RXO, Inc.

Welcome to RxO Q2 2023 Earnings Conference Call and Webcast. My name is Sylvie 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. I'm pleased with RxO's performance in the second quarter of 2023 despite the soft rate market. Importantly, we accelerated our market share gains and achieved the goals we laid out for you last quarter. We continued to grow brokerage volume year-over-year, and we grew adjusted EBITDA sequentially. In addition, Last Mile is on track to grow EBITDA year-over-year for 2023. Overall, our company-wide gross margin remains strong, 18.6%. and our adjusted EBITDA margin was up sequentially, even though revenue declined quarter over quarter. We continued to optimize our cost structure and invested to support our growth. Jamie will discuss our efforts in more detail in a few minutes. Our Q2 results were driven by another quarter of impressive year-over-year brokerage volume growth, strong brokerage profitability, and improved results from last mile. In brokerage, we continued to grow profitably, significantly outperforming the industry. Volume grew by 10% year over year, and we achieved gross margin of 15.4%. We set multiple brokerage volume records in the quarter, including new records for total volume, quarterly loads per day, and monthly loads per day during the month of June. Year-over-year volume growth accelerated every month as the quarter progressed. For the last few quarters, we've highlighted the strength of our sales pipeline, which successfully converted to contract volume in the second quarter. Contractual volume remained the most important driver of our brokerage growth. Similar to last quarter, managed transportation and LTL synergy loads also contributed to our growth. Overall, RxO's contractual volume grew 19% year over year. Our contract business now represents 79% of our brokerage volume. Bid momentum continued in the quarter with the number of bids up 23% year over year. Now, let me give you some color on what we're seeing within our brokerage customer verticals. Our retail e-commerce volumes flip positive in the second quarter, growing low single digits year over year. You'll recall that our retail and e-commerce volumes declined by low single digits year over year in the first quarter. This was the first quarter that retail and e-commerce volumes grew year over year since Q3 of 2022. Our retail and e-commerce customers' inventories are in a much better position than they have been in a long time. Similar to last quarter, we also saw strength in the home furnishings, building, and technology verticals. When the market is this soft, many companies find it difficult to grow volume. However, RXO continues to win. Our customer relationships, service, technology, and scale enable us to take share profitably. Our customers are telling us that they continue to reduce the number of carriers they're working with, and our long history of creating value within their supply chains has them awarding more freight to RXO. We're in an excellent position to receive spot loads and project freight when the market turns. As an example of how we're performing for our customers, in the second quarter, RXO-1 delves 2022 North America full truckload of Carrier of the Year Award for the second straight year. Dell told us that our focus on partnership, performance, and flexibility enabled them to meet the challenges of peak demand and last year's disrupted supply chain. We pride ourselves on the close relationships we have with our customers, and we strive to provide this level of performance for every customer. I now want to spend some time discussing the dynamics that impacted brokerage gross profit per load in the quarter. We saw a significant tightening of capacity in a portion of the country as the quarter progressed. To put it in perspective, the national load-to-truck ratio increased when compared to the first quarter of 2023. There was an acute tightness in the states impacted by produce seasons. The tightening of capacity increased our cost of purchase transportation in those states. However, there was no corresponding increase in our sell rate due to the lack of spot market. Despite these dynamics, we still posted solid brokerage gross margin of 15.4% in the quarter, driven by the efforts of our team and our technology. Jared will talk more about this in a few minutes. Turning to the results within our complementary services, gross margin expanded by 50 basis points sequentially, a strong result. Both year-over-year and quarter-over-quarter managed transportation significantly increased the number of synergy loads it provided to our truck brokerage business. Our managed transportation pipeline continues to convert nicely as large shippers strategically choose RxO to manage their transportation spend. In the second quarter, Managed Transportation onboarded a large new customer and secured several key wins that will be onboarded in early 2024. In last mile, EBITDA improved on a year-over-year basis as a result of the strategic pricing actions we discussed last quarter. Last mile's second quarter EBITDA was the highest it's been since the second quarter of 2021. We continue to expect to grow EBITDA within our last small business year-over-year for full year 2023. We're winning because of our scale, our ability to design unique solutions for our customers, and our superior customer service. Our cutting-edge technology continues to support our business results. In the second quarter, 96% of our loads were created or covered digitally. Looking ahead to the third quarter, we expect another quarter of year-over-year brokerage volume growth. Our playbook remains the same. Grow profitably, provide best-in-class customer service supported by industry-leading technology, and control costs while making investments for the future. During the quarter, we announced the expansion of three brokerage offices, Ann Arbor, Michigan, Columbia, South Carolina, and Kansas City, Missouri. Now, shifting to what we're seeing in the market. Both our internal and market data suggest that we're approaching the bottom of this break cycle. The exact timing of the bottom and the pace of the recovery are subject to the broader macroeconomic environment. We're closely watching industry-specific leading indicators, including tender rejections, load-to-truck ratios, and carrier exits. We're always getting feedback from our customers, and we're monitoring broader economic data, including industrial production and consumer demand. Jared will cover what we're seeing later in the call. This isn't the first time we've been through a market like this. Our leadership team has decades of experience operating in every kind of freight cycle. We're optimizing our cost structure, leveraging technology, and closely monitoring all the data to make the right decisions for the long term. We're exactly where we need to be in this part of the freight cycle. RxO's volume growth, combined with our optimized cost structure will lead to significant earnings growth when the cycle inflects. We expect the moves that we're making now will pay off for years to come. With that, I'll turn it over to Jamie.

Thank you, Drew, and good morning to everyone. As Drew mentioned, we're executing well in what is a tough environment. In the second quarter, we generated $1 billion in revenue compared to $1.2 billion in the second quarter of 2022. Profitability remained solid, with gross margin of 18.6%, down 300 basis points year over year. Our adjusted EBITDA was $38 million in the quarter, compared to $101 million in the second quarter of 2022, and our adjusted EBITDA margin was 3.9%, down 430 basis points from the prior year. The declines in these metrics were primarily due to lower year-over-year freight rates, the moderation in brokerage gross margins, and the incremental corporate costs of being a stand-alone public company. It's important to note that Q2 2022 was the peak of the prior freight cycle and the highest EBITDA in the company's history, a tough comparison we are cycling. Combined, derivative operating expenses and SD&A were down 5% on a sequential basis. This was a direct result of the cost actions we took in the quarter and the variable component of our cost structure. Despite the 5% sequential reduction in revenue, our EBITDA margins improved by 20 basis points from the first quarter of 2023, driven by our strong execution and process engineering initiatives. We continued to optimize our cost structure, which helped us hold the pricing pressure. This position does well to draw substantial operating margin leverage when the cycle inflects. I'll expand on this in more detail later. Below the line, our interest expense for the quarter was $8 million. Adjusted to losing earnings per share for the quarter was $0.08. You can find a bridge to adjusted BPS on slide eight of the earnings presentation. Moving to our lives of business. We continued to outperform the brokerage industry. We grew brokerage volume by 10% year-over-year. Profitability in brokerage remained strong, with gross margin of 15.4%. Complementary services gross margin was flat year-over-year and expanded by 50 basis points sequentially. Our last mile pricing initiatives were the biggest driver. Please turn to slide nine as we discuss cash flow. Going forward, we'll communicate our cash conversion on a six-month view, which will normalize with quarterly volatility. We had a very, very strong trailing six-month cash flow conversion of 68%. This exceeded the estimate of 50% that we shared with you last quarter due to earlier than expected collection of some accounts receivable. We ended the quarter with $124 million of cash on the balance sheet. Respectively, there are some second half cash considerations to highlight. The earlier than expected collections in the second quarter were an approximately $15 million benefit, which will likely reverse in the third quarter. In addition, there will be approximately $10 million of cash outflows associated with fully accrued legacy claims. Regarding working capital, we remain comfortable with an annual adjusted cash conversion rate between 40 and 60% of adjusted EBITDA over long-term across market cycles. However, accelerated growth as the cycle turns will result in a usage of working capital in any given period. We anticipate the use of working capital at a rate of approximately 7 to 9% of each incremental revenue dollar. This can impact short-term cash conversion, depending on the pace of recovery. Moving to restructuring and spend-related costs. Last quarter, we estimated restructuring and spend-related costs of approximately $35 million for the full year 2023, of which $30 million were expected cash outflows. These estimates remain unchanged. We took out additional costs in the quarter and achieved annualized run rate savings of approximately $7 million. These savings help assort some of the reduction in brokerage gross profit per load in the quarter. We incurred approximately $1 million of restructuring charges to achieve the $7 million of savings, an even better return relative to the first quarter's restructuring actions. As we previously discussed, we continue to anticipate restructuring and spin-related charges to decrease in 2024. We've now achieved year-to-date annualized run rate savings of approximately $27 million. While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load, we are preparing the company for significant operating leverage when the cycle turns. Jared will expand on our growth algorithm in a few minutes. As you can see on slide 10, our balance sheet remains strong with net leverage at quarter end at approximately 1.6 times trailing 12 months adjusted EBITDA. This is at the midpoint of our stated target range and slightly higher when compared to the first quarter as we lapped last year's second quarter EBITDA. We executed $2 million of share repurchases in the quarter. As we discussed last quarter, At a minimum, we plan to repurchase enough shares to cover dilution from restricted stock grants on an annual basis. Additionally, we'll continue to settle tax withholding obligations for the vesting of pre-spend RSU grants in cash. This was a $2 million cash outflow in the second quarter and a $9 million cash outflow for the six-month period. We estimate a cash outflow of approximately $15 million for RSU tax withholding obligations in 2023. You can find our 2023 modeling assumptions on slide 14 of the deck. They remain unchanged and we continue to expect the following. Capital expenditures between 60 and $65 million. This includes $15 million of strategic investments in real estate to position us for additional growth in our brokerage business. Capital expenditures totaling approximately 1% of revenue over the long term, in line with our guidance yesterday. Stock-based compensation expense between $20 and $22 million. Depreciation and amortization between $70 and $75 million. interest expense between $32 and $34 million, and an adjusted effective tax rate of 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 state of the macroeconomy, and specifically the freight cycle, We're pleased with our execution. We're operating well, have solid cash flow generation, and a strong balance sheet. Now, I'd like to turn it over to our Chief Strategy Officer, Jared Weisfeld, who will talk more about our outlook.