RXO, Inc.

Welcome to RxO Q4 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 loss, 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 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 as 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, and thank you for joining today. With me here in Charlotte are Chief Financial Officer Jamie Harris and Chief Strategy Officer Jared Weisfeld. Before I get into our fourth quarter results, I want to recap 2023, a historic year for RxO. When we spun from XPO in November of 2022, we created a new public company that is more fit for purpose with the ability to allocate capital even more effectively. While market conditions were difficult when we spun, we viewed this as an opportunity to demonstrate the power of our model. In 2023, we doubled down on our strengths, exceptional customer service, solutions that help our customers solve their toughest transportation challenges, innovation, and deep customer relationships. We also successfully integrated new leaders into our existing long-tenured team. Our model delivered outperformance for 2023, despite the extended soft freight market conditions. Brokerage volume grew by 12% year over year, with gross margin of more than 15%. Brokerage cross-border loads grew by 37% year-over-year. Brokerage productivity, as measured by loads per head per day, increased by over 15%. In maintenance transportation, we significantly grew the synergy loads provided to our other lines of business, largely truck brokerage. We also onboarded several large new customers. We grew last mile adjusted EBITDA year over year. We also generated strong adjusted free cash flow of $49 million, which Jamie will expand on later. We achieved all of this while making investments for our future, including our people, offices, technology, and services. I couldn't be prouder of what the RxO team delivered in 2023, and I'm looking forward to continuing to outperform this year. Now let's discuss our fourth quarter results. RxO continued to perform well in the quarter, despite soft rate market conditions that have persisted. For the third consecutive quarter, we achieved double-digit brokerage volume growth. Total brokerage volume grew by 15%. Full truckload brokerage volume grew by 11%, and less than truckload volume grew by 45% year over year. We again broke records in our brokerage business this quarter. Quarterly loads per day and total volume hit new highs. Full truckload has always been the core of our brokerage business, and it represented 84% of volume in the quarter. Later, Jared will talk in more detail about our volume growth by vertical, but all of our major truckload verticals grew year-over-year. Our cross-border loads also grew by an impressive 28% year-over-year. Contract volume was again the most important driver of our growth and represented 80% of our mix in the quarter. Securing contractual volume puts us in prime position to win spot volume and project loads when the market inflects. RxO continues to take profitable market share. Brokerage gross margin was 14.8% in the quarter. In complementary services, managed transportation again grew the synergy loads it provided to our other lines of business, mainly truck brokerage. Managed Transportation also secured several key wins, including new Managed Expedite customers solidifying our position as a leading provider of this service. In Last Mile, the focus we placed on improving profitability was successful, and we grew adjusted EBITDA both sequentially and year-over-year for the fourth quarter and for full year 2023. We're pleased with the progress we've made in our last mile business, and we have many opportunities ahead. Complimentary services gross margin was 20.9% in the quarter, up 90 basis points sequentially, and up 40 basis points year over year. Our proprietary technology continues to drive many of these results. In the fourth quarter, 97% of the loads were created or covered digitally. up from 87% a year ago. Our seven-day carrier retention was 76%, up 200 basis points year over year. I'd now like to spend some time giving you an overview of what we're seeing in the market and how that impacted our business in the fourth quarter. The freight market continued to soften during the fourth quarter, primarily due to supply-side challenges. The load to truck ratio declined to about 2 to 1 in the fourth quarter, down from nearly 3 to 1 in the third quarter. Industry tender rejections remained steady at just about 4%. The Logistics Manager's Index dropped sharply in November after three consecutive monthly increases. It rebounded only modestly in December. Carrier exits accelerated, but there's still too much capacity relative to demand. We also experienced a muted peak season. We saw a typical seasonal capacity reduction at the end of Q4, and when combined with inclement weather hitting certain parts of the country, there were limited opportunities to improve our buy rates. This negatively impacted both our brokerage gross margin percentage and gross profit per load throughout the quarter. However, our focus on profitable growth while controlling costs enabled us to increase adjusted EBITDA by approximately 20% sequentially in line with the expectations that we communicated to you last quarter. I'd like now to discuss our expectations for the first quarter. We expect that our strong brokerage sales pipeline will enable us to deliver year-over-year brokerage volume growth in the first quarter albeit at a slower pace than in the fourth quarter. Brokerage gross margin compression continued into January, and we anticipate that will impact the first quarter. Jamie and Jared will discuss this in more detail later in the call. As we look forward to the rest of the year, we're preparing for multiple scenarios. At this time, our base case is the recovery will begin in the second half of the year. That assumes that the macro economy remains stable and carrier exits continue to accelerate. In market conditions like these, large companies like RXO who have financial strength, strong relationships with customers and carriers, and cutting-edge technology will excel and widen the gap with the competition. We have our sights set on the future and are investing for long-term growth and profitability. We also continue to react quickly to changing market dynamics, including by reducing our costs. The actions we're taking now will help drive outsized growth when the market turns. Now, Jamie will discuss our financial results in more detail.

Jamie? Thank you, Drew, and good morning, everyone. I'll review our fourth quarter performance in addition to some highlights for the full year. In the fourth quarter, we generated $1 billion in revenue compared to $1.1 billion in the fourth quarter of 2022. Gross margin in the quarter was 18%. While gross margin declined 150 basis points year over year, we are pleased with this performance given the current freight environment. Our adjusted EBITDA was $31 million in the quarter, in line with our expectations of 20% sequential growth. This compares to $64 million in the fourth quarter of 2022. Our adjusted EBITDA margin was 3.2% down 250 basis points year over year. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Below the line, our interest expense for the quarter was $8 million. Our adjusted effective tax rate of 29% in the quarter was lower than our previous expectations due to discrete tax items. Adjusted diluted earnings per share for the quarter was 6 cents, which includes approximately 2 cents of discrete tax benefits. You can find a bridge to adjusted EPS on slide 7 of the earnings presentation. Moving to our lines of business. In the fourth quarter, our brokerage business generated $610 million of revenue, down 8% year-over-year, primarily due to lower freight rates. Brokers volume for the quarter increased by 15% year over year. Brokers gross margin remained strong in the quarter at 14.8%. While gross margin declined 300 basis points year over year against a very tough comp, it only declined by 30 basis points sequentially. Complementary services revenue in the quarter of $411 million was down 16% year over year. Revenue was impacted by lower automotive volumes in our managed transportation business and continued weakness in the big and bulky category impacting last mile. While last mile stops were down 9% year over year in the quarter, last mile adjusted EBITDA was up year over year, primarily as a result of strategic price and actions we took early in the year combined with continued operational improvements. Our customers recognize the value that our last mile business provides and we're excited about the opportunities in this part of our business. Complementary services gross margin of 20.9% improved by 40 basis points year over year and by 90 basis points sequentially. Fourth quarter seasonality and our last mile pricing initiatives were the biggest drivers of our improved gross margin on a sequential and year over year basis, respectively. Turning to the full year. In 2023, We generated $3.9 billion in revenue compared to $4.8 billion in 2022. 2023 gross margin of 18.3% was down 130 basis points year over year. Our full year adjusted EBITDA was $132 million compared to $306 million in 2022. Our adjusted EBITDA margin for the year was 3.4% down 300 basis points. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Now I'd like to discuss the full year results for our lines of business. Brokerage revenue for the year was $2.4 billion, down 19% year-over-year, primarily due to lower freight rates. Brokerage volume for the year increased by 12% year-over-year. Brokers' gross margin remained strong at 15.4%, but declined by 300 basis points year over year. Complimentary services revenue was $1.7 billion for the full year, down 15%. Gross margin of 20.8% improved by 80 basis points year over year. For the full year, last month's stops were down 9%, but adjusted EBITDA was up year over year, as we mentioned earlier. Please turn to slide eight as we discuss cash flow. Our adjusted free cash flow of negative $2 million over the trailing six months was impacted by lower profitability levels at the bottom of the freight cycle. As we mentioned during last quarter's call, Q3 adjusted free cash flow was also negatively impacted by the earlier than expected collections in the second quarter. For the full year, RxO generates strong adjusted free cash flow of $49 million, or approximately 37% of adjusted EBITDA. As we discussed last quarter, our 2023 adjusted free cash flow was impacted by out-of-period cash tax payments in the amount of $15 million. When adjusting for those payments, our 2023 adjusted free cash flow conversion was approximately 48%. This speaks to the power of the RxO model and our ability to generate meaningful cash flow during a down cycle. We remain comfortable with an annual adjusted cash conversion rate between 40 and 60% of adjusted EBITDA over the long-term across market cycles. At the bottom of the cycle, adjusted cash conversion will be negatively impacted by fixed charges such as interest expense in addition to the capital expenditures that we intend to make for long-term growth. As Drew mentioned, at this time, our base case is that the freight market recovery will begin in the second half of the year. As a reminder, accelerated growth as the cycle turns will result in a use of working capital. We continue to anticipate using approximately 7 to 9% of each incremental revenue dollar. This could impact short-term cash conversion depending on the pace of the recovery. Now let's move to slide eight, where we've included a six-month cash bridge. We ended the quarter with $5 million of cash on the balance sheet, slightly above our expectations due to strong receipts in the quarter. The reduction of our cash balance from the third quarter was principally a function of our $100 million term loan prepayment. Turned into cost, in 2023, we achieved annualized run rate savings of approximately $32 million, with associated restructuring charges of $16 million, a very strong return. While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load, this will create significant operating leverage when the cycle turns. Our full year 2023 restructuring and spend-related costs were $28 million, better than last quarter's estimate of $30 to $32 million, and our initial expectation of approximately $35 million at the beginning of 2023. Additionally, the cash outflows associated with these restructuring and spend-related actions were $23 million, also better than the $25 million expectation that we shared with you last quarter and our initial expectation of $30 million at the beginning of 2023. I want to spend some time discussing our cost optimization efforts for 2024. While we continue to strategically invest in the business, we will always leverage our technology and operate with a continuous improvement mindset. That said, given the current market conditions, we are acting expeditiously to take additional cost out of the business. We currently plan to take out at least $25 million of additional annualized operating expenses. From a capital expenditure perspective, our current projection for 2024 is for capital expenditures in the amount of $40 to $50 million. This compares to $64 million in 2023 and is more in line with our long-term, cross-cycle target of 1% of revenues. Also remember, 2023 capital expenditures included approximately $12 million of strategic real estate spent. As I mentioned earlier, we are continuing to invest for growth but are mindful of the current operating environment. As you can see on slide nine, our liquidity position remains healthy with $600 million of committed liquidity at the end of the quarter. Gross and net leverage at quarter end were both approximately 2.5 times trailing 12 months adjusted EBITDA, moving higher from the prior quarter as we cycled through last year's EBITDA. We remain comfortable with our current leverage ratio, and given the strong free cash flow characteristics of our business, we will delever as the cycle inflects. Our customers want to work with strong partners like RXO. that can perform and invest across all market cycles. Regarding the first quarter, as Drew mentioned earlier, our brokerage business is currently being impacted by market conditions and limited spot opportunities, pressuring our gross margin. We therefore are anticipating an above-seasonal sequential decline in adjusted EBITDA. Specifically, we expect Q1 adjusted EBITDA in the range of $12 to $18 million. You can find our 2024 modeling assumptions on slide 13 of the deck. We expect the following. Capital expenditures between $40 and $50 million. Depreciation expense between $56 and $58 million. Amortization of intangibles of approximately $12 million. Stock-based compensation expense between $24 and $26 million. Restructuring transaction and integration expenses 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%. This assumes no change in the current tax law. You should also model an average diluted share count of approximately 120 million shares This does not include any impact associated with potential share repurchases. Overall, given the current state of the freight cycle, we're pleased with our execution. We're operating well, investing strategically while remaining disciplined on cost, and positioned in RxO for the cycle inflection. Now, I'd like to turn it over to Chief Strategy Officer Jared Weisfeld, who will talk more in detail about our results and our outlook.