RXO - NYSE

Welcome to RXO Q4 2023 Earnings Conference Call and Webcast. My name is Lara 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 and 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, and thank you for joining today. With me here in Charlotte are Chief Financial Officer Jamie Harris and Chief Strategy Officer Jared Weisfeld. Before I get into our fourth quarter results, I want to recap 2023, a historic year for RXO. When we spun from XPO in November of 2022, we created a new public company that is more fit for purpose with the ability to allocate capital even more effectively. While market conditions were difficult when we spun, we viewed this as an opportunity to demonstrate the power of our model. In 2023, we doubled down on our strengths, exceptional customer service, solutions that help our customers solve their toughest transportation challenges, innovation, and deep customer relationships. We also successfully integrated new leaders into our existing long-tenured team. Our model delivered outperformance for 2023 despite the extended soft freight market conditions. Brokerage volume grew by 12% year-over-year, with gross margin of more than 15%. Brokerage cross-border loads grew by 37% year-over-year. Brokerage productivity, as measured by loads per head per day, increased by over 15%. In maintenance transportation, we significantly grew the synergy loads provided to our other lines of business, largely truck brokerage. We also on-boarded several large new customers. We grew last mile adjusted EBITDA year-over-year. We also generated strong adjusted free cash flow of $49 million, which Jamie will expand on later. We achieved all of this, while making investments for our future, including our people, offices, technology, and services. I couldn't be prouder of what the RXO team delivered in 2023, and I'm looking forward to continuing to outperform this year. Now let's discuss our fourth quarter results. RXO continued to perform well in the quarter despite soft freight market conditions that have persisted. For the third consecutive quarter, we achieved double-digit brokerage volume growth. Total brokerage volume grew by 15%. Full truckload brokerage volume grew by 11%, and less than truckload volume grew by 45% year-over-year. We again broke records in our brokerage business this quarter. Quarterly loads per day and total volume hit new highs. Full truckload has always been the core of our brokerage business and it represented 84% of volume in the quarter. Later Jared will talk in more detail about our volume growth by vertical, but all of our major truckload verticals grew year-over-year. Our cross-border loads also grew by an impressive 28% year-over-year. Contract volume was again the most important driver of our growth and represented 80% of our mix in the quarter. Securing contractual volume puts us in prime position to win spot volume and project loads when the market inflects. RXO continues to take profitable market share. Brokerage gross margin was 14.8% in the quarter. In complementary services, Managed Transportation again grew the synergy loads it provided to our other lines of business, mainly truck brokerage. Managed Transportation also secured several key wins including new managed expedite customers solidifying our position as a leading provider of this service. In Last Mile, the focus we placed on improving profitability was successful and we grew adjusted EBITDA both sequentially and year-over-year for the fourth quarter and for full year 2023. We're pleased with the progress we've made in our Last Mile business and we have many opportunities ahead. Complementary Services gross margin was 20.9% in the quarter, up 90 basis points sequentially and up 40 basis points year-over-year. Our proprietary technology continues to drive many of these results. In the fourth quarter, 97% of the loads were created or covered digitally, up from 87% a year ago. Our seven-day carrier retention was 76%, up 200 basis points year-over-year. I'd now like to spend some time giving you an overview of what we're seeing in the market and how that impacted our business in the fourth quarter. The freight market continued to soften during the fourth quarter, primarily due to supply side challenges. The load to truck ratio declined to about 2 to 1 in the fourth quarter, down from nearly 3 to 1 in the third quarter. Industry tender rejections remained steady at just about 4%. The logistics manager’s index dropped sharply in November after three consecutive monthly increases. It rebounded only modestly in December. Carrier exits accelerated, but there's still too much capacity relative to demand. We also experienced a muted peak season. We saw a typical seasonal capacity reduction at the end of Q4 and when combined with inclement weather hitting certain parts of the country, there were limited opportunities to improve our buy rates. This negatively impacted both our brokerage gross margin percentage and gross profit per load throughout the quarter. However, our focus on profitable growth while controlling costs enabled us to increase adjusted EBITDA by approximately 20% sequentially, in line with the expectations that we communicated to you last quarter. I'd like now to discuss our expectations for the first quarter. We expect that our strong brokerage sales pipeline will enable us to deliver year-over-year brokerage volume growth in the first quarter, albeit at a slower pace than in the fourth quarter. Brokerage gross margin compression continued into January and we anticipate that will impact the first quarter. Jamie and Jared will discuss this in more detail later in the call. As we look forward to the rest of the year, we're preparing for multiple scenarios. At this time, our base case is the recovery will begin in the second half of the year. That assumes that the macro economy remains stable and carrier exits continue to accelerate. In market conditions like these, large companies like RXO, who have financial strength, strong relationships with customers and carriers, and cutting-edge technology will excel and widen the gap with the competition? We have our sights set on the future and are investing for long-term growth and profitability. We also continue to react quickly to changing market dynamics, including by reducing our costs. The actions we're taking now will help drive outsized growth when the market turns. Now, Jamie will discuss our financial results in more detail. Jamie?

Thank you, Drew, and good morning, everyone. I'll review our fourth quarter performance in addition to some highlights for the full year. In the fourth quarter, we generated $1 billion in revenue compared to $1.1 billion in the fourth quarter of 2022. Gross margin in the quarter was 18%. While gross margin declined 150 basis points year-over-year, we are pleased with this performance given the current freight environment. Our adjusted EBITDA was $31 million in the quarter, in line with our expectations of 20% sequential growth. This compares to $64 million in the fourth quarter of 2022. Our adjusted EBITDA margin was 3.2%, down 250 basis points year-over-year. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Below the line, our interest expense for the quarter was $8 million. Our adjusted effective tax rate of 29% in the quarter was lower than our previous expectations due to discrete tax items. Adjusted diluted earnings per share for the quarter was $0.06, which includes approximately $0.02 of discrete tax benefits. You can find a bridge to adjusted EPS on slide 7 of the earnings presentation. Moving to our lines of business. In the fourth quarter, our brokerage business generated $610 million of revenue, down 8% year-over-year, primarily due to lower freight rates. Brokerage volume for the quarter increased by 15% year-over-year. Brokerage gross margin remained strong in the quarter at 14.8%. While gross margin declined 300 basis points year-over-year against a very tough comp, it only declined by 30 basis points sequentially. Complementary services revenue in the quarter of $411 million was down 16% year-over-year. Revenue was impacted by lower automotive volumes in our managed transportation business and continued weakness in the big and bulky category impacting Last Mile. While Last Mile stops were down 9% year-over-year in the quarter, Last Mile adjusted EBITDA was up year-over-year, primarily as a result of strategic pricing actions we took earlier in the year combined with continued operational improvements. Our customers recognize the value that our Last Mile business provides and we're excited about the opportunities in this part of our business. Complementary services gross margin of 20.9% improved by 40 basis points year-over-year and by 90 basis points sequentially. Fourth quarter seasonality and our Last Mile pricing initiatives were the biggest drivers of our improved gross margin on a sequential and year-over-year basis, respectively. Turning to the full year. In 2023, we generated $3.9 billion in revenue compared to $4.8 billion in 2022. 2023 gross margin of 18.3% was down 130 basis points year-over-year. Our full year adjusted EBITDA was $132 million compared to $306 million in 2022. Our adjusted EBITDA margin for the year was 3.4% down 300 basis points. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Now I'd like to discuss the full year results for our lines of business. Brokerage revenue for the year was $2.4 billion down 19% year-over-year, primarily due to lower freight rates. Brokerage volume for the year increased by 12% year-over-year. Broker’s gross margin remained strong at 15.4%, but declined by 300 basis points year-over-year. Complementary services revenue was $1.7 billion for the full year, down 15%. Gross margin of 20.8% improved by 80 basis points year-over-year. For the full year, Last Miles stops were down 9%, but adjusted EBITDA was up year-over-year, as we mentioned earlier. Please turn to slide eight as we discuss cash flow. Our adjusted pre-cash flow of negative $2 million over the trailing six months was impacted by lower profitability levels at the bottom of the freight cycle. As we mentioned during last quarter's call, Q3 adjusted pre-cash flow was also negatively impacted by the earlier than expected collections in the second quarter. For the full year, RXO generates strong adjusted free cash flow of $49 million, or approximately 37% of adjusted EBITDA. As we discussed last quarter, our 2023 adjusted free cash flow was impacted by out-of-period cash tax payments in the amount of $15 million. When adjusting for those payments, our 2023 adjusted free cash flow conversion was approximately 48%. This speaks to the power of the RXO model and our ability to generate meaningful cash flow during a down cycle. We remain comfortable with an annual adjusted cash conversion rate between 40% and 60% of adjusted EBITDA over the long-term across market cycles. At the bottom of the cycle, adjusted cash conversion will be negatively impacted by fixed charges such as interest expense in addition to the capital expenditures that we intend to make for long-term growth. As Drew mentioned, at this time our base case is that the freight market recovery will begin in the second half of the year. As a reminder, accelerated growth as the cycle turns will result in the use of working capital. We continue to anticipate using approximately 7% to 9% of each incremental revenue dollar. This could impact short-term cash conversion depending on the pace of the recovery. Now let's move to slide eight where we've included a 6-month cash bridge. We ended the quarter with $5 million of cash on the balance sheet, slightly above our expectations due to strong receipts in the quarter. The reduction of our cash balance from the third quarter was principally a function of our $100 million term loan prepayment. Turning to cost, in 2023 we achieved annualized run rate savings of approximately $32 million with associated restructuring charges of $16 million, a very strong return. While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load, this will create significant operating leverage when the cycle turns. Our full year 2023 restructuring and spend related costs were $28 million, better than last quarter's estimate of $30 to $32 million and our initial expectation of approximately $35 million at the beginning of 2023. Additionally, the cash outflows associated with these restructuring and spend related actions were $23 million, also better than the $25 million expectation that we shared with you last quarter and our initial expectation of $30 million at the beginning of 2023. I want to spend some time discussing our cost optimization efforts for 2024. While we continue to strategically invest in the business, we will always leverage our technology and operate with a continuous improvement mindset. That said, given the current market conditions, we are acting expeditiously to take additional costs out of the business. We currently plan to take out at least $25 million of additional annualized operating expenses. From a capital expenditure perspective, our current projection for 2024 is for capital expenditures in the amount of $40 to $50 million. This compares to $64 million in 2023 and is more in line with our long-term, cross-cycle target of 1% of revenues. Also remember, 2023 capital expenditures included approximately $12 million of strategic real estate spend. As I mentioned earlier, we are continuing to invest for growth but are mindful of the current operating environment. As you can see on slide nine, our liquidity position remains healthy with $600 million of committed liquidity at the end of the quarter. Growth and net leverage at quarter end were both approximately 2.5 times trailing 12-month adjusted EBITDA, moving higher from the prior quarter as we cycle through last year's EBITDA. We remain comfortable with our current leverage ratio and given the strong free cash flow characteristics of our business, we will de-lever as the cycle inflects. Our customers want to work with strong partners like RXO that can perform and invest across all market cycles. Regarding the first quarter, as Drew mentioned earlier, our brokerage business is currently being impacted by market conditions and limited spot opportunities pressuring our gross margin. We therefore are anticipating an above seasonal sequential decline in adjusted EBITDA. Specifically, we expect Q1 adjusted EBITDA in the range of $12 to $18 million. You can find our 2024 modeling assumptions on Slide 13 of the deck. We expect the following: capital expenditures between $40 million and $50 million, depreciation expense between $56 million and $58 million, amortization of intangibles of approximately $12 million, stock-based compensation expense between $24 million and $26 million; restructuring, transaction and integration expenses between $20 million and $25 million; net interest expense between $31 million and $33 million, and we expect our full year 2024 adjusted effective tax rate to be approximately 30%. This assumes no change in the current tax law. You should also model an average diluted share count of approximately 120 million shares. This does not include any impact associated with potential share repurchases. Overall, given the current state of the freight cycle, we're pleased with our execution. We're operating well, investing strategically while remaining disciplined on cost and positioning RXO for the cycle inflection. Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk more in detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. We continued to outperform the market in the fourth quarter, growing brokerage volume by 15% year-over-year with continued substantial profitable market share gains enabled by our people and our technology. More specifically, we grew our core truckload volumes by 11% year-over-year and grew LTL volume by 45% year-over-year. Our full truckload customers continue to award us LTL loads because of our strong service and relationships. LTL represented approximately 16% of brokerage volumes in the fourth quarter. In our full truckload business, all of our major verticals grew year-over-year in the fourth quarter. We believe this speaks to our idiosyncratic profitable market share gains as our results continue to outpace the macroeconomic indicators most closely aligned with these verticals. Retail and e-commerce volumes grew by 12% year-over-year. Volume from our industrial and manufacturing customers increased by high single digits year-on-year. This is particularly noteworthy as the ISM manufacturing PMI was in contractionary territory for all of 2023. From a profitability perspective, we again delivered strong brokerage gross margin of 14.8% in the quarter, down just 30 basis points sequentially, enabled by our technology. The quarter started off strong from a gross margin standpoint. But as Drew discussed earlier, the freight market weakened throughout the entire quarter, we had a muted holiday peak season, and we experienced the capacity squeeze at the end of the quarter. I'll discuss this in more detail shortly. In the fourth quarter, 97% of our loads were created or covered digitally versus 87% in the fourth quarter of 2022. Seven-day carrier retention was a strong 76% in the quarter compared to 74% in the fourth quarter of 2022. We launched several new technology features in the quarter, including enhanced generative AI capabilities that are helping our sales enablement teams get closer to our customers. We also increased automation within our LTL business and implemented new auto tracking capabilities for cross-border freight. Our technology continues to enable our people to become even more productive. In 2023, productivity in our brokerage business as measured by loads per head per day improved by over 15% year-over-year. In the fourth quarter, contractual volume represented 80% of our business flat sequentially and up 500 basis points when compared to the fourth quarter of 2022. Contract volume grew 23% year-over-year. Because our LTL business is largely contractual, we thought it would also be helpful to share our contract mix for our truckload business, which was approximately 75% in the quarter. While we have not yet seen meaningful spot opportunities, it's worth noting that line haul spot rates moved higher as the fourth quarter progressed. I'll discuss this in more detail shortly, but if spot rates in industry-wide tender rejections continue to move higher because of our contractual business and our deep customer relationships, RXO will be a prime beneficiary of spot volume. I'd like to expand on our current view of the freight cycle, and I'll refer you to Slides 10 through 12 of the presentation. Let's start with revenue per load. Revenue per load declines eased again in the fourth quarter and declined by 20% year-over-year. The year-over-year decline improved by 600 basis points when compared to the third quarter. As we discussed last quarter, to get a better view of our consolidated year-over-year price declines on a per load basis, it's important to consider the impacts of length of haul, mix and changes in fuel prices. When normalizing for those items, revenue per load was down at approximately low teen’s percentage on a year-over-year basis, in line with the broader market. This decline also improved versus last quarter's mid-teens year-over-year decline. We generated a strong gross margin percentage across all different parts of the freight cycle by leveraging our proprietary technology and pricing algorithms to procure capacity at better than market rates. Let's move to Slide 11 and discuss brokerage monthly gross margin trends. There are points in the cycle, including the current environment where market conditions limit our ability to bring down transportation costs. While we leverage our proprietary best-in-class technology and our people to generate a strong gross margin, our actions cannot fully offset changing market conditions. In fact, transportation costs have recently moved higher given that, in many cases, carrier operating costs are at or above current spot rates. This is best demonstrated through the continuation of carrier exits in the industry, which have occurred every month since October of 2022. The carrier exit rate accelerated at the end of December, and we anticipate the acceleration to continue throughout 2024. In fact, in the month of January, the average weekly carrier exit rate was approximately 30% above full year 2023 levels. To give you some additional color, RXO active network carriers declined approximately 5% sequentially. While these carriers hauled less than 1% of our volume over the last 90 days, it serves as a good proxy for broader market conditions. Moving to brokerage gross margin trends in the quarter. As we discussed last quarter, we saw some softening during the month of October, but our gross profit per load remained resilient. However, margin decreased as the quarter progressed as weakness in the freight market persisted. The national load-to-truck ratio averaged 2:1 during the quarter and for many weeks, it was below 2:1, levels not seen since earlier in 2023. For context, the load-to-truck ratio has averaged approximately 4:1 for the last 5 years, and spot volumes typically emerge around 6:1 to 7:1. Tensor rejection rates were relatively unchanged at about 4% in the quarter, special projects wound down into November and December, and it was a muted peak season. Market conditions also limited our ability to bring down the buy side, and we saw the typical seasonal capacity squeeze at the end of Q4. This margin pressure worsened in January when compared to December and was further amplified by inclement weather in certain regions. The load-to-truck ratio sharply increased above 3:1 at the end of December and sustain the move higher into January. To help put that in perspective, when comparing January to December, our gross profit per load percentage decline in weather impacted states was 2 to 3 times the amount when compared to volumes in states not impacted by weather, entirely driven by an increase in cost of purchase transportation. The declines in the Midwest and Southeast regions of the country were the most acute. While our book of business is by design largely contractual, we can pivot quickly to changing market conditions. This model has worked well for us for more than a decade, delivering above industry growth and profitability. During the previous freight market recovery, RXO was able to quickly respond to service our customers' needs and our spot mix increased significantly in just one quarter. Let's go to Slide 12 and briefly look at RXO's brokerage gross profit per load on a quarterly basis. Given the strong month of October, RXO's Q4 2023 gross profit per load increased sequentially despite the gross margin squeeze in the quarter. I'd now like to look forward and give you some more color on the first quarter outlook that Jamie provided. Given recent volatile market conditions, I'll be giving a more granular view of our Q1 expectations, which is typically our seasonally weakest quarter. Let's start with volume. Our brokerage sales pipeline remains robust. More specifically, our late-stage pipeline is up 24% year-over-year and up 90% on a 2-year stack. This gives us confidence that we will again grow brokerage volume on a year-over-year basis in the first quarter. While January brokerage volumes still increased on a year-over-year basis, we did see year-over-year volume growth moderate when compared to the fourth quarter. More specifically, we grew January brokerage volumes by approximately 8% year-over-year. We're assuming first quarter year-over-year brokerage volumes will grow, but at a slower pace than the fourth quarter. Brokerage revenue per load trends are encouraging, and we expect the moderation in year-over-year revenue per load declines in the first quarter. The first quarter will be the third consecutive quarter where revenue per load declines have improved on a year-over-year basis. Moving to brokerage gross margin, which I mentioned moved lower throughout the fourth quarter. We expect Q1 brokerage gross margin to be approximately 12% to 14%, solid performance given the difficult market dynamics at this part of the freight cycle. While gross profit per load declines have eased over the last few weeks, we're continuing to monitor market conditions. From a complementary services perspective, we expect typical negative Q1 seasonality, including an absorption of fixed costs on a lower revenue base in Last Mile. Putting it all together, we expect RXO's first quarter adjusted EBITDA to be between $12 million and $18 million in the first quarter. If buy rates cool as weather patterns normalize, and the business seasonally improves into February and March, we are likely to come in at the midpoint or high end of our adjusted EBITDA range. If the recent margin squeeze within brokerage persists, we are likely to come in at the lower end of the range. Based on our current view of the broader macroeconomic data, industry-wide carrier exit rates and what we are hearing from our customers, our current base case is a market recovery in the second half of the year. It's important to differentiate between the macro economy, which remains reasonably healthy in the freight cycle. Consumer confidence is increasing, inflation is moderating and goods demand relative to services has stabilized. However, there is still too much trucking capacity relative to demand negatively impacting the freight market. We believe the rate of carrier exits is the largest variable affecting the timing of the freight recovery. In summary, we're continuing to gain market share profitably with another quarter of strong brokerage volume growth and gross margin. We're optimizing our cost structure while strategically investing in the business and have a playbook to deliver rapid earnings growth when the market inflects. We're operating in a prolonged soft rate market, but we're making the right strategic moves to position us well for the long term. With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] We have our first question coming from the line of Ken Hoexter from Bank of America. Please go ahead.

Great, good morning. Jamie, I think you said you ended the year with $5 million cash on hand, and that was slightly above target. Just wondering why you're running on such thin cash? And then just thinking about what Jared just talked about and Drew mentioned for the first quarter, $12 million to $18 million of adjusted EBITDA implies maybe another $8 million of operating cash flow and your CapEx seems to be on $10 million to $15 million. So it looks like you might be negative on cash again. Can you maybe walk us through the rollout there and then the thoughts on cash?

Yes. Ken, this is Jamie. Yes, so cash, remember in the quarter, in November, we paid down our term loan. So we used $100 million of our cash is on the balance sheet of Q4 to pay down term loans. So that was the big use of cash. From an operational standpoint, we finished the 6-month trailing at about a negative $2 million adjusted free cash flow. If you remember, in second quarter, we had a large approximately $15 million early receipt that really bumped up our conversion rate in the first half of the year that really calls the third quarter and therefore, the 6-month period to be a little bit lower. If you take that into account, we're at about a 22% conversion. We actually -- the cash balance of $5 million, we had a $5 million cash balance, $5 million usage of the revolver, that was actually slightly better than we had anticipated being based on our outlook 90 days ago. So we were actually pleased with where we landed for the quarter. If you look at lifetime to date, Ken, going back to the spin, we're over 50% conversion rate of EBITDA to adjusted free cash flow. For year-to-date, we're about 48%. So both of those metrics fall right in line with our 40% to 60% target that we believe is our long-term cross-cycle conversion. If you kind of go over to the first quarter, to your question about where we think we'll land a $12 million to $18 million range should put us somewhere in the neighborhood of a usage of cash of about $2 million to $3 million on an adjusted free cash flow basis, taking into account all other cash items, primarily, which will be some restructuring costs there. We should be in the $10 million to maybe $15 million usage in the first quarter. To your point about CapEx, we are spending -- we guided to about $40 million to $50 million of CapEx. That's more in line with our long-term target of just over -- just at or over 1% of our revenues. So overall, we actually felt really good about our cash flow for the quarter. As we outlook, the first quarter based on that range, we see cash being in that ballpark.

If I could -- a follow-up. I guess just talking about your gross margin, Drew, looking at the steep drop-off of margins, I guess, is there something that is accelerating downward in the business in the first quarter from where you ended. I know you talked about a lot of things, weather and everything in the fourth quarter, lack of peak, but it seems like the step down is beyond economic and seasonal press, is there increased competition that you're seeing that's accelerating that? Maybe just talk about that outlook a little bit. Thanks.

Yes. No, absolutely. Thank you, Ken. This is Drew. So if you look at what we saw in the first quarter, typically, the first two weeks of January, you see pressure on your gross profit per load and your gross profit percentage. We saw that, but it actually was worse than what we anticipated due to whether Jared hit on in his prepared commentary, that the Midwest and the Southeast, specifically those gross profit percentages were down 2 to 3 times more than what the rest of the country was. So this was largely driven by weather. There is also the cost of purchase trends. We had hit the bottom of where the carriers were operating at, so there was no room to pull down carrier costs, and we're operating in what is largely a contractual volume. There's not a lot of spot loads out there in the market today to where spot gross profit per load can help offset that. But again, if you look at where we finished for the quarter, I think our gross margin percentage stacks up well for where we finished in the industry. And I think that we'll continue to see best-in-class gross margins because of the investments that we've made in our technology.

Great. Appreciate the thoughts. Thank you.

Our next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Yes, hi. I was wondering you sort of talked about expectation for a second half recovery. Can you maybe give us some thoughts on the cycle recovery? How is it going to look? What still has to happen? Will -- does that include net revenue or gross margins starting to expand again? Just some color on that and sort of the comfort level in the second half. Thanks.

Yes. So Jordan, two big things have to happen for the back half recovery. The first is the overall macro. If you look at what's happened in the macro, GDP sitting around 3.3%. Inflation continues to ease. The job market reports have been good. So we need the market to continue to be in a stable environment. The second thing and the biggest thing that we're watching right now is capacity exits. And as Jared said, we've seen capacities exit the market every month since October of 2022. And in the month of January, we saw them run at 30% higher than what all of 2023 came out at. So we need to continue to see capacity exits across. There's still a good bit more capacity in the market than what there was even at pre-COVID. So those two big things have to happen for the back half of the recovery. That is our base case. That's what we're anticipating happening. And when you look at that, what the base case implies is that you start to see revenue, gross profit per load EBITDA turning positive during that time frame.

Okay, thanks so much.

Our next question comes from the line of Stephanie Moore from Jefferies. Please go ahead. Miss Moore, your line is now live. Please go ahead.

Maybe following up on Ken's question to start. Could you talk a little bit about even seasonality in the first quarter? Maybe what you see from January to March, I know March can be a pretty big inflection? So maybe just talk about kind of thoughts on normal seasonality and what the quarter and how that relates to your guidance?

Yes. So typically, you do see Q1 get better throughout the month -- I mean, throughout the quarter. And that's what we're anticipating in the guide that we gave you from $12 million to $18 million in EBITDA for Q1. January, there was pressure on gross profit per load. As we've gotten into February, we've seen in this first little bit of February, we've started to see gross profit per load trend better than what it was in the month of January. It's not back to where it was in October and November, but it has started the path to recovery, which is why we were able to give you the range that we did of $12 million to $18 million.

That's helpful. Appreciate it. And then I think you noted and have shown that in the past, you are able to adapt very quickly on the cycle turns and move your mix between contracts and spot. Given the cycle has really been probably not like any cycle we've seen before. Can you talk about your ability either to not be able to move from contract to spot as quickly as you have in the past? Or what might limit your ability to move as quickly, potentially if this is a slower recovery or faster recovery? Just how should we think about how the environment could possibly inflect?

Yes. So the recovery will largely depend on the spot market, it will largely depend on what's happening in the overall market. That's not something you can -- as a business, it's harder to shift from spot to contract, is more of looking at what's going on in the market and making sure that you're in the pole position as spot loads as project as many bids start to happen, you're in the pole position for customers to reach out to you, and we're confident that we're in the pole position. If you look at the market, I mean, in Q4 load-to-truck ratio went down to around 2:1. Tender rejections were around 4%. That's not a market that's conducive to being a heavy spot market. Now did we see spot loads go up sequentially? Yes, but it was minimal. Our spot gross profit per load was trending ahead of our contractual gross profit per load. But it's not a robust spot market and the measures that we watch are load-to-truck ratio, tender rejections, carrier exits and what we're hearing from our customers. And our customers are still telling us that they will lean on us for projects. They'll lean on us for spot loads as the market does start to tighten.

Great. Thank you so much.

Thank you.

Our next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Hey good morning guys. And thanks for taking my question. And I hope this doesn't come off the wrong way, but you referenced numerous times in the presentation this quarter and I think in past quarters, too, about continued profitable growth in the brokerage business. But obviously, like the bottom line is adjusted EBITDA keep coming in lower. I mean, I think we're back to maybe the lowest even approach where we were in early 2020. So help put in context that comment about growing profitable loads relative to consolidated results. I appreciate that.

Yes. Absolutely, Bran. The biggest thing that we're looking at is how we're operating versus the industry versus in the environment that we're in. And so when you look at what we're seeing right now, we're putting up best-in-class volume growth, and we're doing that with best-in-class margins. Now in the bottom part of the cycle, you do feel pressure on your gross profit per load. Gross profit per load is one of the biggest levers that we watch for where we're going to go long-term. So the pressure that you see on the downward -- you see the good side of that on the upswing that gross profit per load can bring to you. So for us, we're confident that we're making the right investments that allow us to operate at the best gross margin percentage with strong volume growth.

Okay. Appreciate that, Drew. And then, Jamie, on the cost side, I think you talked about continuing to optimize the cost structure, maybe Jared made that comment, but what's your objective for cost in 2024? And if you could provide any directional guidance, that would be helpful.

Yes. So we expect to take out at least $25 million in 2024. Last year, we were able to take out about $32 million of annualized savings on OpEx, not all of that has found its way into the P&L because some of that was the latter part of the year. So you'll see some pickup from the animalization of that this year. But $25 million -- at least $25 million for this year. Since then, we've been working very aggressively to optimize our cost structure throughout. We've looked at all processes. We've looked at all the roles of vendor relationships to make sure that we're running as effectively and efficiently as possible. From a cost standpoint, we really want to set ourselves up so that we are optimally structured cost-wise. So when we see a market inflection, it just gives us significant operating leverage and flow through to the bottom line when gross profit per load recovers.

Okay, thank you guys.

Our next question comes from the line of Allison Poliniak from Wells Fargo. Please go ahead.

Hi, good morning. Just on the cost side of it, what I'm implying is -- or what I'm hearing is it sounds like it's a more structural cost reduction there versus variable? Or is it a bit of a mix? Just trying to understand those costs out for 2024.

Yes. It's primarily structural. There will be some variable, but it's predominantly structural, Allison. I mean, obviously, as the market grows and we continue to grow, we'll have to invest in the right places around the structure, but that $25 million is predominantly structural.

Got it. And then, Drew, you had talked about the contracts and the profitability of those contracts when it accelerate. Could you talk about the profitability of those adds versus maybe, say, a year ago? Is it better, the same? Just any thoughts there. Thanks.

Yes. So if you look at it, the gross profit per load is down from where it was a year ago which is what gives -- again, what you see in the $12 million to $18 million number is the impact that gross profit per load has on the business. And you'll see or feel the upside of that as the market starts to recover. For every dollar the gross profit per load recovers is a meaningful impact to the P&L.

Got it. Thank you.

Thank you.

Our next question comes from the line of Scott Schneeberger from Oppenheimer. Please go ahead.

Thanks very much. Good morning. I guess if we could start out managed transportation, it sounds like a lot of the softness there was in automotive. So I'm curious if you could just talk managed transportation and brokerage about the end markets, what you're seeing across the end markets. If you could elaborate on the automotive weakness. And then you mentioned some wins in managed transportation synergistic with brokerage that will impact 2024 or onboard in 2024, if you could touch on that, too, please?

Yes. So obviously, we're impacted by the strikes with the UAW. And I would say that things came back online slower than what we would have anticipated. The major OEMs did a fantastic job of preplanning how they were routing shipments to make sure that they had enough inventory at sites as they were starting back. So there wasn't as many of the expedite just-in-time shipments is what we would expect going in. As far as the wins that we're having in managed transportation, we've had a number of wins in the three specifically in the managed transportation expedite business. That's been a leading position for us for a long time. Customers know that we understand the importance of time-critical freight and what it does to their supply chains. We've been a trusted partner in that for more than two decades. So we think that we'll continue to take share there. The overall managed transportation business, that pipeline is strong. We've got a number of large deals that are in the works right now that can potentially move the ball forward in a big way.

It is just kind of along the lines of the cost question theme that's been going. But you mentioned some investments to cross-border capabilities, GenAI in sales, increased protection, maybe just touch on those. But I think the bigger question is, how are -- in this environment, how are you weighing your investments as it's not an optimal time, but you guys perpetually push the business forward with your IT and others. So just curious how you're looking at the investments in this time period? Thanks.

Yes, I'll start with that, the second part of your question, Scott, with how we look at it. The first thing is we look at ROIC and what's the return on invested capital that we're putting in. The second thing that I would say is for everything that we do, we look at how it will impact volume, how it will impact our overall margins and how it will impact us as employees? Will it make us more productive and allow us to do more loads per day per head? And that's a metric that we've continued to move forward. So we look at the business for the long-term. We're not -- while we're optimizing our costs right now, we look at the business at where we're headed for the long term. You mentioned some of the specific investments that we've had down at the border, down at Laredo that was a huge deal for us. If you look at where we're positioned at Laredo, we're right at the World Trade Bridge. There's a lot of freight that goes through there. It's the largest crossing for cross-border shipments north and south bound. And if you look at -- most recently, we announced a GenAI tool that allows our customers to move loads more efficiently on cross-border freight and it allows our carriers to have complete tracking of where their trailers are at, at our different facilities.

Thanks very much.

We have our next question coming from the line of Ravi Shanker from Morgan Stanley. Please go ahead.

Good morning everyone. I think you said in the press release that you're seeing a strong pipeline of new business. Can you give us a little more detail there, kind of which end markets, what kind of customers? And also, where is this pipeline coming from? Are these customers who are ramping up and kind of getting revved up to start restocking soon? Or kind of what's the message you're hearing from them?

Hey Ravi, good morning. It's Jared. So to your point, the pipeline does remain quite strong, up late-stage pipeline, specifically within brokerage is up about over 20% year-over-year and on a 2-year stack, it's up almost 90%. So I think that speaks to just the broad-based idiosyncratic share gains that we are having with strong margins as a company by that. It's pretty broad-based in nature in terms of what we're seeing within brokerage in the quarter. All of our major verticals grew on a year-over-year basis, including retail and e-commerce and industrial despite being in a broader industrial economy recession. So I think that it speaks to -- you look at RXO post-spin, us being even more focused on our customers, us allocating capital more effectively, really using this time to ensure that we're delivering the services that our customers want. It's pretty broad-based in nature, and I think it's coming through in the pipeline.

Got it. And maybe as a follow-up, kind of going back to your previous response on investments. So are you saying the [Indiscernible] that your CapEx plans are reasonably locked? Or is there much flexibility there? I'm just wondering if the downturn lasts longer or deeper than you guys think, especially in the first half of this year. Or can you push back some of that CapEx to the back half of the year to preserved equity?

Yes, Ravi, this is Jamie. That CapEx for the majority of the spend is always flexible. We've got a plan. We're working to plan. But for the most part, it's very flexible. So we could defer if needed.

Understood. Thank you.

We have our next question coming from the line of Scott Group from Wolfe Research. Please go ahead.

Hey thanks good morning. So it sounds like 1Q is more about weather than the real inflection in the market, and you're assuming that's more of a second half recovery. Sort of in that backdrop as your base case assumption, what's a typical ballpark of how to think about 1Q as a percentage of a year? I'm just trying to sort of understand are we -- do we think EBITDA grows this year or not? Any color?

Hey Scott, it's Jared good morning. So when you look at the ongoing market dynamics, to your point, weather has had an acute impact in the month of January, and that's impacting Q1 as we said in the prepared remarks, you look at some of the regions in the country is severely impacted by weather. Gross margin per load was impacted by 2 to 3x that of other regions. So I think that was acute when you talk about how the quarter progressed, we're expecting to progress, as Drew just mentioned in one of the other responses, we have seen some relief in the last week or so in terms of gross profit per load. It's still early. We want to see whether or not buy rates cool. When you look at the full year, our base case right now is for a second half recovery. And assuming that the second half recovery does play out that would lead to second half growth year-on-year. In terms of Q1 as a percentage of the full year, just given the dynamics that we're seeing right now, I think that's probably not a great way to look at things just given how acute the squeeze has been as impacted by weather.

So the hope would be an inflection in EBITDA in the second half of the year?

I wouldn't say hope, I would say that our base case recovery is for second half and the largest variable impacting that would be the rate of capacity exits. We've seen capacity exit the industry every month since October of 2022 that accelerated in December. It accelerated in January to the point of 30% above 2023 levels. And it just comes back to economics at the -- with respect to where spot line haul rates are relative to the cost of the carrier. So we expect that to continue to accelerate throughout 2024.

Okay. And then just one follow-up. So if I think about the contract mix today, the cash balance today, the working capital drag, whenever the up cycle will come. Do all those factors combined, does that in any way limit in your mind how quickly or how much of a recovery you'll see?

Scott, I want to make sure that I'm understanding the question right. Are you saying like the recovery in cash or gross profit per load? I'm not sure I followed you completely.

Yes, ultimately, your recovery in earnings, EBITDA, everything, Yes.

Yes. No. So we're very confident in the long-term. As you look at different parts of the cycle, whether it was in 2017 when the market was down, 2015 when the market was down, in 2020 at the beginning parts of COVID. You've seen that customers -- as tender rejection start to go, customers come to us and we're their go-to choice for spot loads, for projects, for many bids. We've got a proven history of showing that the gross profit per load does recover in the up part of the cycle. So we're extremely confident in that.

Thank you guys. Appreciate it.

Thank you.

We have our next question coming from the line of Bruce Chan from Stifel. Please go ahead.

Thank you operator. And good morning everyone. Maybe just to follow up on a couple of things. Specifically, Scott's questions there on the customer adds and the contract mix. To what extent is that going to be a headwind to gross margins if we do see a recovery in buy rates increase in the back half? Is the expectation that gross margins are going to continue to be under pressure in 2025? Or does your base case kind of anticipate that you can pivot into the spot market fast enough to offset that?

Bruce, I think that we've shown in the past that we can absolutely pivot to be able to do that. You've seen our mix shift as close to 1,000 basis points on a quarter-over-quarter basis. Again, it goes back to what I told Scott. When the market turns, when people are rejecting loads, when there's projects, customers are going to come to the people that they know best. They're going to go to who they've had long-term relationships with, who's got technology that's integrated within their business. Somebody who has delivered results for their supply chain and their transportation needs. And if you look at our largest customers, they've been with us for 16 years on average. So we're highly confident that as the market inflects, you will see a big movement in gross profit per load and overall profitability.

That makes a lot of sense. I guess what I'm getting at to a little bit more is the timing. Is that going to be more of a 2025 event? And I guess what I'm really trying to get at is, if I think about annual EBITDA, you've got a 60% guide down for Q1 here. I know you've got that second half expectation for an inflection here, but is the thought that you can grow EBITDA in 2024? Or are we likely to see another flat year?

Yes, this is Jamie. As we look at 2024, I mean, clearly, Q1 is below where we expected it to be. As we look to the back half, it really depends on the timing and the shape of the recovery. Our base case is for that recovery to hit in the second half. If that hits, we're very confident we'll grow that EBITDA in the back half of the year. But I think it really depends on the timing and the shape of the recovery. We're positioning ourselves well from a cost standpoint and from a customer relationship point to be able to take those spot loads and to service well. And we'll get significant flow through when the market does inflect.

Okay, appreciate it.

We have our next question coming from the line of Jack Atkins from Stephens. Please go ahead.

Okay, great. Thanks for taking my question guys. Really appreciate it. So I guess, Drew, going back to your comment earlier about when the cycle turns, customers are going to want to -- shippers are going to all go up to capacity providers that they know really well. I guess as I think about the brokerage market, oftentimes, it's perceived as being highly commoditized. So I guess, in that type of market inflection, why wouldn't shippers try to find the best possible price in addition to looking for good service as well? I just -- I think there's just some worry that these market share gains may not be -- stick with you once the cycle does inflect.

Jack, I think that one thing that you could go back and look at is the history and they have stuck with us. The growing volume isn't something that has been unusual to us or onetime on a yearly basis. I think that what you would look for is the best price. Customers look for best price, best solution, best service. Service is really important to our customers. And the fact that we can flex our capacity up and down with them, the fact that we're delivering when we say we're going to deliver, we've got great communication. We've got technology that helps deliver results into their business. We can help customers decide when they're going to ship something, what mode of transportation they're going to use. We've helped them optimize their freight. So in that sense, you do see them lean on us more to create solutions in a tighter market than what you see in a looser market.

Okay. Got it. And then I guess my last question, going back to sort of, Jamie, your comments around working capital needs, what the cycle does inflect. I guess you're kind of run rating now somewhere at or above 3 times debt to EBITDA leverage. As you sort of think about the working capital needs, once the cycle does turn, I guess, how much leverage are you comfortable adding to the balance sheet perhaps temporarily to fund business growth there before you're able to start collecting cash and pay that down?

Yes. So at year-end, we were about 2.5, Jack. If you project forward into Q1 at both ends of the range. We're in the 2.9 to 3 range ballpark. We use about a 7% to 9% factor on the growth on the top line. That being said, we have actually a very quick turnaround on our DSO. So we collect -- we begin to collect money fairly quickly. And as we do that, we repeat that business through that second and third and fourth cycle, we become cash flow positive very quickly. And so we feel very comfortable that we've got the balance sheet strength to support the growth plan that we have in place. And when the cycle inflects, I think we'll be in really good shape to accommodate that.

Okay, thank you for the time guys. Appreciate it.

Thank you, Jack.

This concludes the question-and-answer session. I'd now like to turn the call back over to Mr. Wilkerson for final closing comments.

Thank you, Lara. RXO continued to deliver significant brokerage volume growth and strong margins in the fourth quarter despite the freight market that has been solved for a significant amount of time. We're taking the right actions today to deliver long-term results, including deepening our customer relationships, having a disciplined approach to cost and making the right investments for future growth. I'm proud of all that RXO delivered in 2023, and I'm looking forward to continuing to deliver for shareholders, customers, employees and the carriers that we partner with again in 2024. Thank you all for your time today, and I look forward to seeing a lot of you over the next few weeks.