RXO, Inc. (NYSE:RXO) Q2 2023 Earnings Call Transcript

RXO, Inc. (NYSE:RXO) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Welcome to RXO Q2 2023 Earnings Conference Call and Webcast. My name is Sylvie 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 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 non-GAAP financial measures that the company uses when discussing its results.

I will now turn the call over to Drew Wilkerson. Mr. Wilkinson, you may begin.

Drew Wilkerson: Good morning, everyone. Thanks for joining today’s earnings call. Joining me today in Charlotte are Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. I’m pleased with RXO’s performance in the second quarter of 2023 despite the soft freight market. Importantly, we accelerated our market share gains and achieved the goals we laid out for you last quarter. We continued to grow broker volume year-over-year and we grew adjusted sequentially. In addition, last mile is on track to grow EBITDA year-over-year for 2023. Overall, our company-wide gross margin remained strong, 18.6%, and our adjusted EBITDA margin was up sequentially, even though revenue declined quarter-over-quarter.

We continued to optimize our cost structure and invested to support our growth. Jamie will discuss our efforts in more detail in a few minutes. Our Q2 results were driven by another quarter of impressive year-over-year brokerage volume growth, strong brokerage profitability and improved results from last mile. In brokerage, we continue to grow profitably, significantly outperforming the industry. Volume grew by 10% year-over-year and we achieved gross margin of 15.4%. We set multiple brokerage volume records in the quarter, including new records for total volume, quarterly loads per day and monthly loads per day during the month of June. Year-over-year volume growth accelerated every month as the quarter progressed. For the last few quarters, we’ve highlighted the strength of our sales pipeline was successfully converted to contract volume in the second quarter.

Contractual volume remained the most important driver of our brokerage growth. Similar to last quarter, managed transportation and LTL synergy loads also contributed to our growth. Overall, RXO’s contractual volume grew 19% year-over-year. Our contract business now represents 79% of our brokerage volume. Bid momentum continued in the quarter with the number of bids up 23% year-over-year. Now let me give you some color on what we’re seeing within our brokerage customer verticals. Our retail e-commerce volumes flipped positive in the second quarter, growing low single digits year-over-year. You’ll recall that our retail and e-commerce volumes declined by low single digits year-over-year in the first quarter. This was the first quarter that retail and e-commerce volumes grew year-over-year since Q3 of 2022.

Our retail and e-commerce customers’ inventories are in a much better position than they have been in a long time. Similar to last quarter, we also saw strength in the home furnishings, building and technology verticals. When the market is this soft, many companies find it difficult to grow volume. However, RXO continues to win. Our customer relationships, service, technology and scale enable us to take share profitably. Our customers are telling us that they continue to reduce the number of carriers they’re working with. And our long history of creating value within their supply chain has been awarding more freight to RXO. We’re in an excellent position to receive spot loads and project freight when the market turns. As an example of how we’re performing for our customers, in the second quarter, RXO won Dell’s 2022 North America Full Truckload Carrier of the Year Award for the second straight year.

Dell told us that our focus on partnership, performance and flexibility enabled them to meet the challenges of peak demand in last year’s disrupted supply chain. We pride ourselves on the close relationships we have with our customers and we strive to provide this level of performance for every customer. I now want to spend some time discussing the dynamics that impacted brokerage gross profit per load in the quarter. We saw a significant tightening of capacity in a portion of the country as the quarter progressed. To put it in perspective, the national load-to-truck ratio increased when compared to the first quarter of 2023. There was an acute tightness in the states impacted by produce season. The tightening of capacity increased our cost of purchase transportation in those states.

However, there was no corresponding increase in our sell rate due to the lack of spot market. Despite these dynamics, we still posted solid brokerage gross margin of 15.4% in the quarter, driven by the efforts of our team and our technology. Jared will talk more about this in a few minutes. Turning to the results within our complementary services, gross margin expanded by 50 basis points sequentially, a strong result. Both year-over-year and quarter-over-quarter, managed transportation significantly increased the number of synergy loads it provided to our truck brokerage business. Our managed transportation pipeline continues to convert nicely as large shippers strategically choose RXO to manage their transportation spend. In the second quarter, managed transportation onboarded a large new customer and secured several key wins that will be onboarded in early 2024.

In last mile, EBITDA improved on a year-over-year basis as a result of the strategic pricing actions we discussed last quarter. Last mile’s second quarter EBITDA was the highest it’s been since the second quarter of 2021. We continue to expect to grow EBITDA within our last mile business year-over-year for full year 2023. We’re winning because of our scale, our ability to design unique solutions for our customers and our superior customer service. Our cutting-edge technology continues to support our business results. In the second quarter, 96% of our loads were created or covered digitally. Looking ahead to the third quarter, we expect another quarter of year-over-year brokerage volume growth. Our playbook remains the same, grow profitably, provide best-in-class customer service, supported by industry-leading technology and controlled cost while making investments for the future.

During the quarter, we announced the expansion of three brokerage offices: Ann Arbor, Michigan; Columbia, South Carolina; and Kansas City, Missouri. Now shifting to what we’re seeing in the market. Both our internal and market data suggest that we’re approaching the bottom of this freight cycle. The exact timing of the bottom and the pace of the recovery are subject to the broader macroeconomic environment. We’re closely watching industry-specific leading indicators, including tender rejections, load-to-truck ratios and carrier exits. We’re always getting feedback from our customers and we’re monitoring broader economic data, including industrial production and consumer demand. Jared will cover what we’re seeing later in the call.

This isn’t the first time we’ve been through a market like this. Our leadership team has decades of experience operating in every kind of freight cycle. We’re optimizing our cost structure, leveraging technology and closely monitoring all the data to make the right decisions for the long term. We’re exactly where we need to be in this part of the freight cycle. RXO’s volume growth, combined with our optimized cost structure, will lead to significant earnings growth when the cycle inflects. We expect the moves that we’re making now will pay off for years to come. With that, I’ll turn it over to Jamie.

James Harris: Thank you, Drew, and good morning to everyone. As Drew mentioned, we’re executing well in what is a tough environment. In the second quarter, we generated $1 billion in revenue compared to $1.2 billion in the second quarter of 2022. Profitability remained solid with gross margin of 18.6%, down 300 basis points year-over-year. Our adjusted EBITDA was $38 million in the quarter compared to $101 million in the second quarter of 2022 and our adjusted EBITDA margin was 3.9%, down 430 basis points from the prior year. The declines in these metrics were primarily due to lower year-over-year freight rates, the moderation in brokerage gross margins and the incremental corporate costs of being a standalone public company.

It’s important to note that Q2 2022 was the peak of the prior freight cycle and the highest EBITDA in the company’s history, a tough comparison we are cycling. Combined direct operating expenses and SG&A were down 5% on a sequential basis. This was a direct result of the cost actions we took in the quarter and the variable component of our cost structure. Despite the 5% sequential reduction in revenue, our EBITDA margins improved by 20 basis points from the first quarter of 2023, driven by our strong execution and process engineering initiatives. We continue to optimize our cost structure which helped us sort the pricing pressure. This positions us well to drive substantial operating margin leverage when the cycle inflex. I’ll expand on this in more detail later.

Below the line, our interest expense for the quarter was $8 million. Adjusted diluted earnings per share for the quarter was $0.08. You can find the bridge to adjusted EPS on Slide 8 of the earnings presentation. Moving to our [lives of] business. We continue to outperform the brokerage industry. We grew brokerage volume by 10% year-over-year. Profitability in brokerage remained strong with gross margin of 15.4%. Complementary Services gross margin was flat year-over-year and expanded by 50 basis points sequentially. Our last mile pricing initiatives were the biggest driver. Please turn to Slide 9 as we discuss cash flow. Going forward, we’ll communicate our cash conversion on a six-month view, which will normalize for quarterly volatility.

We had a very strong trailing six-month cash flow conversion of 68%. This exceeded the estimate of 50% that we shared with you last quarter due to earlier-than-expected collection of some accounts receivable. We ended the quarter with $124 million of cash on the balance sheet. Prospectively, there are some second half cash considerations to highlight. The earlier-than-expected collections in the second quarter were an approximately $15 million benefit, which will likely reverse in the third quarter. In addition, there will be approximately $10 million of cash outflows associated with fully approved legacy claims. Regarding working capital, we remain comfortable with an annual adjusted cash conversion rate between 40% and 60% of its adjusted EBITDA over the long term across market cycles.

However, accelerated growth as the cycle turns will result in a usage of working capital in any given period. We anticipate the use of working capital at a rate of approximately 7% to 9% of each incremental revenue dollar. This can impact short-term cash conversion dependent on the pace of recovery. Moving to restructuring and spin-related costs. Last quarter, we estimated restructuring and spin-related costs of approximately $35 million for the full year 2023, of which $30 million were expected cash outflows. These estimates remain unchanged. We took out additional costs in the quarter and achieved annualized run rate savings of approximately $7 million. These savings help us sort some of the reduction in brokerage gross profit per load in the quarter.

We incurred approximately $1 million of restructuring charges to achieve the $7 million of savings and even better return relative to the first quarter’s restructuring actions. As we previously discussed, we continue to anticipate restructuring and spin-related charges to decrease in 2024. We’ve now achieved year-to-date annualized run rate savings of approximately $27 million. While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load, we are preparing the company for significant operating leverage when the cycle turns. Jared will expand on our growth algorithm in a few minutes. As you can see on Slide 10, our balance sheet remains strong with net leverage at quarter-end at approximately 1.6 times trailing 12 months adjusted EBITDA.

This is at the midpoint of our stated target range and slightly higher when compared to the first quarter as we lapped last year’s second quarter EBITDA. We executed $2 million of share repurchases in the quarter. As we discussed last quarter, at a minimum, we plan to repurchase enough shares to cover dilution from restricted stock grants on an annual basis. Additionally, we’ll continue to settle tax withholding obligations for divestment of pre-spin RSU grants in cash. This was a $2 million cash outflow in the second quarter and a $9 million cash outflow for the six-month period. We estimate a cash outflow of approximately $15 million for RSU tax withholding obligations in 2023. You can find our 2023 modeling assumptions on Slide 14 of the deck.

They remain unchanged and we continue to expect the following: capital expenditures between $60 million and $65 million. This includes $15 million of strategic investments in real estate to position us for additional growth in our brokerage business. Capital expenditures totaled an approximately 1% of revenue over the long term, in line with our guidance at Investor Day. Stock-based compensation expense, between $20 million and $22 million. Depreciation and amortization, between $70 million and $75 million; interest expense, between $32 million and $34 million; and an adjusted effective tax rate of approximately 25%. You should also model an average diluted share count of approximately 120 million shares. Please note that this does not include any impact associated with potential share repurchases.

Overall, given the current state of the macro economy and specifically the freight cycle, we’re pleased with our execution. We’re operating well, has solid cash flow generation and a strong balance sheet. Now I’d like to turn it over to our Chief Strategy Officer, Jared Weisfeld, who will talk more about our outlook.

Jared Weisfeld: Thanks, Jamie, and good morning, everyone. We continue to outperform the market, growing brokerage volume by 10% year-over-year, with substantial market share gains enabled by our people and technology. We’ve been investing in artificial intelligence for the last decade. Our industry-leading pricing algorithms helped fuel brokerage gross margin of 15.4% in the quarter despite softness in the freight cycle. RXO’s pricing suite of products is pinged to hundreds of thousands of times daily, which allows us to benefit from best-in-class dynamic pricing. I recently hosted an AI webcast with a few of our technology leaders to highlight this differentiated homegrown technology. In the second quarter, 96% of our loads were created or covered digitally versus 80% in the second quarter of 2022.

Seven-day carrier retention was a strong 78% in the quarter, compared to 73% in the second quarter of 2022. While carriers exited the market during the quarter, albeit at a slow rate, RXO’s platform continued to benefit from carrier adoption. Q2 active network carriers increased by 2% sequentially and we grew weekly active users by 3% on a year-on-year basis. This quarter, we were again in an evitable position with contractual volume representing 79% of our business, up 200 basis points sequentially and up 600 basis points when compared to the second quarter of 2022. On a two-year stack, contract volume growth was up 49%, accelerating from 42% in the prior quarter. As we approach the bottom of this freight cycle, I wanted to review how our contract and spot mix can shift during an upturn.

While we’ll still haul the same contractual freight, our best-in-class service to our contract customers will yield spot volume, mini bids and special projects. Our spot mix can increase quickly on a sequential basis. Revenue per load continues to be impacted by declining fuel prices, increased LTL synergy loads and length of haul, which was down year-over-year as last year’s port diversion volume did not reoccur. When compared to the second quarter of 2022 revenue on a per mile basis declined at a rate less than revenue per load. Given recent market developments, I thought it would be helpful to give a bit more color on our monthly trends in the quarter and expand on our current view of the freight cycle. I’ll refer you to Slides 11 through 13 of the presentation.

The national load-to-truck ratio moved higher as the quarter progressed. Capacity tightened significantly in certain states during the quarter and was particularly acute in states impacted by produce season. As you can see on Slide 11, this had a direct impact on our cost of purchase transportation with buy rates moving up every month throughout the quarter. This is a long-term positive development but it does have the near-term impact of moderating gross margin and our brokerage gross margin exited the quarter at approximately 14%. Despite tightening market conditions, RXO still delivered strong brokerage gross margin of 15.4% for the quarter. We are very pleased with this margin performance at this point in freight cycle. Moving to Slide 12.

We’re improving our cross-cycle profitability, delivering higher highs and higher lows. During the prior freight recession in 2019, RXO’s adjusted EBITDA declined for four quarters by approximately 70% from peak to trough. We’re now four quarters past our most recent peak but RXO’s adjusted EBITDA is approximately 3.5 times higher when compared to the second quarter of 2020. Our volume in that same period is up by 77%. Not only is our EBITDA significantly higher but our cost structure is more efficient and we’re still making improvements while simultaneously investing in the business. You can see the impact of that effort in our second quarter results. EBITDA margin was up 20 basis points sequentially despite a 5% sequential reduction in revenue.

Putting this all together, we are priming our model for significant operating leverage when the market inflects and I know all of you have questions about when we think that will be. Our overall perspective is informed by internal and market data and we believe that we’re approaching the bottom of this freight cycle. National load-to-truck ratio has moved higher since our last earnings call carrier exits are continuing, albeit at a slow pace. Additionally, consumer data has been encouraging and both retail inventory positions and volumes have improved. But while these are encouraging trends, we are still operating in a soft freight market. And as Drew mentioned, the exact timing of the bottom and pace of the recovery are subject to the broader macroeconomic environment.

Let’s now move to Slide 13. Our Q2 gross profit per load was roughly in line with Q1 2020, the lowest level in the last five years. Note that this was partly impacted by the growth of LTL synergy loads within our brokerage business. Importantly, since Q1 2020, our brokerage volume has grown by approximately 70%, led by our core full truckload. Expanding on this a bit more, our exit rate gross profit per load was roughly in line with Q2 2017 levels. By Q4 2017, gross profit per load had recovered by approximately 70%. While we are not calling for this type of recovery, I thought it was important to provide some historical context about how quickly the market can turn. I talked earlier about making higher lows. While we’re currently operating at similar gross profit per load when compared to Q2 2017, brokerage gross margin during the month of June was 300 basis points higher.

This is a business that moves quickly and we believe that RXO has a best-in-class growth algorithm. When the environment improves, we expect a greater than 50% EBITDA contribution margin, providing a path to rapid earnings growth. I’d now like to look forward and give you some more color on what we’re expecting in the third quarter. While we don’t provide quarterly guidance, I wanted to provide some puts and takes for our brokerage business given recent market developments. We exited the quarter with incredible brokerage volume momentum. Our brokerage sales pipeline remains robust and is at its highest level since pre-COVID. The pipeline is up 118% and 132% on a two and three-year stack, respectively, despite a lower rate environment.

This gives us confidence that we will again grow brokerage volume on a year-over-year basis in the third quarter. However, the third quarter will be negatively impacted by the full run rate impacts of the tighter market conditions that developed in the second quarter. Turning to monthly trends. July trends were similar to the month of June. While gross profit per load has not yet recovered, it did stabilize and was roughly flat in July when compared to June. Additionally, there were two fewer business days in the month. Encouragingly, brokerage volumes grew again on a year-over-year basis in July and truckload revenue per load trends held flat versus June. This is the first time truckload revenue per load has stabilized month-over-month since the first quarter of 2022.

There are a few ways the remainder of the quarter can play out for our brokerage gross margin and I’ll summarize them for you. Let’s start with typical seasonality. While we have not yet seen gross profit per load recover, we typically see a seasonal gross profit per load improvement starting in August. To the extent this occurs, gross margin percentage for the quarter could be flat sequentially. Secondly, let’s discuss that there’s no change in the current environment. If the current environment continues with no gross profit per load recovery and only moderate capacity exits, gross margin percentage would be down slightly when compared to the second quarter of 2023. The last scenario is that there is a change in either supply or demand.

If capacity starts to accelerate in a more meaningful manner, or demand increases heading into back-to-school and peak season, spot loads would emerge and increase as a percentage of the mix. While this is a long-term positive, our near-term gross margin percentage would moderate further in this scenario. To summarize, we’re continuing to gain market share profitably with brokerage gross margins that are higher than previous cycles. We’re optimizing our cost structure while strategically investing in the business and have an algorithm to deliver rapid earnings growth. We’re improving cross-cycle profitability. Our asset-light business model generates significant free cash flow and we’re returning capital to shareholders. We continue to believe that growth of free cash flow on a per share basis is a primary driver of long-term value creation.

Put simply, we just grew volumes by 10% with strong gross margins as we approach the bottom of the cycle. Imagine the possibilities when the freight cycle inflects. With that, I’ll turn it over to the operator for Q&A.

Q&A Session

Operator: Thank you, sir. [Operator Instructions] And your first question will be from Stephanie Moore at Jefferies. Please go ahead.

Stephanie Moore: Hi, good morning. Thank you.

Drew Wilkerson: Good morning, Stephanie.

Stephanie Moore: So my first question, really impressive load growth continues acceleration in 2Q. Can you maybe just talk a little bit about how you’re growing volumes at these levels, double-digit clip while still holding on to these strong above-peer margin. Thank you.

Drew Wilkerson: Yes. Thank you, Stephanie. When you look at how we built the business, it’s not one particular thing that is allowing us to outperform the market from a volume perspective and from a margin perspective. We’ve got great service with our customers. We pick up and deliver on time. We’ve got great communication throughout the life of a load cycle. When you look at the relationships with our customers, they’re extremely strong. They’re long tenured. We’ve got a history of creating solutions for them. So it’s something they’re comfortable coming back to. Our technology, we feel like it’s second to none and it’s something that allows them to be able to contribute success to their supply chain and it allows them to make informed decisions on how they’re going to move their transportation.

And then the last thing that I would highlight, as Jared mentioned in the opening comments, is that we’ve got a team that has been here, done this before, knows and understands how to operate in every part of the cycle.

Stephanie Moore: Oh, great, and that’s really helpful. And then just for a follow-up. I appreciate the color that you provided, what you’re seeing thus far in July. But I was wondering if you could talk a little bit about maybe what – just high level, just remind us what normal seasonality is for revenue growth as well as gross profit per load. And then the comment, to the point where you do see similar gross profit per load as June and July. Maybe just talk a little bit about why you think that’s the case? Is the macro starting to turn? Are you seeing some incremental volumes because of disruption in the space. Any additional color would be helpful. Thank you.

Drew Wilkerson: Yes, absolutely. So when you look from June to July, it was the first time in a while that we saw revenue per load stabilization. We also saw stabilization within our gross profit per load. It’s still a soft trucking environment out there. But some of the things that have us cautiously optimistic as we look forward are, you’re still seeing capacity exit the market. You’re starting to see tender rejections pick up for the first time in a while. And if you look at waterfall routing guides, three, four or five weeks ago, it wasn’t getting past the first carrier. Now you’re seeing waterfall routing guides get past the first carrier for the first time in a while and still landing somewhere between two and five weeks for where it is.

So that tells you that there’s been a shift in capacity. It’s not a big enough shift to where it has created spot loads, which is ultimately when I believe the inflection will be. So we’ve seen a shift, but not enough to take us out of a soft market overall. Your second part of your question, as far as disruption in the industry, disruption and volatility typically is a good thing if you’re a good, strong broker. And so obviously, in the LTL, we’ve seen some orders pick up over the last couple of weeks. And one thing that we’re watching closely is, if you start to see long awkward freight bleed over into the truckload network. We haven’t seen that yet but it’s something that we do think is a possibility over the coming weeks.

Stephanie Moore: Great. Thank you so much.

Drew Wilkerson: Thank you.

Operator: Next question will be from Brandon Oglenski at Barclays. Please go ahead.

Brandon Oglenski: Yes, good morning, and thanks for taking my question. Drew, I guess this is more strategic in nature, but gross profit per load obviously spiked during the pandemic and we know all the disruption looking backwards. But I guess, looking forward, with more competition in the space and you guys have obviously done a good job going more and more digital, is the value proposition structurally changed where like prior GP per load is just not the right benchmark anymore?

Drew Wilkerson: That’s not how we think about it, Brandon. When you look at the industry, there’s been over 10,000 brokers in the space for as long as I’ve been doing this. So competition has always been there. To me, this is a cyclical business. And when you look at coming out of a low cycle, when you start to see load-to-truck ratio shift and typically is somewhere around 6:1, you’ll see more spot loads. And what you’ll see happen then is our gross profit per load on our contractual business that we’ll still serve will come down. But the gross profit per load on the spot loads will go up.

Brandon Oglenski: Okay. And can you expand on the sales line? Is this expanding business with your current customers? Because I think you also had a stat in the slide saying like average users on your platform only up maybe 3%. And – so is this going deeper and bigger with the customers that you have already.

Drew Wilkerson: Absolutely. So whenever our customers are coming to us, they don’t just come back and renew the business that we’ve got with them because we’ve got great service because we’ve got technology that’s integrated within their platforms, they come back to us and they’re giving us more freight than what we were hauling for them before. They trust us. But we’re also bringing on new customers, make no mistake about it. I mean, this year, we brought on some new Fortune 100 companies and we’re excited about the pipeline of bringing on new customers. We’ve got a strong brand in the marketplace.

Brandon Oglenski: All right. Thank you.

Drew Wilkerson: Thank you, Brandon.

Operator: Next question will be from Ken Hoexter at Bank of America. Please go ahead.

Ken Hoexter: Hey, great. Good morning. Just want to kind of focus on that profitable growth commentary, right, which you highlighted a couple of times. I just want to understand the contrast with EBITDA falling from 8% margins to 4% margins. Maybe dig in how we should think about that move and then the inflection that you see coming? And then a couple of comments on cash calls that you made, there was a $10 million legacy claim. It seemed like there are a couple of things going on with cash, cash flow. Maybe you can – either you or Jamie dig into that as well. Thanks.

Jared Weisfeld: It’s Jared, I’ll start and then I’ll hand it over to Jamie. In terms of EBITDA margin comparison, I think, as – Jamie noted this in his – I think it’s really important to note that last year’s Q2 EBITDA was the peak of the prior freight cycle and importantly was also the peak and the highest company EBITDA that RXO has ever delivered in terms of where we are in the cycle. It’s a really tough comparison. In terms of strong profitability, 15.4% gross margins at this point in the freight cycle, given where we are, we’re really proud of. You’ve covered us for a while. It’s part of our DNA in terms of profitable growth, where we operate in a $400 billion market and we gain share and we’re doing it profitably. I’ll hand it over to Jamie in terms of the cash considerations.

James Harris: Yes. Thanks, Jared. Good morning, Ken. On the cash comment, we had actually a really good quarter, very good first half of the year with conversion, and we’re about 68%. One of our call out, is we had about $15 million roughly of collections of accounts receivable that came in earlier than we had anticipated. And so that will be on an apples-to-apples basis that will reverse in the third quarter. So it will be a little bit of something to consider when you build on the model. And then second call out was, we had about – we have about a $10 million outflow of cash for some legacy claims that we’ve been – that we’ve settled – everything, ordinary course of business, fully accrued, but we mainly called out just because it is an item that we want you to be able to model in your cash flow.

Ken Hoexter: All right. So just that, you’re calling out just the $10 million on the outflow. I just want – there were a couple of things you had mentioned there in terms of things that could affect cash coming up in the third quarter.

James Harris: Yes, that’s one – just the early collections of some receivables late in the second quarter.

Ken Hoexter: Which reversed itself, yes. And then just, minor thing, you used some new terms I haven’t heard before, synergy loads and some things. What is – what are those?

Drew Wilkerson: Yes. So when you look at the LTL loads that we talked about, the reason that we have seen growth in LTL over the last couple of quarters is because of our service in truckload. So these are customers who are doing business with us on the truckload side and they’re coming to us and say, we want to continue to expand, we want to look at other modes of transportation with you. So the synergy that we’re getting off of our truckload is leading to growth within other verticals for us. When you look at LTL overall, these are highly automated loads on both covered and created and it’s low touch and it’s incremental margin for us as far as what we’ve done there on the LTL side. But make no mistake about it, our business is led by the truckload growth and truckload growth led the quarter for us as well.

Ken Hoexter: So then I guess on that, are there any immediate reads given all the volatility, you mentioned kind of you’re starting to see that. I mean, I would imagine just over the last three weeks, we would have seen such a massive shift on the LTL side. Anything you can kind of highlight on the business shift in that part of the business?

Drew Wilkerson: Yes. We’ve seen a slight pickup in our LTL loads. Again, we’re close to all of our customers. They’re going to call us as they are experiencing any kind of disruption in the market to be able to create a solution for them. The biggest thing that I’m watching for, Ken, is do you start to see freight bleed over into the truckload market? Does that create spot load? It’s not something we’ve seen at this point but it’s something we’re monitoring.

Ken Hoexter: Great. Thanks for the time and, Drew, I appreciate it.

Drew Wilkerson: Thank you, Ken.

Operator: Next question will be from Scott Schneeberger at Oppenheimer. Please go ahead.

Scott Schneeberger: Thanks very much. Good morning. I guess, I’d start off, could you guys speak a little bit – I understand you’re not giving forward guidance, but can you give some scenario analysis to how third quarter may play, just curious your visibility into back-to-school and the holiday season and what you’re seeing out there? And then just kind of as a follow-on, as you gaining share here, where – what are the end markets you’d say where you’re gaining share? And is it small peers? Is it large peers? Just a sense of that. Thank you.

Drew Wilkerson: Yes. So we haven’t seen a notable change from June to July, from what we’re tracking. As you start to look out farther than Q3 and you look into Q4, inventory levels are in a much better position than what they were at this point last year. The consumer health has been resilient as we’ve gone through the cycle. The biggest thing that we’ve got to be able to see is what happens from a consumer demand perspective. And we don’t have a forecast or a read on how that’s going to play out for Q4 yet at this point. But one of the positive trends for us in the third quarter is you did – in the second quarter, is you did see retail and e-commerce volumes picked up for the first time since the middle of last year.

Your second question, I think, was about like where is the share gains coming from? And it is coming from everywhere. It’s not one specific competitor or shape and size of a competitor. It’s really about going to our customers, creating solutions, looking at what fits in well within our network that’s going to create value within their supply chain. And again, one of our customers that we’ve got a long history with, that we do business with, they come back to us time and time again, they don’t just come back and say we want to renew what we’re doing with you. We want to grow. So we’re able to take share and we’re able to do it at best-in-class margins.

Scott Schneeberger: Great, thanks. Jamie, if I could just over to you ask on a status report on your cost savings initiative. Where are you, what inning? What’s to come? What type of unique savings and spend we should anticipate in upcoming quarters? Thanks.

James Harris: Yes. So we’ve had a really good year in terms of the take cost out of the business. To date, we spent about $9 million on restructuring charges we had $1 million in this quarter, $8 million in the first quarter. But that’s yielded annualized about $27 million worth of run rate savings. And we’re really pleased with kind of a 3:1 investment ratio and we’re going to continue to do that if we can find those opportunities. If you look at kind of what inning we’re in, what we did, we – after spin, we really took up – I’ll call it a white sheet of paper and we looked at org structure, we looked at vendors. We had some duplicative roles. We had some duplicative vendors that we were able to consolidate.

We were able to cut some costs there. We looked at facilities to make sure that we can still service the customer with excellent and maybe put two facilities together, sublet us some space. In terms of the [indiscernible] from a overall process engineering, we want to become known internally and externally as a continuous improvement company that’s always looking to optimize cost. And what we’re going to do is, really begin to drive how can we get quicker, better, make quicker decisions. At the end of the day, I think it’s evident and sequentially, if you look at our margins, up about 20 basis points sequentially, despite having revenue down, I think you’re seeing those cost savings begin to play out in the P&L. And so we’ve got a lot to do there.

But the big thing to take away is, we want to be a continuous improvement company. We’re constantly finding ways to improve our cost structure. So when this market inflects, we have opportunity to bring some really good saving – really good earnings to the bottom line.

Scott Schneeberger: Excellent. Thanks very much.

Operator: Thank you. Next question will be from Ravi Shanker at Morgan Stanley. Please go ahead.

Ravi Shanker: Thanks. Good morning, everyone. Drew and team, I think you were the first management team to call the end of the down cycle on your previous conference call and hopefully, you’re the first management team to call the beginning of the upside on this conference call. So a, thank you for your service. And b, I think Jared’s walk through of the different scenarios for the back half of the year, really helpful. But just trying to get a sense of, are you guys looking for a U-shape or a V-shaped recovery here? Because I think it looks like there’s a little bit of a delay in the handoff between the down cycle and the up cycle. Do you think this kind of limbo period lasts for a while? Or do you think kind of as we get into back-to-school and holiday season, we should see a pretty nice recovery among those scenarios.

Drew Wilkerson: Yes, absolutely. Thank you, Ravi. Well, I do want to clarify, we didn’t call for the inflection yet at this point. We said we’re approaching the bottom. And the shape of the recovery and the timing of the recovery is still to be determined. I think some of that is going to be determined by overall consumer demand. We’re seeing some positive trends whenever you think about carriers exiting, whenever you start thinking about tender rejections going up, load-to-truck ratio increasing, you’re going farther down the routing guide. Those are positive signs and you have to have those before an inflection. But the shape and timing of the recovery, I think it’s still too early to call.

Jared Weisfeld: And Ravi, it’s Jared. And I think in your last note, you made a really good point in terms of as the back half of the year plays out, what we’re looking to is the health of the consumer, right? So as we noted in the script, the health of the consumer. We’re seeing some encouraging signs in terms of the resiliency. We want to see how that plays out. But as Drew also noted, inventories are in a much better position for our retail and e-commerce customers. So to the extent that we look into the back half of the year to the extent that continues, it could be a really interesting situation as you think about the back half.

Ravi Shanker: And maybe as a follow-up, kind of just looking at the tightening of the routing guide, do you have a sense of how much of that is demand improvement versus kind of supply exiting the market? And kind of when we talk about supply, obviously, we’re thinking about asset-based trucking supply. But are you also seeing something similar on the brokerage side where mom-and-pop brokers simply can’t compete in an AI arms race or a machine learning arms race. And so kind of that part of the tail of the brokerage business is also being consolidated?

Drew Wilkerson: The biggest thing that we’ve seen is, if people who have led with rates on a waterfall routing guide, they may not be taking as much of the tenders as what they were taking in a few months earlier. So that, that hasn’t held up whether it’s been broker or asset-based carriers. So for us, if you see the market tighten up more, you’re going to see more pressure there, Ravi.

Ravi Shanker: Very good. Thank you.

Drew Wilkerson: Thank you, Ravi.

Operator: Thank you. Next question will be from Scott Group at Wolfe Research. Please go ahead.

Scott Group: Hey, thanks. Good morning. So Jared, I understand some of the scenarios you laid out for us. I’m just curious, your take, is it – do you think it’s more likely that EBITDA is higher or lower third quarter versus second quarter or if you – second half versus first half, wherever you think you’ve got better visibility?

Jared Weisfeld: Hey,Scott, I appreciate the question. So as you know, we don’t – while we don’t issue formal – we don’t issue quarterly guidance, I wanted to lay out some scenarios in terms of how we think about Q3 is going to play out. I think the first thing to consider is certainly, as we talked about, the market tightening, that progressed as of Q2 in terms of month-on-month changes in buy rates, that, of course, you have the full run rate impact from market conditions that develop late into Q2, into Q3. So then as you think about how the quarter progresses from a July standpoint, as we mentioned, we’re seeing some encouraging trends in terms of gross profit per load stabilization. We’re seeing revenue per load on truckload flat relative to the month of June.

That’s the first time that’s occurred since Q1 of last year. So certainly an encouraging development. And then to your point, as you think about the remainder of the quarter, I think it’s still too early to call. We’re seeing some encouraging signs, as Drew mentioned, with respect to tender projections and talking about the waterfall on the routing guide. So I think that’s, we’ll see how the quarter plays out. But I think those three scenarios are how we’re looking at the rest of the quarter in terms of whether or not we see the typical seasonality uplift that we see in August in terms of gross profit per load, whether or not the environment remains the same or whether or not carriers continue to accelerate in terms of the exits in the market and then whether or not we’ve got the staging for peak season.

Scott Group: Okay. And then when I think about net operating margins. Last year, they were about 20%. This year, we’re modeling closer to 10%. As you think about the next up cycle, what – is there something that we can do to get to higher ultimate net operating margins in the next up cycle to just get better underlying profitability.

Jared Weisfeld: Yes. From our standpoint, we continue to look at free cash flow on a per share basis as our primary – as our primary North Star. From our perspective, I think Jamie hit on this a little bit, right? We’re priming the cost structure for significant operating leverage when the cycle inflects. We expanded EBITDA margins by 20 basis points sequentially despite a 500-basis point decline in sequential revenue. And when you think about what we’re doing, I gave some color on the commentary in terms of how to think about contribution margin, right? So when we think at this point in the cycle, when the cycle inflects, we’re going to have greater than 50% EBITDA contribution margin, which gives us confidence for rapid earnings growth when the cycle inflects.

Scott Group: Okay. Thank you, guys.

Jared Weisfeld: Thanks, Scott.

Operator: Next question will be from Allison Poliniak at Wells Fargo. Please go ahead.

Allison Poliniak: Hi, good morning. On the volume growth sort of share gain commentary, is there a way to unbundle that in terms of what’s coming from new customers versus increasing your share of wallet with existing customers? Then any differential in margin contribution, if it’s coming from one way or the other? Thanks.

Drew Wilkerson: Yes. No, absolutely. The majority of it is coming from existing customers because typically, whenever you’re bringing on a new customer, you’re not starting out with huge chunks of business. You’re showing your capabilities. You’re showing them what our technology can do and you continue to move the ball forward over time. So the majority of it is coming from existing customers. And if it’s lanes that we have strong capacity in, their power lanes for us across the country, it’s easy to integrate and the margins run similar to how the overall business is performing. If it’s a newer lane and somewhere that we’re building out a power lane, then the margins improve over time.

Allison Poliniak: Got it. And then the business wins in managed transportation, understanding how those wins will probably use more than one of your lines of businesses. Is there a way to understand sort of what that contribution could be in ‘24 or sort of an algorithm there? Thanks.

Drew Wilkerson: If you look right now, 62% of our revenue comes from customers who do business with more than one line of business. And we think that, that can continue to improve. We’re just scratching the surface with what we’re able to do from the integrations that we’ve got across our customers.

Allison Poliniak: Okay. Thank you.

Jared Weisfeld: It’s Jared. We secured several key wins in the quarter, to your point, just to emphasize that we feel comfortable. We are going to be onboarded in early 2024. And growth of freight under management within our managed transportation business is a real strategic priority for the organization. So when we think about the ability, we talked about in the quarter in terms of sequential and year-on-year synergy loads from our Managed Transportation business, they were up significantly. So as we think about the confidence level we have with the business momentum and managed transportation on those new wins, we think that’s going to be a really exciting opportunity for us next year.

Allison Poliniak: Perfect. That’s helpful. Thank you.

Operator: Thank you. Next question will be from Tom Wadewitz at UBS. Please go ahead.

Thomas Wadewitz: Yes, good morning. I wanted to see if I could ask like a clarification on the load growth comment. So when you talk about 10% load growth, is that truckload growth? Or is that including LTL growth? And if it does include LTL, what did the truckload volume growth look like?

Drew Wilkerson: That is – our overall load count growth, Tom, was 10%. And the majority of that was our – came from the truckload side. We haven’t broken it out but the more that we grow LTL is something that we should consider.

Thomas Wadewitz: So you were pretty close to 10% on truckload volume growth, too? Or I guess the reason I ask is just obviously, LTL loads revenue per load is a lot lower. And so you can kind of skew the load growth number if you see a meaningful change in the LTL loads.

Jared Weisfeld: Hey, Tom, it’s Jared. Yes. No. So to Drew’s point, a majority of that growth that we talked about in the quarter is coming from our core full truckload. And I think it’s important to emphasize also, when we think about the LTL loads that we’re winning, why we’re winning them, right? We’re winning them because we’re servicing that contractual freight on full truckload so well. So we talked about LTL synergy loads in the quarter contributing as a percentage, contributing to growth. Maybe to give you comfort or to give you some more perspective, LTL mix in the quarter was relatively unchanged relative to the prior quarter. And to Drew’s point, a majority of our volume growth in the quarter was certainly attributable to our core full truckload.

Thomas Wadewitz: Okay. All right, great. When I look at one of the big challenges, obviously, revenue per load down pretty significantly year-over-year and down sequentially quite a bit as well, how do we – I mean, the market is going to do what it’s going to do, right? How do we think about responsiveness of revenue per load for RXO when spot rates move up? Because you’re at a very high contractual level but I think broker contracts can be pretty flexible. So how do you think about your revenue per load responsiveness when spot rates move up? Is that a couple of quarter lag? Do we have to wait for the next bid season to really see the kind of responsiveness and improvement in your revenue per load. Just trying to understand that time lag between the two.

Drew Wilkerson: The market can turn quick, Tom. So I don’t think that – I mean, I don’t think anybody’s got a crystal ball on when it’s going to turn but it can inflect at a very fast rate. And whenever you start to see spot loads those will be at a higher revenue per load. Now how much higher they will be at a revenue per load will depend on how tight capacity comes during that time.

Thomas Wadewitz: But if you’re running 79% of loads or contract, like – maybe I should ask it a little bit more fine point on it, how quickly would your contracts revenue per load respond to change in spot, are your contracts all one year? Are there – is there a mix where you can get to some a lot quicker than that?

Drew Wilkerson: It varies, Tom. A lot of our contracts are one year but you also – whenever a market turns like that, you start to see more mini bids and you start to see more project freight come out. So you can see your contract revenue per load go up during that same time. And some of that’s just a function of carrier givebacks within the customer.

Jared Weisfeld: And encouragingly, in the month of July, we talked about full truckload revenue per load flat sequentially relative to June. So we are starting to see some encouraging trends, and that was the first time that remained flat since Q1 of last year, Tom.

Thomas Wadewitz: Okay, sounds good. Thanks for the time.

Jared Weisfeld: Thank you.

Operator: Next question will be from Jack Atkins at Stephens. Please go ahead.

Jack Atkins: Okay, great. Thanks and good morning. I guess just maybe following up on Tom’s question. If I go back to last quarter’s call, I think the comment you guys made was that you thought you could skew or change that mix of contract versus spot by 1,000 basis points relatively quickly when the market began to turn. I guess, how do you – a, is that still – do you feel still like that’s the case? And b, if that is, how do you square the idea of maybe taking market share and keeping market share with the reputational kind of challenges of going back to customers and walking back your rate commitments.

Drew Wilkerson: Yes. So I’ll start with the latter part of your question. The reputational thing is something that we’ve got a strong reputation. That’s why you’ve seen us outperform over the last decade. Jack, if you remember from 2013 through 2021, we grew 3 times faster than what the brokerage industry grew. And over the last year, you’ve seen our share gains accelerate. That’s because we have strong service. We’ve got great relationships with our customers. We’ve committed – we’ve given them solutions that have had huge impacts on their business. So the reputational piece is not one that – it plays to our advantage.

Jared Weisfeld: Yes. And Jack, I think you’re exactly right. I mean we touched on this a little bit in the prepared remarks and we talked about this last quarter as well, our ability to mix shift aggressively to the contract versus spot, we think, is best-in-class. We’re a flexible and agile organization. We’re still going to haul the same contractual freight, to Drew’s point, reputation and ability to service our customers is paramount to the organization. But then because of how well we service that contractual freight, we’re going to get rewarded the mini bids, the special projects, the spot freight. So we’re going to move fast. We have in cycles, to your point, moved the spot contract mix by as much as 1,000 basis points in a given quarter.

Obviously, that’s going to be a function of how quick the recovery is. But I think the important takeaway is that we’re going to get rewarded that spot volume because of how well we service that contractual freight.

Jack Atkins: Okay. Got it. And then, I guess, thinking about the longer-term outlook, a year ago, when you all spun out from XPO, I think that if we kind of fast forward to where we are now, it’s been a more challenging down cycle that I think really anybody would have anticipated. So the trough is maybe deeper and it’s a longer kind of haul back to that $475 million to $525 million kind of longer-term target that you guys laid out for adjusted EBITDA in 2027. Are you guys still comfortable with that longer-term target, have sort of the key building blocks of that changed some just based on how the last year has progressed? Any sort of kind of comments on that?

Drew Wilkerson: We’re still comfortable with the $475 million to $525 million EBITDA range for 2027 that we provided you with. We’re making the right moves and investing in the business. We’re building the foundation and preparing for the inflection. And Jack, when you look at what we’re doing within the business, we’re creating higher highs and higher lows. So we’re setting ourselves up very well for when the market turns. So we’re in a good position right now.

Jack Atkins: Okay. Thank you for the time.

Operator: Thank you. Next question will be from Jordan Alliger at Goldman Sachs. Please go ahead.

Jordan Alliger: Great. Hi morning. Just a quick question, around the SG&A. As you noted in your presentation, it’s a pretty good sequential as well as year-over-year decline. And you mentioned cost initiatives and stuff in the call, few times, but – and I guess there’s the variable cost aspect. Can you maybe talk a little bit more specifically about some of the actions taken and how do we think about that going forward?

James Harris: Yes. This is Jamie. Yes, so we were able to take out run rate of $27 million, which we talked about. The overwhelming majority of that is what we would call structural cost removal, where it will not be added back as volume increases. I think you’ll see, as Jerry mentioned, we’re positioning the company from a cost structure to have a very good contribution margin as the market inflex. You’ve heard us talk before about productivity, loads per head per day, that is set up to continue to grow, continue to become more productive. So the cost structure, some came out of SG&A, some came out of direct OpEx. But the way I would think about it is predominantly, it is a structural removal of cost that won’t be added back with growth.

Jordan Alliger: Great. Thanks. And then just a quick follow-up. Just on contracts again. Obviously, 79% is a pretty high level. Drew, maybe if you can just comment on sort of how you think about contracts over the cycle, how you feel that could flex over time up or down? And is this level, I mean, assume it’s a level that you feel comfortable with because you’re there but sort of strategically, why you sort of boosted it up so high right now?

Drew Wilkerson: In a softer market, there’s not a lot of spot loads. So the way to grow your business is to grow it through contractual business. For customers who trust you, the first step that you get is through a contractual business. So contractual businesses are based and spot loads come as the market inflex, as you start to see changes in capacity. And the first place that customers lean on, for whenever they see a tightness in capacity, is for the people they have the strongest relationships with. So when the market does inflect, we are in a very good position because of the relationships that we’ve got with our customers and the service that we provide to them.

Jordan Alliger: Is there one particular quarter or two there where we could look towards the bulk of the renewals? Like is it going to start in the fourth quarter of this year? Or is it more second quarter next year? Thanks.

Drew Wilkerson: Typically, you start to see it in Q4 and Q1.

Jordan Alliger: All right. Thanks so much.

Drew Wilkerson: Thank you.

Operator: Thank you. At this time, I would like to turn the call back over to Mr. Wilkerson for closing remarks.

Drew Wilkerson: Thank you, Sylvie. In the second quarter, RXO delivered significant brokerage volume growth and solid margin performance. This is an important part of the freight cycle. The decisions that we’re making right now will position us for significant earnings growth when the cycle inflects. We’ve got a seasoned leadership team that’s focused on continuing to take share while optimizing our cost structure and making the investments for future growth. With our cutting-edge technology, massive capacity and the best people and strong customer relationships, RXO is well positioned over the long-term. We remain confident in our ability to deliver our 2027 adjusted EBITDA targets. Thank you for your time today and I look forward to seeing many of you in the coming weeks.