RXO, Inc. Q3 FY2025 Earnings Call

Welcome to the RXO Q3 2025 Earnings Conference Call and Webcast. My name is Michael, 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 with 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 information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures the company uses when discussing its results. I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may now begin.

Good morning, everyone. Thank you for joining today. I'm here in Charlotte with RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. This morning, we announced our third quarter results. Year-over-year, overall brokerage volume grew 1%, driven by less-than-truckload volume growth of 43%. Brokerage truckload volume declined by 11% year-over-year but increased by 1% sequentially. Last mile stops grew by 12% year-over-year, the fifth consecutive quarter of double-digit growth. And we added cash to the balance sheet and had 56% adjusted free cash flow conversion. Brokerage gross margin was 13.5% and RXO's EBITDA was $32 million in the quarter, below our expectations. Contrary to our assumptions on last quarter's call, the market tightened in September. Capacity began exiting in certain regions, driven primarily by regulatory changes and enforcement. About two-thirds of RXO's freight in the quarter came from regions where buy rates increased and this impacted our results. Buy rates increased faster than our contractual sale rates with no meaningful corresponding increase in accretive spot opportunities. We take our commitments to our customers very seriously and continue to honor the service commitments we made in the quarter. Industry tender rejections in the third quarter were 6%. RXO's were just 2%. This built trust and strengthened relationships with our customers, and you can see the impact of our efforts and recognition we recently received from blue-chip customers, including United States Cold Storage, Owens Corning, and Altonium. Reliably serving our customers' freight at this point in the market cycle will position RXO to win more spot loads and mini bids as the market recovers. Now I'd like to provide you with the details on our fourth quarter expectations, including EBITDA between $20 million and $30 million. The biggest driver of the sequential decline is volume weakness within our last mile business, which is counter to typical seasonality. While we posted another quarter of impressive double-digit stock growth in the third quarter, since Labor Day, we've seen a weakening in demand for big and bulky goods. Jamie and Jared will discuss this in more detail later in the call. In brokerage, we expect the squeeze dynamic to intensify into the fourth quarter. At this point in the cycle, roughly 70% of our truckload brokerage business is contract, primarily with enterprise customers. So the squeeze on our gross profit per load has been acute. In addition, we have not yet seen a meaningful increase in accretive spot opportunities. When demand ultimately recovers, spot loads will increase, which will be accretive to gross profit per load, helping to offset the higher cost of purchase transportation. The big question is whether these changes to the industry capacity are permanent. If the regulatory changes hold and enforcement continues, we believe a significant amount of truckload capacity will permanently exit the market. This will help improve the overall safety of the industry as well as help combat theft and fraud. This has the potential to be one of the largest structural changes to truckload supply since deregulation and could result in a higher-for-longer freight environment. RXO is well positioned to capitalize on that if it occurs because of our larger scale as the third-largest provider of broker transportation. However, for a sustained freight market recovery, we need increased demand for goods, and we aren't seeing that yet. Demand trends weakened throughout the third quarter and remain below typical seasonality. In fact, during the month of August, cast freight shipments reached their lowest level since 2020. We continue to take strategic actions to position RXO for both the short term and the long term. We've greatly improved RXO's cost structure throughout the downturn and took additional action in the third quarter. Since we've become a public stand-alone company, we've removed more than $125 million of cost. That is a significant improvement to our cost structure. Right now, the impact is being masked by the market-driven declines in gross profit per load. We're looking at our actions holistically. Some examples of our initiatives include investing in artificial intelligence that frees up time for our team to focus on our customers' most challenging problems, optimizing our real estate footprint and rightsizing our teams to ensure the optimal balance between current demand and ensuring we're staffed for growth. Given the sustained soft freight market conditions, we've been moving quickly to streamline our costs within our brokerage business. As an example, in the third quarter, brokerage headcount declined by approximately 15% year-over-year. Our actions to date, including our investments in technology, have already yielded substantial productivity gains in brokerage. Productivity increased by 19% over the last 12 months and by 38% over the last 2 years. These are sticky changes to our business that will yield benefits in the future. I remain extremely confident in RXO's ability to deliver outsized earnings growth over the long term because of five things: our improved cost structure, larger scale, continued focus on profitable growth, best-in-class technology, and ability to generate cash. First, our much more efficient cost structure will provide us with significant operating leverage when the market improves. Second, we have a much larger scale. Scale is a differentiator in brokerage, and I'll highlight two examples. Scale enables us to purchase transportation more effectively. Our common technology platform is helping us capitalize on additional power lanes while providing the best truck for each load. During the third quarter, our incremental buy rate favorability was similar to last quarter and approximately 30 to 50 basis points better when compared to the period before the carrier migration. Those improvements were more than offset by the September market tightening I mentioned earlier. We expect our buy rate favorability to further improve as we increase productivity across the organization. We remain confident that over time, our favorability will increase to approximately 100 basis points. Another benefit of scale is a decreased cost per load. This was one of the guiding principles of the Coyote acquisition, and we achieved results in this area. Since our spin, our cost per load has decreased by more than 20%. We're effectively leveraging our increased scale and technology platform, and we'll continue to bring down our cost to serve. The third driver of long-term value creation for RXO is profitable growth. This is part of our DNA, and we have continued opportunities to drive future growth. In addition to growing our core truckload business, we will also grow by offering valuable premium services that deepen relationships with customers. We're also in the early stages of growing more consistent sources of EBITDA, including managed transportation and LTL because they reliably bring in strong and more consistent profits through market cycles. In the third quarter, we grew LTL volume by 43%. While LTL volume has grown significantly, it only represents about 10% of total brokerage gross profit dollars. We have a long runway in LTL. We have an exceptional track record when it comes to growth. Over the 5 years prior to the Coyote acquisition, RXO grew total volume by 72% organically and 11% CAGR. Fourth, our technology is a differentiator. Customers and carriers constantly tell us that our tech is the best and easiest to use in the industry. We invest heavily in this area, spending over $100 million every year. This technology powered by AI and machine learning helps our employees be more productive, freeing up their time to focus on our customers and carriers. It also enhances our customer experience and drives our pricing engines. And fifth, our asset-light business model enables us to produce strong cash flow. In the quarter, despite the soft market conditions, our adjusted free cash flow conversion was 56%. We remain confident in delivering 40% to 60% conversion across market cycles. In conclusion, although we're in a challenging market environment, and we're not satisfied with our near-term performance, we've taken decisive strategic actions. We remain focused on what has made us so successful over the past decade plus. We provide exceptional service, a comprehensive set of solutions, cutting-edge technology, and deep customer relationships. All of this provides RXO with a unique algorithm for long-term growth. Now Jamie will discuss our financial results in more detail.

Thank you, Drew, and good morning. Let's review our third quarter performance in more detail. Our results were slightly below our outlook. For the quarter, we reported $1.4 billion in total revenue, gross margin of 16.5%, adjusted EBITDA of $32 million and an adjusted EBITDA margin of 2.3%. Gross margin and adjusted EBITDA were primarily impacted by the increase in cost of transportation, further broad-based demand weakness, and continued headwinds in the automotive sector. As Drew mentioned, cost of transportation increased without a corresponding increase in sale rates or accretive spot opportunities. This caused a margin squeeze on our contractual brokerage volume during the month of September. Jared will provide more details later in the call. Automotive was a continued headwind and represented an approximately $5 million year-over-year margin impact in the quarter. As we discussed over the past two quarters, this freight is time critical and with high service requirements and typically carries a higher-than-average gross margin with strong flow-through to EBITDA. Below the line, our interest expense was $9 million. For the quarter, our adjusted earnings per share was $0.01. You can find a bridge to adjusted EBITDA on Slide 7 of the earnings presentation. Now I'd like to give an overview of our performance within our lines of business. Brokerage revenue was $1 billion and represented 70% of our total revenue. Overall, brokerage volume growth was 1% in the quarter. We had strong LTL growth of 43%, which was offset by an 11% decline in full truckload volume. The year-over-year decline in truckload volume was impacted by overall demand weakness, softness in the automotive sector, and efforts we undertook with customers to optimize price, volume, and service. Given the market tightening in September, brokerage gross margin was down 90 basis points sequentially to 13.5% at the low end of our outlook. Complementary services revenue in the quarter of $442 million increased by 5% year-over-year and was 30% of our total revenue. Gross margin within complementary services was 21.3%. Now let's discuss each line of business within complementary services. Managed Transportation generated $137 million of revenue in the quarter, down 9% year-over-year. Managed Transportation continues to be impacted by lower automotive volume in our managed expedite business. Our last mile business generated $305 million in revenue in the quarter, up 14% year-over-year. Last Mile stops grew by 12%. However, over the past few months, we have seen a weakening in the big and bulky demand. This trend has worsened into the fourth quarter. Let's now discuss cash. Please refer to Slide 8. Adjusted free cash flow in the third quarter was $18 million, yielding a strong 56% conversion from adjusted EBITDA. As a reminder, our semi-annual interest payment is not due until the fourth quarter, which benefited our third quarter conversion. Year-to-date, our conversion is 50%. We're very pleased with our conversion at this point in the freight cycle. Given our asset-light business model, we remain confident in a 40% to 60% conversion over the long term and across market cycles. We ended the quarter with $25 million of cash on the balance sheet, which increased by $7 million sequentially with no change to the revolver balance. We grew our cash balance despite $9 million of restructuring, transaction, and integration cash outflows. As you can see on Slide 9, our liquidity position continues to be strong with $590 million of total committed liquidity, of which approximately $375 million is currently available. Quarter end net leverage was 2.3x LTM bank adjusted EBITDA, up slightly when compared to the prior quarter. I'd now like to talk about the actions we've taken to optimize our cost structure. We've taken actions to achieve more than $125 million of annualized expense savings, including $65 million of post-spin costs and $60 million of cost synergies related to the Coyote acquisition. Today, we announced that we're taking additional actions that will yield more than $30 million of incremental annualized savings. Collectively, this means a total reduction in annualized expenses over the last three years of more than $155 million. We're optimizing our cost structure, operating more efficiently, and automating key processes. Now let's discuss our expectations for the fourth quarter. Our outlook reflects a fluid macroeconomic environment with weakening freight demand and a continued increase in the cost to purchase transportation. For the combined company in the fourth quarter, we expect to generate between $20 million and $30 million of adjusted EBITDA. While we would typically see a sequential increase in brokerage adjusted EBITDA in the fourth quarter, that is being more than offset by higher cost of purchase transportation. We're also expecting a decline in complementary services, driven by slowing demand in last mile, which is counter to normal seasonality. Jared will provide more details on our outlook shortly. Slide 14 includes our fourth quarter modeling assumptions. There are a few things I want to highlight. We expect CapEx of approximately $20 million. We're tracking towards the low end of our previously discussed $65 million to $75 million outlook for the full year 2025. For 2026, we continue to expect CapEx to be between $45 million and $55 million, down materially year-over-year. As we discussed, we're taking additional cost actions that will result in more than $30 million of annualized expense savings. In conjunction with these actions, we expect fourth quarter restructuring, transaction, and integration expenses to be approximately $15 million. Below the line, we expect net interest expense of approximately $9 million, an adjusted effective tax rate of approximately 30%, and fully diluted shares of 170 million. To summarize, recent accelerated capacity exits are putting upward pressure on our cost of purchase transportation and squeeze in our contractual brokerage gross margin. This impacts near-term profitability given our large footprint of contract business with Tier 1 shippers. We are reliably servicing our customers' freight and are well-positioned to win spot opportunities and special projects when demand recovers. Longer term, as we think about the broader macro economy, we do see positive developments such as lower interest rates, new tax legislation, domestic investment announcements, and improving clarity on freight. Lower interest rates specifically can spur freight activity in many rate-sensitive industries such as the housing sector. As an example, according to the American Trucking Association, every new home built requires between 6 and 10 truckloads of goods to be shipped. Mortgage rates recently reached 12-month lows, and any recovery in the housing market would be positive for ground transportation and RXO. We are closely monitoring the macro environment and are positioned to benefit when demand strengthens. 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. As I typically do, I'll start with an overview of our brokerage performance in the quarter. To make the comparisons more useful for you, I'll give you combined numbers that include Coyote's results in the prior period. Brokerage volume in the quarter was up 1% year-over-year, outpacing the cash freight index. LTL volume increased by a strong 43% year-over-year. LTL represented 31% of brokerage volume in the quarter, up 900 basis points year-over-year and down slightly from the second quarter. Truckload volume was down 11% year-over-year and represented 69% of brokerage volume, up 100 basis points sequentially. Similar to last quarter, truckload volume was impacted by a decline in automotive, efforts we undertook with customers to optimize price, volume, and service, and broader market weakness. From a vertical perspective, automotive volume was down 22% year-over-year. In the industrial and manufacturing vertical, encouragingly, we saw a slight pickup sequentially, which was largely driven by special projects. Industrial manufacturing volume declined by 3% year-over-year. Contract volume was 71% of our overall truckload volume in the quarter. Contract business declined by 200 basis points sequentially and 100 basis points year-over-year. Spot represented 29% of our truckload volume in the quarter, up 200 basis points sequentially and 100 basis points year-over-year. This was partly tied to the Coyote technology integration. As we migrated shippers to RXO Connect from Bazooka, we benefited from an increase in API connectivity. This enhanced connectivity will also benefit the combined organization when the freight market eventually recovers. However, given the weakening demand environment, the spot opportunities were less robust when compared to the second quarter and not enough to offset the squeeze on our contractual book of business. Before reviewing our financial performance and market conditions in more detail, I'd like to talk more about some of the technology offerings that we rolled out in the quarter. We deliver technology that drives improvements across four key pillars: volume, margin, productivity, and service. We've been developing and enhancing our artificial intelligence and machine learning capabilities for years, utilizing our proprietary data. During the quarter, we made progress further enhancing our AI capabilities across each pillar. We enhanced our proprietary and differentiated pricing model, which leverages the combined data of RXO and Coyote. We implemented agentic AI solutions to streamline carrier inquiries, reducing manual effort by tens of thousands of hours. We've deployed AI image solutions in the last mile to ensure delivery and install quality, which has the opportunity to fully automate thousands of manual photo validations per day, and our engineering teams have been leveraging AI tools that have generated millions of lines of code. We're applying AI to structurally improve the long-term margin profile of the business. Let's now review our brokerage financial performance and market conditions in more detail, starting with revenue per load on Slide 10. In the third quarter, truckload revenue per load moderated. Year-over-year revenue per load, excluding the impact of changes in fuel prices and length of haul increased by 1%. The demand environment also weakened in the third quarter, negatively impacting revenue per load. Let's move to Slide 11 and discuss brokerage margin performance and current market conditions. As Drew mentioned, the truckload market tightened during the month of September. This squeezed the margins in our contractual book of business, resulting in a moderation in gross profit per load and third quarter brokerage gross margin at the low end of our outlook. From a market standpoint, buy rates and industry KPIs moved higher in the quarter. Tighter market conditions have been entirely driven by supply side dynamics as overall demand has weakened. This tightening in supply is largely due to enforcement actions related to non-domiciled CDLs and English language proficiency. From a seasonal standpoint, buy rates typically ease during September. This year, however, the market moved counter-seasonally and buy rates moved higher in September. This trend not only continued but was even more pronounced in October despite weaker demand. For the quarter, approximately two-thirds of our freight came from outbound states with buy rate increases. For example, we saw acute tightening in California and Texas. Over the last two months, industry-wide linehaul spot rates have moved up by approximately $0.06 per mile with no increase in sell rates or a corresponding increase in accretive spot opportunities. While RXO continued to procure transportation more favorably than the market, we are not immune to market squeezes given our large contractual book of business with Tier 1 enterprise shippers. As it relates to purchase transportation savings from the Coyote acquisition, our incremental buy rate favorability was similar to the prior quarter at approximately 30 to 50 basis points. Our customer and carrier representatives continue to increase their familiarity and productivity within RXO Connect. We remain confident in our ability to achieve 100 basis points of incremental favorability over the long term. As a reminder, in tightening market conditions, such as the current market, incremental favorability serves as cost avoidance. Turning to Slide 12. As we just discussed, truckload gross profit per load moderated in the third quarter given softer demand and tighter capacity. This market tightness intensified recently. And to put in perspective, our truckload gross profit per load in the month of October was approximately 25% behind our five-year average, excluding COVID highs. Incremental margins attributable to a gross profit per load increase are very strong in excess of 80%. Moving to Slide 13. RXO's LTL brokerage volume continues to outperform the broader LTL market. In the quarter, LTL gross profit per load also improved sequentially. We have many opportunities to continue to grow LTL volume with existing and new customers. I'd now like to look forward and give you some more details on our fourth quarter outlook. We're assuming a muted peak season and weak demand trends across all our lines of business. Starting with brokerage. We expect overall volume to decline by a low single-digit percent year-over-year with continued soft truckload volume trends, partially offset by strong LTL growth. Market tightness intensified in the month of October and is expected to persist throughout Q4, pressuring brokerage gross margin and gross profit per load. We anticipate that brokerage gross margin will be between 12% and 13%. Let’s now talk about complementary services. In Managed Transportation, while the business has strong sales momentum and an expanded pipeline, managed expedite automotive headwinds continue to impact us in the near term. In last mile, demand trends within big and bulky have weakened after Labor Day, and we're taking that into account in our outlook. Putting it all together, we expect RXO's fourth quarter adjusted EBITDA to be in the range of $20 million to $30 million. While we would typically see a sequential increase in brokerage adjusted EBITDA in the fourth quarter, that is being more than offset by higher cost of purchase transportation. We are also expecting a decline in complementary services, driven by slowing demand in last mile, which is counter to normal seasonality. Taken together, the impact of these two items is approximately $15 million. Similar to previous quarters, we thought it would also be helpful to share some assumptions underlying our fourth quarter outlook. The low end of our adjusted EBITDA outlook assumes a further moderation of our truckload gross profit per load. This would include a continued increase in buy rates and no corresponding increase in accretive spot opportunities. The high end of our outlook assumes an increase in our gross profit per load and improvement in brokerage gross margin. This would include accretive spot opportunities to offset the squeeze. To close, we continue to operate in a soft demand environment. On the supply side, continued enforcement of non-domiciled CDL restrictions and English language proficiency would result in a major structural change to the industry. While our brokerage gross margin is impacted in the near term, assuming enforcement continues, this could result in a sharper inflection when demand eventually recovers. Longer term, this could be a very positive development for large-scale brokerages like RXO and it would strengthen safety, reduce theft, and fraud. Our actions over the last several years have improved RXO's cost structure, which will lead to higher earnings across market cycles. We have taken actions to remove over $125 million of cost. We announced more than $30 million of new cost initiatives today to enhance operational efficiency. We've improved brokerage productivity by 38% over the last 2 years. Our brokerage cost per load has decreased by more than 20% since our spin, and we are committed to investing in technology, including AI with a strong return on invested capital. More than ever, shippers want to do business with large-scale brokerages that have the resources, capital, and ability to invest throughout market cycles. With a continued focus on profitable growth, a more efficient cost structure, larger scale, and a cutting-edge technology platform, we are well positioned to drive significant long-term earnings and free cash flow growth. With that, I'll turn it over to the operator for Q&A.

It is now time for our Q&A session. Our first question will come from Stephanie Moore with Jefferies.

I wanted to get a sense, I guess, just on the underlying market dynamics and specifically the supply environment, which you've touched on here, but there's a lot of debate on whether these federal enforcement actions will be enough to shift the supply-demand balance. So the first question is, do you think the recent supply exits are sustainable and enough to structurally reduce market supply? And then second, if this is, in fact, the final squeeze that we would expect to see at the bottom of the cycle, if demand doesn't materialize near term, what actions can RXO take just to manage gross profit per load for, say, the next couple of quarters?

Stephanie, it's Drew. I'll take the first part on reducing capacity, and Jared will take the second part of your question on the gross margin dollars and gross profit per load through a quarter. When you look at what's going on, on the supply side, as I said in my prepared commentary, I think this is the biggest structural change potentially in transportation. Compare it to something like ELDs. And when ELDs were enforced, drivers had a choice of whether or not they were going to invest into their equipment and continue to haul. At this point, they don't have a choice. They're being pulled off the road if they're non-domiciled drivers or the English language proficiency doesn't meet their requirements. So I think it's a much bigger change than what anything that has happened in the industry in the past. And it is something that will take out capacity in a major way in large percentage points. The one thing that we still need is for demand to return overall. As demand returns, what that does is it creates a much sharper inflection as the market comes back.

And Stephanie, on your second part of the question in terms of if this is the final squeeze, but demand doesn't recover, what actions can we do? I would point to the $30 million of new cost initiatives that we announced this morning, more than $30 million, where you will see a partial impact here in the fourth quarter. We continue to streamline the cost structure of the business, and we see significant opportunities as it relates to improving that cost structure longer term. As you think about additionally heading into next year, and Drew touched on this in the opening remarks, our cost of purchase transportation benefits as carrier reps continue to gain incremental efficiencies on RXO Connect and Freight Optimizer, the ability to go ahead and become more productive and benefit from a PT standpoint, I think, are very real. And then the last thing I'd close with is, I think Jamie touched on this. Ultimately, we are seeing lower interest rates and some benefits associated with the recent bills that were passed through Congress as it relates to potential investments in the U.S. as well. So as you think about what this is setting up for when supply eventually continues to normalize combined with a demand inflection, it could be pretty strong on the other side, but enforcement does need to sustain.

Drew, this is going to come off a little critical, but I think it's probably for the betterment of everyone on the call. I mean let's take it at face value. Your adjusted EBITDA guide here is down about 40% at the midpoint year-on-year, and that's a year-end Coyote. We really thought Coyote was going to be transformative, a pretty big acquisition for a company of your size. I guess looking back, are there things that you maybe wouldn't have done? And I mean, maybe to exemplify it, I think the last couple of years, you guys have said, look, Q1 is usually a lot weaker than Q4. Is that what we're to infer here? And if that's the case, I mean, I guess investors are probably going to look for more tangible actions here on earnings.

Yes, Brandon, thanks for the question. If you look back at the Coyote acquisition, on people, customers, and technology, we have done extremely well. But the financial results are not where they need to be. And the biggest miss off of that was whenever you went into the 2025 market, we made a decision on pricing, and we took price up off of that. I made the wrong call on that one. And that is something that has impacted overall volumes. And if you go back and you look at our history, we've outgrown the market for several times. I look forward to us getting back to the days of where we are the market leader and we're the transportation leader from a growth standpoint of taking market share. Clearly, 2025 is not where we want it to be overall. As you go from Q4 to Q1, first, I would say, let's start with the third quarter. Typically, from the third quarter to the fourth quarter, you see brokerage and last mile go up from an EBITDA perspective. That is not what you're seeing this year. So the headwind going from Q4 to Q1 is not the same as what it typically would be. We also have the cost actions that we have taken that will be impacted from Q4 to Q1. So I don't think it's apples-to-apples. Demand is still an unknown as we go into Q1 and are we still getting squeezed as we go into Q1? That's unknown. But ultimately, what is happening in the business right now is setting up for a very, very good thing.

We ended the quarter with a net leverage of 2.3. Looking ahead to the midpoint of our range at the end of Q4, around 25, that would put us at about 2.8. Our covenant is 4.5, so we have plenty of flexibility. Our balance sheet is very strong, and we have access to hundreds of millions of dollars in capital, which isn't a concern for us. It's worth noting that we had a strong cash flow quarter with a 56% conversion rate, adding cash to our balance sheet. In Q4, we will have our semi-annual bond payment, which is typically due then, and we will use some cash for that. However, looking at 2025 as a whole, there are about $65 million to $70 million in cash outflows that won’t repeat in 2026. There are three main reasons for this: firstly, we had $25 million in cash usage in Q1 to finalize costs related to the Coyote acquisition, which is a matter of timing. Secondly, our total expenditures on restructuring and integration will decrease by approximately $30 million year-over-year. Lastly, our capital expenditures will decline by $10 million to $15 million. Taking all of this into consideration, the cash outflow in 2025 will be $65 million to $70 million that won’t happen again. In the context of our $25 million midpoint target for the full year, this suggests we would generate $20 million to $25 million in free cash flow in 2025. From a bottom-of-cycle perspective, these figures are strong and set the stage for future improvement as the cycle progresses. Overall, we have a solid cash flow business, a strong balance sheet, and while we monitor our balance sheet closely, we aren’t overly concerned at this time.

So it's a bit of an AI arms race out there in the brokerage space. It's all about how many agentic AI bots you have and how many press releases you put out. But you said that your customers are telling you that you have the best and easiest tech out there. Can you just unpack for us the process of going out there and selling your tech platform to your customers? Like what are they looking for? How do you drive conversion? And kind of how do you differentiate yourself with what else is out there from a tech world? Because sometimes it may be hard to see for us in our seat.

Yes. Ravi, one, I appreciate the question. The only thing I would level set on is it's not about press releases for us. It's about results for employees. It's about results for customers. It's about results for carriers. And we are hitting an inflection point with our AI investments that we have been making. Not only have we been running an integration, we have been investing in AI, and we've been investing in it heavily. When you look on the ability of what we're able to do on the pricing side, it is something while we had a very strong pricing algorithm that's allowed us to outperform the market from a margin perspective for a decade plus, it is getting better. When you look at the way that we are communicating with carriers, it is changing, and it is allowing our reps to spend more time focusing on solutions. And then the last thing is even if you look at our last mile business, we've done things like whenever you're doing an installation versus a person going in there and getting a photo and checking it, we've been able to actually do that with an AI bot that is checking everything from an installation standpoint, which is critical to our customers and consumers and how that process unfolds. So for us, very excited about hitting an inflection point with AI and what it will actually mean from an operating margin perspective to the business and look forward to hosting you next week and let you actually see it on the floor of how it impacts carriers' lives, how it impacts customers and how we're interacting with them so that you can see it live and in person.

Great. Looking forward to that as well. Maybe just a quick follow-up. Your 4Q guidance is predicated on the current demand-supply equation holding, right? So if for some reason, the supply side or the enforcement drops off or supply side gets looser, your 4Q gross margin will be better than guidance?

Ravi, as you think about the range that we provided for Q4, $20 million to $30 million of adjusted EBITDA, the midpoint assumes that current market conditions in terms of the intensification that occurred in the month of October with respect to market tightness given the supply dynamics that we talked about, that sustains throughout the rest of the quarter. The low end assumes that the market further tightens in terms of that squeeze impact without a corresponding increase in demand in spot opportunities. So that environment would result at the low end. And for the high end, to your point, as you think about either the market tightening to the point where it results in some pressure in waterfall routing guides and some spot opportunities and/or if there is an easing in buy rates, that would allow gross profit per load to improve from current levels to get to the high end of our guide for Q4.

I guess I want to ask a question about operating expenses and your ability to maybe sort of rein those in a little bit as you go forward in this weaker market. Maybe you can talk a little bit about the potential opportunities you have. It looks like if I just sort of zone in on direct OpEx and labor expenses, those have been relatively flat in this market over the course of the last few quarters. Is there work that you can do there to try to adapt to what has been obviously a more challenging outlook?

Yes. So this is Jamie. We've taken a lot of cost actions since then, $155 million in total, including the synergies we've gotten from the acquisition. We're constantly looking at our expenses. If you look at our P&L, a lot of the direct OpEx that you see in the P&L relates to our last mile and our managed transportation business. SG&A that shows up in the P&L across all the business lines. There's still plenty of actions that we can take. We've talked about automation. We've talked about process improvement. One of the things that we're constantly working on, Drew mentioned in his remarks, footprint, how do we consolidate footprint so we can give the same level of high customer service and fewer square feet of space and fewer facilities. Those are the types of things we're constantly working on. So the answer is yes, there is more that we can do, and we're constantly working on those types of activities. And you can see it with the $30 million that we announced today. I mean that's a constant process that we're going through.

Yes, Chris, we are closely monitoring several factors regarding demand, as Jamie mentioned in his prepared comments. We are keeping an eye on interest rates and the housing market, and paying particular attention to the automotive sector. The managed expedite portion of automotive is crucial for us, especially when there are urgent situations that require immediate delivery to prevent a production halt. This segment was significant during peak times, contributing about 13% of our gross margin in brokerage from expedite loads, but currently, it has dropped to around 1% or 2%. We are eager to see how the business can recover in this area. Our presence in retail and e-commerce remains strong, supported by valuable relationships. The Coyote acquisition has provided us with increased exposure to food and beverage. We are focused on expanding in technology and high-value cargo goods, and we have a promising pipeline with successful outcomes in these segments. Regarding the market conditions, this situation is not temporary; it is not influenced by seasonal factors or external checkpoints. Instead, it represents a significant structural change in the industry. Supply chain issues are significant and ongoing, which combined with demand, creates favorable conditions for large carriers, particularly brokers who maintain strong customer relationships and offer comprehensive solutions backed by advanced technology. We are well-positioned in this respect, and while this phase is challenging, we are aware of the opportunities that lie ahead.

So Drew or Jared, I want to clarify the messaging for the fourth quarter. Is this just a quick shift in the spot price? Are you noticing an acceleration in the decline of demand? It seems like a much more significant change for the fourth quarter outlook compared to what we've heard from other carriers in the past week. I'd like to understand what you're seeing that might be different. You mentioned that two-thirds of the costs came from regions where the buy rates increased. Is this perhaps more specific to RXO than to your competitors, or is it due to capacity tightening in Texas and California? Any insights would be appreciated; I know that's a complex question.

Ken, it's Jared. So when you think about the bridge from Q3 to Q4, typically, both brokerage and last mile are up sequentially from third quarter to fourth quarter. This year, we are assuming that they are both down sequentially. And that's a function of both of what you cited in terms of lower demand and higher PT costs. So on the demand side, we are seeing lower demand across the business. We saw that play out throughout Q3, and we are expecting the same in the fourth quarter. I'd say specific also to last mile, we did see a drop off, call it, after the Labor Day timeframe with respect to goods for big and bulky. So last mile is seasonally up into the fourth quarter, and we are expecting that to decline sequentially given that decline in big and bulky demand. With respect to the question as it relates to purchase transportation costs, right? So when you think about our business, to your point, we did see about two-thirds of states where we were moving goods from an outbound standpoint, our PT costs going higher in the third quarter. So I'd say it moved modestly higher in the month of September, but that acute tightening really did happen over the last four weeks after the emergency order on non-domiciled CDLs came into effect at the end of September. And we've seen that play out with gross profit per load and gross margin compression within the brokerage business in the month of October. And what makes this interesting and unique to Drew's point, where this is very structural from our standpoint because this is not an episodic squeeze like we've seen over the last three years where whether it's seasonality due to produce season or DOT Checkpoint, this is a lot of capacity that is coming out of the market. And ultimately, it's happening at a point where we are having weaker demand trends. So you don't have routing guide pressures to allow for accretive spot opportunities, so that's really what's playing out here, Ken.

Ken, I will elaborate on this a bit. There is a lot of public data indicating the current state of demand. The cash freight index shows a decline of 7%. When looking specifically at truckload, FreightWaves SONAR provides data that indicates a decrease of around 17% in that sector. So, it’s not just about our perspective; you can refer to the available public data regarding the truckload market.

We're observing a tightening market. Meanwhile, truckload revenue per load has decreased from an increase of 3% to just 1%. Drew, considering your extensive experience, have you encountered a situation where the market tightens and buy rates increase while industry spot rates or sell rates remain unchanged? I'm not sure I've seen this happen before. Ultimately, I'm trying to figure out if a typical squeeze for your business lasts about a quarter or two before you see benefits. Do you believe this time, if driven by supply, will lead to a longer squeeze? Or do you think the current situation, where buy rates rise but sell rates do not, is unsustainable? At some point, won't sell rates need to start increasing significantly?

Yes. Scott, I think that everything that you just said points to it being a structural change that has happened in the industry because it is something that we all have not seen before and shaking out this way. As far as how long the squeeze is, yes, I don't think it would be wise of me to venture a guess on how long the squeeze is because I don't think that anybody saw the upside and the downside of the cycle lasting 5-plus years at this point. So I don't know how long the squeeze will be. But yes, we are in the thick of it right now as something that impacts our margins. I'll tell you, if you go back and you look at the time of ELD, you actually saw our margins fall to 11.5% during that time. And within 2 quarters, you saw more than it makes up for that on the recovery side. Now there was demand there. So I think that demand is a key point. But I do not think that the capacity coming out in this situation is the same as ELD. I think it's in a much bigger way because at ELD, you had a choice of if you were going to spend the money and invest in your equipment to meet federal mandates. This time, you don't have a choice, you're just coming off of the road.

Yes. To follow up, regarding the purchasing transport and the squeeze, we are seeing a considerable squeeze happening with the increase in prices. As we approach the contract season for the next cycle, likely starting early next year or in March, we should anticipate a significant rise in contract rates, and the squeeze is expected to alleviate.

Yes, Jordan, I think it will still depend on what happens with overall demand. And bid season is underway right now. We're in the middle of some of our largest bids. Yesterday in Charlotte, we had 7 of our largest customers, and we spent a lot of time talking about our pricing strategy with them, talking about how we could draw synergies between the customers that were in the room from a capacity standpoint, talking about what was going on with the federal mandates. So for us, we look at every customer as their own story as we go through the bid cycle. So is there the opportunity for rates to go up? Absolutely. But I think some of it depends on what's going on in the market as that customer's bid is going on. So I'm not going to forecast on where rates are going to go for next year. But what I will say is as routing got start to break down, that's where spot loads come in, and those are at a much higher revenue per load.

I wanted to revisit how we should interpret the run rate for the fourth quarter and what that means for 2026 or how to generally consider 2026. If you take the midpoint of your EBITDA guidance for the fourth quarter and combine it with the three reported, you arrive at a $117 million EBITDA base for 2025. Considering the seasonality of the $25 million in the fourth quarter, it probably falls well below $100 million. I understand you have the $30 million in cost savings and additional initiatives, but do you believe the 2026 EBITDA will be closer to $100 million or nearer to $150 million? It seems challenging to determine an accurate range, especially since the fourth quarter appears quite difficult.

Yes, this is Jamie. We approach one quarter at a time. As we think about 2026, there are many uncertainties as we head into the next year, particularly regarding volume demand and purchasing costs. We are unsure how long the current challenges will last and whether they might worsen or improve, and if so, when. We've successfully reduced a significant amount of costs, part of which will carry over into 2026. There are opportunities in transportation, which, as Drew mentioned, have yielded 30 to 50 basis points in savings so far. Much of this is reflected in our P&L as cost avoidance, and we anticipate achieving 100 basis points in the future. Therefore, it’s not feasible to extrapolate our Q4 projections into Q1 or Q2 since Q4 is typically lower than usual. We expect both last mile and brokerage activities to see a sequential increase from Q3 to Q4; however, they have actually decreased. This means that Q1 will not be typical either. As the market evolves, and as Drew discussed regarding capacity, when demand returns—and we believe it will—we're positioned well to take advantage of that opportunity, though we cannot predict exactly when it will happen.

Tom, I agree with everything that Jamie just said. But one thing that I would add is if you look at what's happened in the industry over the last 7, 8 weeks and the impact that has had to financials, it's running in the negative way. It works the exact opposite whenever the market starts to turn on the positive way. And this is an industry that turns very, very quickly, and you've got the opportunity as the market recovers to expand margins in a big way. Yes. I mean the biggest thing that we're watching right there is what happens on tender rejections. And if you look, even though demand is down significantly, tender rejections have gone up to over 6%. So right now, you are starting to see capacity push it to where it goes. And it's not necessarily as much on the contract rates that you're watching right there. It's more what happens on the tender rejections whenever routing guides start to break and on the spot. So that's with demand extremely depressed, you're starting to see pressure on tender rejections. So that's mostly what I'm watching right now, Jeff.

Yes, this is Jamie. Personally, I believe that the current enforcement situation is more of a federal issue rather than a state-by-state concern. Regardless of a carrier's location, they could be subject to being taken off the road anywhere. It may take some time, but we are already witnessing an impact on capacity that has occurred rapidly. I don't think there's any particular area where companies can safely operate without facing the risk of being caught. Therefore, I anticipate that enforcement will continue.

Tom, just remember, you only have to drive a few hundred miles in any direction to be in another state line.

Group question, I know nobody can predict how long this squeeze is going to go on. But I guess kind of following Scott and Jordan's question a little bit, if things just stayed static where they are right now, where the market is, I know you talked about 1 to 2 quarters, 2 to 3 quarters. How long would it take you to price up to where this was not impacting the franchise anymore if it didn't get worse from where it was?

Yes. I mean the biggest thing that we're watching right there is what happens on tender rejections. And if you look, even though demand is down significantly, tender rejections have gone up to over 6%. So right now, you are starting to see capacity push it to where it goes. And it's not necessarily as much on the contract rates that you're watching right there. It's more what happens on the tender rejections whenever routing guides start to break and on the spot. So that's with demand extremely depressed, you're starting to see pressure on tender rejections. So that's mostly what I'm watching right now, Jeff.

That appears to be our last question. I'll turn the conference back to Drew Wilkerson for any additional remarks.

Thank you, Michael. We're in a squeeze, but I remain extremely confident in RXO's ability to deliver outsized earnings growth over the long term. Our improved cost structure, larger scale, continued focus on profitable growth, best-in-class technology, and ability to generate cash are differentiators for RXO. We remain focused on what has made us so successful over the past decade plus. We provide exceptional service, a comprehensive set of solutions, cutting-edge technology, and deep customer relationships. Thank you all for your time today and look forward to seeing you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.