RXO, Inc.

Welcome to the RxO Q3 2024 Earnings Conference Call and Webcast. My name is Joelle, 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 and uncertainties and other factors that could cause actual results to differ materially from those in forward-looking statements. A discussion of today's factors that could cause actual results to differ materially is contained in the company's SEC filings, as well as in the 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 your conference.

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 three main points I want to convey this morning. First, we completed our transformative acquisition of Coyote Logistics in the quarter. The acquisition significantly increases RxO's earning power over the long term. The integration is ahead of schedule, and we're already seeing early wins from the combined business. As a result, we're raising our estimate for cost synergies and now expect at least $40 million. In addition, we expect to achieve significant benefits within cost of purchase transportation once our tech platforms are integrated. Our balance sheet is even stronger than it was pre-acquisition. Our leverage decreased by more than 40% as a result of our successful equity financing. Second, while the market remains soft, RxO continued to deliver on our financial commitments for adjusted EBITDA, adjusted free cash flow, and brokerage gross margin. Importantly, we achieved these solid results while completing a transformative acquisition. Third, We continued our momentum and complimentary services in the quarter with significant new customer wins and a massive pipeline and managed transportation. And last mile, we grew stops by an impressive 11%. I'll start by giving you an update on our transformative acquisition of Coyote Logistics, which closed in mid September. I'm extremely pleased that we're ahead of schedule on fostering employee engagement, taking care of our customers, integrating our tech, and synergy opportunities. Let me cover each of those elements in more detail. I continue to be impressed by our people. The acquisition brought a deep bench of seasoned leaders to RxO. Everyone across the organization has stepped up to quickly advance the integration and deliver results for the business. Morale across the whole company is high. We recently conducted our quarterly all employee survey And the comments I received through it showed me that our people are hungry and excited about our prospects for growth. Our people remain focused on ensuring we take care of our customers through the integration. We have a structured process that ensures we're effectively communicating across the organization about customer needs, pricing, and growth opportunities. Since the acquisition, we've consistently been in front of our customers to ensure that bid season runs smoothly. Our customers' candid feedback is helping us quickly decide where to focus during integration and bid season. I've personally met with dozens of customers since the acquisition, and the customer feedback I've received has been overwhelmingly positive. Many of those conversations have yielded opportunities for growth and cross-selling that neither RxO nor Coyote would have seen as a standalone company. Specifically, Since closing the acquisition, there have been more than 200 distinct cross-selling opportunities where Legacy Coyote has offered RxO's additional services and solution. Also, we're using Legacy Coyote capacity for some of the special projects and spot loads that were awarded to RxO. We're starting to realize the benefits of our increased scale. When it comes to our technology, our teams have worked closely together over the last month and a half to do deep dives on all the tech that both teams are using. We've identified best practices from both Legacy Coyote and Legacy RxO, and now have a roadmap to integrate our technology for our customers, our contract carrier network, and our employees in the next year. As a result of the smooth integration so far, we now expect at least $40 million of cost synergies more than our initial estimate of at least $25 million. Jamie will talk more about this later in the call. Just as the acquisition is strengthening our bench of talent, customer relationships, and technology, it has also strengthened our balance sheet. Leverage decreased by more than 40% after the successful equity financing to fund the Coyote acquisition. Next, I'll walk you through our third quarter results. which came in line with our expectations. RxO delivered adjusted EBITDA of $33 million. Legacy RxO delivered $31 million of adjusted EBITDA at the midpoint of our guidance range. Volume in Legacy RxO's brokerage business declined by 5% year-over-year. Full truckload volume decreased by 9% and was partially offset by a 13% increase in less than truckload volume. This performance was in line in what we had forecasted last quarter and similar to what Legacy Coyote saw in their business as well. Jer will talk more about that later in the call. Last quarter, we highlighted that we're building scale within our LTL business, and we did so rapidly in the third quarter. Our LTL volume has more than doubled with the acquisition of Coyote. We're pleased that our bid season strategy along with our effective management of purchased transportation yielded brokerage gross margin of 13.7%. We've continued to see momentum within complementary services. In managed transportation, customers awarded us more than $300 million in freight under management, or FUM, in the quarter. In the fourth quarter, we expect to onboard another $400 million in new business, That's more than 10% of managed transportation's current annualized FUM. The total new FUM in our sales pipeline remains substantial, greater than $1.3 billion. We have a long runway for growth in managed transportation, and converting that pipeline will fuel growth across RxO. In the third quarter, last mile stops grew by 11% year over year. an acceleration from the 7% growth we delivered in the second quarter. We remain the industry leader of big and bulky last-mile deliveries because of our focus on building deep relationships and providing customers with the best service in the industry. Top brands trust RxO because of our scale, technology, financial stability, and exceptional service. Complementary services gross margin of 21.5%, was up 150 basis points year-over-year. RxO's company-wide gross margin was 17.3% in the quarter. I'd like to give you an update on the overall freight market. We didn't see many changes in the freight market conditions when compared to the previous quarter. The national load-to-truck ratio declined, while industry tender rejections increased slightly. On the demand side, conditions remained soft, port volumes remained strong, but they have not yet translated into over-the-road volume strength. On the supply side, carriers continued to exit each month in the quarter. However, the rate of exits continued to slow. Rate rates continue to be challenging for many carriers. In October, we did see acute tightness in the market due to Hurricanes Helene and Milton, as well as the brief port strike. The tightness has continued in recent weeks. Heading into the holiday season, we're closely monitoring the macroeconomic environment, but anticipate another muted peak season this year. On the positive side, inflation is moderated, retail inventory positions are healthy, and consumer confidence has recently rebounded. However, the labor market and the industrial sector of the economy have weakened. We continue to lean into our playbook to ensure RxO is properly positioned no matter the market conditions. We remain focused on reliably servicing our customers' needs and honoring our contractual rates. This strategy contributed to our third quarter results and will position us well to capture spot volume and project rate. Recently, several customers came to us for assistance as they worked to serve their customers that were affected by Hurricanes Helene and Milton. I'm proud that the deep relationships that we've built with our customers are enabling us to serve both them and our communities during crisis and other times of stress. Jamie and Jared will discuss our outlook in more detail, but we expect combined brokerage volume to be up sequentially in the fourth quarter, with tightening market conditions impacting our buy rates in the short term. While no one knows when the freight market will turn, I believe that RxO is uniquely positioned to capitalize on opportunities as they arise. With larger scale, we can provide our customers with a broader array of services and buy transportation even more cost-effectively. Our differentiated portfolio of complementary services will drive organic growth across RxO. Our exceptional proprietary technology includes pricing algorithms that leverage AI and machine learning to continuously improve, and employee-facing software that drives ongoing increases in productivity. our strong balance sheet positions as well for future M&A, and we expect all of this to lead to greater earnings, free cash flow, and conversion. Now I'll turn it over to Jamie to discuss our financial results in more detail.

Jamie? Thank you, Drew, and good morning, everyone. Let's review our third quarter performance in more detail. We completed the acquisition of Coyote Legit on September 16th, and our financial results therefore include two weeks of contribution from Coyote. My comments will refer to the combined company, less specifically referring to either Legacy RxO or Legacy COTI. We generated $1.04 billion in revenue. Gross margin was 17.3%. Our adjusted EBITDA was $33 million. Our adjusted EBITDA margin was 3.2%. Let me give you some detail about Legacy RxO's performance in the quarter. Legacy RxO revenue was $935 million, down 4% year-over-year. Adjusted EBITDA was $31 million at the midpoint of the range we provided to you in August. This compares to $26 million in the third quarter of 2023. Adjusted EBITDA margin was 3.3%, up 60 basis points year-over-year. Below the line, our interest expense was $6 million. For the quarter, our adjusted earnings per share was 5 cents. You can find the bridge to adjusted EPS on slide 7 of the earnings presentation. One item of note on the bridge is an accounting charge associated with the private placement of equity as part of our acquisition financing. We recorded a $216 million non-cash charge, which represents the difference between the issuance price and the closing market price of RxO's common stock on the effective date of the profit placement. Now I'd like to give an overview of our performance within our lines of business. Combined brokerage revenue was $655 million and represented 61% of our total revenue in the quarter. Please note that all of Legacy Cody's revenue has been classified into brokerage. From a profitability perspective, brokerage gross margin remained solid at 13.7%. Legacy RxO's brokerage revenue was $550 million, down 7% year-over-year, primarily due to lower full truckload volume. Legacy RxO brokerage gross margin was 13.8%, slightly below the midpoint of our guidance range, and was down 130 basis points year-over-year. Complementary services revenue in the quarter of $419 million was flat year-over-year, and represented 39% of total revenue. To manage transportation, while automotive plants came back online later in the quarter, overall auto demand and managed expedite volumes remained soft. Last Mile continues to perform well, and stops grew by 11% year-over-year, accelerating from last quarter's growth rate. Complimentary services gross margin of 21.5% increased 150 basis points year-over-year. Both managed transportation and last mile contributed to this performance. As we discuss cash, please refer to slide eight. Legacy RxO adjusted free cash flow in the third quarter was very strong at $27 million. This represents an 87% conversion from adjusted EBITDA, better than our expectation, which was to exceed 50%. This was mostly attributable to better-than-expected collections in the quarter. Over the trailing six months, Legacy RxO adjusted free cash flow with $18 million, which represents a 31% conversion from adjusted EBITDA. Trailing six months' cash flow was impacted by lower profitability levels at the bottom of the freight cycle and includes a semiannual interest payment associated with our outstanding senior notes. including the two weeks of CODI adjusted free cash flow over the quarter was $9 million. For the six month period, it was zero. This was in line with our internal expectations. Free cash flow was impacted by working capital timing differences on the legacy CODI business. Much of cash associated with this working capital headwind has already been collected in the fourth quarter. We ended the quarter with $55 million of cash on the balance sheet. The increase from the prior quarter was primarily a function of the equity financing associated with the acquisition of COTI. However, it's important to note that this is mainly the result of timing as most of the current cash balance will be used for previously incurred expenses, transaction costs, and future restructuring charges. We expect our fourth quarter cash balance to be approximately $5 to $10 million. As you can see on slide 9, our liquidity position is the strongest it's been in our company's history. Our $600 million revolver was undrawn at the end of the third quarter. Quarter-end gross leverage was 1.6 times trailing 12-month pro forma adjusted EBITDA. Last 12 months, leverage decreased significantly from the prior quarter after the successful execution of the equity financing associated with the acquisition of Cody Logistics. The benefits of increased scale and associated free cash flow conversion was one of the strategic merits of the acquisition. With our current capital structure, the free cash flow generation potential of the combined company is significant. Let's talk more about the Cody integration. We now expect at least $40 million of annualized cost synergies. 60% higher than our initial estimate of at least $25 million. By the end of the fourth quarter, we will have at least $15 million of annualized synergies completed. Most of the P&L benefit associated with these synergies will be realized in the first quarter of 2025. Consistent with our expectations from a few months ago, we expect a total of $25 million of annualized synergies completed within the first 12 months of close. The incremental $15 million of synergies associated with today's increased estimate will likely occur in late 2025 as our technology integration is completed. RxO Connect will be our primary operational system, and moving to one unified platform will result in significant savings. To give some additional context, Legacy Coyote was spending approximately $50 million per year in technology. Importantly, these synergies do not include opportunities for the cost of purchase transportation, which we believe have the potential to be significant. To put this into context, the combined annual cost of purchase transportation across brokerage is now more than $4 billion. We're very pleased with our progress, and we're ahead of schedule. Now, let's discuss our expectations for the fourth quarter. the macroeconomic environment remains reasonably healthy. GDP continues to grow, and consumer confidence has recently increased, although the industrial sector and the labor market have weakened. I'd like to give you some additional insights regarding our fourth quarter outlook. We're assuming a muted peak season in continued soft freight market conditions. In both brokerage and managed transportation, we're assuming softness in the automotive market, In brokerage, our gross margin outlook reflects tightening market conditions and the impact from legacy COTI customer mix. We're not expecting our typical seasonal increase in last mile given better than expected stops in the third quarter. For the combined company, we expect to generate between $40 and $45 million of adjusted EBITDA in the fourth quarter. Jared will provide more details on our outlook shortly. Slide 15 includes our modeling assumptions for the fourth quarter, which reflect the results of the combined company. We expect the following. Capital expenditures between $16 and $18 million. Depreciation expense between $20 and $22 million. Standardization of intangibles of approximately $18 million. Stock-based compensation expense of $6 and $7 million. restructuring transaction and integration expenses between $15 and $17 million, net interest expense of approximately $8 million, and an adjusted effective tax rate of approximately 25%. You should also model an average fully diluted share count of approximately 167 million shares. Year-end fully diluted share count is expected to be approximately 170 million shares. We will provide additional 2025 modeling assumptions in February during our fourth quarter earnings call, but there are a few assumptions I can give you now. We expect 2025 amortization of intangible expense of approximately $50 million. The increase is driven by the CODI acquisition. Interest expense should be unchanged at approximately $32 million, and we expect our adjusted effective tax rate to be between 27 and 29%. We continue to be very pleased with our execution given the current phase of the freight cycle. The integration of COTI is ahead of schedule, the teams are working well together, and we've received positive feedback from customers. While we're still operating in a prolonged, soft freight environment, we're positioning RxO for the long term and are excited about the earnings power and the free cash flow generation of the combined company. 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.