RXO, Inc.

Welcome to the RxO Q4 2025 Earnings Conference Call and Webcast. My name is Ina, and I will be your operator for today's call. Please note that this conference is being recorded. During this call, the Committee will make certain forward-looking statements within the meaning of federal securities laws, which by the nature involve a number of risks, uncertainties, and other factors that could cause ASHA 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 NANGA financial measures that the company uses when it's discussing its results. I will now turn the call over to Joe Wilkerson. Mr. Wilkerson, you may begin.

Good morning, everyone. Thank you for joining today. With me here in Charlotte are RSO's Chief Financial Officer, Jamie Harris, and Chief Strategy Officer, Jared Weisfeld. This morning, I want to cover three key points. First, we continue to take decisive actions to mitigate the effects of the prolonged soft freight market and significant capacity reductions, which are squeezing our brokerage gross margin. We have a rigorous, disciplined approach to optimizing our cost structure and our gross profit per load. We're taking steps to augment our carrier base, grow brokerage volume, grow businesses that are stable sources of EBITDA, and leverage our deep customer relationships and last mile hub network to design unique solutions for customers. Second, we've got a strong brokerage late stage sales pipeline for new business, which grew more than 50% year over year. Most of that growth is driven by full truckload. Our managed transportation business continues to win and also has a very strong pipeline. Third, we finalized a new asset-based lending facility, which replaces our revolver. Our new facility is right-sized for our needs, decreases our costs, and provides us with increased flexibility across all market cycles. Now let's discuss our fourth quarter results. In brokerage, overall volume declined by 4% year over year. Less than truckload volume growth of 31% was more than offset by a 12% decline in truckload volume. Brokerage gross margin was 11.9%. In complimentary services, managed transportation was awarded more than $200 million of freight under management, and last mile stops grew by 3% year over year. Complementary services gross margin was 20.2%. Overall, RSO's EBITDA was $17 million in the quarter, below our expectations primarily due to a more pronounced brokerage margin squeeze towards the end of the quarter. This was primarily driven by capacity exits, which led to the largest November to December increase in industry-wide buy rates in 16 years. In December, rates increased by about 15% month over month, much faster than our contractual sale rates. At the same time, demand remained soft with not enough spot loads to offset the rise in purchase transportation costs. Sonar tender rejections and the load-to-truck ratio reached the highest levels of the year in December, and both increased further in January. Because our book of business is largely contractual, With enterprise customers, this affected our near-term brokerage gross margin performance. That said, winning contract business is a hallmark of our brokerage model because it positions us to win accretive spot opportunities, mini-bids, and special projects. The capacity reductions in the industry represent one of the largest structural changes to truckload supply since deregulation and should set the market up for a sharper inflection when demand recovers. The regulatory actions will also help improve the overall safety of the industry, as well as help combat theft and fraud, but they do put pressure on near-term results. We're continuing to take decisive actions to navigate the market. Specifically, we remain disciplined when it comes to cost and optimizing our gross profit per load. We're expanding alternative sources of capacity, like private fleets, to help reduce buy rate volatility. We're working closely with our customers to optimize volume, service, and price this bid season. We're also working to convert the strong late-stage brokerage sales pipeline, and we're developing more creative ways to leverage our hub network within Last Mile to provide customers with customized middle-mile solutions. I remain extremely positive about the actions we're taking to mitigate this part of the freight cycle, and all those we're taking to position RxO for future outperformance. More importantly, now that we're past the bulk of the integration, we're more unified than ever with the singular focus on returning to growth mode, leveraging our scale, and outperforming the market. We'll do that through our differentiated approach to sales and customer service and our unified tech platform. Our multi-layered sales team focuses on building exceptional customer relationships. This helped us grow our late-stage brokerage sales pipeline by more than 50% year-over-year, strong momentum as we start 2026. This pipeline is composed of high-quality new names and long-tenured existing enterprise customers for which we have built successful solutions in the past. While bid season is not yet complete, we've seen early wins. The strength and makeup of our pipeline gives us confidence that we will resume year-over-year truckload volume outperformance as early as the middle of this year. In managed transportation, we also continue to win. We were awarded more than $200 million in freight under management in the fourth quarter and still have a very robust pipeline of opportunities. These wins will result in increased synergy loads to RxO's other lines of business. We're very proud of the strength of our customer relationships across RxO. Recently, we received awards from blue chip customers, including Kelanova, Lowe's, and Electrolux. Another reason I'm excited is our team is now operating on an integrated platform, which includes our CRM, our pricing tools, and our proprietary systems, RxO Connect and Freight Optimizer. The integration work we've done over the past year is now providing unparalleled visibility for our sales and operations team. It has enabled us to leverage decades worth of proprietary data from both Legacy RxO and Legacy Coyote to power our pricing algorithms and recommend the best truck for each load. We're positioning RxO for the long term through our investments in transformational AI capabilities. Our vision is that RxO will lead the next decade in freight by arming expert people with the best in class intelligence to solve problems before they happen, delivering a level of speed and flexibility that makes the old way of thinking unimaginable. Later in the call, Jared will talk more about the rapid progress and real results we're seeing from our initiatives. RxO has a strong balance sheet, and we took steps in the fourth quarter to further improve our capital structure. we finalized a new asset-based lending facility, which replaces our revolving credit facility. We have tailored the new facility to better align with our business needs, securing better pricing and greater financial flexibility across all parts of the market cycle. Jamie will walk you through these details later. In summary, we continue to take strategic actions to better position RxO for both the short and long term. I remain confident in RxO's ability to deliver outsized earnings growth driven by five key factors. Scale. Scale allows us to purchase transportation more effectively. Our technology platform and the Coyote acquisition have helped decrease our cost to serve by more than 20% since our spend. We also expect buy rate favorability to continue improving. Profitable growth. We're focused on gaining profitable truckload markets here, and we're expanding the parts of our business that are stable sources of EBITDA, like managed transportation, SMB, and LTL. In the fourth quarter alone, LTL volume grew 31%, the fourth consecutive quarter of double-digit growth, underscoring our momentum in this area. Technology. We invest over $100 billion annually in our best-in-class tech. all in service of achieving our future state tech vision, which will be driven by AI. Once fully implemented, our capabilities will fundamentally change how our people get work done and provide customers with a faster, more seamless way of managing their freight. Cash generation. Our asset light model is resilient. Despite soft market conditions, we achieved adjusted free cash flow conversion of 43% in 2025, within our long-term target range. Cost structure. Since becoming a standalone company, we've taken out more than $155 million in costs through targeted initiatives, including AI investment, real estate optimization, and productivity. We're not done yet. Notably, brokerage headcount declined by a mid-teens percentage year over year. Over the last 12 months, we also achieved a 19% increase in productivity. Our streamlined operations will provide us with substantial operating leverage. While we're not satisfied with near-term results in this soft environment, we're very excited about the path ahead for RxO. We've shifted from integration mode and are returning to growth mode to take advantage of our larger scale. We continue to adhere to the formula that has driven our success for over a decade. Exceptional service, comprehensive solutions, deep customer relationships, and cutting-edge technology. RxO has 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 fourth quarter and full-year performance in more detail. For the quarter, we reported $1.5 billion in total revenue, gross margin of 14.8%, adjusted EBITDA of $17 million, and adjusted EBITDA margin of 1.2%. Gross margin and adjusted EBITDA were negatively impacted by the increase in cost of transportation within our brokerage business and soft demand within last mile. Our interest expense was $9 million. For the quarter, our adjusted loss per share was 7 cents. You can find a bridge to adjusted EPS on slide 8 earnings presentation. Of note, we had a $12 million goodwill impairment associated with the restructuring of our express service offering within our managed transportation business. This impairment was non-cash. Turning to our lines of business, brokerage revenue was $1.1 billion and was down 14% year-over-year due to continued soft freight market conditions. Brokerage represented 72% of total revenue in the quarter. Cost of transportation increased in the quarter due to tightening of the full truckload market, primarily driven by regulatory developments and associated capacity exits. This occurred without a meaningful corresponding increase in sales rates or sufficient spot opportunities causing a margin squeeze on our contractual book of business. Jared will provide more details later in the call. Given the market tightening and resulting margin squeeze, brokerage gross margin was 11.9%, slightly below the low end of our outlook. Brokerage gross margin declined 160 basis points sequentially and 130 basis points year-over-year. Complementary services revenue in the quarter of $431 million was flat year-over-year and represented 28% of total revenue. Complementary services gross margin was 20.2%, down 110 basis points sequentially and 90 basis points year over year, primarily due to weakening demand within last mile and the impact of the fixed cost structure of our last mile hubs. Within complementary services, managed transportation generated $133 million of revenue in the quarter, down 6% year over year. Encouragingly, our year-over-year automotive headwind eased as company-wide automotive gross margin dollars declined by low to mid-single-digit percent year-over-year. Our last-mile business generated $298 million in revenue in the quarter, up 3% year-over-year. Last-mile stops also grew by 3%. As we communicated during our last call, big and bulky demand weakened towards the end of the third quarter, and that continued throughout the fourth quarter. Turning to the full year, we reported $5.7 billion in total revenue, gross margin of 16.2%, adjusted EBITDA of $109 million, and an adjusted EBITDA margin of 1.9%. Now let's discuss cash. We ended the quarter with $17 million of cash on the balance sheet, in line with our expectations. Cash decreased by $8 million sequentially, with no change to the revolver balance. As a reminder, in the quarter we made our semiannual bond payment of $13 million, and we had a $9 million cash usage associated with restructuring, transaction, and integration activities. For the quarter, our adjusted free cash flow conversion was 6%, And for the trailing six months, it was 39%. As you can see on slide nine, adjusted free cash flow for the year was $47 million, yielding a solid 43% conversion from adjusted EBITDA. This was primarily driven by disciplined strategic capital deployment and favorable working capital. Net capex for the year was $57 million, compared to our outlook of $65 to $75 million. We also harmonize working capital processes across the organization. Given our asset light business model, we remain confident in a 40 to 60% conversion over the long term and across market cycles. We're very pleased with our full year conversion at this point in the freight cycle. Turning to slide 10, quarter end net leverage with three times LTM bank adjusted EBITDA. Our LTM EBITDA moved lower as profitability was impacted by the brokerage gross margin squeeze. On slide 11, I'd like to spend time walking through our new asset-based lending facility, which we announced this morning. The ABL is a $450 million facility and replaces our previous $600 million revolver. The ABL provides us with more flexibility through all market cycles. There are a few important points and key benefits associated with the new ABL facility. First, we intentionally structured the credit facility to $450 million of capacity based on the needs of the business, saving approximately $400,000 of annual unused commitment fees. The facility also has a $200 million accordion feature available. we have access to 100% of the facility to use for our cash needs and letters of credit requirements. At current utilization levels, our interest rate is approximately 35 basis points more favorable. Lastly, all covenants under the revolver, including the leverage and interest coverage covenants, have been replaced with a fixed charge covenant that has minimal impact on our ability to borrow. Now let's move to slide 16 and discuss our outlook for the first quarter and our full year 2026 modeling assumptions. Similar to last quarter, our outlook continues to reflect weak freight demand across all our lines of business. Within our brokerage business, we're not assuming a meaningful increase in either spot opportunities or sale rates in the first quarter. Additionally, our outlook reflects elevated purchase transportation costs. For the combined company in the first quarter, we expect to generate between $5 and $12 million of adjusted EBITDA. Jared will provide more details on our outlook shortly. For our 2026 modeling assumptions, we expect the following. CapEx to be between $50 and $55 million. Depreciation expense between $65 and $75 million. Amortization expense between $40 and $45 million. Stock-based compensation between $25 and $35 million. Net interest expense between $32 and $36 million. And cash tax outflows of approximately $6 to $8 million. We anticipate restructuring, transaction, and integration expenses to be between $25 and $30 million. It's important to note that approximately one-third of these expenses relate to actions taken in prior periods. The associated cash outflow with these actions is expected to be approximately $30 to $35 million, about half of which is related to prior periods. We expect a fully diluted share count of approximately 170 million shares. To summarize, while elevated purchase transportation costs are squeezing our contractual brokerage gross margin and impacting profitability, this is a positive development for the long-term health of the freight market. As we think about the macro economy, we continue to see many developments that have the potential to stimulate demand. These include lower short-term interest rates, new tax legislation, proposals for housing affordability, and domestic investment announcements. As an example, Monday's ISM report showed many positive developments in the manufacturing data, a key leading indicator for the U.S. economy, the transportation industry, and an important vertical for RxO. Specifically, U.S. manufacturing activity in January expanded by the most since 2022. While it's difficult to predict the timing of the demand recovery Any significant improvement in demand could set up for a sharp inflection, and RxO is well positioned to benefit. 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.