and mentioned the full year. With that said, I feel positive about our situation for the entire year. As I mentioned, there are still some uncertainties with the overall macro environment. I don’t believe anyone has a clear indication of when the market will change, whether it’s in the third quarter, fourth quarter, or first quarter.

Yes, I just want to make sure we got that right. You raised restructuring costs, Jamie, to $35 million. Maybe I'm a little confused. I mean the spin is complete. Why are we restructuring and the other costs going up at this point? And maybe dig into the thoughts on your EBITDA growth comment. Can you put parameters on that?

Yes, Ken. This is Jamie. At the start of the quarter, as a newly independent public company, we closely examined all our costs. We conducted a thorough zero-based budgeting review, assessing every vendor, contract, and organizational structure. As a result, we identified a potential for approximately $20 million in future savings. The restructuring expenses amounted to about $8 million, which was not included in the earlier estimate of $10 million to $15 million since we actively pursued these changes in the middle of the first quarter. Looking ahead, we've adjusted our projections to account for the $8 million already spent and added another $10 million due to various ongoing initiatives we expect to wrap up in the second and third quarters. We're anticipating additional savings to emerge as we move forward. In total, we spent $8 million more than we initially communicated within the $15 million range, while achieving a $20 million annualized savings trajectory. We believe this return on our restructuring efforts is favorable, and it positions us well to optimize our cost structure with an efficient back office and shared services, enabling us to capitalize on market opportunities when they arise.

Your next question comes from the line of Stephanie Moore from Jefferies.

My first question is for Drew regarding capacity exiting, which often indicates when tender rejections begin to increase. I'm interested in your perspective on where we currently stand in the cycle. Many have suggested that the first quarter may be weaker than initially expected, but it seems like we might be approaching a period of stabilization. Do you believe that things are moving seasonally as they typically would, even if it's from a lower starting point in the first quarter? What's your outlook on the cycle at this time?

Yes, looking at seasonality over the past three years, there have been many fluctuations, making it challenging to identify precise patterns. Typically, we see an increase in volumes from the first quarter to the second quarter as we fully implement the bids completed in the fourth and first quarters. Regarding the current market cycle, the exit of capacity is a positive sign as it should result in higher tender rejection rates in the long run. Currently, the load-to-truck ratio is approximately 2:1, and in my 16 years of experience, I haven't seen it drop below 2:1 for an extended period. While we are not declaring that we have hit the bottom, there are indications suggesting a more positive trend from a capacity perspective, which should have beneficial implications. In comparing this situation with previous cycles, we are not experiencing conditions similar to 2008 and 2009; instead, the load-to-truck and tender rejection ratios align more closely with what we observed in 2018 and 2019.

That's helpful. And then on the final mile piece, I was hoping, is there anything you guys can give in terms of the metrics on quantifying sort of what the repricing is looking like or how things are going? I know you mentioned that you guys were okay walking away with some business that is going to be more profitable. But I was hoping you guys could maybe peel back the onion a little bit on what's going on in Final Mile?

Yes. So I mean, we were in pricing conversations with our customers for really the last 3 to 6 months. And what we found is that because of our service, because of our scale, our customers wanted to continue to partner with us and value the business that we were doing. So despite the tough macroeconomics, we are confident that we'll grow Last Mile EBITDA on a full year basis and are happy to be rewarded and recognized for the service that we're giving to our customers. And we actually, there was a small piece of business that we ended up parting ways with the customer. But on the other hand, we actually picked up a few markets from several of our customers. So happy with how those conversations turned out.

And maybe just to confirm, I know this is historically a difficult business to be profitable, and you guys are profitable in Final Mile and you're just growing that profitability?

That is correct. We are profitable, and we are growing the profits on it.

Your next question comes from the line of Scott Schneeberger from Oppenheimer.

I would like to ask about volumes, pricing, and cadence, similar to Ken's question. What did spot pricing look like during the first quarter and into the beginning of April, on an industry level? Drew, in your last response, you mentioned the possibility of the load-to-truck ratio bottoming out. When can we expect to see that reflected in spot and contract pricing?

Yes. So on the spot pricing, what little bit of spot loads that are out there is down significantly. Spot pricing at a 2:1 load-to-truck ratio is well below what your contract pricing is. And that's one of the things that we talk about as you see the capacity exiting the market and you start to see that load-to-truck ratio shift, that's a positive thing because it creates spots. At that point, they'll go higher than what you see on the contractual loads. As far as the overall bottoming of the market, again, we're not going to call the bottom, but there are signs of optimism that we've got as we look ahead. Retail e-commerce is a big part of our business and you look that those inventory levels are in a lot better position than what they were a year ago, that's a positive thing for us. The growth that we're seeing in technology and health care, specifically, or tailwinds that we think will continue. And if you see more capacity exit, that's going to create spot loads. And we're in the position to win when the spot loads come. Because if you look from 2018 to 2019 over the last down-cycle, we're up, our volume is up like 55% from that time period. So our foundation is much bigger than what it was during the last downturn. So for spot loads, projects, mini bids, we're going to be the place that customers turn and we'll be in a position to win.

I have a follow-up question that's somewhat multi-faceted. I'm interested in your report of annual bid opportunities showing a revenue increase of 11% quarter-over-quarter in the first quarter. How does that look from your customer perspective? It appears you're gaining market share, and your bids seem strong. Are you primarily taking share from smaller competitors, or do you see some larger competitors as well? Since you measure this by revenue, is the growth primarily driven by a few significant opportunities, or does it involve a diverse range of customers? Lastly, how significant is your cross-border business, particularly the new Laredo facility, to these bid opportunities? And Jamie, when you mention new real estate development, is that related to border operations or something different?

Yes. So when you look at share gains, we're not picky on where we take share gains. We're taking it from everybody. We don't walk into a bid looking to target one competitor or one asset-based company where share gains come from. We look at it, how can we match our services to best align with what the customer needs. And because of that, we're winning big. I mean you mentioned our customers. If you look at our top 20 customers, we actually grew volume by 13% on a year-over-year basis. So our largest customers are recognizing our service, and they're not just coming back to do business with us; they're coming back to us and say, 'Hey, we want to give you more business because of the service and solutions that you're able to offer.' On the cross-border side, we think nearshoring is something that's going to continue and U.S. and Mexico will benefit from that. We've been doing cross-border freight for a decade now and very happy with the investment that we've made into Laredo, that's helped us grow our brokerage volume by 30% on a year-over-year basis. And we think that, that will continue for the long run. We do an array of things out of Laredo. It's not just your truckload moves that are going cross-border, which we do a lot of. We're also doing transloading, cross docks. We're doing a little bit of storage for our customers as they're waiting to get product through one side of the border to another. So it just speaks to the array of services and solutions that we create and the stickiness we're becoming with our customers.

And Scott, the question to follow up on the real estate. The real estate is more about expanding or opening some offices for our brokerage business. So we have capacity to fill as volume grows and as the market inflects. So that's really positioning ourselves for the growth that we believe we're going to have.

Your next question comes from the line of Scott Group from Wolfe Research.

Any directional color on how much sequential EBITDA growth you expect from Q1 to Q2, there's a decent range of expectations; are we thinking mid-single, double? Any color would be helpful.

Scott, it's Jared. So I'll give you some puts and takes as we think about it for the quarter, Q2 versus Q1. As we mentioned, we expect year-on-year volume growth again, Q2 versus Q1, offset partially by the continued gross profit per load production that we expected. As we talked about in the script, April started off slow, but we had strong momentum in the back half of the month to endorse volume growth for Q2 versus Q1, both on a year-on-year basis. As it relates to seasonality, seasonally, it's a better quarter for RXO as a whole across all aspects of the business. We'll benefit from brokerage; we'll benefit in Last Mile; we'll have the pricing benefits that we talked about; and then lastly, we'll have the full run rate impact of the cost actions that we took. As it relates to specific guidance on EBITDA sequentially, we don't provide guidance at the consolidated level, but hopefully, that's helpful in terms of the puts and takes.

Okay. And then just wanted to get your perspective. Do you think that second quarter is the bottom for gross profit per load? And then maybe in this context, I'll ask you, like when you go back, the chart of historical gross profit per load was helpful? When you look at that prior trough, is that trough coincident with spot rates bottoming? Or does the trough in profit per load tend to lag spot rates by a quarter or two? I'm just trying to understand, are we at this trough and profit per load yet or if it needs to take a few more quarters?

Yes. A couple of things to consider regarding the profitability trough are tied to when the load-to-truck ratio begins to rise significantly. Once we see a sustained increase in that ratio, spot loads will start to return, leading to improved gross profit per load. This will certainly offset some contract pressures, particularly from a cyclical perspective. It's important to note that if we start to see supply exit the market, especially in Q2, it could create additional gross margin pressures if the load-to-truck ratio increases. We need to use our technology and pricing algorithms to maintain strong profitability, as demonstrated this quarter with stable gross margins year-on-year in brokerage. Looking back at the chart on Slide 12, we aimed to highlight the dynamics of the freight cycle over the past five years. As Drew mentioned earlier, the current situation resembles the freight recession of '18/'19. While approaching the bottom of the gross profit per load cycle, we are in a much stronger position, with volume growth exceeding 55%. As the growth rate of gross profit per load slows, we can expect a notable impact on EBITDA contributions.

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

The tone and content of this call are quite different from what we've heard in the first quarter, which has been somewhat unclear. I'm trying to determine how much of this is unique to your company and the excellent execution you all are demonstrating, versus how much is due to a genuine upturn in the market, particularly in the last weeks of April as you mentioned, and the fact that you're reporting a bit later than your competitors. Perhaps, Drew, I’m giving you a chance to highlight your accomplishments, but I'm trying to understand the balance between market cycle and execution.

Well, thank you for that, Ravi. And we definitely have a lot of things to our business that are idiosyncratic that play at our favor. If you look at our technology, it is second to none, it allows us to operate at best-in-class margins and it also helps us become more integrated with our customers to where we're able to continue to grow and take share and do it at a faster clip than what most are doing in the industry. As far as the tone of the call and where we see the overall macro, I want to be clear, it's still a tough macro environment that we're in. Load-to-truck ratio is still at a 2:1 ratio. And for us to start to see that inflection, you’re going to have to see load-to-truck ratio start to move. For us, this is the part of the cycle to what Jared just said earlier, is about building that foundation and being much bigger than we were at the last market inflection, much more integrated with our customers to prepare to go on a really good run for that. And as I've noted earlier, we've seen some things about this market that we like that show that you could see an inflection, but we're just not ready to call the point of what that inflection could be because there's not enough data there to call if it's Q3, Q4 or Q1.

Got it. I understand. I have two quick follow-up questions. First, for Jared, I noticed that the outlook slide from last quarter included a reiteration of the 5-year guidance, but this time it was absent. I assume this was just a formatting choice and that there hasn't been any change to your outlook for the 5-year guidance. Secondly, regarding the restructuring costs, I understand your emphasis on ROIC, but how long do you anticipate these restructuring actions will continue? Will they extend into 2024?

Ravi, it's Jared. I'll start, and then I'll hand it over to Jamie. Nothing has changed with respect to our confidence in the $500 million of EBITDA. I referenced it in our script in terms of the road to $500 million. And I think the slide that we're referring to, if you look at Slide 12 in the presentation with volume up 55% when compared to the '18-'19 downturn really is laying that foundation for us to go ahead and build from a momentum standpoint. So we remain very comfortable with the outlook that we provided at Investor Day 6 months ago.

Yes. Regarding the restructuring, the spending related to it should significantly decrease by the end of this year. As for the restructuring itself, we will continue to seek ways to optimize costs. This is inherent to our company philosophy. We will consistently aim to be cost-efficient while maintaining our capacity for growth. There are no plans for a restructure in 2024, but if market conditions require it, we will evaluate that possibility. However, our focus will always be on finding ways to improve our cost structure. You can expect these costs to drop significantly by the year's end.

Your next question comes from the line of Tom Wadewitz from UBS.

This is Michael De Matea standing in for Tom. Could you share any further insights on shipper feedback regarding the inventory cycle? What gives you confidence in a potential turnaround? Also, regarding spot markets, when do you anticipate reaching a bottom compared to our current position?

Yes. So as far as what we're hearing back from our customers on inventory levels, inventory levels specifically in retail and e-commerce are already a lot better than what they were a year ago. And we think that's got the potential to be a tailwind for us. That's a decent piece of our business and one that we look to continue to be able to grow. As you look into other verticals, inventory levels, I would call stable right now overall and specifically in technology, health care and food and beverage, everything is running extremely efficiently and smooth. As far as calling the bottom of the spot, we said earlier, we're not going to call the bottom. I don't think there's a crystal ball out there that tells you exactly what the market is going to do. I am confident that we will be able to go out and take market share and do it at best-in-class gross profit in the industry. But we're not going to be the ones who call the bottom. But there are signals that we see out there that we like that show that things could be getting better from a brokerage standpoint.

Your next question comes from the line of Allison Poliniak from Wells Fargo.

This is Ryan speaking on behalf of Allison. I want to discuss the supply leaving the market that you mentioned. How long do you anticipate this process will take? Do you think it will extend longer than the 2018 cycle given the current situation?

Yes. I don't think that we know how long it's going to take yet. We are seeing capacity exit the market faster than what it's entering; at the same time, it hasn't exited at a fast enough rate to be able to call load-to-truck ratio to shift in any sort of dramatic levels at this point. We're prepared for when the market inflects, and we continue to grow our base of business with our customers, and we're prepared to go in a really good run whenever the market inflects. But we don't know exactly when that will happen. The one thing that you've seen recently is Class 8 orders have been down, and they're down significantly. And I think that's another sign that when we talk about capacity exiting the market, that's also less capacity entering the market from that standpoint. So I view that as something that could be a positive trend as far as the load-to-truck ratio outcomes.

Your next question comes from the line of Jack Atkins from Stephens.

I would like to hear your thoughts on how you're positioning the business during this bidding cycle. Given that your revenue per load in brokerage decreased by about 33% in the first quarter, it seems you are using pricing strategies to gain market share. However, the market might be reaching its lowest point. Are you structuring contracts in a way that allows you to increase prices once the spot market rises? What are your thoughts on this, considering that 77% of your business is under contract, which might impact revenue per load?

Yes. So first, we're not using price as a way of getting business. And I think you can see that because our gross profit percentage is the best there is in the industry right now. As far as being able to see spots impacting net revenue per load; spots coming on will actually be a positive thing for us on net revenue per load because you'll see spot rates shift higher than what contractual rates are today, which would naturally be at a higher gross profit per load. So we view that when the market inflects, that will be a good thing. You've seen us shift our mix of business as much as 1,000 basis points quarter-over-quarter. So we're an agile group. We're ready to react with whatever the market throws at us, and we're prepared for an inflection that will be a positive thing for us from a pricing standpoint.

And Jack, it's Jared. Also be mindful of the dynamics from Q4 to Q1, right? You're comparing to Q1 of '22, when the market significantly loosened after the new contract rates had already gone into effect. So much comp in terms of year-on-year, and our comp is actually even harder into Q2 when you think about Q2 of 2022. So to reiterate what Drew said, we are absolutely not using price as a lever. Ultimately, profitable growth is in our DNA. That's how we run this company. But I think it's mindful to think about that comp. And also remember that length of haul was also a headwind on a year-on-year basis, which stepped up relative to Q4 levels.

Okay, Jared. I appreciate that. And then I guess maybe kind of, Drew, getting back to your point on being able to capture spot market activity when it materializes, hopefully later this year or sometime in early next year. I guess I'd be curious to kind of get your thoughts on productivity gains, and you guys have done such a great job maximizing productivity over the last 3, 4, 5 years, Drew under your leadership. So as you sort of think about that and being able to really drive up the percentage of the loads that you're matching digitally with carriers, how do you really kind of move that ball forward here over the next year or two to drive additional productivity opportunity?

Yes, so two things to break down there. One is just the overall productivity. We did see an increase in productivity from our team quarter-over-quarter. That was a positive thing. But really, we look at the productivity gains that we've got over the long term because there will be times that you see us invest in headcount. And we look at the productivity gains more on a 3- to 5-year basis from what we're doing. As we've said in the past, that trend continues to be up and to the right. As far as the opportunity that we've got on the carrier side, we've got a ton of white space, as Jared mentioned in his prepared remarks, to be able to continue to grow on the carrier side from an integration standpoint. We've done a great job on the customer side, and integrating with large customers is a little bit easier than integrating with some of these smaller carriers as we continue to be able to show them RXO Connect and the power of what RXO Connect can do, whether it's being able to keep them on continuous moves, whether it's being able to give them discounts on fuel and tires and maintenance, continuing to pull them back to the app. Once we get them on, we've got a high retention rate. And one of the things that you saw is that when carriers come on to do business with RXO Connect, they come back 79% of the time. We've just got to continue to increase the adoption rate there.

Your next question comes from the line of Jason Seidl from TD Securities.

I wanted to talk a little bit first about the comment you made about Managed Transport in terms of the synergy revenues that I think are one of the reasons that you guys are outperforming your peers in load growths. Can we dig into that a little bit sort of what's going on there? Has there been a shift in some of the customers? Has there just been a better job done internally about pushing some of that freight from one side to the other?

Yes, there hasn't been a shift. We have continued to acquire new customers in Managed Transportation. Whenever we onboard a new customer, one of the first areas they want us to review in terms of freight management is our own performance, as we are recognized as a dependable partner capable of enhancing their supply chain. We anticipate that synergy loads will keep increasing and believe we are only at the beginning in this area, currently managing nearly $4 billion in freight. There are numerous opportunities for us to promote cross-selling within the company. Overall, 62% of our revenue is generated from clients who engage with more than one of our services. Therefore, we are quite integrated across the company.

I appreciate the insights. I wanted to revisit Jack's question regarding the technology aspect. You mentioned that 96% of loads are created and covered digitally, and it seems we might be nearing a peak there. You also mentioned opportunities on the carrier side. Should we anticipate growth in the digitally created and covered loads from Q1 to Q2? When do you plan to begin breaking out that data for us and investors?

Jason, it's Jared. We mentioned that 96% of our loads are created or covered digitally, which is a significant and growing percentage. On the customer side, we've performed exceptionally well, and I see considerable potential for growth on the carrier side. The value proposition is clear and appealing to our carriers through RXO Drive and RXO Connect. Our goal now is to enhance adoption rates among them, and once we achieve that, our carrier retention rate is strong. This quarter, it improved to 79% compared to the previous quarter. We are actively discussing when we will disclose the percentage of loads created and covered digitally, and I look forward to sharing that information with you at the appropriate time.

Thank you.

Your next question comes from the line of Jeff Kauffman from Vertical Research Partners.

A lot of my questions have been answered. So I'd like to delve into expense line items, if I can. I think one of the surprises for me given the revenue was down, was the direct operating expense line was up about $6 million year-on-year. So I guess question 1 is, can we dig a little bit into what drove that? And is that something that sustains at this level or is there something in 1Q that drove that higher and that cost comes down? And then secondly, I want to follow up on Ken Hoexter's call. I think I understand the restructuring charge of things. But why the $6 million in transition and integration costs at this point? Can you help us understand what those are really covering at this point because you're not really rebranding a lot of things, I would assume, but maybe I'm wrong? Just some clarity because those were the 2 costs that kind of stood out versus what expectations were.

The operating expenses mainly include costs associated with our Managed Trans business and Last Mile business. When considering direct operating expenses, it involves costs like facilities at the Last Mile hub and direct labor for preparing products for transportation. We have observed an increase in some of these costs, but very little of our direct operating expenses are linked to brokers as most cost trends are related to purchases. There is nothing particularly noteworthy aside from the expenses supporting Last Mile operations. Regarding restructuring costs, rebranding has been significant. As we moved from being a division of XPO to an independent public company, we incurred costs to rebrand our facilities, which began before the spin-off and continued into the first quarter, though these should decrease as the year progresses. Additionally, there are costs related to retention and noncompete agreements arising from the spin-off, which are also expected to decrease. We anticipate that the expenses related to these spends will substantially decline by late 2023, with only a few items carrying over.

And that will be for our last question. I would like to turn the call back over to Mr. Wilkerson for any closing remarks.

Thank you, Laura. Despite the weak macro environment, RXO took market share and maintained best-in-class brokerage margins. RXO is a differentiated business model with best-in-class technology and massive capacity along with a deeply experienced leadership team. We're navigating the current economic climate well, and we're going to remain focused on delivering results for our shareholders and for your customers along with the carriers we partner with and our employees. Thank you all for your time today, and I look forward to seeing many of you at our upcoming investor conferences.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a lovely day.