RXO, Inc.

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

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

Thank you, Drew. Good morning to everyone. In the first quarter, we generated $1 billion in revenue compared to $1.3 billion in the first quarter of 2022. The revenue decline was primarily due to lower freight rates year-over-year. Profitability remained strong with an adjusted gross margin of 18.8% of 80 basis points year-over-year. primarily driven by our ability to bring down the cost of purchase transportation as the market softened. Additionally, adjusted gross margin within complimentary services expanded by 160 basis points year over year, driven by managed transportation and freight forwarding. Our adjusted EBITDA was $37 million in the quarter, compared to $75 million in the first quarter of 2022. And our adjusted EBITDA margin was 3.7%, down 200 basis points from the prior year. These declines were primarily due to the lower year-over-year freight rates, the resulting moderation in brokerage gross profit per load, and the incremental corporate costs of being a standalone public company. Below the line, our interest expense for the quarter was $8 million. Our income taxes were favorable for the quarter, given by discrete, non-recurring tax items. Adjusted diluted earnings per share for the quarter of 11 cents. You can find a bridge to the adjusted EPS on slide eight of the earnings presentation. Importantly, we continued to outperform the industry. Despite a difficult macro economy, we grew brokerage volume by 6% year over year. Profitability in brokerage remained best in class with gross margins of 16.3% year over year. It was a very strong cash flow. Please refer to slide 9, which has a walk from adjusted EBITDA to adjusted pre-cash flow. We ended the quarter with $121 million of cash versus $98 million at the end of the fourth quarter. Our adjusted EBITDA converted to adjusted pre-cash flow at 100% in the quarter, a great result. Please note that the quarter's adjusted cash flow result included the payment of 2022 incentive compensation. The quarter also included several timing related items that had positive impacts during the quarter. These items included earlier than expected collection of some accounts receivable, zero interest payments on our bonds during the quarter. We pay interest on a semi-annual basis in the second and fourth quarters. We incurred minimal cash taxes in the first quarter based on normal regulatory timing. Most of our cash taxes for Q1 and Q2 will be paid in the second quarter. As we look to the second quarter, these items will normalize, and we expect our cash conversion for the first half of 2023 to be approximately 50%. Over the long term, across market cycles, we'll remain comfortable with our cash conversion at a rate between 40% and 60%. I also want to spend some time discussing spend-related and restructuring costs. Last quarter, we communicated approximately $10 to $15 million for the full year 2023, of which $10 million were expected cash outflows. We continue to optimize our cost structure as a standalone entity. Since our spinoff, we have launched several initiatives to ensure that we have the appropriate cost structure and processes in place to improve profitability and support our growth. Given the weak freight environment, we moved expeditiously in the quarter and achieved annualized run rate savings of approximately $20 million. These savings helped us sort some of the reduction in brokerage gross profit per load in the quarter. We incurred $8 million of restructuring charges to achieve the $20 million savings, a significant return. Looking ahead, We're proactively optimizing our cost structure and our position organization for incremental operating leverage when the freight cycle inflects. As a result, we now expect 2023 STIN-related and restructuring costs to be closer to $35 million with approximately $30 million of expected cash outflows. On slide 10, we have provided an update on our balance sheet. We have $621 million in liquidity, including our $500 million revolver, which remains undrawn. We have a strong balance sheet, and our net leverage at quarter end was approximately 1.2 times trailing 12 months adjusted EBITDA. This remains at the low end of our stated range of 1 to 2 times. As Drew mentioned, our Board of Directors authorized a $125 million share repurchase program Given our strong balance sheet and free cash flow generation, we are pleased to have this authorization as a formal part of our capital allocation framework. We will opportunistically repurchase shares through a balanced approach that will include relative market value, leverage, free cash flow, and overall macroeconomic conditions. At a minimum, we plan to buy enough shares to cover dilution from restricted stock grants on an annual basis. Additionally, as you saw this quarter, we will continue to set our tax withholding obligations for the vesting of our pre-stand RSU grants in cash. Using cash in lieu of selling shares to sell these tax withholding obligations will help minimize dilution. For the first quarter, this was a $7 million cash outflow. We estimate an additional $10 million for the balance of the year for a total 2023 estimate of approximately $17 million. You can find an update to our 2023 modeling assumptions on page 13 of the presentation. We now expect capital expenditures between $60 and $65 million. This includes $15 million of strategic investments in real estate to accommodate growth in our brokerage business. We remain committed to spending approximately 1% of revenue capital expenditures over the long term in line with our guidance in Investor Day. Stock-based compensation expense is expected to be between $20 and $22 million. Appreciation and amortization is expected to be between $70 and $75 million. Interest expense will be between $32 and $34 million, $1 million lower than our prior forecast. and we expect our adjusted effective tax rate will be approximately 25%. You should also model an average diluted share count of approximately 120 million shares. Please note that this does not include any impact associated with potential share repurchases. Overall, given the current macroeconomic backdrop, we are pleased with our financial results. We are operating well, have solid cash flow generation, and a strong balance sheet. Now, I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk more about our outlook.