RXO, Inc. Q1 FY2024 Earnings Call

Welcome to the 1Q 2024 RXO Earnings Conference Call. My name is Julie, 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 filing as well as in its earnings release. You should refer to the copy of the company's earnings release in the Investors 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 for 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. I'm here in Charlotte with RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. In the first quarter, the prolonged soft freight environment continued. RXO delivered adjusted EBITDA at the midpoint of the range we gave you in February. In our brokerage business, we posted double-digit volume growth for the fourth consecutive quarter. Total brokerage volume grew by 11%, with 8% growth in full-truckload and 29% growth in less-than-truckload. Full-truckload represented 83% of our volume in the quarter. Our LTL business is growing rapidly, and our increased scale and automation capabilities are enabling it to deliver profitable growth. Jared will discuss our results by vertical later, but most of our full-truckload verticals grew year-over-year. In addition, cross-border volume increased by 37% year-over-year. We continue to strategically manage our mix of contract and spot volume. Contract business represented 79% of our mix in the quarter and positions us well to earn spot volume and project loads when the market improves. Within brokerage, our gross margin was 14.2% in the quarter. In Complementary Services, on a year-over-year basis, Managed Transportation again grew the number of synergy loads it provided to Truck Brokerage. In addition, in the first half of this year, Managed Transportation was awarded or is onboarding more than $350 million in freight under management. In last mile, we continued to focus on our service and our customer relationships, which generated revenue opportunities with new and existing customers. We also focused on optimizing our network of last mile hubs and decreasing our cost of purchased transportation. RXO's company-wide gross margin was 17.4% in the quarter. At RXO, we built our business on four main growth drivers: service, solutions, innovation, and relationships. When it comes to service, we understand that every shipment matters to our customers, and we work to deliver a great customer experience that delivers value at every touch point. We offer a wide variety of solutions to meet every freight transportation need. We are proactive in solving our customers' toughest challenges. We innovate and design technology that leverages data to help customers and internal stakeholders make better decisions and improve productivity. And we build multi-layer, long-term relationships with customers that are built on trust. Our focus on these areas has enabled us to grow quickly. Because of the trust customers have in us and the value we create for them, our company-wide sales pipeline is the largest it's been in four years. We recently made an organizational change that will position us to win even more customer business. We moved our Freight Forwarding business under Managed Transportation to help create more comprehensive solutions for our customers. In many cases, customers were purchasing services from both groups. Our forwarding business has built many domestic services that complement our Managed Transportation business. This combination will reduce costs and accelerate the many natural synergies between the two teams. Jamie will discuss what this means for our financial reporting, but from a strategic standpoint, this combination will enable RXO to more quickly innovate and grow. Next, I want to talk about the overall market conditions and how they affected our business in the first quarter. The freight market remained soft. All major freight market KPIs weakened as the quarter progressed. The quarter was mixed in terms of carrier exits. While carriers left the market every month, the rate of exits was slower than anticipated, and in some weeks, the total number of registered carrier authorities actually increased. On the demand side, while the macroeconomy remained reasonably healthy, the data was more mixed than prior quarters. Employment, wage growth, and retail inventory positions were all encouraging, yet GDP grew at a slower rate than the market's expectations, and inflation remained sticky. January was a difficult month for everyone in the industry, including RXO. As we mentioned during last quarter's earnings report, severe weather caused a temporary market squeeze. But as the weather improved into February, we moved quickly to bring down our cost of purchased transportation. Gross profit per load and gross margin improved every month as the quarter progressed. While we did see some weakening in full-truckload volume, it was more than offset by the improvements in gross profit per load. Given current market conditions, we've taken swift actions on costs. Jamie will talk more about this in a few minutes, but this year's actions will now result in at least $35 million of annualized savings. That's $10 million more than the estimate we provided to you last quarter. We'll see the full benefit of these actions in the second half of the year. I'm proud to work with the team that embraces a continuous improvement mindset and reacts quickly to market conditions. Let's now discuss our expectations for the second quarter. Typically, by this point in the year, we would see a positive seasonal increase in full-truckload volume within our brokerage business. That has not materialized given the sustained market weakness. In addition, and as we've discussed previously, we believe carrier rates are at or near the bottom, and we're preparing for a market recovery. We're making strategic decisions on price based on where we think the market is heading. We're doing this to ensure we earn a fair margin in an environment where carrier rates rise. Because we provide great service to our customers and have a history of honoring our contractual agreements, we're also in prime position to capture spot volume and project freight when the market recovers. Nonetheless, we do anticipate that we will grow our consolidated brokerage volumes again year-over-year in the second quarter. Our ability to grow total brokerage volumes is a testament to the diversity of our portfolio. Our LTL business continues to gain traction and will grow strongly year-over-year in the second quarter. We expect brokerage gross margin to hold relatively steady to what we saw in the first quarter. With our improvement in the brokerage gross profit per load and our momentum within complementary services, we anticipate that adjusted EBITDA will increase significantly on a sequential basis in the second quarter. RXO's focus on providing the best service, the most comprehensive set of solutions, continuous innovation, and close customer relationships is enabling us to take market share and grow our sales pipeline. When you combine that with our disciplined focus on costs and the expertise of our team, RXO is primed to deliver significant earnings growth when the market inflects. Now, I'll turn it over to Jamie to discuss our financial results in more detail.

Thank you, Drew, and good morning, everyone. Let's review our first quarter performance in more detail. We generated $913 million in revenue compared to $1 billion in the first quarter of 2023. Gross margin was 17.4%. While gross margin declined 130 basis points year-over-year, we're pleased with our performance given the current freight environment. Our adjusted EBITDA was $15 million, at the midpoint of the guidance range we provided you in February. This compares to $37 million in the first quarter of 2023. Our adjusted EBITDA margin was 1.6%, down 210 basis points year-over-year. The declines in these metrics were primarily due to lower freight rates and lower brokerage gross margin. Below the line, our interest expense was $8 million. For the quarter, our adjusted diluted loss per share was $0.03, which includes approximately $0.01 of discrete tax benefits. You can find a bridge to adjusted EPS on Slide 8 of the earnings presentation. Now I'd like to give an overview of our performance within our lines of business. Brokerage generated $564 million of revenue, down 6% year-over-year, primarily due to lower freight rates. However, as Drew mentioned, brokerage volume for the quarter increased by 11% year-over-year, the fourth consecutive quarter of double-digit volume growth. Brokerage gross margin remained at a strong 14.2%, above the high end of our expectations, primarily due to lower cost of purchased transportation. While gross margin declined 210 basis points year-over-year, it only declined by 60 basis points sequentially. Complementary Services revenue in the quarter of $384 million was down 12% year-over-year. The revenue decline was primarily due to a decrease in automotive expedite volumes in our Managed Transportation business. Complementary Services gross margin of 20.6% declined by 20 basis points year-over-year. Please turn to Slide 9 as we discuss cash flow. Our adjusted free cash flow in the first quarter was $1 million, exceeding the expectations that we shared with you in February. Over the trailing 6 months, we generated $7 million of adjusted free cash flow, representing conversion of about 15%. Lower profitability levels at the bottom of the freight cycle continue to negatively impact cash conversion. We remain comfortable with the conversion range of 40% to 60% over the long term through market cycles. We ended the quarter with $7 million of cash on the balance sheet, slightly above expectations due to strong receipts in the quarter. The primary use of cash over the last 6 months was to prepay our $100 million term loan in November of 2023. Looking ahead and as we've discussed previously, we pay interest due on our senior notes in the second and fourth quarters. That will be about a $14 million use of cash in each of those quarters. Additionally, in the second quarter, we anticipate approximately $10 million of outflows for previously discussed legacy claims. As you can see on Slide 10, our liquidity position remained strong with over $600 million of committed liquidity at the end of the quarter. Quarter-end gross leverage was 3x trailing 12 months adjusted EBITDA and net leverage was 2.9x and approximately half a turn sequential increase due to our cycling of last year's EBITDA. During the quarter, we also proactively enhanced our liquidity position. We amended our revolving credit agreement to relax our covenants for 12 months beginning in the second quarter of 2024. We remain comfortable with our current leverage ratio and given the strong free cash flow characteristics of our business, we will deleverage rapidly as the cycle improves. Our customers want to work with partners like RXO that have a strong financial position and can perform and invest across all market cycles. We are pleased with our cash flow and our balance sheet given this extended soft freight cycle. Let's talk about cost. We're operating with a continuous improvement mindset and our actions are yielding tangible results. Last quarter, we communicated that we would strategically invest in the business while eliminating at least $25 million of annualized expenses in 2024. In the first quarter, we moved quickly to take actions to further optimize our cost structure. We now expect to take out at least $35 million of annualized operating expenses this year. That's in addition to the cost savings associated with last year's actions. We realized a small benefit from our 2024 actions in the first quarter, but we'll see a more meaningful benefit in the second quarter and beyond. The second half of 2024 will fully benefit from the annualized impact of our actions and will help offset year-over-year declines in gross profit per load and inflationary pressures. It's important to note that the 2024 restructuring charges we previously communicated to you remain unchanged despite the higher cost takeout. We're getting more efficient and productive with every action, and the steps we're taking now will deliver significant operating leverage when the cycle turns. Now let's discuss our expectations for the second quarter and full year. With the improved momentum Drew mentioned earlier, we anticipate a meaningful sequential increase in our adjusted EBITDA and expect to deliver between $24 million and $30 million of adjusted EBITDA in Q2. Jared will provide more details on our outlook shortly. Slide 14 includes our modeling assumptions for the full year. We continue to expect the following: capital expenditures between $40 million and $50 million; depreciation expense, between $56 million and $58 million; amortization of intangibles, 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. We expect our full year 2024 adjusted effective tax rate to be approximately 30%. You should also model an average diluted share count of approximately 120 million shares. One other thing that you'll see beginning next quarter, as Drew mentioned earlier, we've combined our Managed Transportation and Freight Forwarding businesses to improve our customers' experience and help drive growth. Starting in the second quarter, you'll see these businesses combined in our earnings presentation and financial statements. Overall, given the current state of the freight cycle, we're pleased with our execution. Our businesses are operating well. We're taking proactive and sustainable actions to reduce cost, and we continue to invest strategically. All of this positions RXO well for the cycle inflection. Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk in more detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. We continued to outperform the market in the first quarter, growing brokerage volume by 11% year-over-year. This is our fourth consecutive quarter of double-digit volume growth in the prolonged soft freight market. More specifically, we grew our full-truckload volumes by 8% year-over-year. On a 3-year stack, our full-truckload contract volumes grew by approximately 40%. LTL volume in the quarter grew by 29% year-over-year. Our full-truckload customers award us LTL freight because of our strong service and relationships. LTL represented approximately 17% of brokerage volumes in the first quarter. We also maintained a favorable mix of contract and spot business in the quarter, with contractual volume representing 79% of our business, down 100 basis points sequentially and up 200 basis points when compared to the first quarter of 2023. Contract volume grew 18% year-over-year. Within our full-truckload business, we saw year-over-year volume growth in most of our major verticals. Retail and e-commerce volumes grew by 10% year-over-year. Volume from industrial and manufacturing customers increased by 13% year-over-year, accelerating from 8% last quarter. The acceleration in our industrial volumes was consistent with the ISM manufacturing PMI entering expansionary territory in the quarter, the first time it's expanded in approximately 1.5 years. Automotive grew at 21% year-over-year, although at a slower pace than the last few quarters. From a profitability perspective, brokerage gross margin of 14.2% was ahead of the 12% to 14% range we provided you in February and was a result of our quick actions to bring down our cost of purchased transportation. Brokerage gross margin percentage and brokerage gross profit per load improved every month throughout the quarter. In the first quarter, we launched several new technology enhancements across multiple modes of transportation. We increased dedicated lane capabilities to enhance the carrier experience and 7-day carrier retention remained strong at 76% in the quarter. We also added increased LTL automation capabilities across the order life cycle. We remain excited about the growth and profitability of our LTL business. Our technology enables our people to become even more productive. On a rolling 12-month basis, productivity in our brokerage business, as measured by loads per head per day, improved by over 18% year-over-year. I'd now like to review our brokerage financial performance and market conditions in more detail. Revenue per load declines eased for the third consecutive quarter and declined by 15% year-over-year. The year-over-year decline improved by 500 basis points when compared to the fourth 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 on a percentage basis was down high single digits year-over-year, in line with the broader market. This decline moderated when compared to last quarter's low double-digit year-over-year decline. We generated 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. We expect year-over-year revenue per load declines to improve again in the second quarter, marking the fourth consecutive quarter of moderating declines. Importantly, the change in full-truckload year-over-year revenue per load should meaningfully improve into the second quarter. To give additional context, in the month of April, full-truckload revenue per load was down just mid-single digits on a year-over-year basis and up slightly when compared to the month of March. As we look towards the end of the second quarter, we believe full-truckload revenue per load will be approximately flat year-over-year. This would mark the first time in about two years that revenue per load has held on a year-over-year basis. Let's move to Slide 12 and discuss brokerage monthly gross margin trends. The market loosened after January's acute inclement weather. Load to truck ratio, tender rejections and line haul spot rates all moved lower throughout the quarter. We moved quickly and leveraged our proprietary technology to reduce our cost of purchased transportation in February and March. Let's go to Slide 13 and briefly look at RXO's brokerage gross profit per load, which decreased sequentially in the first quarter because of January's weather-related challenges. However, as we've just walked through, our gross profit per load improved every month as the quarter progressed. I'd now like to look forward and give you some more color on the second quarter outlook that Jamie provided. Let's start with volume. We expect to grow year-over-year brokerage volumes again in the second quarter, although at a slower rate relative to the first quarter's growth rate. We expect full-truckload volume to be down low-to-mid single-digits year-over-year, primarily because of the prolonged weak freight market and more difficult comps given our robust brokerage volume growth in 2023. To put that in perspective, a low-to-mid single-digits year-over-year volume decline in the second quarter would still result in full-truckload contract volume growth of approximately 40% on a 3-year stack, which speaks to our significant multi-year market share gains. As Drew mentioned earlier, we approached this bid season, anticipating a freight market recovery. We're focused on reliably servicing our customers' needs and honoring our contractual rates. These actions will put us in prime position to capture spot volume and project freight when the market recovers. Turning to LTL, we have significant momentum and expect year-over-year volume growth to be more than 30%. We expect brokerage gross margin to be between 13% and 15% in the second quarter, approximately flat at the midpoint when compared to the first quarter. While RXO's brokerage gross margin in March and April came in at the high end of that range, we are assuming some seasonal moderation in May and June as a result of DOT Roadcheck and produce season. We're also not assuming any material spot opportunities in our second quarter outlook. We expect a sequential improvement in brokerage gross profit per load in the second quarter. In Complementary Services, we expect typical positive Q2 seasonality, primarily in our last-mile business. Putting it all together, we expect RXO's second quarter adjusted EBITDA to be between $24 million and $30 million. From an industry perspective, there is still too much truckload capacity relative to current demand. Carriers are exiting the market slowly, but we still expect the pace of exits to accelerate throughout the year given the challenges to carriers' unit economics. Encouragingly, we saw an acceleration in carrier exits in April when compared to March. In summary, we're continuing to execute well in the soft freight market. We're entering the second quarter with improved momentum and the largest sales pipeline over the last four years. We're optimizing our cost structure while strategically investing in our business and have a playbook to deliver strong earnings growth when the market inflects. With that, I'll turn it over to the operator for Q&A.

Your first question comes from Stephanie Moore.

Maybe it would be helpful, Drew, could you provide maybe a little bit more color on the volume performance for the first quarter and then really your truckload volume growth expectations for 2Q, how this stacks up on kind of a multi-year growth standpoint, and then your ability to take share across the cycle, and what is the potential for maybe upside to that guide? Thanks.

Yes, absolutely. When you look at where we are right now on truckload growth, very proud of what the team did, again, by growing 8% on a year-over-year basis in the first quarter. As you look out to the second quarter, there are two things that you should look at. One, the overall market is down again on a year-over-year basis. The second thing is that our comps get a little bit more difficult. But the way that we look at the business is what are we doing on a multi-year stack? And when you look on a 3-year stack in the first quarter, our contractual business was up around 40%, and it's going to be up around the same thing in the second quarter on a 3-year stack. So on a multi-year stack, what we've shown is that this market share that we're taking is sticky market share.

Got it. No, that's helpful. And then maybe just a follow-up. Can you provide just color, I guess, on the gross margin and gross profit per load trends that you've seen in April?

Yes. So, January was tough. It got better in February. It got better again in March, and it was a little bit better in April.

Your next question comes from Tom Wadewitz from UBS.

I have two questions. Regarding the EBITDA guidance, is the sequential improvement mainly due to operating expense reductions? Is that the main factor behind the sequential increase? It seems like you're experiencing worse than usual seasonality concerning loads in the market. Is that the correct perspective, or are there other significant factors contributing to the increase in EBITDA?

Yes, this is Jamie. Several factors are driving our performance. First, we start Q2 with strong momentum. The main contributor to our sequential growth is the increase in gross profit per load in our brokerage business. We acted swiftly in January, despite facing challenging weather conditions early in the month, to adapt to cost changes. We have managed to maintain this improvement through the end of Q1 and into April. Additionally, we are benefiting from a strong performance in April, May, and June compared to January. There are also enhancements in some of our complementary services, particularly in last mile, where we are experiencing significant seasonal growth during these months. Furthermore, we are realizing operational improvements from various initiatives, and as you pointed out, we expect to see quarter-over-quarter improvements due to our cost reductions. All these elements combined are driving the sequential increase.

Right. Okay. And then the second one, I think, Drew, you mentioned you're positioning for the improvement in the market. It does seem like that improvement in the market is getting pushed out of ways in general. But how do you think about the contract mix management, the 79% you mentioned that's contracts in the brokerage side? Seems like it's at the high end of the range, and that would maybe point to some risk when your cost of capacity goes up, that you get squeezed there. But are you doing shorter commitments on the rate? Do you think you have flexibility there? Or how do you think about the kind of preparation for that eventual move up in the market?

Tom, we think that our contract mix is actually an opportunity because one has built strong relationships with our customer. It shows that they trust us with their most important pieces of business. And as the market shifts, the first place that they go is the people that they trust and have delivered value and strong service to them. So spot loads, project, mini bids, we think we're in prime position, and those will typically be at a higher gross profit per load. So, yes, we would get squeezed on the contractual business, but the spot business would be at a higher gross profit per load. So it positions us well for when the market does inflect. You're right that I think most folks have pushed out on when the market recovery is coming, but we do think that it's going to happen sometime over the next 6, 9, or 12 months, which is why we've taken the step to price the business the way that we have. Our customers have told us two things that are really important: One, service the business; and two, whenever you get the business, tender acceptance is extremely important. So, we price the business accordingly for where we think the market is going. And with that said, we've seen some business that customers have gone with lower rates that they've actually already come back to us because the service and tender acceptance is so important.

Right. Okay. Great, thanks for the time.

Your next question comes from Scott Schneeberger from Oppenheimer.

I want to focus a little bit on LTL. You're still anticipating really strong volume growth in the second quarter, and that, in fact, is probably what's going to keep your overall volume growth in brokerage positive. Just your level of confidence that you can keep overall volume in brokerage positive? And then on the LTL, are we going to see some tough comps heading into the back half where that strong growth will moderate significantly?

Yes. So, if you look right now on a year-over-year basis in the second quarter, we did say that we expected to grow overall volume once again. But with that said, we expect truckload to be down a little bit, and we expect significant growth again in our LTL business. The reason that we're getting this LTL business is it's coming from customers who do business with us on the truckload side. And so what these customers have told us is LTL is a small piece of their overall revenue and what they're managing, but it's a big piece of the headaches that they get, meaning claims, late deliveries, things like that. And so for us to be able to put it on our platform, RXO Connect and manage all of their LTLs is a huge advantage to them. They've seen the value that we've created in their transportation network on the truckload side and now getting a shot at the LTL is something that we think is a tailwind for us for the foreseeable future. The comps do get tougher in the second half, but I do expect us to still be growing LTL volume in the second half.

Great. And then could you guys elaborate on this in this largest in four years sales pipeline? Sounds like a lot is in Managed Transportation, but could you just kind of go across the segments, touch on what that is? How you're getting that, and directionally, what you expect going forward?

Yes. It's really across the board, and it speaks to the diversity of our portfolio. I mean, one, we've talked a lot about LTL already this morning. So, looking at the LTL pipeline that's coming over from the truckload side is strong. We talked about Managed Transportation winning or onboarding $350 million of freight under management. Our last mile, because we're the largest player in the market, customers are coming to us and saying, 'Hey, we want to give you new markets.' They know that we've got great service and they know that we've got scale and capacity to service their business. So we're seeing huge opportunities there. So very pleased with where the overall pipeline is and excited to see the conversion of it in the second half of the year.

Your next question comes from Brandon Oglenski from Barclays.

Drew, I was wondering if you could talk to the truckload volumes being down in the second quarter. I guess that's a little bit of a deviation from the past.

Yes. So, Brandon, again, two things to start off with. One, if you look at the overall industry and truckload volume, volumes are again down on a year-over-year basis. So that's a multi-year trend that volumes have been down. So there's less volume out there in just the market. The second thing is, we've created tough comps for ourselves because we have been going out there and taking share through this market. But as I told Stephanie earlier, the important thing for us is how do we look at the business, and we look at it on a multi-year stack basis. And if you look at volumes in the first quarter, our contractual business was up on a 3-year stack, 40%. That's going to be in that same range in the second quarter. So, again, like the biggest thing that we wanted to be able to answer off of this is showing that the market share gains that we've had are sticky and they're going to stay with us for a long time.

Okay. I mean, is this volumes with existing customers going down? Or did you walk away from some contracted business in 2Q?

It is volumes within existing customers that are down. We are always evaluating what's in the portfolio and how do we service that best for the customers and create good solutions. And like I talked about earlier, we've had customers who have come back and told us, 'Hey, we got paper rates, we took the paper rates, but now we're coming back to you because we realized that you'll give us the service and the tender acceptance that we desire.'

Okay. And then, Jamie, on the cost reductions, you mentioned purchased transportation. So should we be thinking cost is coming out of, you know not just SG&A but also purchased transportation on these initiatives?

Yes. So the cost-outs that we called out do not include anything related to cost of purchased transportation. Two separate topics. The cost of purchased transportation is really a reaction to what's going on in the freight marketplace. The cost-outs are back office support service vendor contracts. We consolidated some facilities in our last mile hub operation. It's structural cost items that will have a meaningful impact kind of below the gross profit line.

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

I want to follow up on Brandon's question about truckload volume. Are you noticing any changes in business trends? I understand that the comparisons are more challenging, but is there a rapid shift happening in the market?

No. So if you look in April, I mean, truckload was down 1% on a year-over-year basis, Ken. It's more about where we think the market is going. And we've said that we've taken a position that we think that the market is going to turn at some point over the next 6, 9, or 12 months. And it's important for us to put in prices that we can service our business to our customers, make a fair profit margin, and be able to give them the service and tender acceptance that they desire. So for us, it's about pricing for where we believe the market is going.

Okay. In the $24 million to $30 million EBITDA range, I want to clarify the underlying assumptions. What changes are we expecting from the first quarter to the second quarter? I understand there is some seasonality in last mile operations. Are we anticipating that the $1.25 spot pricing will remain stable, and is that significantly contributing? I would like to know what indicators we should monitor for any market changes that could affect the EBITDA as we progress through the quarter.

Sure. Ken, it's Jared. When we look to the $24 million to $30 million that we provided in terms of Q2 adjusted EBITDA, the way to think about it is we talked about in the month of March and the month of April, we were at the high end of our brokerage gross margin percentage so call it in that 15% range or so. What we've done is, we're assuming some seasonal moderation already baked into that guide, attributable to the tightness that we expect from DOT Checkpoint Week as well as produce season, and we're also assuming no meaningful spot opportunities in that outlook. So we've already accounted for the seasonal moderation that we typically expect in the brokerage business in that second quarter. And on the positive side, like we talked about, Q2 is generally a stronger quarter for Complementary Services, in particular Last Mile, and there's some really good business momentum there right now.

Okay. And then, given the light cash flow, Jamie, maybe what shifts sequentially and then the impact if we continue with this elongated freight recession, if we go into '25, maybe. What are your thoughts on cash there?

Yes, Ken. In the first quarter, we had strong cash collections. We are currently in a down cycle for freight, resulting in adjusted cash flow of about $1 million. Looking ahead to the second quarter, we have upcoming interest payments on our bonds, totaling around $14 million. We also anticipate some legacy liability claims that we likely will pay out in the second quarter, which we previously thought would occur in Q4. These claims will probably amount to about $10 million. Thus, for the second quarter, we expect a cash usage of around $10 million. Additionally, we’ll incur restructuring cash charges of approximately $7 million to $8 million. Overall, it appears our total cash usage in the second quarter will be about $18 million. However, when considering the legacy claims and restructuring, we will essentially break even in cash flow for the first half of the year. Given the current cycle, this is actually a positive result. Looking ahead, if the down cycle persists, we believe our asset-light model will allow us to maintain a countercyclical cash flow in relation to our revenue. We are quite optimistic about our position. Importantly, we've structured our call effectively, so when the market improves, we expect significant flow-through to the EBITDA line, which will then convert into cash flow. We feel very comfortable about our outlook.

Your next question comes from Jason Seidl from TD Cowen.

Wanted to talk a little bit about the cost savings. You said it would be predominantly in the back half of the year. Should we spread that evenly between 3Q and 4Q?

Yes, this is Jamie. I don't think we specified the second half of the year clearly. What we indicated is that these changes happened late in the first quarter, so the full effects won't be visible until the second quarter. To put it simply, you can expect an impact of approximately $35 million in 2024, around $32 million, give or take. You'll notice an increase from about 3% to 9%, which will be the run rate moving forward. This impact will be fully realized in the second quarter for the remainder of the year. However, it's important to remember that this will help offset some inflationary pressures. For instance, in April, we typically see merit increases. So, while you may think of this as a full 6% increase to the bottom line, it will actually be used to counterbalance other factors that we have in our model for the second quarter, and that's how it will be distributed.

All right. That makes sense. Also, you mentioned that you saw a little bit more of an exit in April of capacity in the marketplace. Can you put some numbers around that on what you're seeing in your carrier group?

Yes, absolutely. Jason, it's Jared. From an industry standpoint, January started strong in terms of industry exits, which were about 30% higher compared to the average for 2023. As the quarter went on, the situation was a bit mixed, particularly in March, where there were weeks with an increase in net carrier exits. However, we saw that reverse in April. While there were still exits in March, the increase from March to April was about three to four times. Ultimately, this is primarily driven by carrier unit economics and current carrier costs in relation to spot prices, which is unsustainable from our perspective. Therefore, I believe we will continue to see this trend accelerate. Regarding the RXO active network, the number of carriers remained flat when comparing Q1 to Q4.

Okay, that's great color. And lastly, on the last mile business, some of your competitors have reported actually pretty decent results. And I understand everybody has a little bit different in the last mile game. But could you talk to demand and what you're seeing out there and what we should expect going forward?

I am very pleased with the last mile team's performance. We discussed in 2022 the potential to enhance last mile's overall profitability and increase EBITDA, and they have started this year strong. The reason we have the strongest pipeline we've seen in four years is due to the last mile team's solid relationships with customers. Currently, they are experiencing a seasonal uptick, which is one of the reasons for the raised guidance for Q2 compared to Q1, reflecting the last mile's performance. They have several operational initiatives in progress, including maximizing the use of space in our last mile hubs and reducing purchased transportation costs, which had been rising in 2022 and early 2023. Additionally, we are exploring opportunities with some of our large customers who trust us and are willing to give us a chance to capture more of their business. Early results from this initiative are very promising. Lastly, we still have opportunities to adjust pricing with some customers in last mile to ensure we receive fair value for the services we provide.

That's good. Can we dig in a little bit more into what you were talking about? You said, 'Hey, a record pipeline of last mile is responsible for a bunch of that.' What percentage of the pipeline is last mile now versus maybe, say, last year?

Yes. So, I don't think that I said that they were responsible for a bunch of it. I said that they were one of the reasons that we were able to have the strongest pipeline of what we had in 4 years. Not going to break that down by our overall lines of business because that's not how we manage the business. We told you all along, as you look out over the long term, there are a number of ways for us to hit our longer-term targets: improving in last mile, growing brokerage, taking market share, improving the volumes on the LTL business, adding Managed Transportation firm. There's a lot of opportunities and we're excited about where the overall pipeline is right now.

We have reached the end of the question-and-answer session for today. I'll hand the floor back over to Drew Wilkerson for closing remarks.

Thank you, Julie. We entered the second quarter with momentum, and our sales pipeline is the largest that it's been in four years. We expect to deliver a significant sequential increase in our adjusted EBITDA in the second quarter. We're doing all the right things today to ensure our success, including focusing on service, solutions, innovation, and our relationships. We also continue to have a disciplined focus on costs while we're still investing in our future. Thanks for joining us today, and I look forward to seeing many of you at the upcoming conferences. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you.