RXO, Inc.

2024 Earnings Conference Call and Webcast. My name is Sharon 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 its earnings release. You should refer to a copy of the company's earnings release and 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'll 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. There are four main takeaways I'd like you to walk away with today. First, we delivered adjusted EBITDA, brokerage volume growth, both full truckload and LTL, and brokerage gross margin at the high end of our guidance ranges. Second, we have momentum in managed transportation and have one significant new business, and have an impressive sales pipeline. Third and last mile, we achieved the fastest year-over-year growth rate in stops in nearly two years and have taken actions to significantly improve profitability. And lastly, we expect our actions to result in both sequential and year-over-year adjusted EBITDA growth in the third quarter. Now, let me walk you through our second quarter results. RxO executed well with adjusted EBITDA of $28 million in what continues to be a soft freight market. Our brokerage business grew volume by 4%, with a 40% increase in less than truckload volume. We continue to build scale in our LTL business, which now represents 20% of our brokerage volume and is contributing to profitable growth. Full truckload volume was down 2% above the midpoint of our expectations. The decline was the result of the bid season strategy we walked you through last quarter and a tough comparison to the second quarter of 2023. Cross-border brokerage volume increased by 12% year-over-year. We're hitting tough comparisons, but cross-border demand remains robust. Full truckload contract business represented 78% of our mix in the quarter and positions as well to earn spot volume and project loads when the market improves. Our strong relationships and service lead customers to choose RXO for spot loads and projects. Importantly, the bid season strategy we talked with you about last quarter, combined with our effective management of purchase transportation, yielded brokerage gross margin of 14.7%. Jared will discuss brokerage margin dynamics in more detail. Complimentary services were a major contributor to our results. In managed transportation, we again grew synergy loads provided to our brokerage business year over year, and customers awarded us more than $200 million in freight under management, or FUM, in the quarter. The total new FUM in our sales pipeline is substantial. greater than $1.6 billion. We have a long runway for growth in managed transportation, and converting that pipeline will fuel growth across RxO. In the second quarter, last mile stops grew by 7% year over year, the fastest rate in nearly two years. This was a result of our focus to build deep relationships with the top brands and provide those customers with the best service in the industry. The largest retailers of big and bulky goods are turning to large national last mile providers like RxO because of our scale, technology, financial stability, and exceptional service. We continue to bolster our position as the number one provider of big and bulky last mile deliveries. Complimentary services gross margin of 23% was up 170 basis points year over year. The increase was primarily driven by last mile performance, which included stronger volume and the results of a profitability initiative. Jamie will talk more about this in a few minutes, but we expect this effort to generate more than $20 million in annualized adjusted EBITDA. RSO's company-wide gross margin was 19% in the quarter. Let's talk about the overall freight market. While conditions remain soft, most key industry metrics improved since the first quarter. On the supply side, carriers continued to exit each month in the quarter. However, the rate of exit slowed when compared to the first quarter. As we anticipated, the national load to truck ratio moved seasonally higher as the quarter progressed. This was a result of DOT road check, produce season, and continued capacity exits. Carrier rates have started to increase, And while this puts short-term pressure on our gross margin, it's consistent with our view that rates are at an unsustainable level for many carriers. On demand side, indicators continue to be mixed. While inflation is moderated and retail inventory positions are healthy, the labor market, consumer confidence, and the industrial ISM index have all weakened. It's too soon to tell whether the tightening we're seeing is sustainable. but we continue to make strategic decisions in anticipation of the market recovery. We remain focused on reliably serving our customers' needs and honoring our contractual rates. This strategy contributed to our second quarter results and will position us well to capture spot volume and project freight when the market recovers. Let's talk about what we saw in July and what our expectations are for the third quarter. July is typically the slowest month of the quarter, And we expect that to be the case this year. Full truckload volume in the month was down approximately mid-single digits when compared to June and down high single digits year over year. As July progressed, we did see an improvement in our gross margin. For the third quarter, we anticipate that brokerage volume will decline by a low to mid-single digit percentage on a year over year basis and will grow slightly quarter over quarter. We anticipate that growth in LTL will continue, but that full truckload volume will decline by a high single digit to low double digit percentage. This is primarily because of our bid season pricing strategy and the tough comparison to the third quarter of 2023. As you recall, in the third quarter of last year, our brokerage volume grew by 18% year over year. RxO will continue to take profitable market share over the long term, and those gains will be sticky. In the second quarter, full truckload contract volume grew by more than 40% since the second quarter of 2021. Even with the anticipated third quarter year-over-year volume decline, full truckload contract volume will be up approximately 30% on a three-year stack. While we're still operating in a prolonged soft rate environment, our strong margin performance and disciplined focus on costs give us confidence in our ability to grow adjusted EBITDA again sequentially and also year over year. Jamie and Jared will discuss our guidance in more detail in a few minutes. This is the right point in the cycle to make strategic investments, like our planned acquisition of Coyote Logistics. We're on track to close in the first half of the fourth quarter. As I mentioned on our call in June, We've had an integration mindset since we started the due diligence process and have made good progress. I've had the opportunity to spend some time with a wide range of team members at Coyote, and I'm impressed by their energy, passion, and knowledge. Many in key roles have been with Coyote since its early days and are excited about the significantly increased scale that RxO will have after the acquisition closes. This is the right deal at the right time. We're buying at a good point in the freight cycle. Coyote and RXO share few customers and carriers in common, and our large-scale business will be even more primed for profitable growth. I remain confident that this acquisition will create substantial value for our customers, carriers, employees, and investors. You'll hear more about our progress in the coming weeks and months, but for now, we're focused on continuing to provide the best service, the most comprehensive set of solutions, continuous innovation, and close customer relationships. We'll also remain disciplined when it comes to cost. RHO is well positioned to deliver earnings growth when the market inflects. Now, Jamie will discuss our financial results in more detail. Jamie?

Thank you, Drew, and good morning, everyone. Let's review our second quarter performance in more detail. We generated $930 million in revenue compared to $963 million in the second quarter of 2023. Gross margin was 19%, up 160 basis points sequentially and up 40 basis points year over year. Our adjusted EBITDA was $28 million, above the bid point of the guidance range we provided to you in May, This compares to $38 million in the second quarter of 2023. Our adjusted EBITDA margin was 3%, up 140 basis points sequentially and down 90 basis points year over year. Below the line, our interest expense was $8 million. For the quarter, our adjusted earnings per share was 3 cents. You can find a bridge to adjusted EPS on slide 7 of the earnings presentation. Now I'd like to give an overview of our performance within our lines of business. Brokers generated $543 million of revenue, down 4% sequentially and 3% year-over-year. The year-over-year decline was primarily due to slightly lower full truckload volume and lower freight rates. Brokerage gross margin remained solid at 14.7% towards the high end of our guidance. The margin performance in the quarter was primarily due to our bid season strategy that anticipated a market recovery while honoring customer rates, as well as our focus on procuring purchase transportation effectively. Brokerage gross margin expanded by 50 basis points sequentially and declined by 70 basis points year-over-year. Complementary services revenue in the quarter of $421 million was up 10% sequentially and down 4% year-over-year. The sequential revenue increase was primarily due to seasonality within our last mile business, driven by an increase in stops from new and existing customers. Last mile stops grew 7% year over year, the fastest growth in nearly two years. Similar to the first quarter, automotive expedite volume in our managed transportation business remained soft. Complementary services gross margin of 23% increased by 240 basis points sequentially and by 170 basis points year over year. All of our lines of business contributed to this performance. We're pleased with our complementary services gross margin performance, but we still have plenty of opportunities for future expansion. In last mile, we have several profitability initiatives that are underway. but one specifically I'd like to expand on. Earlier this year, we partnered with an outside consultant to accelerate the design and implementation of a strategy to significantly reduce last mile purchase transportation costs. The initiative has already positively impacted last mile. In the second quarter, the annualized adjusted EBITDA impact of this initiative was approximately $11 million. we realized the associated benefits in a phased approach throughout the quarter resulted in an improvement in second quarter adjusted EBITDA of $2 million, which was more than offset in the quarter by one-time professional fees. Looking forward, and when fully implemented, we expect the annualized adjusted EBITDA impact to be more than $20 million, an impressive return on the dollars spent. As we discussed cash, please refer to slide eight. Over the trailing six months, our adjusted free cash flow was negative $8 million, which was impacted by lower profitability levels at the bottom of the freight cycle. Additionally, this includes the impact of our semiannual interest payment, the settlement of previously discussed legacy liability claims, and our strategic use of working capital, notably increased usage of our quick pay offering for carriers. Our adjusted free cash flow in the second quarter was negative $9 million, slightly better than our expectation of negative $10 million, which we shared with you in May. We ended the quarter with $7 million of cash on the balance sheet, flat with the prior quarter. Our revolving credit facility increased by $18 million sequentially, consistent with our estimate. The primary difference between adjusted free cash flow and cash usage in the quarter with $7 million of reduction-related cash outflows. We continue to expect a conversion range of 40 to 60% through market cycles and remain excited about the cash flow generation that RxO will produce as the market influx. As you can see on slide 9, our liquidity position remains strong with approximately $600 million of committed liquidity at the end of the quarter. Quarter-end gross leverage was 3.3 times trailing 12 months adjusted EBITDA, and net leverage was 3.2 times. This is higher than our first quarter leverage due to our siphon of last year's adjusted EBITDA. We remain comfortable with our current leverage ratio, and given the strong free cash flow characteristics of our business, we expect to delever rapidly as the market recovers. Moving to costs. Last quarter, we updated our expectation for annualized cost reductions to at least $35 million in 2024. We now expect annualized cost reductions of approximately $35 to $40 million. The actions to achieve these cost reductions are complete. The P&L expense and cash outflows associated with these cost reductions were approximately $13 million, a strong return of just under 200%. While a large portion of these cost reductions were offset by the year-over-year declines in gross profit per load and inflationary pressures, they position us well for operating leverage when the market recovers. Importantly, these cost outs are mostly structural in nature. Over the last 18 months, we've taken out more than $65 million of annualized costs while strategically invested in the business. RxO is well positioned for the market recovery. Importantly, as with everything else we're discussing today, these cost savings and restructuring charges don't include any impact from synergies or charges resulting from the upcoming Coyote acquisition. Now let's discuss our expectations for third quarter and the full year. While we're still operating in a prolonged, soft trade environment, our strong margin performance and cost discipline give us confidence in another quarter of sequential adjusted EBITDA growth. We expect to deliver between $28 and $34 million of adjusted EBITDA in Q3. We also expect a strong adjusted free cash flow quarter with an adjusted free cash flow conversion of more than 50%. Jared will provide more details on our outlook shortly. Slide 14 includes our modeling assumptions for the full year. which remain unchanged. As mentioned previously, these assumptions exclude the impact of the pending acquisition of Coyote Logistics. We continue to expect the following. Capital expenditures between 40 and 50 million dollars. Depreciation expense between 56 and 58 million dollars. Amortization of intangibles of approximately 12 million dollars. Stock-based compensation expense between $24 and $26 million. Restructuring transaction integration expenses, excluding Coyote acquisition-related costs, between $20 and $25 million. Net interest expense between $31 and $33 million. And we expect our full-year 2024 adjusted effective tax rate to be approximately 30%, which is above our long-term expectation of approximately 25%. You should also model an average diluted share count of approximately 120 million shares. Overall, we're very pleased with our execution given the current phase of the freight cycle. Our brokerage business is generating solid gross margin despite the tightening market, and we're seeing improved gross margin and pipeline opportunities across all complementary services. We're especially pleased with the improvement to date in last mile and the significant opportunities ahead to structurally improve our margins. Now, I'd like to turn it over to our Chief Strategy Officer, Jared Weisfeld, who will talk more in detail about our results and our outlook.