RXO - NYSE

Welcome to the RXO Q3 2024 Earnings Conference Call and Webcast. My name is Joelle, 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 forward-looking statements. A discussion of today's factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in the earnings release. You should refer to a copy of 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 your conference.

Good morning, everyone, and thank you for joining today. I'm here in Charlotte with RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. There are three main points I want to convey this morning. First, we completed our transformative acquisition of Coyote Logistics in the quarter. The acquisition significantly increases RXO's earning power over the long term. The integration is ahead of schedule, and we're already seeing early wins from the combined business. As a result, we're raising our estimate for cost synergies and now expect at least $40 million. In addition, we expect to achieve significant benefits within cost of purchase transportation once our tech platforms are integrated. Our balance sheet is even stronger than it was pre-acquisition. Our leverage decreased by more than 40% as a result of our successful equity financing. Second, while the market remains soft, RXO continued to deliver on our financial commitments for adjusted EBITDA, adjusted free cash flow and brokerage gross margin. Importantly, we achieved these solid results while completing a transformative acquisition. Third, we continued our momentum in complementary services in the quarter, with significant new customer wins and a massive pipeline in Managed Transportation. In Last Mile, we grew stops by an impressive 11%. I'll start by giving you an update on our transformative acquisition of Coyote Logistics, which closed in mid-September. I'm extremely pleased that we're ahead of schedule on fostering employee engagement, taking care of our customers integrating our tech and synergy opportunities. Let me cover each of those elements in more detail. I continue to be impressed by our people. The acquisition brought a deep bench of seasoned leaders to RXO. Everyone across the organization has stepped up to quickly advance the integration and deliver results for the business. Morale across the whole company is high. We recently conducted our quarterly all-employee survey and the comments I received through it show me that our people are hungry and excited about our prospects for growth. Our people remain focused on -- we take care of our customers through the integration. We have a structured process that ensures we're effectively communicating across the organization about customer needs, pricing and growth opportunities. Since acquisition, we've consistently been in front of our customers to ensure that bid season runs smoothly. Our customers' candid feedback is helping us quickly decide where to focus during integration and bid season. I've personally met with dozens of customers since the acquisition and the customer feedback I've received has been overwhelmingly positive. Many of those conversations have yielded opportunities for growth and cross-selling that neither RXO nor Coyote would have seen as a stand-alone company. Specifically, since closing the acquisition, there have been more than 200 distinct cross-selling opportunities where legacy Coyote has offered RXO additional services and solution. Also, we're using legacy Coyote capacity for some of the special projects and spot loads that were awarded to RXO. We're starting to realize the benefits of our increased scale. When it comes to our technology, our teams have worked closely together over the last month ad half to do deep dives on all the tech that both teams are using. We've identified best practices from both legacy Coyote and legacy RXO and now I have a road map to integrate our technology for our customers, our contract carrier network and our employees in the next year. As a result of the smooth integration so far, we now expect at least $40 million of cost synergies, more than our initial estimate of at least $25 million, Jamie will talk more about this later in the call. Just as the acquisition is strengthening our bench of talent, customer relationships and technology, it has also strengthened our balance sheet. Leverage decreased by more than 40% after the successful equity financing to fund the Coyote acquisition. Next, I'll walk you through our third quarter results, which came in line with our expectations. RXO delivered adjusted EBITDA of $33 million. Legacy RXO delivered $31 million of adjusted EBITDA at the midpoint of our guidance range. Volume in legacy RXO's brokerage business declined by 5% year-over-year. Full truckload volume decreased by 9% and was partially offset by a 13% increase in less than truckload volume. This performance was in line in what we had forecasted last quarter and similar to what legacy Coyote saw in their business as well. Jared will talk more about that later in the call. Last quarter, we highlighted that we're building scale within our LTL business, and we did so rapidly in the third quarter. Our LTL volume has more than doubled with the acquisition of Coyote. We're pleased that our bid season strategy, along with our effective management of purchase transportation yielded brokerage gross margin of 13.7%. We've continued to see momentum within complementary services. In Managed Transportation, customers awarded us more than $300 million in freight under management or FUM in the quarter. In the fourth quarter, we expect to onboard another $400 million in new business, that's more than 10% of Managed Transportation's current annualized FUM. The total new FUM in our sales pipeline remained substantial, greater than $1.3 billion. We have a long runway for growth in Managed Transportation and converting that pipeline will fuel growth across RXO. In the third quarter, Last Mile stops grew by 11% year-over-year, an acceleration from the 7% growth we delivered in the second quarter. We remain the industry leader of big and bulky Last Mile deliveries because of our focus on building deep relationships and providing customers with the best service in the industry. Top brands trust RXO because of our scale, technology, financial stability and exceptional service. Complementary services gross margin of 21.5%, was up 150 basis points year-over-year. RXO's company-wide gross margin was 17.3% in the quarter. I'd like to give you an update on the overall freight market. We didn't see many changes in the freight market conditions when compared to the previous quarter. The national load-to-truck ratio declined, while industry tender rejections increased slightly. On the demand side, conditions remain soft. Port volumes remained strong, but they have not yet translated into over-the-road volume strength. On the supply side, carriers continue to exit each month in the quarter, however, the rate of exits continue to slow. Freight rates continue to be challenging for many carriers. In October, we did see acute tightness in the market due to Hurricanes Helene and Milton as well as the brief port strike. The tightness has continued in recent weeks. Heading into the holiday season, we're closely monitoring the macroeconomic environment, but anticipate another muted peak season this year. On the positive side, inflation has moderated. Retail inventory positions are healthy and consumer confidence has recently rebounded. However, the labor market in the industrial sector of the economy have weakened. We continue to lean into our playbook to ensure RXO is properly positioned no matter the market conditions. We remain focused on reliably servicing our customers' needs and honoring our contractual rates. This strategy contributed to our third quarter results and will position us well to capture spot volume and project freight. Recently, several customers came to us for assistance as they work to serve their customers that were affected by Hurricanes Helene and Milton. I'm proud that the deep relationships that we've built with our customers are enabling us to serve both them and our communities during crisis and other times of stress. Jamie and Jared will discuss our outlook in more detail, but we expect combined brokerage volume to be up sequentially in the fourth quarter with tightening market conditions impacting our buy rates in the short term. While no one knows when the freight market will turn, I believe that RXO is uniquely positioned to capitalize on opportunities as they arise. With larger scale, we can provide our customers with a broader array of services and by transportation even more cost effectively. Our differentiated portfolio of complementary services will drive organic growth across RXO. Our exceptional proprietary technology includes pricing algorithms that leverage AI and machine learning to continuously improve and employee-facing software that drives ongoing increases in productivity. Our strong balance sheet positions us well for future M&A and we expect all of this to lead to greater earnings, free cash flow and conversion. Now I'll turn it over to Jamie to discuss our financial results in more detail. Jamie?

Thank you, Drew, and good morning, everyone. Let's review our third quarter performance in more detail. We completed the acquisition of Coyote Logistics on September 16 and our financial results, therefore, include two weeks of contributions from Coyote. My comments will refer to the combined company, unless specifically referring to legacy RXO or legacy Coyote. We generated $1.04 billion in revenue. Gross margin was 17.3%. Our adjusted EBITDA was $33 million. Our adjusted EBITDA margin was 3.2%. Let me give you some detail about legacy RXO's performance in the quarter. Legacy RXO revenue was $935 million, down 4% year-over-year. Adjusted EBITDA was $31 million at the midpoint of the range we provided to you in August. This compares to $26 million in the third quarter of 2023. Adjusted EBITDA margin was 3.3%, up 60 basis points year-over-year. Below the line, our interest expense was $6 million. For the quarter, our adjusted earnings per share was $0.05. You can find a bridge to adjusted EPS on Slide 7 of the earnings presentation. One item of note on the bridge is an accounting charge associated with the private placement of equity as part of our acquisition financing. We recorded a $216 million noncash charge, which represents the difference between the issuance price and the closing market price of RXO's common stock on the effective date of the private placement. Now I'd like to give you an overview of our performance within our lines of business. Combined brokerage revenue was $655 million and represented 61% of our total revenue in the quarter. Please note that all of legacy Coyote's revenue has been classified into brokerage. From a profitability perspective, brokerage gross margin remained solid at 13.7%. Legacy RXO's brokerage revenue was $550 million, down 7% year-over-year, primarily due to lower full truckload volume. Legacy RXO brokerage gross margin was 13.8%, slightly below the midpoint of our guidance range and was down 130 basis points year-over-year. Complementary services revenue in the quarter of $419 million, was flat year-over-year and represented 39% of total revenue. In Managed Transportation, while automotive plants came back online later in the quarter, overall auto demand and managed expedite volumes remain soft. Last Mile continues to perform well and stops grew by 11% year-over-year, accelerating from last quarter's growth rate. Complementary Services gross margin of 21.5% increased 150 basis points year-over-year, both Managed Transportation and Last Mile contributed to this performance. As we discuss cash, please refer to Slide 8. Legacy RXO adjusted free cash flow in the third quarter was very strong at $27 million. This represents an 87% conversion from adjusted EBITDA better than our expectation, which was to exceed 50%. This was mostly attributable to better-than-expected collections in the quarter. Over the trailing six months, legacy RXO adjusted free cash flow was $18 million, which represents a 31% conversion from adjusted EBITDA. Trailing six months cash flow was impacted by lower profitability levels at the bottom of the freight cycle and includes a semiannual interest payment associated with our outstanding senior notes. Including the two weeks of Coyote, adjusted free cash flow over the quarter was $9 million. For the six-month period, it was zero. This was in line with our internal expectations. Free cash flow was impacted by working capital timing differences on the legacy Coyote business, much of cash associated with this working capital headwind, has already been collected in the fourth quarter. We ended the quarter with $55 million of cash on the balance sheet. The increase from the prior quarter was primarily a function of the equity financing associated with the acquisition of Coyote. However, it's important to note that this is mainly the result of timing as most of the current cash balance will be used for previously incurred expenses, transaction costs and future restructuring charges. We expect our fourth quarter cash balance to be approximately $5 million to $10 million. As you can see on Slide 9, our liquidity position is the strongest it's been in our company's history. Our $600 million revolver was undrawn at the end of the third quarter. Quarter end gross leverage was 1.6 times trailing 12-month pro forma adjusted EBITDA. Last 12 months, leverage decreased significantly from the prior quarter after successful execution of the equity financing associated with the acquisition of Coyote Logistics. The benefits of increased scale and associated free cash flow conversion was one of the strategic merits of the acquisition. With our current capital structure, the free cash flow generation potential of the combined company is significant. Let's talk more about the Coyote integration. We now expect at least $40 million of annualized cost synergies, 60% higher than our initial estimate of at least $25 million. Now at the end of the fourth quarter, we will have at least $15 million of annualized synergies completed. Most of the P&L benefit associated with these synergies will be realized in the first quarter of 2025. Consistent with our expectations from a few months ago, we expect a total of $25 million of annualized synergies completed within the first 12 months of close. The incremental $15 million of synergies associated with today's increased estimate will likely occur in late 2025 as our technology integration is completed. RXO Connect will be our primary operational system and move into one unified platform will result in significant savings. To give some additional context, legacy Coyote was spending approximately $50 million per year in technology. Importantly, these synergies do not include opportunities for the cost of purchase transportation, which we believe have the potential to be significant. To put this into context, the combined annual cost of purchase transportation across brokerage is now more than $4 billion. We're very pleased with our progress, and we're ahead of schedule. Now let's discuss our expectations for the fourth quarter. Overall, the macroeconomic environment remains reasonably healthy, GDP continues to grow, and consumer confidence has recently increased, although the industrial sector and the labor market have weakened. I'd like to give you some additional insights regarding our fourth quarter outlook. We're assuming a muted peak season and continued soft freight market conditions. In both brokerage and Managed Transportation, we're assuming softness in the automotive market. In brokerage, our gross margin outlook reflects tightening market conditions and the impact from legacy Coyote customer mix. We're not expecting our typical seasonal increase in last mile given better-than-expected stops in the third quarter. For the combined company, we expect to generate between $40 million and $45 million of adjusted EBITDA in the fourth quarter. Jared will provide more details on our outlook shortly. Slide 15 includes our modeling assumptions for the fourth quarter, which reflect the results of the combined company. We expect the following: capital expenditures between $16 million and $18 million, depreciation expense between $20 million and $22 million, amortization of intangibles of approximately $18 million, stock-based compensation expense of $6 million and $7 million. Restructuring, transaction and integration expenses between $15 million and $17 million. Net interest expense of approximately $8 million and an adjusted effective tax rate of approximately 25%. You should also model an average fully diluted share count of approximately 167 million shares. Year-end fully diluted share count is expected to be approximately 170 million shares. We will provide additional 2025 modeling assumptions in February during our fourth quarter earnings call, but there are a few assumptions I can give you now. We expect 2025 amortization of intangible expense of approximately $50 million. The increase is driven by the Coyote acquisition. Interest expense should be unchanged at approximately $32 million and we expect our adjusted effective tax rate to be between 27% and 29%. We continue to be very pleased with our execution given the current phase of the freight cycle. The integration of Coyote is ahead of schedule. The teams are working well together, and we've received positive feedback from customers. While we are still operating in a prolonged soft freight environment, we're positioning RXO for the long term and are excited about the earnings power and the free cash flow generation of the combined company. Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk in more detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. As I typically do, I'll start with an overview of our brokerage performance in the quarter. For this quarter only, I'll give perspective on both legacy RXO and legacy Coyote. With the integration ahead of schedule, starting next quarter, we'll talk about results on a combined basis. Legacy RXO brokerage volume in the quarter was in line with our expectations, down 5% year-over-year. Legacy RXO LTL volume growth was solid at 13% year-over-year. LTL represented 20% of brokerage volume in the quarter, flat sequentially and up 300 basis points year-over-year. Legacy RXO full truckload volume was down 9% year-over-year, consistent with our expectations of down high single digits to low double digits. Full truckload volume improved every month in the quarter and represented 80% of our brokerage volume. The mix was flat sequentially and down 300 basis points year-over-year. We also maintained a favorable mix of contract and spot business in the quarter. Contracts represented 77% of our full truckload volume in the quarter, down 100 basis points sequentially and up 100 basis points year-over-year. Spot volume represented 23% of our full truckload volume in the quarter and increased by 100 basis points sequentially. While it was only a modest improvement, legacy RXO benefited from some project opportunities at the end of the quarter, and this is the first time that full truckload spot volume increased as a percentage of our mix in over three years. This is consistent with our view that we are at the bottom of the freight cycle. In the third quarter, our full truckload contract volume grew by over 30% on a three-year stack, which speaks to our multiyear market share gains. Let's now move to legacy Coyote brokerage trends in the quarter. LTL represented 22% of volume and full truckload, including intermodal, was 78% of legacy Coyote's mix. Legacy Coyote's full truckload volume continues to improve. Volume has increased since we announced the acquisition and year-over-year volume declines are moderating. Specifically, legacy Coyote's volume was down approximately 11.5% year-over-year, but full truckload volume trends have improved for the third consecutive quarter. Before reviewing our financial performance and market conditions in more detail, I'd like to talk about several new technology enhancements that legacy RXO implemented in the third quarter, which are detailed on Slide 10. We strengthened tracking and visibility for RXO flex fleet, our drop trailer solution and we introduced a prepay option for the RXO Extra fuel card in RXO Connect. We also improved contract pricing algorithms within our flatbed mode, and we rolled out enhanced security features across our platform. Seven day carrier retention remains strong at 72% in the quarter, down from 75% in the second quarter. Our technology enables our people to become even more productive on a rolling 12-month basis, productivity in our legacy RXO brokerage business as measured by loads per person per day improved by 15%. From a technology integration standpoint, RXO Connect will be our primary operational system. We're integrating unique capabilities from Coyote and this best of both world strategy will drive improved profitability and productivity. We anticipate the technology integration to be substantially complete within the first 12 months of close. I'd now like to review our legacy RXO brokerage financial performance and market conditions in more detail. You can find this information on Slides 11 through 14 of the presentation. Revenue per load declined by 3% year-over-year, the fifth consecutive quarter of easing. Truckload revenue per load declined by less than 1% year-over-year in the quarter. To get a better view of our 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 flat year-over-year. Let's move to Slide 12 and discuss legacy RXO brokerage monthly gross margin performance and industry trends. Market conditions were relatively unchanged throughout the third quarter and industry KPIs continue to reflect a soft freight market. Gross margin was consistent throughout the quarter at approximately 14% and gross profit per load improved in September when compared to July. While we're still in a soft market, there have recently been some encouraging signs. The market began to tighten in October with the national load-to-truck ratio and tender rejections moving higher. Specifically, the national load-to-truck ratio increased to 4 to 1 and tender rejections have increased to 5.5%, with the market tightening, buy rates have also moved higher. On the demand side, while it has not yet translated into over-the-road volume strength, year-to-date port volume growth has been robust, growing more than 20% year-to-date at the big three West Coast ports. This is also consistent with the improved inventory positions of our retail customers. Turning to supply. There is still too much truckload capacity relative to current demand and carrier unit economics remain challenged. Carrier exits continued, but at an even slower pace when compared to the second quarter. However, we believe the environment is still more susceptible to being impacted by near-term changes in demand. While it's too early to determine if this is the beginning of the recovery, industry metrics are moving in the right direction. Let's go to Slide 13 and look at legacy RXO's quarterly full truckload gross profit per load trends. As we just walked through, while our gross profit per load improved in September when compared to July, Recall that market conditions tightened as the second quarter progressed. So we entered the third quarter with a lower starting point. Moving to Slide 14. Legacy RXO's LTL brokerage volume continues to outperform the broader LTL market with stable gross profit per load. We've more than doubled the size of our LTL business with the acquisition of Coyote and have significant opportunities with our customers to grow that business even faster. I'd now like to look forward and give you some more color on our fourth quarter outlook. The combined business now has a more pronounced seasonality into the fourth quarter, primarily driven by legacy Coyote's mix of business. We expect both Legacy RXO and Legacy Coyote brokerage volume to grow on a sequential basis in the fourth quarter. We expect combined brokerage volume to increase by 5% to 10% sequentially, which represents a 5% to 10% year-over-year decline. We expect brokerage gross margin to be between 12% and 14% in the fourth quarter due to tightening freight market conditions and legacy Coyote customer mix. While legacy RXO and legacy Coyote are both experiencing an increase in buy rates with tightening market conditions, legacy RXO benefited from some spot opportunities and special projects during the month of October, helping to partially offset. We are not assuming that these special projects continue through the rest of the quarter. Coyote has not yet seen similar opportunities, but we think there is significant runway ahead of us to reaccelerate legacy Coyote volume growth and win similar type of project work. Turning to complementary services. In Managed Transportation, the business has tremendous momentum with more than $300 million of freight under management awarded in the quarter, and we expect to onboard more than $400 million in the fourth quarter. The EBITDA impact from this FUM won't occur until next year. And in the near term, industry-wide automotive headwinds continued to impact our Managed Transportation business. Last Mile continues to execute well, and we expect another quarter of year-over-year stop growth, although at a slower rate when compared to the third quarter. Putting it all together, we expect RXO's fourth quarter adjusted EBITDA to be in the range of $40 million and $45 million. This assumes no meaningful improvement in freight market conditions, a muted peak season and limited spot opportunities in the months of November and December. Historically, our adjusted EBITDA declined from the seasonally strong fourth quarter into the first quarter, which is seasonally the weakest for the combined company. To close, I'd like to build on Drew's earlier commentary that our acquisition of Coyote significantly increases RXO's long-term earnings power. While we are still operating in a prolonged soft rate environment, we believe that RXO's normalized earnings power is materially higher from current levels. Let me extend on this. From a cyclical perspective, legacy RXO full truckload gross profit per load remains at trough levels. In the third quarter, full truckload gross profit per load was over 30% below our five-year average. Excluding the COVID peak, our full truckload gross profit per load was still over 20% below our five-year average. When the cycle recovers, there will be strong flow-through to adjusted EBITDA. We just closed the acquisition of Coyote and we're seeing immediate cross-selling opportunities across the combined organization. The higher trucking market is massive and the opportunity to accelerate the brokerage volume growth of the combined company is significant. Our integration of Coyote is ahead of schedule, and we've raised our annualized cost synergy estimate to at least $40 million. This does not include opportunities associated with cost of purchase transportation, which should also be significant. We'll begin to see those benefits once the technology integration is substantially complete. We have also built a scaled platform and have the balance sheet capacity for future M&A, which can contribute to additional earnings growth. With that, I'll turn it over to the operator for Q&A.

Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Your first question comes from Ariel Rosa with Citigroup. Your line is now open.

Hi, good morning. Congratulations on the Coyote acquisition. It certainly sounds like a lot of positive momentum there. I wanted to talk about the higher synergy target of $40 million. It's just -- it's only been a little over a month since you closed the acquisition. I'm curious to hear just kind of more detail on what you're seeing that gives you the confidence to raise that target. And then how do we get comfortable with the notion that obviously, big integrations like this can be very complicated. How do we get confident that you're not going to see customer or employee attrition through the process? Thanks.

Hey, thanks. This is Jamie. Good morning. I'll take the first part of that. So we did raise to at least $40 million. As we've been able to close the transaction on September 16, really two big areas as this increase came from. The first one is technology. And as you know, this is a key to the integration. We are way ahead of schedule on the plan and the execution of putting two platforms together. We have made the decision firmly to go to the RXO Connect platform. We're bringing a lot of features from the old Coyote platform. But we view this as ahead of schedule. And as a matter of reference, Coyote has historically spent $50 million a year on tech. And so as we have seen the integration moving more rapidly than originally anticipated, we believe there's additional savings to happen there. I'd say the second bucket is, as we have now closed the transaction and have better visibility of what our vendor spend is. We have more overlap with vendors than we probably initially thought. We have also very similar vendor type services, and we can put vendors together and get more purchase and scale. So when you put those two together, we just see kind of a significant increase in synergies that we think is available. And as a reminder, that does not include the cost of purchase transportation, which also can be significant. If you just give you some context there, it's a combined spend of about $4 billion a year and while we haven't given a specific number and it's not included in that number, we think it could be the largest actually could surpass our synergy targets so far. Think about if we can save 1% of $4 billion annually that could be $40 million. Now we're not naming that is the number. We just give you context of the population set that we have to work with the transportation efficiency and buying. So we're very pleased with the synergies so far. And I think Drew is going to take the other part.

Ariel, welcome back to covering Transportation. When you look at the second part of your question, it was about difficult integration and then it was on employee and customer retention. So if you go back to the early days of XPO, we did a lot of M&A, and there was always three things that I found that we focused on that helped us have successful acquisitions. And the first one was on employees and making sure that you are retaining the top talent and they want to be there. They're excited to be there. And from an employee engagement standpoint, we talked about morale being up. Our survey scores on a quarter-over-quarter basis, we're actually up here, retaining these employees is important. If you look at every key operational leader as well as every sales leader as well as every enterprise sales rep, have already agreed to stay on by signing a retention agreement for VP level and above. So keeping the core team together, the servicing the customers is important. The second piece is the customer retention. And you do that by spending a lot of time with customers. And we've already had several customer events I mentioned on the call that I personally already met with dozens. The same holds true for all of my direct reports. And the feedback that we're getting from customers is extremely positive. And then the last thing that we would focus on is the tech integration. And we've spent a lot of time together between the two teams of bringing together the best of both worlds. As we go on to the RXO Connect platform, there are several things that we've learned from Coyote that we want to make sure that are integrated into our system, whether it is how we deal with carriers, whether it's carrier RFPs, there are some tools that employees that use, that would make us more efficient. So we think we've got a lot of opportunity there. I would say we're in the very early stages of integrating the acquisition, but there's a lot of excitement around the organization and a lot of hunger to get back into growth mode.

That's exciting, certainly. We're excited to see what you guys can do with Coyote under your umbrella. If I could just for my follow-up, maybe hone in on the fourth quarter outlook. So the $40 million to $45 million of adjusted EBITDA, it sounded like RXO did stand-alone EBITDA of about $31 million in third quarter. And then if I think back to your June presentation, when you announced the acquisition or when you kind of were detailing some of the synergies around the acquisition, I think Coyote was doing $86 million annualized in EBITDA, which would be kind of run rate, call it, $20 million a quarter. So just help me with kind of the component pieces there of -- as we think about fourth quarter, what's the contribution from Coyote? What's the contribution from RXO? And then how impactful is this kind of seasonal component or maybe the seasonal headwind that would suggest kind of the 2 businesses combined are maybe coming in a little bit below where they were for 2023. Thanks.

Yeah. So when you look at the fourth quarter, Ari, really, there's three things that I would focus on for what we're seeing. First, as both Jared and I highlighted in our prepared commentary, you saw purchase transportation go up during the month of October. And while legacy RXO had some spot loads and some projects that came in, legacy Coyote did not have those same opportunities that came through. And for us, we're actually viewing that as a great thing. That's another opportunity to talk about building synergies within the acquisition, is to be able to get Coyote into growth mode to where they're not just serving the contract business well. But that as a group, we're creating solutions. We've got great service. We're building on the relationships that we're the first call that customers make on spot loads and project, in times of stress. The second thing is the Last Mile in the third quarter performed seasonally well for us. And we told you that we were expecting a muted peak season. So for that piece, we expect Last Mile's EBITDA to go down quarter-over-quarter. And then the last thing is both our Maintenance Transportation and Brokerage business have a lot of automotive business and the automotive industry is down. So that is impacting the guide. For us, as we look towards of what we're doing in the future of being able to build off of the synergies, capitalize on purchase transportation and looking out at this business for the long term, we're in a very good position.

Got it, that’s very helpful. Thank you for your time.

Your next question comes from Scott Schneeberger with Oppenheimer. Your line is now open.

Thanks very much and good morning. Just staying on that topic of the fourth quarter, could you all discuss a little bit more of what normal seasonality is expected in the fourth quarter and how this year may compare to that as an aggregate company or as the two pieces, Coyote and RXO in isolation? And then as kind of a part two to the question, could you speak more to some of those special projects that occurred in October, the magnitude. You mentioned that you don't expect them to repeat. I assume they were associated with weather, port strikes or something, just very unique to some quantification and what occurred behind there. Thanks.

Hey, Scott, good morning. It's Jared. I'll start with the first question and then hand it over to Drew for the second. So from Q3 to Q4, the concept of seasonality, it's been a unique one over the last 3 to 5 years, right? No real such thing as seasonality. So I think what I would think about is, what Drew was talking about in the prior question with respect to just overall market conditions have really tightened here in the month of October. So you're seeing the impact of the buy rates compress gross margin from Q3 to Q4. As we said earlier, and we'll dovetail the second part, legacy RXO saw some special projects and opportunities that helped offset that. But legacy Coyote definitely felt the squeeze a little bit harder. So when we think about that bridge from Q3 to Q4 with respect to the brokerage piece, it really is that aspect of increased cost of purchase transportation, which really doesn't, which really makes it difficult to tie from a seasonal standpoint from Q3 to Q4. And I'll hand it to Drew to the second piece.

Scott, on the special projects, the first thing that I want to say is we've talked about for two years that at RXO we built relationships with our customers that whenever there were spot loads and special projects that our base of contract business would put us into a position to receive those. This is a small sample size of seeing what the power of that is whenever the market does turn. So I think that's something that I want to make clear is that there were times of stress and RXO was this customer's first call. You're right that some of this did relate to Hurricane Helene and Milton on the special projects as well as the port tightness for a few days, but there were also some special retail projects that were out there for a couple of weeks that we were the customer's choice of being able to call and build on those. So while spots are certainly not abundant, whenever they are there, we're picking up more than our fair share.

Thanks. I'll keep money on my follow-up thematically consistent and go over to Last Mile. The stops up 11% year-over-year in the third quarter, sounds very strong. It sounds like a pull forward in that you're anticipating that to go down a good bit in the fourth quarter. Just curious how that looks with your historical seasonality there? And then also maybe some commentary in Last Mile, you had some pricing initiatives over the past year. I just want maybe an update on the pricing front there. Thanks.

Sure. Scott, it's Jared. I'll take the first part and then hand it over to Jamie for the second part of the question. So you're right. Last Mile had an excellent quarter in Q3. It stops accelerated in terms of year-on-year volume growth to 11% year-over-year. So for the overall business, we are assuming a muted peak season, given what we're seeing. But we are expecting Last Mile stops to grow again year-over-year in but at a slower growth rate when compared to Q3. So that will translate into last mile EBITDA being down sequentially from Q3 to Q4, given those dynamics. And then I'll hand it to Jamie for the other question.

Yeah. So regarding price and I think you're referring to carrier stops and the cost of purchase trans in our Last Mile business, that project continues to go well. I think we mentioned last quarter, we had identified about $11 million annualized number that we believe we can take out of the cost to purchase trends in our carriers there. That continues to go well. You'll see a small incremental roll into the P&L, we saw a little bit in the third quarter. We'll see additional in the fourth quarter. But that project continues to go well, and we're very excited about it.

Thanks so much.

Your next question comes from David

Hey, thanks for squeezing me here. Could you talk a little bit about cash needs for integration, especially with the increased synergy costs, what do you think about the cash needs next year in terms of costs of getting those out?

Yeah. So this is Jamie. So we raised our guide to about $40 million. We see a cash outflow associated with getting that $40 million to be approximately a $25 million spend. You'll see, call it, $12 to $15 million of that go out in the fourth quarter with the balance being spent next year.

And then with the relatively lower volume during the quarter, it seems like on the contract side. Where do you view yourself in a position to capture that spot business that it seems like you're expecting to come in 2025?

Yeah. One, I think that we don't know when the market will turn. I think the thing that we can do is put ourselves to be in the best position that we will be the customer's call whenever it does come. As we sit here today, we talked about in the month of October that there wasn't a lot of spot loads in projects, but where they were, we were picking them up, and we were in the rooms with the customers, helping make decisions about how to get product to the end consumers faster. And we've got a history of being able to go out there and when the cycle turns to be able to take market share. The things that you're watching for to see what the cycle turns or some of what Jared highlighted in his prepared commentary, you're watching of what the load-to-truck ratio is, what tender rejections are, how much capacity is exiting the market and how much demand is going up in the overall industry. And while we're sitting here and Jared highlighted that we're at the bottom of the cycle, we think that there's a lot of room for us to be able to go up in the future, and we're in a good position to be there to service the customers whenever that happens.

Thank you, appreciate it.

Next question comes from Stephanie Moore with Jefferies. Your line is now open.

Hi, good morning, everybody. This is Joe Hafling on for Stephanie more. I wanted to ask a little bit about your peak season expectations and maybe how you see the range of potential outcomes here coming into peak season? And you mentioned the mix headwind. I'm just curious if that -- is the UPS business a drag on margin in fourth quarter? Or is it still a pretty normal gross margin for you in the quarter?

Yeah. I'm not going to break down any customer-specific level profitability. I mean the UPS business for us is profitable. And obviously, they are a significant customer, and I think it's well known that, that business is running at a high for the year, typically in the fourth quarter. For us. We view that as a great partnership that we think the additional services that we have at RXO we're in a position to be able to grow our position with that customer just like all of our other customers within the network. But you are right that when you look at quarter-over-quarter, looking at margins coming down, there is a customer mix impact that will cause that to go down from a gross margin percentage.

Got it. And then obviously, we're in a pretty dynamic environment and macro environment right now. Curious what you're hearing from customers on both the retail and industrial front in terms of expectations going forward. There may be a lot of increasing pull forward of imports and maybe if interest rates come down, housing and industrial looks better. So curious what your conversations with customers have been?

Joe, it's Jared. So on the retail side, I think encouragingly, at the largest retailers in the country, inventory positions have improved for the last seven quarters with revenue growth in excess of inventory dollar growth. So I certainly think that the potential for restocking certainly is there if the consumer shows up and similarly, on the industrial side, both retail and industrial volumes were down year-over-year in the quarter. Industrial, I'm sure you've seen industrial ISM with respect to the new orders component continues to decline here. So that's been impacted by the weakness. Our industrial volumes have been impacted by the weakness in the overall sector as well. But to your point, right, both of those sectors of the economy are influenced by interest rate movements. And we shall see in terms of what that means going forward. But I think both importantly, the inventory positions for a lot of our large customers are the healthiest they've been in the long term.

Great. Thanks so much for the time, guys.

Thank you.

Your next question comes from Ken Hoexter with Bank of America. Your line is now open.

Hey, great. Good morning. So I want to follow-up on Ari's question because it seemed like a significant cut to EBITDA on a combined basis. But it sounds like PT is climbing at Coyote. Was that the only or main driver of the gross margin falling 100 basis points? Or is there something else in there? And then you're seeing final mile pressure at RXO, so I get that in terms of the EBITDA impact, but I want to hit on the buy rates, right? Is that kind of the indication of the turn of the market if we're getting squeezed because the buy is going up? Or was that onetime from the ports pre-shipping strikes or all the other things you mentioned?

The buy has absolutely gone up, and you saw that in the month of October. Legacy RXO was able to see some spot loads and projects. So it did not impact gross profit per load as much as what it did at legacy Coyote. It was actually positive for legacy RXO. So legacy Coyote saw the same thing of purchase transportation go up, but did not see the correlation with spot loads and projects. And like I told already, this is something that has got us extremely excited. We know that we can put ourselves in a position to be able to go out there and serve customers and take these spot loads projects in many bids as we position ourselves. And the early conversations I'm having with customers is they're anxious to see us get back into that spot. So for us, while I realize that it has an impact on Q4's numbers, for the long term of the business, it is extremely positive. And it's a more bullish case than what we went into the diligence with.

And on the second part of your question, Ken, I wouldn't say last mile is being pressured, I'd say that in Q4, we're still expecting year-over-year stock growth again, just at a slower rate relative to Q3, given that we are expecting a muted peak season.

Yeah. Let me follow up on that because Drew, you kind of said the muted 4Q peak. A lot of asset-based carriers on been more optimistic and some of them kind of talked about shifts from brokers to asset-based carriers. Is that something you're seeing at all? And then I guess in the same question, Jamie, you gave that 40% to 45%. What's the high and low end in terms of not seeing a meaningful improvement, but through that limited peak?

Yeah. So when you look at what we hear from our customers is use this time to go with the folks that they depend on and that have had great service. And you've seen for the last year and half that customers have been shrinking the number of carriers that they're working with. For us, we've seen that with some of our largest customers. It's actually been an opportunity to grow with them. We're seeing the same thing as we're starting to have some of those 2025 conversations right now. With customers we're in the early stages of bid season, but the feedback that we're receiving is very positive so far.

Yeah. And Ken, on the second part of your question, I mean, the range we gave, 40% to 45%, built in some of the functions about what we were seeing in the market that we Drew called out, we are seeing softer automotive volume, both brokerage and managed trans. We talked about last mile. If you think about where peak season on the low end, high end, we're halfway through the quarter right now. And so we have fairly decent visibility about what might happen over the next four to six weeks. So I think you could look at that 40% to 45% is kind of the low and the high -- could there be something that was -- caused it to go up? Absolutely. But at this point, our visibility to kind of say that our bookends.

If there's a peak season, Ken, then we'll be there to service the customers and we'll participate in it. Right now, we're expecting to be muted. But if there's one, then it will be a great surprise for us. And we've got the capacity and the bandwidth to cover it.

Awesome. Drew, Jared, Jamie. Thank you for the time. Appreciate it.

Thank you.

Your next question comes from Bruce Chan with Stifel. Your line is now open.

Hey, good morning, gents. Jared, you talked about some of the improvement in productivity. Just wondering if you can give us a sense of where headcount sits today. Does that number move lower? Is it stable at this point? And when you think about productivity, whether that's in terms of net revenue per head or loads per person per day, what did that metric look like pre-deal versus now? And ultimately, where do you expect that to kind of settle out once the integration wraps up?

Yeah. Thanks, Bruce. So we're making significant advances with respect to our technology suite and continue to benefit from a productivity standpoint. I'm not going to get into the breakdown of the components across headcount. But what I can give you some additional color you think about productivity, up 15% over the last 12 months on a rolling basis. And we've been punching at about mid-double digits for the last few quarters here as we go ahead and continue to see benefits of just increased innovation with respect to the product suite. When you think about legacy Coyote, they're a little bit behind us from a productivity standpoint. We think there is a -- especially as we complete and substantially complete the technology integration within the next 12 months, getting both groups onto the one unified platform, RXO Connect, not only bringing legacy Coyote productivity up in line with where RXO is, but then going ahead and advancing the ball even further and increasing productivity. I think there's significant opportunity for incremental productivity improvements and therefore, incremental adjusted EBITDA as well as it relates to operating margin leverage.

Okay. Great. So is it fair to say then that, that number kind of accelerate sequentially?

We're not going to give a productivity outlook, if you will, but certainly to assume to think about -- we don't see productivity initiatives stopping in the near future at all. There is a significant runway ahead with where we think optimal state is in terms of loads per person per day.

When you look at what our top reps are doing, know there's a lot of opportunity for us to continue to improve productivity. And this is with what we're doing on the technology side, being able to pull tools from both systems, we're in the early stages of continuing to increase productivity.

Okay. Fair enough. And then just a follow-up. I want to make sure I understand it properly. Drew, you talked about some of the benefits to legacy RXO from the spot and project business. Is that continuing in the fourth quarter?

It was in the month of October. As we said in the prepared commentary, we have not seen that carry over into November. If there was upside into November and December, it would come largely from a peak season being stronger than expected.

Okay. Thank you.

Your next question comes from Scott Group with Wolfe. Your line is now open.

Hey, thanks. Good morning, guys. Can you just start with -- can you share the pro forma EBITDA for Q3?

Company pro forma?

Yes.

Yes. So I won't get into the specifics for the whole quarter because we didn't own the business. But if you look at the $2 million incremental for Coyote in the last two weeks, -- if you think about that and then you go back and look at, I think, on Page 22 of the slide deck, it gives you kind of a trailing 12 of about $66 million. I think if you were to kind of extrapolate it would be not fair to extrapolate two weeks of ownership into a full year. We don't think that would be the appropriate amount. But if you look somewhere in between those numbers, you probably get kind of where the run rate might be. But $31 million for RXO, $2 million for Coyote is kind of where we were for the quarter. We don't want to get into the specifics because we didn't now on the business.

Okay. And then, Jared, you had a comment about Q1 is typically seasonally lower than Q4. Just given the synergy ramp that you're talking about, it sounds like there's some squeezes in Q4, right? Would you expect that normal seasonality to play out? Or do you think you can do better than that and see sequential EBITDA improvement ultimately -- and then maybe just if I could broaden out a little beyond just Q1, like any thoughts of how to think about just like the combined earnings power of this business going forward on a full year basis?

Yeah, sure. So I'll start, Scott. So when you think about Q4 to Q1, as you know, Q1 is typically the season -- or historically the seasonally weakest quarter for RXO and that is certainly still the case with Coyote. There's really -- we've looked at the data in a lot of different ways. There's really no typical decline. It is seasonally down, right? Generally, it's been down anywhere between 30% and 35% over the last three to five years. But that's -- I would certainly caution that it heavily depends on how Q4 shapes out and what happens here over the next few months from a peak season standpoint. Because we're not expecting a muted peak season, all else equal, it certainly should be a lower decline relative to the last three to five years. And then ultimately, to your point, right, we just increased the synergy number by 60% to at least $40 million when you look at the impact in Q4, it's very minimal contribution from a synergy standpoint in terms of realization of P&L to about $1 million, right? So all of the actions that we're taking here in Q4, you'll see the full run rate benefit certainly in Q1. So hopefully, that gives some perspective. And then in terms of long-term earnings power, that was the last section of my prepared commentary where we have even more confidence now in terms of increased long-term earnings power about the combined organization. You look at full run rate of synergies, which is now at least $40 million. If you look at the cost of purchase transportation synergies that Jamie hit on in his prepared remarks and during the Q&A with that $4 billion pool with cost of purchase transportation, right? Bind by just 1% would yield another $40 million potentially as an example. And you think -- and the cross-selling opportunities that we've seen in just the last six weeks, gives us even more confidence in terms of what the long-term earnings power of the business looks like.

And just to add, I agree with everything that Jared just said, but I think there's one important factor that I want to make sure that was highlighted in Jared's prepared commentary that you're looking at on a normalized earnings basis. One of the biggest factors in our profitability is where gross profit per load sits. And if you look at where it is today, is over 30% below our five-year average. And if you say you take out the COVID highs, it's still over 20% -- over 20% above our five-year average. So with that, that's one of the biggest factors of being able to drive back towards normalized earnings, and there's a lot of runway there.

Thank you, guys. Appreciate it.

Your next question comes from David Hicks with Raymond James. Your line is now open.

Hey, guys. Thanks for taking the question. As a volume growth has been a hallmark for you guys or slowed down here as of late, albeit against really tough comps versus the market. Can you maybe go over the timing of volume acceleration and how decelerating volumes you kind of fits into that equation?

We said that Coyote's volume trends have gotten better over the year. But if you look their volume declines were similar to what RXO were. You're right. We look at this business on a long-term basis and over the long term, we know that we've taken market share. If you go all the way back to 2013 through 2021, we were growing 3 times faster than what the brokerage industry was growing. '22 and '23 were phenomenal volume growth years for us. As we came into 2024, we were very transparent and put out there that we had a different bid strategy and that we wanted to put ourselves in a position to make sure that we could honor the contractual rates that we put in with our customers so that we could continue to build on the relationship to be there in service for spot loads projects in many bits. The market obviously hasn't turned and there haven't been a lot of spot loads, but the position with the customers is stronger than what it's ever been. So I'm confident over the long term, we'll continue to outperform the market from a volume growth perspective.

Okay. That's extremely helpful. And then moving to gross margin per load or gross profit low, do you just maybe -- is there a sizable difference between RXO Legacy and Coyote Legacy and kind of what you're doing there to kind of bring convergence to the higher end between the two?

There's a couple of things that I would say there. One, yes, Coyote's gross profit per load is a little bit behind where legacy RXO is. One of the biggest factors is they do have a customer mix that puts it to where there's some point and click and efficient business out there, but it runs at a lower gross profit per load. The second thing is we talked about being able to realize some of these large projects. Over time, we think that both groups have an opportunity to be able to improve gross profit per load, especially as the cycle inflects.

Great. Appreciate the time.

There are no further questions at this time. I will now turn the call over to management for closing remarks.

Thank you, Joelle. We completed the Coyote acquisition and decreased our leverage ratio by more than 40%. The integration is ahead of schedule, and we now anticipate at least $40 million in annualized cost synergies. We've delivered on our commitments in the third quarter with continued momentum in both managed transportation and Last Mile. As we work to fully integrate the Coyote business and navigate the prolonged soft freight cycle, we remain focused on providing the best service, the most comprehensive set of solutions, continuous innovation and close customer relationships. Thank you all for your time this morning.