RXO, Inc.

Welcome to the RSO Q3 2025 earnings conference call and webcast. My name is Michael, 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 with 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 Investors Relations section on the company's website for additional information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures the company uses when discussing its results. I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may now begin.

Good morning, everyone. Thank you for joining today. I'm here in Charlotte with RxO's Chief Financial Officer, Jamie Harris, and Chief Strategy Officer, Jared Weisfeld. This morning, we announced our third quarter results. Year-over-year, overall brokerage volume grew 1%, driven by less than truckload volume growth of 43%. Brokerage truckload volume declined by 11% year-over-year, but increased by 1% sequentially. Last-mile stops grew by 12% year-over-year, the fifth consecutive quarter of double-digit growth. And we added cash to the balance sheet and had 56% adjusted free cash flow conversion. Brokerage gross margin was 13.5%, and RSO's EBITDA was $32 million in the quarter, below our expectations. Contrary to our assumptions on last quarter's call, the market tightened in September. Capacity began exiting in certain regions, driven primarily by regulatory changes and enforcement. About two-thirds of RxO's freight in the quarter came from regions where buy rates increased, and this impacted our results. Buy rates increased faster than our contractual sale rates, with no meaningful corresponding increase in accretive spot opportunities. We take our commitments to our customers very seriously and continue to honor the service commitments we made in the quarter. Industry tender rejections in the third quarter were 6%. RxOs were just 2%. This built trust and strengthened relationship with our customers, and you can see the impact of our efforts in recognition we recently received from Blue Chip customers, including United States Cold Storage, Owens Corning, and Altonium. Reliably serving our customers' freight at this point in the market cycle will position RXO to win more spot loads and mini bids as the market recovers. Now I'd like to provide you with the details on our fourth quarter expectations, including EBITDA between $20 and $30 million. The biggest driver of the sequential decline is volume weakness within our last mile business, which is counter to typical seasonality. While we posted another quarter of impressive double-digit stock growth in the third quarter, since Labor Day, we've seen a weakening in demand for big and bulky goods. Jamie and Jared will discuss this in more detail later in the call. In brokerage, we expect the squeeze dynamic to intensify into the fourth quarter. At this point in the cycle, roughly 70% of our truckload brokerage business is contract. primarily with enterprise customers, so the squeeze on our gross profit per load has been acute. In addition, we have not yet seen a meaningful increase in accretive spot opportunities. When demand ultimately recovers, spot loads will increase, which will be accretive to gross profit per load, helping to offset the higher cost of purchase transportation. The big question is whether these changes to the industry capacity are permanent. If the regulatory changes hold and enforcement continues, we believe a significant amount of truckload capacity will permanently exit the market. This will help improve the overall safety of the industry as well as help combat theft and fraud. This has the potential to be one of the largest structural changes to truckload supply since deregulation and could result in a higher for longer freight environment. RxO is well positioned to capitalize on that if it occurs because of our larger scale as the third largest provider of broker transportation. However, for a sustained freight market recovery, we need increased demand for goods, and we aren't seeing that yet. Demand trends weakened throughout the third quarter and remain below typical seasonality. In fact, during the month of August, cast freight shipments reached their lowest level since 2020. We continue to take strategic actions to position RxO for both the short-term and the long-term. We've greatly improved RxO's cost structure throughout the downturn and took additional action in the third quarter. Since we've become a public standalone company, we've removed more than $125 million of cost. That is a significant improvement to our cost structure. Right now, the impact is being masked by the market-driven declines in gross profit per load. We're looking at our actions holistically. Some examples of our initiatives include investing in artificial intelligence that frees up time for our team to focus on our customers' most challenging problems, optimizing our real estate footprint, and right-sizing our teams to ensure the optimal balance between current demand and ensuring we're staffed for growth. Given the sustained soft freight market conditions, we've been moving quickly to streamline our costs within our brokerage business. As an example, in the third quarter, brokerage headcount declined by approximately 15% year-over-year. Our actions to date, including our investments in technology, have already yielded substantial productivity gains in brokerage. Productivity increased by 19% over the last 12 months and by 38% over the last two years. These are sticky changes to our business that will yield benefits in the future. I remain extremely confident in RxO's ability to deliver outsized earnings growth over the long term because of five things. Our improved cost structure, larger scale, continued focus on profitable growth, best-in-class technology, and ability to generate cash. First, our much more efficient cost structure will provide us with significant operating leverage when the market improves. Second, we have a much larger scale. Scale is a differentiator in brokerage, and I'll highlight two examples. Scale enables us to purchase transportation more effectively. Our common technology platform is helping us capitalize on additional power lanes while providing the best truck for each load. During the third quarter, our incremental buy rate favorability was similar to last quarter and approximately 30 to 50 basis points better when compared to the period before the carrier migration. Those improvements were more than offset by the September market tightening I mentioned earlier. We expect our buy rate favorability to further improve as we increase productivity across the organization. We remain confident that over time our favorability will increase to approximately 100 basis points. Another benefit of scale is a decreased cost per load. This was one of the guiding principles of the Coyote acquisition, and we achieved results in this area. Since our spend, our cost per load has decreased by more than 20%. We're effectively leveraging our increased scale and technology platform and will continue to bring down our cost to serve. The third driver of long-term value creation for RxO is profitable growth. This is part of our DNA, and we have continued opportunities to drive future growth. In addition to growing our core truckload business, we will also grow by offering valuable premium services that deepen relationships with customers. We're also in the early stages of growing more consistent sources of EBITDA, including managed transportation and LTL, because they reliably bring in strong and more consistent profits through market cycles. In the third quarter, we grew LTL volume by 43%, while LTL volume has grown significantly It only represents about 10% of total brokerage gross profit dollars. We have a long runway in LTL. We have an exceptional track record when it comes to growth. Over the five years prior to the Coyote acquisition, RxO grew total volume by 72% organically and 11% CAGR. Fourth, our technology is the differentiator. Customers and carriers constantly tell us that our tech is the best and easiest to use in the industry. We invest heavily in this area, spending over $100 million every year. This technology, powered by AI and machine learning, helps our employees be more productive, freeing up their time to focus on our customers and carriers. It also enhances our customer experience and drives our pricing engines. And fifth, our asset-like business model enables us to produce strong cash flows. In the quarter, despite the soft market conditions, our adjusted free cash flow conversion was 56%. We remain confident in delivering 40% to 60% conversion across market cycles. In conclusion, although we're in a challenging market environment and we're not satisfied with our near-term performance, we've taken decisive strategic actions. We remain focused on what has made us so successful over the past decade plus. We provide exceptional service. a comprehensive set of solutions, cutting-edge technology, and deep customer relationships. All of this provides RxO with a unique algorithm for long-term growth. Now, Jamie will discuss our financial results in more detail.

Thank you, Drew, and good morning. Let's review our third quarter performance in more detail. Our results are slightly below our outlook. For the quarter, we reported $1.4 billion in total revenue. gross margin of 16.5%, adjusted EBITDA of $32 million, and an adjusted EBITDA margin of 2.3%. Gross margin and adjusted EBITDA were primarily impacted by the increase in cost of transportation, further broad-based demand weakness, and continued headwinds in the automotive sector. As Drew mentioned, cost of transportation increased without a correspondent increase in sale rates or accretive spot opportunities. This caused a margin squeeze on our contractual brokerage volume during the month of September. Jared will provide more details later in the call. Automotive was a continued headwind and represented an approximately $5 million year-over-year margin impact in the quarter. As we discussed over the past two quarters, this freight is time critical and with high service requirements and typically carries a higher-than-average gross margin with strong flow-through to EBITDA. Below the line, our interest expense was $9 million. For the quarter, our adjusted earnings per share was one cent. You can find a bridge to adjusted EBITDA on slide seven of the earnings presentation. Now I'd like to give an overview of our performance within our lines of business. Brokers revenue was $1 billion and represented 70% of our total revenue. Overall brokers volume growth was 1% in the quarter. We had strong LTO growth of 43%, which was offset by 11% decline in full truckload volume. The year-over-year decline in truckload volume was impacted by overall demand weakness, softness in the automotive sector, and efforts we undertook with customers to optimize price, volume, and service. Given the market tightening in September, brokerage gross margin was down 90 basis points sequentially to 13.5% at the low end of our outlook. Complementary services revenue in the quarter of $442 million increased by 5% year-over-year and was 30% of our total revenue. Gross margin within complementary services was 21.3%. Now let's discuss each line of business within complementary services. Managed transportation generated $137 million of revenue in the quarter, down 9% year-over-year. Managed transportation continues to be impacted by lower automotive volume in our managed expedite business. Our last mile business generated $305 million in revenue in the quarter, up 14% year over year. Last mile stops grew by 12%. However, over the past few months, we have seen a weakening in the big and bulky demand. This trend has worsened into the fourth quarter. Let's now discuss cash. Please refer to slide eight. Adjusted free cash flow in the third quarter was $18 million, yielding a strong 56% conversion from adjusted EBITDA. As a reminder, our semi-annual interest payment is not due until the fourth quarter, which benefited our third quarter conversion. Year to date, our conversion is 50%. We're very pleased with our conversion at this point in the freight cycle. Given our asset-light business model, we remain confident in a 40% to 60% conversion over the long term and across market cycles. We ended the quarter with $25 million of cash on the balance sheet, which increased by $7 million sequentially with no change to the revolver balance. We grew our cash balance despite $9 million of restructuring, transaction, and integration cash outflows. As you can see on slide 9, Our liquidity position continues to be strong with $590 million of total committed liquidity, of which approximately $375 million is currently available. Quarter-end net leverage was 2.3 times LTM bank-adjusted EBITDA, up slightly when compared to the prior quarter. I'd now like to talk about the actions we've taken to optimize our cost structure. We've taken actions to achieve more than $125 million of annualized expense savings, including $65 million of post-spend costs and $60 million of cost synergies related to the Coyote acquisition. Today, we announced that we're taking additional actions that would yield more than $30 million of incremental annualized savings. Collectively, this means a total reduction in annualized expenses over the last three years of more than $155 million. We're optimizing our cost structure, operating more efficiently, and automating key processes. Now let's discuss our expectations for the fourth quarter. Our outlook reflects a fluid macroeconomic environment with weakened freight demand and a continued increase in the cost of purchase transportation. For the combined company in the fourth quarter, we expect to generate between $20 and $30 million of adjusted EBITDA. While we would typically see a sequential increase in brokerage adjusted EBITDA in the fourth quarter, that is being more than offset by higher cost of purchase transportation. We're also expecting the decline in complimentary services driven by slowing demand and last mile, which is counter to normal seasonality. Jared will provide more details on our outlook shortly. Slide 14 includes our fourth quarter modeling assumptions. There are a few things I want to highlight. We expect capex of approximately $20 million. We're tracking towards the low end of our previously discussed $65 to $75 million outlook for the full year 2025. For 2026, we continue to expect CapEx to be between $45 and $55 million down materially year over year. As we discussed, we're taking additional cost actions that will result in more than $30 million of annualized expense savings. In conjunction with these actions, we expect fourth quarter restructuring, transaction, and integration expenses to be approximately $15 million. Below the line, we expect net interest expense of approximately $9 million, an adjusted effective tax rate of approximately 30%, and fully diluted shares of $170 million. To summarize, recent accelerated capacity exits are putting upward pressure on our cost-to-purchase transportation and squeezing our contractual brokerage gross margin. This impacts near-term profitability given our large footprint of contract business with Tier 1 shippers. We are reliably servicing our customers' freight and are well-positioned to win spot opportunities and special projects when demand recovers. Longer term, as we think about the broader macroeconomy, we do see positive developments such as lower interest rates, new tax legislation, domestic investment announcements, and improving clarity on trade. Lower interest rates specifically can spur freight activity in many rate-sensitive industries, such as the housing sector. As an example, according to the American Trucking Association, every new home built requires between six and 10 truckloads of goods to be shipped. Mortgage rates recently reached 12-month lows, and any recovery in the housing market would be positive for ground transportation and RxO. We are closely monitoring the macro environment and are positioned to benefit when demand strengthens. Now, I'd like to turn it over to Chief Strategy Officer Jerry Weisfeld, who will talk in more detail about our results and our outlook.