But we continue to see a very strong cash flow business. We’ve talked about 40% to 60%. We still believe that’s a good number to use. In fact, it’s been about 43% year-to-date of conversion. So we think – we feel very comfortable with the optimized capital structure that we put in place in early November.
Brandon Robert Oglenski: Appreciate that. Thank you.
Operator: Thank you. The next question comes from Scott Group from Wolfe Research. Please go ahead, you line is open.
Scott H. Group: Hey, thanks. Good morning. So just for the market overall, I’m curious, where do you – what kind of spread are you seeing between contract rate and spot rate right now? And how does that look versus normal? And then I guess what I’m trying to figure out is you guys are – we’re talking about, hopefully, July being the bottom. Typically, with brokers, when spot rates eventually spike, we get an incremental squeeze. Do you think that is – do you think we’ve already seen your squeeze? Or is there an incremental squeeze that comes whenever eventually spikes?
Drew M. Wilkerson: Yes. Good morning, Scott. You’re still at a point where spot rates are below contract rates at this point in the cycle. When you talk about the squeeze, we definitely saw a squeeze in July. I think that the squeeze can come at different points in the cycle, and that’s a good thing for the business. Whenever you get squeezed, that can last anywhere from a week to 1 to 2 months. It’s not something that is a bad thing as you start to see a shift in the market. I don’t think that the squeeze that we experienced in July was the broader turning of the market. I think that was more related to produce season. But on the other side of the squeeze is when you start to see the spot loads come in. And that’s whenever you’re going to see contract gross profit per load come down, but the spot gross profit per load will go up and more than offset and show the power of the earnings behind the business.
Scott H. Group: And then I know a lot of talk about the gross margin, but I want to ask on the net operating margins fell to 6% in the quarter. Any color on how brokerage net operating margin is doing versus the rest of the business? And then ultimately, when we get this up cycle at some point, how should we think about where net operating margins can go?
Jared Ian Weisfeld: Scott, it’s Jared. A couple of things on that point. So in terms of the sequential decline in net operating margins, the – we look at the business on an adjusted EBITDA and adjusted free cash flow basis. But what you’re calling out, I think I’d highlight a couple of things. One, what Drew talked about earlier in terms of the seasonality in Last Mile from Q2 to Q3 is typically weaker with generally a fixed cost base that doesn’t move that much in for quarter when you think about the movement from Q2 to Q3. So those decremental margins impacted the sequential move. And then also remember that the low point in gross profit per load was in July. So the starting point for the quarter really felt the full run rate impact of the squeeze coming out of produce season.
So I call those two factors out as well as some of the impact that we talked about earlier with respect to managed transportation associated in the UAW strike. So boiling all – I think combining all those factors, I think, largely explains the move that you’re talking about. In terms of the incremental contribution margins from here, I’ll hit on what I talked about earlier in terms of the cost optimizations that we’re taking in the incremental margins that we’re expecting. Last quarter, we talked about from the low point brokerage gross – brokerage contribution margins specifically can be pretty strong from the bottom of the cycle, certainly in excess of 50%. So that’s how we’re thinking about the business from a contribution margin standpoint.
Scott H. Group: Thank you, guys.
Operator: Thank you. Our next question comes from Jason Seidl from TD Cowen. Please go ahead, you line is open.
Jason H. Seidl: Thank you, operator. Good morning, gentleman. You called for capacity to come out of the marketplace at a more material level over the next 3 to 6 months. Most people would have probably called for the same thing in the last couple of quarters to be fair. So what’s giving you the confidence that now finally capacity is going to start coming out of the TL market?
Drew M. Wilkerson: Yes, Jason, I said over the next 3 to 9 months. And the biggest…
Jason H. Seidl: Sorry about that.
Drew M. Wilkerson: No worries. The biggest thing on that is carriers right now, what it costs to run a small trucking company, spot rates are below right now. So we do not think that the balance sheet that they build up during COVID can sustain much longer than where it’s at right now.
Jason H. Seidl: Okay. Fair enough. And you talked a little bit about some of your customers saying that sort of you’re done with the sort of inventory drawdown. What are they saying about the restock going forward?
Jared Ian Weisfeld: Jason, it’s Jared. From a restock standpoint, we saw encouraging trends in Q3, specifically in the retail and e-commerce vertical, which was a continuation of the acceleration that we saw in the prior quarter as well. Some of that was expanding share of wallet and market share gains at RXO, but also indicative of the broader health of the vertical. So like Drew said earlier, we are hearing different things from different customers, some think that we’re going to have a peak, some are more mixed on that view. I think what’s important for us is to ensure that we are prepared for that. We are staffed for growth. We have the right investments. And we’ll see as the rest of the quarter plays out, whether or not we’ll have a peak. But we did see encouraging trends with respect to the retail and e-com vertical during the quarter.
