RXO - NYSE

Welcome to the RXO Q1 2023 Earnings Conference Call and Webcast. My name is Laura, 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. Wilkerson, you may begin.

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. RXO delivered solid results in the first quarter of 2023 despite the tough economic backdrop. The Q1 results were driven by another quarter of year-over-year brokerage volume growth and best-in-class brokerage profitability. Overall, our company-wide adjusted gross margin remained strong at 18.8%, up 80 basis points year-over-year. Our tech-enabled brokerage business continued to significantly outperform the industry. We took share and achieved best-in-class gross margin. Brokerage volume was up 6% year-over-year. The most important driver of our growth was contractual volume. We also grew synergy loads from our managed transportation business, cross-border loads and other modes in the quarter, including LTL. Brokerage gross margin was 16.3%, flat year-over-year. To give some more color, year-over-year volume growth was consistent throughout the quarter. From the vertical perspective, there have been some improvements in the inventory positions at our retail and e-commerce customers. We have seen increased brokerage volumes from home furnishing, building products and technology customers. Last quarter, we highlighted our robust sales pipeline, and we're pleased with our conversion in the first quarter. Our pipeline conversion resulted in our contractual volume growing 19% year-over-year. As a result, our contract business now represents 77% of our brokerage volume. We also saw continued momentum with bids. And in the first quarter, annual bids were up 11% sequentially, as measured in revenue. This is the hardest part of the cycle to grow volumes. And we were able to do so because of our customer relationships, service, technology and scale. We are confident that when the market inflects, we are in a great position to win. Our complementary services also continued to execute well in the quarter and complementary services adjusted gross margin expanded by 160 basis points year-over-year. Managed Transportation significantly increased the number of synergy loads, it provided in our truck brokerage business. Managed Transportation continues to benefit from the outsourcing trend. The world's largest companies are turning to RXO to handle their freight transportation needs. In fact, for the fifth straight year, General Motors named RXO Supplier of the Year. This is an honor to work with global powerhouses like GM and to help provide consistent, reliable solutions for their shipping needs. We're also capitalizing on the near-shoring trend. In the first quarter, RXO's cross-border brokerage loads increased by more than 30% year-over-year. We're supporting our customers' efforts through our new cross-border facility in Laredo. We're in the contracting process with several large customers who want to utilize the wide array of services the site offers. Turning to our Last Mile business. RXO is the largest provider of big and bulky services in the U.S. Our customers tell us we offer the best service in the industry. Our recent pricing actions reflect the premium service that we provide, and we now expect to grow EBITDA within Last Mile year-over-year for full year 2023. We also had a very good cash flow quarter, converting 100% of adjusted EBITDA to adjusted free cash flow. I'm also pleased to announce that our Board of Directors has authorized a $125 million share repurchase program. This program fits into our balanced capital deployment approach, which Jamie will expand on later. Our business results were underpinned by adoption of our best-in-class technology, which helps customers and carriers make sound decisions and improve productivity. In the first quarter, 96% of loads were created or covered digitally. And we also hit a milestone for the RXO Drive-out, which surpassed 1 million downloads in the quarter. As RXO continues to grow, we remain focused on developing our people. We have a strong bench of talent, and I wanted to highlight 2 leadership changes we made in the quarter. Paul Boothe, who has led our managed transportation business for the last 3 years, has been named the President of our Last Mile business. Under Paul's leadership, we successfully onboarded several high-profile customers and freight under management more than doubled to $4 billion. Paul brings operational expertise that will help us improve the structural profitability of Last Mile. I'd like to thank Fernando Rabel, who served as interim Last Mile President. Fernando will work closely with Paul to ensure a smooth transition and will continue to deliver results for our largest customers. Brian Dean has been promoted to lead RXO's Managed Transportation business. Brian has been with RXO for more than 20 years. and most recently served as Vice President of Operations for Managed Transportation. Brian has been a key driver in designing and delivering solutions for our customers that help them optimize their transportation spend. I'm thrilled that we have been able to fill these roles internally, and I'm looking forward to continuing to work closely with Paul and Brian on my leadership team. Looking ahead, we still anticipate a tough macro environment in the second quarter, similar to what we saw in the first quarter. We again expect to grow brokerage volumes on a year-over-year basis, but continue to anticipate further moderation in gross profit per load. While April started off slow, in the last 2 weeks, we have seen volumes improve. Jared will provide more detail about our expectations in a few minutes. We are executing our playbook and remain focused on profitable growth. Our playbook proves its value in terms of chaos and disruption. It positions us well for the long term. Customers continue to consolidate the number of carriers they work with and our service, best-in-class technology and financial stability have led many to choose RXO as a strategic partner. As a stand-alone company, that's more fit for purpose, everyone at RXO is focused on delivering results for our customers and shareholders. With our accelerating market share gains and best-in-class profitability, we are positioning the business to deliver significant returns when the market inflects. And now over to Jamie.

Thank you, Drew. Good morning to everyone. In the first quarter, we generated $1 billion in revenue compared to $1.3 billion in the first quarter of 2022. The revenue decline was primarily due to lower freight rates year-over-year. Profitability remained strong with an adjusted gross margin of 18.8%, up 80 basis points year-over-year, primarily driven by our ability to bring down the cost of purchase transportation as the market softened. Additionally, adjusted gross margin within Complementary Services expanded by 160 basis points year-over-year driven by Managed Transportation and freight forwarding. Our adjusted EBITDA was $37 million in the quarter compared to $75 million in the first quarter of 2022. And our adjusted EBITDA margin was 3.7%, down 200 basis points from the prior year. These declines were primarily due to the lower year-over-year freight rates, the resulting moderation in brokerage, gross profit per load and the incremental corporate costs of being a stand-alone public company. Below the line, our interest expense for the quarter was $8 million. Our income taxes were favorable for the quarter driven by discrete nonrecurring tax items. Adjusted diluted earnings per share for the quarter was $0.11. You can find a raise to the adjusted EPS on Slide 8 of the earnings presentation. Importantly, we continued to outperform the industry. Despite the difficult macro economy, we grew brokerage volume by 6% year-over-year. Profitability in brokerage remained best-in-class with gross margins of 16.3%, flat year-over-year. It was a very strong cash quarter. Please refer to Slide 9, which has a walk from adjusted EBITDA to adjusted free cash flow. We ended the quarter with $121 million of cash versus $98 million at the end of the fourth quarter. Our adjusted EBITDA converted to adjusted free cash flow at 100% in the quarter, a great result. Please note that the quarter's adjusted cash flow results included the payment of 2022 incentive compensation. The quarter also included several timing-related items that had positive impacts during the quarter. These items included earlier-than-expected collection of some accounts receivable, 0 interest payments on our bonds during the quarter. We paid interest on a semiannual basis in the second and fourth quarters. We incurred minimal cash taxes in the first quarter based on normal regulatory timing. Most of our cash taxes for Q1 and Q2 will be paid in the second quarter. As we look to the second quarter, these items will normalize, and we expect our cash conversion for the first half of 2023 to be approximately 50%. Over the long term, across market cycles, we remain comfortable with our cash conversion at a rate between 40% and 60%. I also want to spend some time discussing spend-related and restructuring costs. Last quarter, we communicated approximately $10 million to $15 million for the full year 2023, of which $10 million were expected cash outflows. We continue to optimize our cost structure as a stand-alone entity. Since our spin-off, we have launched several initiatives to ensure that we have the appropriate cost structure and processes in place to improve profitability and support our growth. Given the weak freight environment, we moved expeditiously in the quarter and achieved annualized run rate savings of approximately $20 million. These savings helped us sort some of the reduction in brokerage gross profit per load in the quarter. We incurred $8 million of restructuring charges to achieve the $20 million [ savings ], a significant return. Looking ahead, we're proactively optimizing our cost structure and our position in the organization for incremental operating leverage when the freight cycle inflects. As a result, we now expect 2023 spend related and restructuring costs to be closer to $35 million, with approximately $30 million of expected cash outflows. On Slide 10, we have provided an update on our balance sheet. We have $621 million in liquidity, including our $500 million revolver, which remains undrawn. We have a strong balance sheet and our net leverage at quarter end was approximately 1.2x trailing 12 months adjusted EBITDA. This remains at the low end of our stated range of 1x to 2x. As Drew mentioned, our Board of Directors authorized a $125 million share repurchase program. Given our strong balance sheet and free cash flow generation, we are pleased to have this authorization as a formal part of our capital allocation framework. We will opportunistically repurchase shares through a balanced approach that will include relative market value, leverage, free cash flow and overall macroeconomic conditions. At a minimum, we plan to buy enough shares to cover dilution from restricted stock grants on an annual basis. Additionally, as you saw this quarter, we will continue to settle tax withholding all obligations for the vesting of a pre-spend RSU grant in cash. Using cash in lieu of selling shares to sell these tax reporting obligations will help to minimize dilution. For the first quarter, this was a $7 million cash outflow. We estimate an additional $10 million for the balance of the year for a total 2023 estimate of approximately $17 million. You can find an update to our 2023 modeling assumptions on Page 13 of the presentation. We now expect capital expenditures between $60 million and $65 million. This includes $15 million of strategic investments in real estate to accommodate growth in our brokerage business. We remain committed to spending approximately 1% of revenue on capital expenditures over the long term, in line with our guidance at Investor Day. Stock-based compensation expense is expected to be between $20 million and $22 million. Depreciation and amortization is expected to be between $70 million and $75 million. Interest expense will be between $32 million and $34 million, $1 million lower than our prior forecast, and we expect our adjusted effective tax rate will be approximately 25%. These 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 macroeconomic backdrop, we are pleased with our financial results. We are operating well, have solid cash flow generation and a strong balance sheet. Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk more about our outlook.

Thanks, Jamie, and good morning, everyone. I'd like to start with the structural profitability of our business. We again outperformed the market this quarter with best-in-class brokerage volume growth and profitability enabled by our technology. Brokerage gross margin of 16.3% was flat year-on-year despite the difficult freight cycle dynamics, a testament to our technology and pricing algorithms. Our driver app, RXO Drive, surpassed 1 million downloads in the quarter, up 45% year-over-year. Average weekly users increased 25% year-over-year in Q1. And importantly, 7-day carrier retention was strong 79%. Q1 active network carriers declined 3% sequentially as carriers began to exit the market during the quarter, which will ultimately lead to a more balanced supply and demand dynamics. In the first quarter, 96% of our loads we created or covered digitally versus 87% last quarter and 74% in the first quarter of 2022. This was the result of continued adoption of our technology in addition to the full quarter impact of the platform capability within RXO Connect that was discussed last quarter. Over the next few quarters, while we expect the percentage of loads created or covered digitally to stabilize around the current level, we are not stopping there. Increasing the number of fully digital loads on the platform is a top strategic priority for the business. We've done an excellent job on the customer side with digital integration, but there's still plenty of white space ahead of us on the carrier side. The value proposition of RXO Drive and Connect is clear, and helps drive engagement and stickiness with our customers and carriers as evidenced by our 7-day carrier retention rate. Importantly, as the percentage of digital load increases, we would anticipate higher contribution margins. This quarter, we, again, were in an enviable position with contractual volume representing 77% of our business, up 200 basis points sequentially and 900 basis points when compared to the first quarter of 2022. RXO continues to benefit from ongoing carrier consolidation across our customer base. Even though freight demand is weakening, we are viewed as a strategic carrier and we are gaining share given our exceptional technology, service, and deep customer relationships. RXO's top 10 customers have been with us for 16 years on average. From a vertical perspective, retail and e-commerce volumes declined in the quarter, as expected, but the rate of decline moderated relative to the fourth quarter as customers' inventory positions improved. Additionally, we saw significant volume growth in our other verticals, including homebuilding, health care, biotech and technology. Last quarter, I told you that our fourth quarter brokerage gross profit per load was roughly in line with our 3-year average. I thought it would be helpful to share current trends relative to prior freight cycles, and I'll refer you to Slide 12, which details our historical volumes and gross profit per load trends. We are now approaching our 5-year gross profit per load volume. More specifically, we are within 10% of our trough gross profit per load over the last 5 years, excluding the low of the COVID-19 pandemic. Since that trough, our brokerage volume has grown by more than 55%. This is our playbook for this very important part of the rate cycle, increasing share with best-in-class profitability, while we strategically invest in the business positions us well for the next inflection and the road to $500 million in EBITDA. I'd now like to look forward and give you some more color on what we are expecting in the second quarter. We do not anticipate any major changes in the state of the economy or the freight cycle. Both will remain challenging. We do continue to expect a moderation in gross profit per load as the second quarter will reflect the full run rate impact of new contract rates. However, our brokerage sales pipeline remains robust, up 50% and 84% on a 2- and 3-year stack, respectively. Retail and e-commerce volume declines are moderating, and our non-retail verticals are still growing year-over-year. We ended in April with strong brokerage volume momentum, giving us confidence that we will again move brokerage volume on a year-over-year basis in the second quarter. Putting it all together, we expect company-wide second quarter adjusted EBITDA to grow sequentially when compared to the first quarter. Turning to the full year. Our brokerage business continues to have momentum supported by year-over-year volume growth in the first quarter and our expectation for second quarter year-over-year volume growth significantly outperforming the industry. I mentioned that the inventory position of some customers within the retail and e-commerce sectors has improved. This may lead to restocking activity in the second half. However, visibility remains limited. Within Last Mile, we continue to work on operational improvements, execution, service and pricing. Given the success of our strategic pricing actions, we are confident that 2023 Last Mile EBITDA will grow versus 2022 levels, helping to partially mitigate brokerages moderating gross profit per load. Our asset-light business model generates significant free cash flow. Prospectively, we remain confident that we will continue to achieve a strong adjusted free cash flow conversion relative to adjusted EBITDA. We will thoughtfully deploy capital through a balanced capital allocation approach including the $125 million share repurchase program that we announced this morning. We believe that growth of free cash flow on a per share basis is a primary driver of long-term value creation. I'll leave you with why we remain so excited about our business despite the challenges of the current freight cycle and the economy. We operate in a $750 billion market with plenty of room to grow. Our financial profile can generate meaningful free cash flow and our strong balance sheet and new share repurchase authorization provides us with flexibility to deliver returns to our shareholders. We have a small share of an enormous market, a proven team, a winning strategy and a long runway for profitable growth. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Ken Hoexter from Bank of America.

Maybe just dig into the outlook a little bit, your solid performance in terms of the 6% volume growth, maybe thoughts on that thought of continued volume growth with -- in the face of softening margins that you talked about. You're still outpacing your peers on margins. You noted the last 2 weeks showed some improvement. I think the market is still trying to understand what that means in terms of is that a seasonal bounce, if there's any insight you can provide in and obviously, maybe compare and contrast that with the conflicting data of margins still coming in. So if you could just walk us through maybe a little bit more detail on that second quarter outlook and the turnaround you're seeing in the last few weeks?

Yes, absolutely. Good morning, Ken. This is Drew. I'll start with the second quarter outlook. When you look at what we saw as April started off, April started off fairly slow coming off of quarter end, coming out of Easter holiday, the first 2 weeks were a lot slower than what we had hoped. But the back half -- back half of April in the last 2 weeks picked up fairly well, and we saw good returns, enough returns that we were comfortable enough to be able to endorse volume growth for the full year. As you look a little bit further out, we've got signs of some things that we like that we're seeing overall in the market. Retail, e-commerce inventory levels are much better than what they were last year. Growth in technology, health care and home furnishing has been really strong for us, and we expect that to be able to continue through the back half of the year. And we started to see, for the first time, in the first quarter, we started to see more capacity exit the market than what's entering the market. And that's the first thing that you see before tender rejection start to increase. And so for us, that's something that's got us excited looking as we look forward. But with that, there's a lot unknown in the overall macro for the rest of the year. So very happy with where we sit right now and the playbook that we've got to be able to continue to build the foundation, take market share and do it profitably.

And Ken, this is Jared. Just building on what Drew was saying with respect to volume growth, we feel comfortable with respect to Q2 volume growth on a year-on-year basis. And to give you some puts and takes as it relates from Q2 to Q1, Q2 is seasonally a better quarter for us from a RXO standpoint. That's across our businesses, including within Last Mile, we'll have the benefit of seasonality as it relates to Last Mile as well with respect to also benefiting from the strategic pricing actions that we took in the quarter. We'll also have the full run rate impact of the cost takeouts that we talked about in Q1, benefiting Q2, giving us comfort that company-wide adjusted EBITDA will grow sequentially from Q1 to Q2.

Just to clarify before I get to my second question, Drew, you said -- so you're confident in endorsing volume growth for the full year and then Jared jumped in with volume growth through 2Q. I just want to make sure you're talking 2Q or you...

I was talking Q2 on a year-over-year basis and said full year. With that said, I like where we're sitting for the full year. Just as I said, there's still some unknowns with the overall macro. I don't think that anybody -- there's no crystal ball for when the market inflects if it's Q3, Q4 or Q1.

Yes. I just want to make sure you -- we got that right. You raised restructuring costs, Jamie, to $35 million. Maybe I'm a little confused. I mean the spin is complete. Why are we restructuring and the other costs going up at this point? And maybe dig into the thoughts on your EBITDA growth comment. Can you put parameters on that?

Yes, Ken. This is Jamie. Yes, so restructuring and the spin-related costs, we came into the quarter, first of all, as a stand-alone public company, we wanted to take a look at every single cost we had in the company. We look -- we did a ground-up zero-based budgeting process, looked at every vendor, every contract, all of our org structures. And as you saw, we were able to take out about a run rate of about a $20 million savings on a go-forward basis. And so that restructure costs us about $8 million. That was not included in that $10 million to $15 million because we really went after that aggressively in the middle of the first quarter. As we look forward for the year, we did raise our number to include the $8 million that we already spent, but we raised another $10 million because we have several initiatives in place today that we're working on that we expect to complete during the course of the second, third quarters, let's call it, and we also expect to have some additional savings to come out of a run rate basis. And so for us, we spent $8 million more of the core than we had communicated in the $15 million, but we were able to produce a $20 million annualized run rate savings. And that's a return that for the work we did on the outlook, we very happily like the return, but also it positions us very well to be ready to leverage our cost structure with a very efficient back office and shared service functions to take advantage of the market when it inflects.

Your next question comes from the line of Stephanie Moore from Jefferies.

[indiscernible] for Stephanie. My first question, Drew, you mentioned capacity exiting and that's kind of the first sign we see before tender rejections start to pop up. And so I was kind of curious what your view kind of where we are on the cycle is today? I think most have talked about the 1Q maybe being weaker than expected and things kind of playing out a little bit of stabilization. Do you feel at this point that things kind of seasonally move normally, albeit off of a lower base in the 1Q? Or what's kind of your view on the cycle right now?

Yes. I think for seasonality, when you look at it for the last 3 years, there's been a lot of puts and takes. So it's hard to peg exactly what happens from a seasonality perspective. But typically, you see volumes increase from Q1 to Q2 because that's when you've got the full run rate of implementing the bids that you completed in Q4 and Q1. When you look at this market cycle that we've seen, I talked about capacity exiting the market, and we think that, that is a good thing because it will lead to tender rejections over the long run. Right now, we're seeing load-to-truck ratio at around 2:1. I've been doing this for 16 years, and I haven't seen it go below 2:1 for any sustained amount of time. So while we're not calling the bottom, we felt like there are signs that are pointing towards a more positive direction from a capacity standpoint, which will benefit the difference. And when you look at the -- compare it to previous cycles, we're not in something that is similar to '08 and '09. What we're seeing from a load-to-truck ratio and a tender rejection ratio runs more in line with what we saw in 2018 and 2019.

That's helpful. And then on the final mile piece, I was hoping, is there anything you guys can give in terms of the metrics on quantifying sort of what the repricing is looking like or how things are going? I know you mentioned that you guys were okay walking away with some business that is going to be more profitable. But I was hoping you guys could maybe peel back the onion a little bit on what's going on in Final Mile?

Yes. So I mean, we were in pricing conversations with our customers for really the last 3 to 6 months. And what we found is that because of our service, because of our scale, our customers wanted to continue to partner with us and value the business that we were doing. So despite the tough macroeconomics, we are confident that we'll grow Last Mile EBITDA on a full year basis and are happy to be rewarded and recognized for the service that we're giving to our customers. And we actually, -- there was a small piece of business that we ended up parting ways from with the customer. But on the other hand, we actually picked up a few markets from several of our customers. So happy with how those conversations turned out.

And maybe just to confirm, I know this is historically a difficult business to be profitable, and you guys are profitable in Final Mile and you're just growing that profitability?

That is correct. We are profitable, and we are growing the profits on it.

Your next question comes from the line of Scott Schneeberger from Oppenheimer.

I'd like to speak kind of similar to Ken's question on volumes, on pricing and cadence. How did spot pricing look throughout first quarter and into the first and second half of April, just on an industry basis? And Drew, on the last response, you were talking about potentially a bottoming on the load-to-truck ratio. How would that -- when would we see that in pricing on a spot and contract basis?

Yes. So on the spot pricing, what little bit of spot loads that are out there is down significantly. Spot pricing at a 2:1 load-to-truck ratio is well below what your contract pricing is. And that's one of the things that we talk about as you see the capacity exiting the market and you start to see that load-to-truck ratio shift, that's a positive thing because it creates spots. At that point, they'll go higher than what you see on the contractual loads. As far as the overall bottoming of the market, again, we're not going to call the bottom, but there are signs of optimism that we've got as we look ahead. Retail e-commerce is a big part of our business and you look that those inventory levels earn a lot better position than what they were a year ago, that's a positive thing for us. The growth that we're seeing in technology and health care, specifically or tailwinds that we think will continue. And if you see more capacity exit, that's going to create spot loads. And we're in the position to win when the spot loads come. Because if you look from 2018 to 2019 over the last downcycle, we're up, our volume is up like 55% from that time period. So our foundation is much bigger than what it was during the last downturn. So for spot loads, projects, mini bids, we're going to be the place that customers turn and we'll be in a position to win.

On my follow-up, it's a bit of a multi-parter. But just curious, you cited annual bid opportunities measured by revenue up 11% quarter-over-quarter in the first quarter. I'm just curious, how is that looking from a customer basis. You all are clearly taking share and it sounds like your bids are still very strong. Are these smaller competitors from whom you're taking share? Are there some large in there from what you can tell? And you measure that by revenue. How is that -- is that just a few lumpy opportunities? Or is that just a lot of different customers in there? And then the last part of this long question is the -- how meaningful is this cross-border business, the new Laredo facility to these bid opportunities? And Jamie, maybe this is new real estate development you're talking about, is that as a border as well or is that something else?

Yes. So when you look at share gains, we're not picky on where we take share gains. We're taking it from everybody. We don't walk into a bid looking to target 1 competitor or 1 asset-based company where share gains come from. We look at it, how can we match our services to best align with what the customer needs. And because of that, we're winning big. I mean you mentioned our customers. If you look at our top 20 customers, we actually grew volume by 13% on a year-over-year basis. So our largest customers are recognizing our service, and they're not just coming back to do business with us, they're coming back to us and say, "Hey, we want to give you more business because of the service and solutions that you're able to offer." On the cross-border side, we think nearshoring is something that's going to continue and U.S. and Mexico will benefit from that. We've been doing cross-border freight for a decade now and very happy with the investment that we've made into Laredo, that's helped us grow our brokerage volume by 30% on a year-over-year basis. And we think that, that will continue for the long run. We do an array of things out of Laredo. It's not just your truckload moves that are going cross-border, which we do a lot of. We're also doing transloading, cross stocks. We're doing a little bit of storage for our customers as they're waiting to get product through one side of the border to another. So it just speaks to the array of services and solutions that we create and the stickier we're becoming with our customers.

And Scott, the question to follow up on the real estate. The real estate is more about expanding or opening some offices for our brokerage business. So we have capacity to fill as volume grows and as market inflects. So that's really positioning ourselves for the growth that we believe we're going to have.

Your next question comes from the line of Scott Group from Wolfe Research.

Any directional color on how much sequential EBITDA growth you expect from Q1 to Q2, there's a decent range of expectations, are we thinking mid-single, double? Any color would be helpful.

Scott, it's Jared. So I'll give you some puts and takes as we think about it for the quarter, Q2 versus Q1. As we mentioned, we expect year-on-year volume growth again, Q2 versus Q1, offset partially by the continued gross profit per load production that we expected. As we talked about in the script, April started off slow, but we had strong momentum in the back half of the month to endorse volume growth for Q2 versus Q1, both on a year-on-year basis. As it relates to seasonality, seasonally, it's a better quarter for RXO as a whole across all aspects of the business. We'll be benefit from brokerage, we'll benefit in Last Mile, we'll have the pricing benefits that we talked about and then lastly, we'll have the full run rate impact of the cost actions that we took. As it relates to specific guidance on EBITDA sequentially, we don't provide guidance at the consolidated level, but hopefully, that's helpful in terms of the puts and takes.

Okay. And then just wanted to get your perspective. Do you think that second quarter is the bottom for gross profit per load? And then maybe in this context, I'll ask you, like when you go back, the chart of historical gross profit per load was helpful? When you look at that prior trough, is that trough -- is that coincident with spot rates bottoming? Or does the trough in profit per load tend to lag spot rates by a quarter or 2? I'm just trying to understand, are we at this trough and profit per load yet or if it needs to take a few more quarters?

Yes. The couple of things I would offer up is when you think about the profitability trough, I think that's also going to come down to when the load-to-truck ratio really starts moving higher. When we do get that sustained move higher, obviously you'll see the spot loads start coming back, and we'll have nice spot gross profit per load, which will certainly be offset from a contract standpoint when you think about the dynamics from a cycle perspective, when you -- so that's certainly something to be mindful of, if to the extent that -- we start to see the supply exit the market, and that has more of an impact here in Q2, could that yield some more gross margin pressure to the extent that we start seeing the load-to-truck ratio move up? Absolutely. And I think it's on us to go ahead and ensure that we leverage our technology, leveraging our pricing algorithms to go ahead and maintain best-in-class profitability as you saw this quarter with gross margins flat year-on-year within brokerage. Hopefully, that's a little bit -- that gives you color what you're looking for. As you look back to the chart that we provided on Slide 12, I think the message that we wanted to relay was certainly to look back over the last 5 years, give you a sense of the different freight cycle dynamics. And I think as Drew just said in one of the earlier questions, this is more like '18/'19 from a freight recession standpoint. And as we're approaching that gross profit per load cycle bottom, we are just in a much stronger position with our volume growth in excess of 55%. So as that second derivative moderates on gross profit per load, you'll see a pretty significant impact from an EBITDA contribution standpoint.

Your next question comes from the line of Ravi Shanker from Morgan Stanley.

So the tone and content of this call is very different than what we've heard on the 1Q call so far, which have been pretty [indiscernible]. So I'm trying to understand how much of this is idiosyncratic to you and you guys just doing an incredibly good job with execution versus how much of this is genuinely the cycle of the market picking up, especially in the last couple of weeks of April, like you mentioned and the fact that you guys are reporting a little bit later than peers? Maybe, Drew, I'm just teeing up to give you a 30 seconds to tell us how awesome you guys are, but just trying to figure out how much of this is cycle versus execution?

Well, thank you for that, Ravi. And we definitely have a lot of things to our business that are idiosyncratic that play at our favor. If you look at our technology, it is second to none, it allows us to operate at best-in-class margins and it also helps us become more integrated with our customers to where we're able to continue to grow and take share and do it at a faster clip than what most are doing it in the industry. As far as the tone of the call and where we see the overall macro, I want to be clear, it's still a tough macro environment that we're in. Load-to-truck ratio is still at a 2:1 ratio. And for us to start to see that inflection, you're going to have to see load-to-truck ratio start to move. For us, this is the part of the cycle to what Jared just said earlier, is about building that foundation and being much bigger than we were at the last market inflection, much more integrated with our customers to prepare to go on a really good run for that. And as I've noted earlier, we've seen some things about this market that we like that we showed that you could see an inflection, but we're just not ready to call the point of what that inflection could be because there's not enough data there to call if it's Q3, Q4 or Q1.

Got it. Understood. And maybe 2 very quick follow-ups. One, maybe for Jared, the outlook slide, in the last quarter, you had the reiteration of the 5-year guide in there. This time you didn't. I'm assuming it was just a formatting thing and nothing has changed with your outlook for the 5-year guidance. And also on the restructuring costs, kind of understood on you guys going for the ROIC there. But how long do you think -- is this going into 2024? Or how long do you think these restructuring actions will continue?

Ravi, it's Jared. I'll start, and then I'll hand it over to Jamie. Nothing has changed with respect to our confidence in the $500 million of EBITDA. I referenced it in our script in terms of the road to $500 million. And I think the slide that we're referring to, if you look at Slide 12 in the presentation with volume up 55% when compared to the '18-'19 downturn really is laying that foundation for us to go ahead and build from a momentum standpoint. So we remain very comfortable with the outlook that we provided at Investor Day 6 months ago.

Yes. And Ravi, on the restructuring, we -- the spend-related restructuring should diminish materially by the end of this year. In terms of the restructuring itself, we're going to be a company that's constantly looking for ways to optimize cost. That's just going to be who we are as a company. We're always going to be positioning ourselves to be cost efficient at the same time being -- have capacity for growth. So we don't have any plans for a restructure in '24. But if the market dynamics say we need to, we're going to look at it, but we're always going to be a company looking to find a way to be better cost wise. And so -- but you'll see these costs go down materially by the end of the year.

Your next question comes from the line of Tom Wadewitz from UBS.

This is [ Michael De Matea ] on for Tom. I was wondering if you could provide any additional commentary regarding shipper feedback on the inventory cycle? And what's providing confidence in a turn? And then also for spot markets, when do you think bottoms versus where we are currently?

Yes. So as far as what we're hearing back from our customers on inventory levels, inventory levels specifically in retail e-commerce already a lot better than what they were a year ago. And we think that's got the potential to be a tailwind for us. That's a decent piece of our business and one that we look to continue to be able to go out and grow. As you look into other verticals, inventory levels, I would call stable right now overall and specifically in technology and health care and food and beverage, they are -- everything is running extremely efficient and smooth. As far as calling the bottom of the spot, we said earlier, we're not going to call the bottom. I don't think there's a crystal ball out there that tells you exactly what the market is going to do. I am confident that we will be able to go out and take market share and do it at best-in-class gross profit in the industry. But we're not going to be the ones who call the bottom. But there are signals that we see out there that we like that show that things could be getting better from a brokerage standpoint.

Your next question comes from the line of Allison Poliniak from Wells Fargo.

This is [ Ryan ] on for Allison. I just want to talk a little bit about the supply leaving the market. You mentioned it was doing so. I was wondering how long that process will take or how long you think it will be? And do you think that's going to be a longer process than the 2018 cycle given the run-up here?

Yes. I don't think that we know how long it's going to take yet. We are seeing capacity exit the market faster than what it's entering at, but it hasn't exited at a fast enough rate to be able to call load-to-truck ratio to shift in any sort of dramatic levels at this point. We're prepared for when the market inflects, and we continue to grow our base of business with our customers, and we're prepared to go in a really good run whenever the market inflects. But we don't know exactly when that will happen. From -- the one thing that you've seen recently is Class 8 orders have been down, and they're down significantly. And I think that's another sign that when we talk about capacity exiting the market, that's also less capacity entering the market from that standpoint. So I view that as something that could be a positive trend as far as the load-to-truck ratio outcomes.

Your next question comes from the line of Jack Atkins from Stephens.

Okay. Great. So I guess Jamie -- or not, Jamie, Drew, I'd love to get your thoughts here on sort of how you're positioning the business through the bid cycle here? Because if I look at your revenue per load in brokerage, down about 33%-or-so in the first quarter, it certainly feels like you guys are using price as a lever to take share. But at the same time, the market is potentially bottoming here. So are you structuring the contracts in a way that give you an opportunity to come back and take that price higher once the spot market moves up? How are you thinking about that? Because it feels like with 77% of the business under contract, spot and flex, that could be a pressure on that revenue per load.

Yes. So first, we're not using price as a way of getting business. And I think you can see that because our gross profit percentage is the best there is in the industry right now. As far as being able to see spots impacting net revenue per load, spots coming on will actually be a positive thing for us on net revenue per load because you'll see spot rates shift higher than what contractual rates are today, which would naturally be at a higher gross profit per load. So we view that when the market inflects that will be a good thing. You've seen us shift our mix of business as much as 1,000 basis points quarter-over-quarter. So we're an agile group. We're ready to react with whatever the market throws at us, and we're prepared for an inflection that will be a positive thing for us from a pricing standpoint.

And Jack, it's Jared. Also be mindful of the dynamics from Q4 to Q1, right? You're comparing to Q1 of '22, when the market significantly loosened after the new contract rates had already gone into effect. So much comp in terms of year-on-year, and our comp is actually even harder into Q2 when you think about Q2 of 2022. So to reiterate what Drew said, we are absolutely not using price as a lever. Ultimately, profitable growth is in our DNA. That's how we run this company. But I think it's mindful to think about that comp. And also remember that length of haul was also a headwind on a year-on-year basis, which stepped up relative to Q4 levels.

Okay. Okay, Jared. I appreciate that. And then I guess maybe kind of, Drew, getting back to your point on being able to capture spot market activity when it materializes, hopefully later this year or sometime in early next year. I guess I'd be curious to kind of get your thoughts on productivity gains, and you guys have done such a great job maximizing productivity over the last 3, 4, 5 years, Drew under your leadership. So as you sort of think about that and being able to really drive up the percentage of the loads that you're matching digitally with carriers, how do you really kind of move that ball forward here over the next year or 2 to drive additional productivity opportunity?

Yes. So 2 things to break down there. One is just the overall productivity. We did see an increase in productivity from our team quarter-over-quarter. That was a positive thing. But really, we look at the productivity gains that we've got over the long term because there will be times that you see us invest in head count. And we look at the productivity gains more on a 3- to 5-year basis from what we're doing. And as we've said in the past, that trend continues to be up and to the right. As far as the opportunity that we've got on the carrier side, we've got a ton of white space, as Jared mentioned in his prepared remarks, to be able to continue to grow on the carrier side from an integration standpoint. We've done a great job on the customer side and integrating with large customers is a little bit easier than integrating with some of these smaller carriers as we continue to be able to show them RXO Connect and the power of what RXO Connect can do, whether it's being able to keep them on continuous moves, whether it's being able to give them discounts on fuel and tires and maintenance, continuing to pull them back to the app. Once we get them on, we've got a high retention rate. And one of the things that you saw is that when carriers come on to do business with RXO Connect, they come back 79% of the time. We've just got to continue to increase the adoption rate there.

Your next question comes from the line of Jason Seidl from TD Securities.

I wanted to talk a little bit first about the comment you made about Managed Transport in terms of the synergy revenues that I think are one of the reasons that you guys are outperforming your peers in load growths. Can we dig into that a little bit sort of what's going on there? Has there been a shift in some of the customers? Has there just been a better job done internally about pushing some of that freight from one side to the other?

Yes. There hasn't been a shift. So one, we've continued to bring on new customers in Managed Transportation. And any time there is a new customer that's brought on, one of the first places that the customer wants us to look at as far as how we're doing out freight is to ourselves because we are known as a reliable partner who's going to be able to go in there and add value to their overall supply chain. So we expect synergy loads to continue to increase going forward and think that we're really just getting started from that perspective, managing close to $4 billion in freight under management. We've got a lot of opportunities to drive cross-selling across the company. And if you look at us overall, 62% of our revenue comes from customers who do business with more than 1 line of business. So we've got -- we're very integrated across the company.

Okay. That's good color there. I also wanted to sort of circle back to Jack's question a little bit on the technology side. I think you asked and I think you sort of talked around it a bit. You said the loads created and covered digitally are 96%, and that's probably -- it feels like it's getting close to topping out there. You said you have a lot of opportunity on the carrier side. So should we expect the loads created and covered digitally to grow from 1Q to 2Q? And when do you guys expect to start breaking out that number for us and investors?

Jason, it's Jared. So what we talked about was 96% of loads created or covered loads -- covered -- created or covered digitally. From a creative and covered perspective, that is a significant percentage of our loads and that is growing. As we talked about a little bit, we've done a really great job on the customer side. I think we've got a ton of white space ahead of us on the carrier side. The value proposition is clear. It's very sticky with our carriers in terms of RXO Drive and RXO Connect. So it really is about increasing the adoption rate with them. And then once we go ahead and increase that adoption rate, the carrier retention rate is very strong, right? This quarter was up nicely Q-on-Q to 79%. So we're certainly having those conversations in terms of when we're going to go ahead and disclose to you the percentage of loads that are created and covered digitally and certainly look forward to sharing that with you when the time is appropriate.

No, we look forward to having it would be helpful. Appreciate the time as always.

Thank you.

Your next question comes from the line of Jeff Kauffman from Vertical Research Partners.

A lot of my questions have been answered. So I'd like to delve into expense line items, if I can. I think one of the surprises for me given the revenue was down, was the direct operating expense line was up about $6 million year-on-year. So I guess question 1 is, can we dig a little bit into what drove that? And is that something that sustains at this level or is there something in 1Q that drove that higher and that cost comes down? And then secondly, I want to follow up on Ken Hoexter's call. I think I understand the restructuring charge of things. But why the $6 million in transition and integration costs at this point? Can you help us understand what those are really covering at this point because you're not really rebranding a lot of things, I would assume, but maybe I'm wrong? Just some clarity because those were the 2 costs that kind of stood out versus what expectations were.

Yes. So the OpEx number specifically, what runs through there is generally our expenses related to our Managed Trans business and our Last Mile business. So when you see a direct OpEx, it's things like the cost of the facilities on the Last Mile hub, it's the direct labor to get the product ready for staging for the transportation. So we did see an uptick in some of those costs. Very little of our direct OpEx runs through our brokers because it's -- most of that cost to purchase trend. And so nothing significant there that stands out other than those kind of costs to support Last Mile and OpEx or Last Mile managed trends. In terms of the cost as it relates to restructuring, some of the things in our spend-related category, if you will, you mentioned rebranding, that's actually one of the biggies. As we transition from being a division of XPO into a stand-alone public company, we did go out and rebrand a lot of our facilities. That was a cost that we started at the time pre-spin, but it carried on over into the first quarter as you would think that will diminish as the year goes on. Other things, we had some retention dollars, some noncompete dollars that are directly related to the spin, those will also diminish, as you would expect. And so we talked earlier, we do expect the spend related costs to diminish materially as the year concludes in late '23, we'll have a few carryover items but very little.

And that will be for our last question. I would like to turn the call back over to Mr. Wilkerson for any closing remarks.

Thank you, Lara. Despite the weak macro environment, RXO took market share and maintained best-in-class brokerage margins. RXO is a differentiated business model with best-in-class technology and massive capacity along with a deeply experienced leadership team. We're navigating the current economic climate well, and we're going to remain focused on delivering results for our shareholders and for your customers along with the carriers we partner with and our employees. Thank you all for your time today, and I look forward to seeing many of you at our upcoming investor conferences.