RXO, Inc. Q4 FY2023 Earnings Call

Welcome to RXO Q4 2023 Earnings Conference Call and Webcast. My name is Lara 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 and 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, and thank you for joining today. With me here in Charlotte are Chief Financial Officer Jamie Harris and Chief Strategy Officer Jared Weisfeld. Before I get into our fourth quarter results, I want to recap 2023, a historic year for RXO. When we spun from XPO in November of 2022, we created a new public company that is more fit for purpose with the ability to allocate capital even more effectively. While market conditions were difficult when we spun, we viewed this as an opportunity to demonstrate the power of our model. In 2023, we doubled down on our strengths, exceptional customer service, solutions that help our customers solve their toughest transportation challenges, innovation, and deep customer relationships. We also successfully integrated new leaders into our existing long-tenured team. Our model delivered outperformance for 2023 despite the extended soft freight market conditions. Brokerage volume grew by 12% year-over-year, with a gross margin of more than 15%. Brokerage cross-border loads grew by 37% year-over-year. Brokerage productivity, as measured by loads per head per day, increased by over 15%. In maintenance transportation, we significantly grew the synergy loads provided to our other lines of business, largely truck brokerage. We also onboarded several large new customers. We grew last mile adjusted EBITDA year-over-year. We also generated strong adjusted free cash flow of $49 million, which Jamie will expand on later. We achieved all of this while making investments for our future, including our people, offices, technology, and services. I couldn't be prouder of what the RXO team delivered in 2023, and I'm looking forward to continuing to outperform this year. Now let's discuss our fourth quarter results. RXO continued to perform well in the quarter despite soft freight market conditions that have persisted. For the third consecutive quarter, we achieved double-digit brokerage volume growth. Total brokerage volume grew by 15%. Full truckload brokerage volume grew by 11%, and less than truckload volume grew by 45% year-over-year. We again broke records in our brokerage business this quarter. Quarterly loads per day and total volume hit new highs. Full truckload has always been the core of our brokerage business and it represented 84% of volume in the quarter. Later Jared will talk in more detail about our volume growth by vertical, but all of our major truckload verticals grew year-over-year. Our cross-border loads also grew by an impressive 28% year-over-year. Contract volume was again the most important driver of our growth and represented 80% of our mix in the quarter. Securing contractual volume puts us in prime position to win spot volume and project loads when the market inflects. RXO continues to take profitable market share. Brokerage gross margin was 14.8% in the quarter. In complementary services, Managed Transportation again grew the synergy loads it provided to our other lines of business, mainly truck brokerage. Managed Transportation also secured several key wins including new managed expedite customers solidifying our position as a leading provider of this service. In Last Mile, the focus we placed on improving profitability was successful and we grew adjusted EBITDA both sequentially and year-over-year for the fourth quarter and for full year 2023. We're pleased with the progress we've made in our Last Mile business and we have many opportunities ahead. Complementary Services gross margin was 20.9% in the quarter, up 90 basis points sequentially and up 40 basis points year-over-year. Our proprietary technology continues to drive many of these results. In the fourth quarter, 97% of the loads were created or covered digitally, up from 87% a year ago. Our seven-day carrier retention was 76%, up 200 basis points year-over-year. I'd now like to spend some time giving you an overview of what we're seeing in the market and how that impacted our business in the fourth quarter. The freight market continued to soften during the fourth quarter, primarily due to supply side challenges. The load to truck ratio declined to about 2 to 1 in the fourth quarter, down from nearly 3 to 1 in the third quarter. Industry tender rejections remained steady at just about 4%. The logistics manager’s index dropped sharply in November after three consecutive monthly increases. It rebounded only modestly in December. Carrier exits accelerated, but there's still too much capacity relative to demand. We also experienced a muted peak season. We saw a typical seasonal capacity reduction at the end of Q4, and when combined with inclement weather hitting certain parts of the country, there were limited opportunities to improve our buy rates. This negatively impacted both our brokerage gross margin percentage and gross profit per load throughout the quarter. However, our focus on profitable growth while controlling costs enabled us to increase adjusted EBITDA by approximately 20% sequentially, in line with the expectations that we communicated to you last quarter. I'd like now to discuss our expectations for the first quarter. We expect that our strong brokerage sales pipeline will enable us to deliver year-over-year brokerage volume growth in the first quarter, albeit at a slower pace than in the fourth quarter. Brokerage gross margin compression continued into January and we anticipate that will impact the first quarter. Jamie and Jared will discuss this in more detail later in the call. As we look forward to the rest of the year, we're preparing for multiple scenarios. At this time, our base case is the recovery will begin in the second half of the year. That assumes that the macro economy remains stable and carrier exits continue to accelerate. In market conditions like these, large companies like RXO, who have financial strength, strong relationships with customers and carriers, and cutting-edge technology will excel and widen the gap with the competition? We have our sights set on the future and are investing for long-term growth and profitability. We also continue to react quickly to changing market dynamics, including by reducing our costs. The actions we're taking now will help drive outsized growth when the market turns.

Thank you, Drew, and good morning, everyone. I'll review our fourth quarter performance in addition to some highlights for the full year. In the fourth quarter, we generated $1 billion in revenue compared to $1.1 billion in the fourth quarter of 2022. Gross margin in the quarter was 18%. While gross margin declined 150 basis points year-over-year, we are pleased with this performance given the current freight environment. Our adjusted EBITDA was $31 million in the quarter, in line with our expectations of 20% sequential growth. This compares to $64 million in the fourth quarter of 2022. Our adjusted EBITDA margin was 3.2%, down 250 basis points year-over-year. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Below the line, our interest expense for the quarter was $8 million. Our adjusted effective tax rate of 29% in the quarter was lower than our previous expectations due to discrete tax items. Adjusted diluted earnings per share for the quarter was $0.06, which includes approximately $0.02 of discrete tax benefits. You can find a bridge to adjusted EPS on slide 7 of the earnings presentation. Moving to our lines of business. In the fourth quarter, our brokerage business generated $610 million of revenue, down 8% year-over-year, primarily due to lower freight rates. Brokerage volume for the quarter increased by 15% year-over-year. Brokerage gross margin remained strong in the quarter at 14.8%. While gross margin declined 300 basis points year-over-year against a very tough comp, it only declined by 30 basis points sequentially. Complementary services revenue in the quarter of $411 million was down 16% year-over-year. Revenue was impacted by lower automotive volumes in our managed transportation business and continued weakness in the big and bulky category impacting Last Mile. While Last Mile stops were down 9% year-over-year in the quarter, Last Mile adjusted EBITDA was up year-over-year, primarily as a result of strategic pricing actions we took earlier in the year combined with continued operational improvements. Our customers recognize the value that our Last Mile business provides and we're excited about the opportunities in this part of our business. Complementary services gross margin of 20.9% improved by 40 basis points year-over-year and by 90 basis points sequentially. Fourth quarter seasonality and our Last Mile pricing initiatives were the biggest drivers of our improved gross margin on a sequential and year-over-year basis, respectively. Turning to the full year. In 2023, we generated $3.9 billion in revenue compared to $4.8 billion in 2022. 2023 gross margin of 18.3% was down 130 basis points year-over-year. Our full year adjusted EBITDA was $132 million compared to $306 million in 2022. Our adjusted EBITDA margin for the year was 3.4% down 300 basis points. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Now I'd like to discuss the full year results for our lines of business. Brokerage revenue for the year was $2.4 billion down 19% year-over-year, primarily due to lower freight rates. Brokerage volume for the year increased by 12% year-over-year. Broker’s gross margin remained strong at 15.4%, but declined by 300 basis points year-over-year. Complementary services revenue was $1.7 billion for the full year, down 15%. Gross margin of 20.8% improved by 80 basis points year-over-year. For the full year, Last Miles stops were down 9%, but adjusted EBITDA was up year-over-year, as we mentioned earlier. Please turn to slide eight as we discuss cash flow. Our adjusted pre-cash flow of negative $2 million over the trailing six months was impacted by lower profitability levels at the bottom of the freight cycle. As we mentioned during last quarter's call, Q3 adjusted pre-cash flow was also negatively impacted by the earlier than expected collections in the second quarter. For the full year, RXO generates strong adjusted free cash flow of $49 million, or approximately 37% of adjusted EBITDA. As we discussed last quarter, our 2023 adjusted free cash flow was impacted by out-of-period cash tax payments in the amount of $15 million. When adjusting for those payments, our 2023 adjusted free cash flow conversion was approximately 48%. This speaks to the power of the RXO model and our ability to generate meaningful cash flow during a down cycle. We remain comfortable with an annual adjusted cash conversion rate between 40% and 60% of adjusted EBITDA over the long-term across market cycles. At the bottom of the cycle, adjusted cash conversion will be negatively impacted by fixed charges such as interest expense in addition to the capital expenditures that we intend to make for long-term growth. As Drew mentioned, at this time our base case is that the freight market recovery will begin in the second half of the year. As a reminder, accelerated growth as the cycle turns will result in the use of working capital. We continue to anticipate using approximately 7% to 9% of each incremental revenue dollar. This could impact short-term cash conversion depending on the pace of the recovery. Now let's move to slide eight where we've included a 6-month cash bridge. We ended the quarter with $5 million of cash on the balance sheet, slightly above our expectations due to strong receipts in the quarter. The reduction of our cash balance from the third quarter was principally a function of our $100 million term loan prepayment. Turning to cost, in 2023 we achieved annualized run rate savings of approximately $32 million with associated restructuring charges of $16 million, a very strong return. While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load, this will create significant operating leverage when the cycle turns. Our full year 2023 restructuring and spend related costs were $28 million, better than last quarter's estimate of $30 to $32 million and our initial expectation of approximately $35 million at the beginning of 2023. Additionally, the cash outflows associated with these restructuring and spend related actions were $23 million, also better than the $25 million expectation that we shared with you last quarter and our initial expectation of $30 million at the beginning of 2023. I want to spend some time discussing our cost optimization efforts for 2024. While we continue to strategically invest in the business, we will always leverage our technology and operate with a continuous improvement mindset. That said, given the current market conditions, we are acting expeditiously to take additional costs out of the business. We currently plan to take out at least $25 million of additional annualized operating expenses. From a capital expenditure perspective, our current projection for 2024 is for capital expenditures in the amount of $40 to $50 million. This compares to $64 million in 2023 and is more in line with our long-term, cross-cycle target of 1% of revenues. Also remember, 2023 capital expenditures included approximately $12 million of strategic real estate spend. As I mentioned earlier, we are continuing to invest for growth but are mindful of the current operating environment. As you can see on slide nine, our liquidity position remains healthy with $600 million of committed liquidity at the end of the quarter. Growth and net leverage at quarter end were both approximately 2.5 times trailing 12-month adjusted EBITDA, moving higher from the prior quarter as we cycle through last year's EBITDA. We remain comfortable with our current leverage ratio and given the strong free cash flow characteristics of our business, we will deleverage as the cycle inflects. Our customers want to work with strong partners like RXO that can perform and invest across all market cycles. Regarding the first quarter, as Drew mentioned earlier, our brokerage business is currently being impacted by market conditions and limited spot opportunities pressuring our gross margin. We therefore are anticipating an above seasonal sequential decline in adjusted EBITDA. Specifically, we expect Q1 adjusted EBITDA in the range of $12 to $18 million. You can find our 2024 modeling assumptions on Slide 13 of the deck. We expect the following: capital expenditures between $40 million and $50 million, depreciation expense between $56 million and $58 million, amortization of intangibles of approximately $12 million, stock-based compensation expense between $24 million and $26 million; restructuring, transaction and integration expenses between $20 million and $25 million; net interest expense between $31 million and $33 million, and we expect our full year 2024 adjusted effective tax rate to be approximately 30%. This assumes no change in the current tax law. You should also model an average diluted share count of approximately 120 million shares. This does not include any impact associated with potential share repurchases. Overall, given the current state of the freight cycle, we're pleased with our execution. We're operating well, investing strategically while remaining disciplined on cost and positioning RXO for the cycle inflection.

Thanks, Jamie, and good morning, everyone. We continued to outperform the market in the fourth quarter, growing brokerage volume by 15% year-over-year with continued substantial profitable market share gains enabled by our people and our technology. More specifically, we grew our core truckload volumes by 11% year-over-year and grew LTL volume by 45% year-over-year. Our full truckload customers continue to award us LTL loads because of our strong service and relationships. LTL represented approximately 16% of brokerage volumes in the fourth quarter. In our full truckload business, all of our major verticals grew year-over-year in the fourth quarter. We believe this speaks to our idiosyncratic profitable market share gains as our results continue to outpace the macroeconomic indicators most closely aligned with these verticals. Retail and e-commerce volumes grew by 12% year-over-year. Volume from our industrial and manufacturing customers increased by high single digits year-on-year. This is particularly noteworthy as the ISM manufacturing PMI was in contractionary territory for all of 2023. From a profitability perspective, we again delivered strong brokerage gross margin of 14.8% in the quarter, down just 30 basis points sequentially, enabled by our technology. The quarter started off strong from a gross margin standpoint. But as Drew discussed earlier, the freight market weakened throughout the entire quarter, we had a muted holiday peak season, and we experienced the capacity squeeze at the end of the quarter. I'll discuss this in more detail shortly. In the fourth quarter, 97% of our loads were created or covered digitally versus 87% in the fourth quarter of 2022. Seven-day carrier retention was a strong 76% in the quarter compared to 74% in the fourth quarter of 2022. We launched several new technology features in the quarter, including enhanced generative AI capabilities that are helping our sales enablement teams get closer to our customers. We also increased automation within our LTL business and implemented new auto tracking capabilities for cross-border freight. Our technology continues to enable our people to become even more productive. In 2023, productivity in our brokerage business as measured by loads per head per day improved by over 15% year-over-year. In the fourth quarter, contractual volume represented 80% of our business flat sequentially and up 500 basis points when compared to the fourth quarter of 2022. Contract volume grew 23% year-over-year. Because our LTL business is largely contractual, we thought it would also be helpful to share our contract mix for our truckload business, which was approximately 75% in the quarter. While we have not yet seen meaningful spot opportunities, it's worth noting that line haul spot rates moved higher as the fourth quarter progressed. I'll discuss this in more detail shortly, but if spot rates in industry-wide tender rejections continue to move higher because of our contractual business and our deep customer relationships, RXO will be a prime beneficiary of spot volume. I'd like to expand on our current view of the freight cycle, and I'll refer you to Slides 10 through 12 of the presentation. Let's start with revenue per load. Revenue per load declines eased again in the fourth quarter and declined by 20% year-over-year. The year-over-year decline improved by 600 basis points when compared to the third quarter. As we discussed last quarter, to get a better view of our consolidated year-over-year price declines on a per load basis, it's important to consider the impacts of length of haul, mix, and changes in fuel prices. When normalizing for those items, revenue per load was down at approximately low teen’s percentage on a year-over-year basis, in line with the broader market. This decline also improved versus last quarter's mid-teens year-over-year decline. We generated a strong gross margin percentage across all different parts of the freight cycle by leveraging our proprietary technology and pricing algorithms to procure capacity at better than market rates. Let's move to Slide 11 and discuss brokerage monthly gross margin trends. There are points in the cycle, including the current environment where market conditions limit our ability to bring down transportation costs. While we leverage our proprietary best-in-class technology and our people to generate a strong gross margin, our actions cannot fully offset changing market conditions. In fact, transportation costs have recently moved higher given that, in many cases, carrier operating costs are at or above current spot rates. This is best demonstrated through the continuation of carrier exits in the industry, which have occurred every month since October of 2022. The carrier exit rate accelerated at the end of December, and we anticipate the acceleration to continue throughout 2024. In fact, in the month of January, the average weekly carrier exit rate was approximately 30% above full year 2023 levels. To give you some additional color, RXO active network carriers declined approximately 5% sequentially. While these carriers hauled less than 1% of our volume over the last 90 days, it serves as a good proxy for broader market conditions. Moving to brokerage gross margin trends in the quarter. As we discussed last quarter, we saw some softening during the month of October, but our gross profit per load remained resilient. However, margin decreased as the quarter progressed as weakness in the freight market persisted. The national load-to-truck ratio averaged 2:1 during the quarter and for many weeks, it was below 2:1, levels not seen since earlier in 2023. For context, the load-to-truck ratio has averaged approximately 4:1 for the last 5 years, and spot volumes typically emerge around 6:1 to 7:1. Tender rejection rates were relatively unchanged at about 4% in the quarter, special projects wound down into November and December, and it was a muted peak season. Market conditions also limited our ability to bring down the buy side, and we saw the typical seasonal capacity squeeze at the end of Q4. This margin pressure worsened in January when compared to December and was further amplified by inclement weather in certain regions. The load-to-truck ratio sharply increased above 3:1 at the end of December and sustained the move higher into January. To help put that in perspective, when comparing January to December, our gross profit per load percentage decline in weather-impacted states was 2 to 3 times the amount when compared to volumes in states not impacted by weather, entirely driven by an increase in cost of purchase transportation. The declines in the Midwest and Southeast regions of the country were the most acute. While our book of business is by design largely contractual, we can pivot quickly to changing market conditions. This model has worked well for us for more than a decade, delivering above industry growth and profitability. During the previous freight market recovery, RXO was able to quickly respond to service our customers' needs and our spot mix increased significantly in just one quarter. Let's go to Slide 12 and briefly look at RXO's brokerage gross profit per load on a quarterly basis. Given the strong month of October, RXO's Q4 2023 gross profit per load increased sequentially despite the gross margin squeeze in the quarter. I'd now like to look forward and give you some more color on the first quarter outlook that Jamie provided. Given recent volatile market conditions, I'll be giving a more granular view of our Q1 expectations, which is typically our seasonally weakest quarter. Let's start with volume. Our brokerage sales pipeline remains robust. More specifically, our late-stage pipeline is up 24% year-over-year and up 90% on a 2-year stack. This gives us confidence that we will again grow brokerage volume on a year-over-year basis in the first quarter. While January brokerage volumes still increased on a year-over-year basis, we did see year-over-year volume growth moderate when compared to the fourth quarter. More specifically, we grew January brokerage volumes by approximately 8% year-over-year. We're assuming first quarter year-over-year brokerage volumes will grow, but at a slower pace than the fourth quarter. Brokerage revenue per load trends are encouraging, and we expect the moderation in year-over-year revenue per load declines in the first quarter. The first quarter will be the third consecutive quarter where revenue per load declines have improved on a year-over-year basis. Moving to brokerage gross margin, which I mentioned moved lower throughout the fourth quarter. We expect Q1 brokerage gross margin to be approximately 12% to 14%, solid performance given the difficult market dynamics at this part of the freight cycle. While gross profit per load declines have eased over the last few weeks, we're continuing to monitor market conditions. From a complementary services perspective, we expect typical negative Q1 seasonality, including an absorption of fixed costs on a lower revenue base in Last Mile. Putting it all together, we expect RXO's first quarter adjusted EBITDA to be between $12 million and $18 million in the first quarter. If buy rates cool as weather patterns normalize, and the business seasonally improves into February and March, we are likely to come in at the midpoint or high end of our adjusted EBITDA range. If the recent margin squeeze within brokerage persists, we are likely to come in at the lower end of the range. Based on our current view of the broader macroeconomic data, industry-wide carrier exit rates and what we are hearing from our customers, our current base case is a market recovery in the second half of the year. It's important to differentiate between the macro economy, which remains reasonably healthy in the freight cycle. Consumer confidence is increasing, inflation is moderating and goods demand relative to services has stabilized. However, there is still too much trucking capacity relative to demand negatively impacting the freight market. We believe the rate of carrier exits is the largest variable affecting the timing of the freight recovery. In summary, we're continuing to gain market share profitably with another quarter of strong brokerage volume growth and gross margin. We're optimizing our cost structure while strategically investing in the business and have a playbook to deliver rapid earnings growth when the market inflects. We're operating in a prolonged soft rate market, but we're making the right strategic moves to position us well for the long term.

We have our first question coming from Ken Hoexter from Bank of America. Please go ahead.

Great, good morning. Jamie, I think you said you ended the year with $5 million cash on hand, and that was slightly above target. Just wondering why you're running on such thin cash? And then just thinking about what Jared just talked about and Drew mentioned for the first quarter, $12 million to $18 million of adjusted EBITDA implies maybe another $8 million of operating cash flow and your CapEx seems to be on $10 million to $15 million. So it looks like you might be negative on cash again. Can you maybe walk us through the rollout there and then the thoughts on cash?

Yes, this is Jamie. In the quarter, specifically in November, we utilized $100 million from our cash reserves to pay down our term loan, which was the primary reason for our cash usage. Operationally, we ended the six-month period with a negative $2 million in adjusted free cash flow. In the second quarter, an early receipt of approximately $15 million significantly boosted our conversion rate for the first half of the year, which affected the figures for the third quarter and the overall six-month period, resulting in a lower performance. Considering this, our conversion rate stands at about 22%. We maintained a cash balance of $5 million and had a $5 million draw from our revolver, which was slightly better than our expectations from 90 days ago, and we were satisfied with our results for the quarter. Since the spin, our lifetime conversion rate of EBITDA to adjusted free cash flow exceeds 50%, and year-to-date, it sits at approximately 48%. Both figures align well with our long-term target conversion rate of 40% to 60%. Looking ahead to the first quarter, we project a range of $12 million to $18 million, which suggests a cash usage of about $2 million to $3 million on an adjusted free cash flow basis, considering other cash factors such as restructuring costs. Thus, we expect a cash usage of around $10 million to $15 million in the first quarter. Regarding CapEx, we are projecting expenditures of approximately $40 million to $50 million, aligning with our long-term goal of slightly over 1% of our revenues. Overall, we feel positively about our cash flow for the quarter, and based on our projections, we anticipate cash to remain within that expected range.

I have a follow-up about your gross margin, Drew. I'm noticing the significant drop in margins and wondering if there are specific factors contributing to this decline in the first quarter compared to where you ended. You've mentioned various influences, such as weather and other issues in the fourth quarter, but it seems this decrease may extend beyond economic and seasonal pressures. Are you experiencing increased competition that might be contributing to this? Could you discuss that outlook a bit more? Thanks.

Yes. No, absolutely. Thank you, Ken. This is Drew. So if you look at what we saw in the first quarter, typically, the first two weeks of January, you see pressure on your gross profit per load and your gross profit percentage. We saw that, but it actually was worse than what we anticipated due to the weather. Jared hit on in his prepared commentary, that the Midwest and the Southeast specifically those gross profit percentages were down 2 to 3 times more than what the rest of the country was. So this was largely driven by weather. There is also the cost of purchase trends. We had hit the bottom of where the carriers were operating at, so there was no room to pull down carrier costs, and we're operating in what is largely a contractual volume. There's not a lot of spot loads out there in the market today to where spot gross profit per load can help offset that. But again, if you look at where we finished for the quarter, I think our gross margin percentage stacks up well for where we finished in the industry. And I think that we'll continue to see best-in-class gross margins because of the investments that we've made in our technology.

Great. Appreciate the thoughts. Thank you.

Yes, I was curious about your expectations for a recovery in the second half of the year. Can you share your insights on the cycle recovery? What needs to occur for this to happen? Does this involve a rebound in net revenue or an increase in gross margins? Any additional details on this and your confidence level for the second half would be appreciated. Thank you.

Yes. So Jordan, two big things have to happen for the back half recovery. The first is the overall macro. If you look at what's happened in the macro, GDP sitting around 3.3%. Inflation continues to ease. The job market reports have been good. So we need the market to continue to be in a stable environment. The second thing and the biggest thing that we're watching right now is capacity exits. And as Jared said, we've seen capacities exit the market every month since October of 2022. And in the month of January, we saw them run at 30% higher than what all of 2023 came out at. So we need to continue to see capacity exits across. There's still a good bit more capacity in the market than what there was even at pre-COVID. So those two big things have to happen for the back half of the recovery. That is our base case. That's what we're anticipating happening. And when you look at that, what the base case implies is that you start to see revenue, gross profit per load, EBITDA turning positive during that time frame.

Maybe following up on Ken's question to start. Could you talk a little bit about even seasonality in the first quarter? Maybe what you see from January to March, I know March can be a pretty big inflection? So maybe just talk about kind of thoughts on normal seasonality and what the quarter and how that relates to your guidance?

Yes. Typically, Q1 tends to improve as the quarter progresses, and that is reflected in our guidance of $12 million to $18 million in EBITDA for Q1. In January, we faced challenges with gross profit per load. However, as we moved into February, we've observed a positive trend in gross profit per load compared to January. While it hasn't fully returned to the levels we saw in October and November, we are on a path to recovery, which supports our guidance range. Thank you.

Hey good morning guys. And thanks for taking my question. And I hope this doesn't come off the wrong way, but you referenced numerous times in the presentation this quarter and I think in past quarters, too, about continued profitable growth in the brokerage business. But obviously, like the bottom line is adjusted EBITDA keep coming in lower. I mean, I think we're back to maybe the lowest ever approach where we were in early 2020. So help put in context that comment about growing profitable loads relative to consolidated results. I appreciate that.

Yes, Bran. The main focus for us is how we are performing compared to the industry and the current environment. Right now, we are achieving exceptional volume growth while maintaining excellent margins. During the lower part of the cycle, we do experience some pressure on our gross profit per load, which is a crucial indicator for our long-term direction. The challenges we face now will eventually lead to improvements in gross profit per load as conditions improve. Therefore, we are confident in our strategic investments that enable us to maintain the best gross margin percentage alongside robust volume growth.

Yes, we anticipate achieving at least $25 million in savings in 2024. Last year, we managed to achieve around $32 million in annualized operating expense savings, although not all of that was reflected in the profit and loss statement immediately as some occurred in the latter part of the year. Thus, you can expect to see some benefit from that this year. We are committed to optimizing our cost structure and have thoroughly examined all our processes and vendor relationships to ensure we operate as effectively and efficiently as possible. Our goal is to set ourselves up for optimal cost efficiency, so when the market rebounds, we can leverage that for significant operating benefits and improved profits as gross profit per load increases.

Hi, good morning. On the cost side, I'm trying to clarify whether the reduction we're seeing is more structural rather than variable, or if it is a combination of both. I'm looking to understand how these costs will play out in 2024.

Yes. It's primarily structural. There will be some variable, but it's predominantly structural, Allison. I mean, obviously, as the market grows and we continue to grow, we'll have to invest in the right places around the structure, but that $25 million is predominantly structural.

Yes. The gross profit per load has decreased compared to a year ago, which is reflected in the $12 million to $18 million figure that illustrates the impact of gross profit per load on the business. As the market begins to recover, you'll notice the positive effects of this change. Each dollar increase in gross profit per load significantly influences the profit and loss statement.

Thanks very much. Good morning. I guess if we could start out managed transportation, it sounds like a lot of the softness there was in automotive. So I'm curious if you could just talk managed transportation and brokerage about the end markets, what you're seeing across the end markets. If you could elaborate on the automotive weakness. And then you mentioned some wins in managed transportation synergistic with brokerage that will impact 2024 or onboard in 2024, if you could touch on that too, please?

Yes. So obviously, we're impacted by the strikes with the UAW. And I would say that things came back online slower than what we would have anticipated. The major OEMs did a fantastic job of preplanning how they were routing shipments to make sure that they had enough inventory at sites as they were starting back. So there wasn't as many of the expedite just-in-time shipments as what we would expect going in. As far as the wins that we're having in managed transportation, we've had a number of wins in the three specifically in the managed transportation expedite business. That's been a leading position for us for a long time. Customers know that we understand the importance of time-critical freight and what it does to their supply chains. We've been a trusted partner in that for more than two decades. So we think that we'll continue to take share there. The overall managed transportation business, that pipeline is strong. We've got a number of large deals that are in the works right now that can potentially move the ball forward in a big way.

It relates to the ongoing theme of cost questions. You mentioned investments in cross-border capabilities, generative AI in sales, and increased protection. I’d like to know how you are prioritizing these investments given that this is not an ideal time for spending, yet you continuously advance the business through IT and other initiatives. What is your perspective on making investments during this period? Thank you.

Yes, I’ll address the second part of your question, Scott, regarding our perspective. First, we evaluate return on invested capital when making decisions. Additionally, we assess how our actions will affect volume, overall margins, and employee productivity. We want to enable our team to handle more loads daily. This is a metric we've consistently prioritized. Our focus is on the long-term outlook for the business. While we are currently optimizing costs, our strategy is aligned with our future direction. You mentioned specific investments at the border in Laredo, which have been significant for us. Our position at Laredo, right at the World Trade Bridge, is advantageous since it handles a substantial amount of freight and is the largest crossing for cross-border shipments. Recently, we introduced a GenAI tool that enhances our customers’ ability to manage loads more effectively in cross-border shipping and provides our carriers with complete visibility of their trailers at our facilities.

Good morning everyone. I think you said in the press release that you're seeing a strong pipeline of new business. Can you give us a little more detail there, kind of which end markets, what kind of customers? And also, where is this pipeline coming from? Are these customers who are ramping up and kind of getting revved up to start restocking soon? Or kind of what's the message you're hearing from them?

Hey Ravi, good morning. It's Jared. To your point, the pipeline remains strong, with the late-stage pipeline in brokerage up over 20% year-over-year and nearly 90% on a two-year stack. This reflects the broad share gains we are experiencing with strong margins as a company. We are seeing growth across all major verticals on a year-over-year basis, including retail, e-commerce, and industrial, despite the broader industrial economy recession. This indicates that following the RXO spin, we have become more focused on our customers and are allocating capital more effectively, taking this opportunity to ensure we are providing the services they desire. The strength is quite broad-based, and it's evident in the pipeline.

Got it. And maybe as a follow-up, kind of going back to your previous response on investments. So are you saying your CapEx plans are reasonably locked? Or is there much flexibility there? I'm just wondering if the downturn lasts longer or deeper than you guys think, especially in the first half of this year. Or can you push back some of that CapEx to the back half of the year to preserve equity?

Yes, Ravi, this is Jamie. That CapEx for the majority of the spend is always flexible. We've got a plan. We're working to plan. But for the most part, it's very flexible. So we could defer if needed.

Hey thanks good morning. So it sounds like 1Q is more about weather than the real inflection in the market, and you're assuming that's more of a second half recovery. Sort of in that backdrop as your base case assumption, what's a typical ballpark of how to think about 1Q as a percentage of a year? I'm just trying to sort of understand do we think EBITDA grows this year or not? Any color?

Hey Scott, it's Jared good morning. So when you look at the ongoing market dynamics, to your point, weather has had an acute impact in the month of January, and that's impacting Q1 as we said in the prepared remarks, you look at some of the regions in the country is severely impacted by weather. Gross margin per load was impacted by 2 to 3x that of other regions. So I think that was acute when you talk about how the quarter progressed, we're expecting to progress, as Drew just mentioned in one of the other responses, we have seen some relief in the last week or so in terms of gross profit per load. It's still early. We want to see whether or not buy rates cool. When you look at the full year, our base case right now is for a second half recovery. And assuming that the second half recovery does play out that would lead to second half growth year-on-year. In terms of Q1 as a percentage of the full year, just given the dynamics that we're seeing right now, I think that's probably not a great way to look at things just given how acute the squeeze has been as impacted by weather.

So the hope would be an inflection in EBITDA in the second half of the year?

I would say that our base case recovery is for the second half of the year, and the biggest factor affecting that will be the rate of capacity exits. We have seen capacity leave the industry every month since October 2022, with an acceleration in December and again in January, reaching 30% above 2023 levels. It ultimately comes down to the economics of where spot line haul rates are compared to carrier costs. We expect this trend to continue to accelerate throughout 2024.

Thank you operator. And good morning everyone. Maybe just to follow up on a couple of things. Specifically, Scott's questions there on the customer adds and the contract mix. To what extent is that going to be a headwind to gross margins if we do see a recovery in buy rates increase in the back half? Is the expectation that gross margins are going to continue to be under pressure in 2025? Or does your base case kind of anticipate that you can pivot into the spot market fast enough to offset that?

Bruce, I think that we've shown in the past that we can absolutely pivot to be able to do that. You've seen our mix shift as close to 1,000 basis points on a quarter-over-quarter basis. Again, it goes back to what I told Scott. When the market turns, when people are rejecting loads, when there's projects, customers are going to come to the people that they know best. They're going to go to who they've had long-term relationships with, who's got technology that's integrated within their business. Somebody who has delivered results for their supply chain and their transportation needs. And if you look at our largest customers, they've been with us for 16 years on average. So we're highly confident that as the market inflects, you will see a big movement in gross profit per load and overall profitability.

Thank you for taking my question, I really appreciate it. Drew, going back to your earlier comment about when the cycle changes, customers will gravitate towards capacity providers they know well. In the brokerage market, which is often seen as highly commoditized, why wouldn't shippers seek the best prices alongside good service during such a market shift? I'm concerned that these market share gains may not last once the cycle turns.

Jack, I think that one thing that you could go back and look at is the history and they have stuck with us. The growing volume isn't something that has been unusual to us or onetime on a yearly basis. I think that what you would look for is the best price. Customers look for best price, best solution, best service. Service is really important to our customers. And the fact that we can flex our capacity up and down with them, the fact that we're delivering when we say we're going to deliver, we've got great communication. We've got technology that helps deliver results into their business. We can help customers decide when they're going to ship something, what mode of transportation they're going to use. We've helped them optimize their freight. So in that sense, you do see them lean on us more to create solutions in a tighter market than what you see in a looser market.

Okay. Got it. And then I guess my last question, going back to sort of, Jamie, your comments around working capital needs, once the cycle does inflect. I guess you're kind of run rating now somewhere at or above 3 times debt to EBITDA leverage. As you sort of think about the working capital needs, once the cycle does turn, I guess, how much leverage are you comfortable adding to the balance sheet perhaps temporarily to fund business growth there before you're able to start collecting cash and pay that down?

At the end of the year, we were around 2.5. If you project into the first quarter, we expect to be in the range of 2.9 to 3. We consider a growth factor of about 7% to 9% on our top line. We've also seen a quick turnaround in our Days Sales Outstanding, meaning we start collecting money very rapidly. As we collect, we can repeat that business through the next cycles, which allows us to become cash flow positive swiftly. We are confident that our balance sheet has the strength to support our growth plans, and when the cycle shifts, we will be well positioned to take advantage of that.

Thank you, Lara. RXO continued to deliver significant brokerage volume growth and strong margins in the fourth quarter despite the freight market that has been soft for a significant amount of time. We're taking the right actions today to deliver long-term results, including deepening our customer relationships, having a disciplined approach to cost, and making the right investments for future growth. I'm proud of all that RXO delivered in 2023, and I'm looking forward to continuing to deliver for shareholders, customers, employees, and the carriers that we partner with again in 2024. Thank you all for your time today, and I look forward to seeing a lot of you over the next few weeks.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.