Welcome to RXO's Coyote Acquisition conference call and webcast. My name is Ludy, and I will be your operator for today's call. Please note that this conference is being recorded. During this call, the company will make certain forward-looking statements within the meaning of federal securities laws, which, by their nature, involve a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those in the forward-looking statements.
A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings, as well as in its earnings release. You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional important information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures that the company uses when discussing its results. I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may begin.
Good morning, and thank you for joining today. With me here in Charlotte are RXO's Chief Financial Officer, Jamie Harris, and Chief Strategy Officer, Jared Weisfeld. Today, I'm excited to announce that we've signed a definitive agreement to purchase Coyote Logistics from UPS for $1.025 billion. When the deal closes, which is expected to be by the end of the year, it will be immediately and significantly accretive to RXO's adjusted diluted earnings per share and adjusted free cash flow, with minimal impact to our leverage. Jamie will walk through the financials in more details in a few minutes. Let me tell you about why I'm so excited about this deal. Number one, market leadership. RXO will become the third-largest provider of brokered transportation in North America and a leading provider of full truckload services.
Number two, the addition of Coyote will significantly increase our scale. The acquisition will add to RXO's already massive capacity and will provide us with access to new power lanes. It will also increase our market share for cross-border and less-than-truckload freight. Our larger scale will allow us to purchase transportation even better than we currently do. Number three , growth. Coyote brings new customers to RXO. Upon closing, we'll increase the number of customers that do more than $1 million in revenue with us by about 80%. We'll also diversify our book of business. Coyote's top two verticals are food and beverage and transportation, while ours are retail and industrial and manufacturing. There is minimal overlap across our largest customers. RXO will count UPS as a customer after the acquisition is complete. As part of the acquisition, we've signed a multi-year commercial agreement with UPS.
We'll focus on providing them with outstanding service to build upon the already strong relationship Coyote has with UPS. Operations, number four. Technology will remain at the center of what we do, supported by the people that provide exceptional customer service. Our continuous improvement mindset will deliver results for our customers, carriers, employees, and shareholders. Number five, synergies. We see significant opportunities to achieve operational synergies, including at least $25 million of annualized cost savings in the first year of ownership. RXO's and Coyote's culture are also synergistic. As I met with the Coyote management team, I was impressed with our shared focus on our key growth drivers: service, solutions, innovation, and relationships. Coyote's people have positioned them to be a market leader in the brokerage industry, and they share our view that relationships matter. Coyote has long-tenured, strong relationships with some of the largest shippers in the world.
Put simply, for customers, our combined business will offer more capacity and a wider array of solutions, along with exceptional service and cutting-edge AI-enabled technology. Carriers, we will have more access to freight on our platform and will be able to reduce their deadhead miles. They'll retain access to our unique portfolio of discounts and other benefits from our RXO Extra Marketplace. I have confidence in RXO's ability to quickly and successfully integrate Coyote. Over the last decade, almost all of RXO's growth has been organic, but it's important to remember that we have also completed 12 acquisitions across our business since 2012. Many members of our management team played a key role in those integrations, and others on the team have significant M&A experience from other leading companies. We'll move quickly, focusing on leveraging our cutting-edge technology and our emphasis on continual improvement.
The acquisition of Coyote is the next step in the evolution of our company, and I'm very excited for the opportunities it brings to our customers, carriers, and our employees, as well as our shareholders. When we launched RXO as a standalone, publicly traded company in late 2022, we envisioned it to grow rapidly through a combination of organic growth and strategic M&A. Our differentiated approach has enabled us to organically grow brokerage volumes by nearly 70% over the last five years, significantly outperforming the industry.
While there have been mergers and acquisitions in the brokerage market, we believe that in the next few years, there will be an increase in consolidation, and the winners will be companies like RXO, who offer the deepest customer relationships, the best technology, and a strong financial profile. I know many employees from both RXO and Coyote are listening to this call. To the Coyote employees, I'm excited to welcome you to RXO. Thank you for building a strong business that has such impressive opportunities for growth. To RXO employees, thank you for the amazing job you've done and continued to do to make this successful. Now, Jamie will walk you through the financial details of the acquisition. Jamie?
Thanks, Drew, and good morning, everyone. We signed a definitive agreement to purchase Coyote Logistics for $1.025 billion on a cash-free and debt-free basis. We expect this transaction to be immediately and significantly accretive to Adjusted EPS and Adjusted cash flow. With increased scale, we'll be the third-largest brokered transportation provider in North America. Our larger size will be a distinct competitive advantage. Additionally, we'll be able to continue to optimize our cost structure and leverage our fixed costs more effectively over a larger and broader base of volume and revenues. I'd like to give you some perspective on Coyote's financial performance. 2023, the business generated approximately $3.2 billion in revenue. Coyote has a highly attractive mix across enterprise, middle market, and small to medium-sized business, which Jared will expand on later.
In 2023, Coyote generated approximately $470 million in gross margin, or 14.5% of revenue. The strong gross margin performance is highly complementary to RXO's premium gross margins. The business generated approximately $86 million of Adjusted EBITDA in 2023. Pro forma, the combined company would have generated approximately $218 million in EBITDA last year before synergies. Going forward, Coyote will meaningfully add to RXO's Adjusted EBITDA. As Drew mentioned, we expect at least $25 million of annualized cost synergies. We'll be able to drive further efficiency through technology and our continuous improvement mindset. We expect to achieve these cost synergies within one year after close.
Including expected synergies, Coyote's 2023 Adjusted EBITDA would have been $111 million, and the combined 2023 Adjusted EBITDA would have been $243 million. Putting it together, we're buying Coyote for approximately 11.9x 2023 Adjusted EBITDA before synergies and approximately 9.2x after synergies. We will fund this acquisition with a mix of equity and debt, and we're pleased that MFN Partners and Orbis Investments, two of our largest shareholders, have fully committed to strategic equity investments totaling $550 million to support the transaction. Also, the acquisition will be backstopped by fully committed financing from Goldman Sachs. Importantly, the acquisition is expected to be neutral to leverage, and we continue to be committed to investment-grade credit metrics.
The transaction is subject to customary regulatory approvals and closing conditions, and we expect it to close by the end of 2024. Separately, RXO is reaffirming its second quarter Adjusted EBITDA outlook, and we continue to expect Adjusted EBITDA between $24 million and $30 million. Freight brokerage is a highly scalable business model, and when the freight market recovers, RXO will be in an even stronger position to generate substantial earnings and free cash flow. I'd now like to hand it over to our Chief Strategy Officer, Jared Weisfeld, who will provide more details on Coyote. Jared?
Thanks, Jamie, and good morning, everyone. We are excited to combine these two highly complementary businesses, creating the third-largest transportation broker in North America. The acquisition of Coyote will further enhance our competitive position with greater scale and an even more diverse set of end markets. With minimal customer overlap, we see significant growth opportunities for the combined company. We will add UPS as a customer and are pleased that we've signed a multiyear commercial agreement with UPS. This agreement runs through January of 2030. I'd now like to give you some additional information on Coyote. Coyote's mode mix is similar to RXO, and in 2023, truckload represented 79% of volume, with the remaining composed of LTL and, to a lesser extent, intermodal.
In addition to the vertical diversification that Drew mentioned earlier, the acquisition of Coyote will accelerate our growth strategy in the middle market and across small to medium-sized businesses. In 2023, middle market and SMB represented over 40% of Coyote's volume. We believe that we'll be able to cross-sell many of our services and solutions, including LTL and managed transportation. From a managed transportation perspective, Coyote's freight under management will be additive to RXO. Importantly, the incremental freight under management will further diversify our end market exposure. I'd now like to quickly walk through Coyote's recent performance. Coyote's volume trends have improved throughout the year and are now approximately in line with the broader market. LTL results have been strong, with volumes up mid-single digits. Over the last two years, Coyote's LTL volumes have increased approximately 20%, which will nicely complement RXO's fast-growing LTL brokerage business.
From a technology perspective, we built our technology to be scalable and handle our rapid growth. We combine our technology with best-in-class operators, which has helped facilitate our outsized growth over the last decade. Coyote has a similar approach. They have a technology-enabled operation that strives to complement labor productivity. This transaction is consistent with our balanced capital allocation philosophy, and we're confident that it will generate strong returns for shareholders. This deal will be immediately and significantly accretive to Adjusted diluted earnings per share and adjusted free cash flow. With the addition of Coyote, we are adding significant scale to the business, which positions us well to capitalize on the growth opportunity ahead of us in the $400 billion for-hire truckload market. With that, I'd now like to hand the call over to the operator for Q&A.
Thank you. And ladies and gentlemen, we will now begin the question-and-answer session. To ask a question, you may press star followed by the number one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Tom Wadewitz with UBS. Please go ahead.
Yeah, good morning, and congratulations on the deal. This, this big deal and certainly gives you a big step up in scale. Drew, I was wondering if you could offer some thoughts about how you think where Coyote is relative to RXO in terms of, you know, it was part of UPS for quite a long time, and so I don't know if there are, like, significant differences in broker productivity between the two. And then also, if you could offer some thoughts on how you'll approach the integration to avoid some of the challenges that maybe big broker acquisitions might have had in the past. I know there haven't been many, but I think of maybe like Command and Echo, where, you know, it took a while, and I think there was some—maybe some loss of business. Two questions on that. Thank you.
Yeah. Thank you, Tom, and we're absolutely excited about the acquisition and the scale that it brings to our RXO. First, I would say to your point on, you know, Coyote and how do they fit in within RXO? Culturally, there's a lot of alignment there. We're both focused on customers. We've got an entrepreneurial mindset, as I talked about in my prepared commentary. Both companies have been built on service, making sure that we're picking up and delivering every load, that we're communicating throughout, that our customers have good visibility of their shipments. Solutions, coming up with unique ways to do things for customers and making sure that their transportation networks run efficiently.
Innovation, making sure that there is technology from both sides on the platform that goes in there and takes in access to data and spits that back out to customers that allows them to run their transportation networks better. And last, and most importantly, relationships. Relationships matter in this business, and both RXO and Coyote have deep relationships with some of the largest shippers in the world. I'm excited about how little overlap there is with the top customers. RXO has a lot of retail and e-commerce, as well as industrial and manufacturing, and Coyote has a lot of food and beverage and transportation. So there's, there's a lot from this culturally that I'm excited about. On your productivity question, our productivity is measured in loads per head per day.
RXO is a little bit ahead of where Coyote is, and I think that as you pull from technology, we've got an opportunity to not just improve Coyote, but we still have more opportunity to improve RXO. As you saw on a rolling 12-month basis last quarter, we announced that our productivity was up 18% on a year-over-year basis. As far as the integration goes, we've done this before. This is something that we're ready for, and we make sure that we were getting the right deal for RXO. You go back to the core of what makes up RXO, and there's been 12 acquisitions over time, and all of those businesses have now become core locations for us and have grown significantly since the time of integration.
I think the most important thing is going in there, getting to know the people, to have the understanding and the trust in who is owning the company and what is going to be the culture, and you're gonna be pay for performance. If you're performing, then you've got the opportunity to make a lot of money as an employee. Then, you know, again, going back to the customers. The customer conversations are already started talking as far as what are the benefits from the acquisition for the customers going to be post-acquisition? I've had a number of customers reach out to me personally. They're excited by this deal, so I think it's something that's gonna be well-received on the customer side.
Great. Thank you.
Thank you.
Your next question comes from the line of Stephanie Moore with Jefferies. Please go ahead.
Hi, good morning. Thank you. Congratulations on such a big deal. It's great to see. You know, maybe just trying to, you know, don't mean to be so short-term focused, but given just the depth of the freight recession we're in, any color that you can provide in terms of how Coyote's been able to perform over the last, you know, year or so, just in the depths of this recession, whether it's volumes, profitability or the likes, you know, flexibility that they might also have that could be similar to some of the levers that you've been able to pull, or is that more so an opportunity post-close? Any color there would be great. Thanks.
Yeah. So Stephanie, in the announcement, we released that Coyote, you know, had an EBITDA of $86 million for 2023. As you look at how 2024, their EBITDA decline on a year-over-year basis in the first quarter was actually less than what RXO's was. Looking at the volume performance as we got into May, they were right there in line with what was going on in the market, down mid-single digits.
So we think this is a huge opportunity, you know, for looking at what we're able to do for customers from a capacity standpoint. And on the capacity side, you know, RXO was built doing business with small to mid-size carriers. Coyote does business with more mid to larges and some private fleets. So for customers on this, they're going to get access to more capacity than what they have already. For us, it's going to allow us to purchase transportation even better than what we do today.
Got it. And I, I meant Coyote, obviously. Sorry about that. And just as a follow-up, maybe talk a little bit about, you know, the ability to maybe expand from an LTL standpoint within the broker space, and then, and how involved Coyote is with that today. Thank you.
One of the things that Coyote has done well is they've, they've grown small to mid-sized businesses, and that's roughly 40% of, of their business. So that, that creates the opportunity to grow with small to mid-sized customers in the LTL. At RXO, we've had a different approach. You know, we've told you all in the past that customers have come to us, large customers have come to us for LTL outsources because they view LTL as a small piece of their overall, transportation spend, but sometimes it's a bigger piece of the headache whenever you look at spend versus time spent.
So for us, it's been more on the, on the large scale network, but we'll have purchasing power on the LTL side, and we'll have the opportunity to do business across large customers all the way to small customers. Something that I think both groups, in talking to the Coyote team, are excited about the opportunity to continue to grow.
Great. Thank you guys so much.
Thank you, Stephanie.
Your next question comes from the line of Jason Seidl with TD Cowen. Please go ahead.
Thank you, operator. Good morning, gentlemen, and congrats on the transaction. Can you talk a little bit about the pace of the synergies that you guys think you can take out of Coyote, maybe as we look through 2025 and beyond? And then, you know, on the UPS agreement that goes out to 2030, you know, is this something that once it ends, there's going to be some things that you guys are paying UPS for that could become cheaper? Is it going to be similar maybe to the type of agreement that TFI struck when they bought UPS Freight?
Yeah. Hey, Jason, this is Jamie. I'll take the first part of that.
Thanks.
Good morning. As we mentioned, we expect at least $25 million of synergies. If you think about that number, it represents about 30% of the $23 million EBITDA. So it's a sizable amount. We believe, I mean, we've started thinking about synergies and integration as part of the diligence process, so we plan to hit the ground running immediately. We'll get those within the first year. We anticipate getting a lot of those early on in the process. I think the other opportunity here is, you know, we, as you know, we have a strong continuous improvement mindset at RXO.
We've taken out a significant amount of cost in our own company just through sheer process improvement. This is an opportunity. We're going to see processes from both companies. We'll be able to take the best of both worlds, but we anticipate, you know, getting after it very soon and, but being, you know, kind of fully completed with at least 25, you know, within the first year.
As far as your second question about the UPS agreement, it's about UPS continuing to stay on as a customer and stay on as a customer of scale. They're a significant customer for Coyote today, and we look to continue to expand on the services and the relationship that has already been built there, and it's extremely strong, stable relationship. The deal runs through January 2030. I think your question was, do we have to pay UPS at the end of that agreement?
There's no payment. We look to continue to expand on the business that we're doing with them and have UPS be a long-term customer. If you look at our top customers, they've been customers for 16 years on average, and so we're looking forward to UPS being a long-time customer and building on the relationship and the services that have already been foundationally laid by the Coyote team.
Yeah, I was just wondering if there's any sort of back office that UPS was continuing to provide, which is something that they did with the UPS freight deal, but it doesn't seem like there is anything that you guys are paying them for to provide back office-wise.
Yeah, Jason, there's a few items. UPS had left Coyote largely standalone. They were providing some services, as you would expect. There will be some transition services agreements that come into effect. They're minimum, and they have a pretty short lifespan. So we expect to have, you know, to use that to some extent, but it's not extensive.
Sounds good. Appreciate the time, gentlemen.
Thank you.
Thank you.
Your next question comes from the line of Brandon Oglenski with Barclays. Please go ahead.
Hey, good morning, and congrats on the deal, and thanks for taking the question. Drew, can you expand on the commercial opportunities that greater scale brings for your customers? And I think you mentioned, you know, a lack of material customer overlap, but why is that important in this situation?
Yeah, the lack of material customer overlap is, you're not too large with any one customer, and you still have opportunity to grow. If you look at our top 25 customers, you know, there's only overlap with three. So all of these customers, as you've seen, Brandon, you followed us for a long time. We've got a history of taking our top 20 customers and continuing to grow them on a year-over-year basis.
So the opportunity is that we're not getting too large, and we still have opportunity to grow with our top customers. And on the commercial strategy overall, you know, we're still a small player in what is a large piece. The overall for-hire truckload market is $400 billion. Of that, brokers make up 22%. The top 10 brokers make up around 50%. This puts us at number three, and we're moving, but we still got a lot of opportunity to go out there and take market share and to do it profitably.
Okay, appreciate that. And then, Jamie, I think this morning you guys put out details of the equity raise with your two top shareholders. I think it's gonna be structured as preferred equity along with warrants. Can you give us more details on the potential dilutive impact from those warrants and how that fits into, you know, the deal being accretive?
Yeah, so, you know, first of all, we've got fully committed financing, as for the acquisition, backstopped by Goldman and the preferred that you spoke of coming from MFN and Orbis. The permanent financing will be a mix of equity and debt, and we anticipate both MFN and Orbis to be participating, not in the preferred manner, but in a common manner, just equity. You know, from a balance sheet standpoint, we are committed to investment-grade metrics.
As Drew said, you know, this transaction, we anticipate to be immediately and significantly accretive. And so, despite share issuances, we do expect significant accretion, you know, right out of the gate. We also expect the transaction to be, you know, neutral to leverage on our balance sheet. You know, the equity portion of the permanent capital structure, you know, is gonna be determined prior to close, and, you know, we'll get into those details at that time.
Sorry, Jamie, can I just ask one clarification?
Sure.
'Cause I thought in the disclosure this morning, it did say preferred stock and warrants.
Yep.
But maybe we're misreading it?
No, that is referring to the bridge, to the committed capital structure for the bridge, not the permanent capital structure.
Okay. All right. We'll follow up offline. Thank you.
Your next question comes from the line of Ken Hoexter with Bank of America. Please go ahead.
Hey, great. Good morning, and congrats on the acquisition. Jim, can you talk a bit about the $25 million in synergies and what has to happen and fall into place for those to come through? And you said at least, so maybe talk about where you think there's upside on the target. Thanks.
Yeah, absolutely, Ken. Good morning, and thanks for joining. Yeah, so, you think about the two companies, you know, our, our brokerage businesses look, you know, there's a lot of similarities. You know, first of all, scale. Scale is one of the pillars and the foundations for putting these two companies together. We'll have a number of fixed costs and overhead costs that we can now leverage over a much broader base of volume and revenues across the business. So we'll get context, we'll get a lot more leverage out of our spend. If you think about the key areas of our businesses, we have two really good technology platforms. We have the opportunity to pull the best from both worlds and to, you know, pull the best processes from both worlds, have a lot of process improvement opportunities.
You think about the areas, you know, again, technology, brokerage ops, back office, business services, we believe there will be duplicative spend in a number of those areas. You also think about just general procurement. A lot of the vendors and contracts that we have will be with similar folks. We'll be able to have bigger scale and better buying power. You think outside of those synergies, though, Ken, you think about, and Drew mentioned this, the cost to purchase trans. We have very good power lanes ourselves.
Coyote has some very strong lanes that they buy better than we do. Drew talked about the profile of the carrier base that we each use. We'll be able to offer our customer much better service, but also, we believe, much better buying power in those lanes. And so we, you know, we do believe there's upside in the 25. And to be clear, what we believe we can potentially get out of cost to purchase trans improvement is not included in the $25 million.
Just to clarify on your prior answer, I just want to understand the dilution that you were talking about on the equity. So is it just the $550 million they're contributing, or... I'm just trying to understand the difference of the news this morning on the additional warrants. Is that additional capital or additional lower priced assets?
Yes. So Ken, think about it this way: we've got basically a bridge financing that provides committed financing for the transaction close. We do not anticipate using that, but it is there for, you know, for transactional purposes. That preferred that you're reading about from MFN and Orbis is part of that preferred structure that gets to a fully committed finance deal at time of close. Again, do not anticipate using that. Separately, we'll be working and are working on the permanent capital structure, which will be a mix of equity and debt. That does not necessarily include that preferred. It could, but we don't anticipate it. We do anticipate both MFN and Orbis to be part of that permanent equity raise to the tune of $550 million in the form of equity.
If you think about a comment I made that we anticipate and are planning for this transaction to be neutral to the leverage on our balance sheet, you can kind of back in to what number that would require from an equity standpoint at a minimum to provide. Now, to your point of dilution, I mean, I would probably say that the biggest way to think about that is we will be issuing equity to support the transaction, but we will be significantly and immediately and over the long term accretive to both to our EPS. And so the transaction is accretive despite issuing shares.
Thank you very much for your time.
Your next question comes from the line of Scott Schneeberger with Oppenheimer. Please go ahead.
Thanks very much. Good morning, all. Drew, sometimes with brokerage acquisitions, there are dis-synergies up front. It sounds like with Coyote and these two counterparts, you're pretty well positioned to minimize that. But if you could address that a little bit on revenue dis-synergies up front, and then maybe longer term, do you see a good opportunity for long-term revenue synergies? Anything perhaps with the managed transportation business as well, and/or, you know, your cross-border capabilities? Just some areas that we might not have thought of offhand that can contribute. Thanks.
I'll start with the latter part of your question, and there's absolutely opportunity for long-term revenue synergy. If you look at managed transportation, some of their largest and longest tenured customers have come from beginning as brokerage customers, as they've gotten to know us, and we talk about building the relationship, building the trust in the service that we're getting them. And then you start working with managed transportation and the engineers behind the team that are going in there and working to pull down the customer's overall purchase transportation, and they essentially become an extension of the customer's team. So with that, we think there's huge opportunities for revenue synergies within managed trans. Cross-border is something that, as you know, we've been growing at around 30% on a year-over-year basis. Coyote's been growing at a pretty good clip as well.
We don't think that nearshoring is anything that's going to slow down in the near term, so absolutely think that there will be opportunities to grow cross-border freight. Coyote actually has an office in Mexico, so we're excited about increasing our presence on cross-border freight and what that does for the customers of adding even more capacity for cross-border freight. As far as the revenue dis-synergies, there's not a lot. There's always going to be some, and you're working to protect the customers, and there may be pockets of places that we have to invest into. I would look mostly at, if you think about how we built the business, it's being built that we're staffed for growth. Right now, Coyote is built to where they're staffed for some growth, just making sure that we're in the right spot there.
Great, thanks. And just real quick, just if you could on the carrier base of both companies, if you can just compare and contrast a little deeper, maybe discuss some of the benefits of the combination, where you see efficiency potential. Thanks.
Sure, Scott. Hey, it's Jared. So when we look at the carrier bases, you know, I think that's part of the strategic merits of the deal. When you think about the fact that, you know, RXO, we really use small owner-operator type carriers. And if we look at the Coyote carrier portfolio, it's going to be much mid and large size carriers. So when we think about what that brings to the table, it'll increase our diversification from a carrier capacity perspective, and we think that's a strong strategic benefit to RXO and to our customers.
Great. Thanks, all.
Your next question comes from the line of Scott Group with Wolfe. Please go ahead.
Hey, thanks. Good morning. So can you share how big is UPS as a, in terms of a customer for Coyote? And then on the EBITDA numbers, the $86 million of EBITDA in 2023, you know, maybe just be helpful if you have the 2022 number and then, maybe your, just for help for our models, your expectations for where 2024 is going to shake out on EBITDA.
I'll start with UPS as size of customer, and then Jared will talk more about the second part of your question with the EBITDA. They're a significant customer for Coyote, and it's a relationship that has been built and continued to expand over time, as one that we think that we've got the opportunity to continue to expand on. This will bring UPS as a customer a lot of the benefits that we're talking about for some of our other customers: stronger capacity, the ability to go out there and do more drop trailer and loads for them.
So there's a lot of opportunity within UPS to continue to grow it. We're not going to disclose the specific amount that they are as a customer, because we don't do that for any one customer in particular, but they're a very important customer to us, and we look forward to continuing to grow in the relationship.
And Scott, in terms of the second part of your question with respect to EBITDA trends, you're right, in 2023, the Adjusted EBITDA number that we talked about was $86 million. When you sort of think about where that came from, you know, I would, I would go back to, as you look at RXO historically, you know, we're, we're certainly operating within the soft part of the freight market. And, you know, when you think about peak-to-trough type, type moves with respect to EBITDA, it's probably not a bad way to think about it. You know, these businesses, as we've talked about, are, we believe, highly complementary and very similar mode mix.
So it's probably not a bad way to think about it when you think about gross profit per load and gross margin trends, looking at RXO as a proxy over the last couple of years. Heading into 2024, you know, I think I mentioned this as part of my prepared remarks, that Coyote year-to-date volumes are encouraging and are now about in line with market. I think Drew said in one of the questions before that, you know, when we look at their performance, we're actually pretty encouraged. So when you think about 2024, to give you some ballpark, they're actually ahead of plan. And, you know, I think probably not a bad way of thinking about EBITDA in 2024 is down mid-single digits relative to 2023.
Okay, very helpful. And then, just last thing, I just want to clarify, I know there's been a couple questions on the financing. I just want to make one last one, I just want to clarify. I understand it's bridge financing, but the warrants, are those incremental to the $550 million of preferred bridge, or is that inclusive of the $550 million of bridge?
Yeah. Yeah, Scott, this is Jamie. That would be inclusive as part of the bridge financing if we needed to use it. The permanent capital structure we'll put in place most likely will not include the preferred with the warrants. It potentially could, but most likely won't, will not. We would expect, you know, we do not intend to fund the bridge, of course. And as we put together the permanent capital structure, you know, we do anticipate MFN and Orbis being part of, you know, equity, the equity raise at, you know, to the tune of $550 million. And, you know, we haven't completed that process. We'll give more details as the process gets closer.
Understood. Thank you, guys. Appreciate it.
Thanks, Scott.
Thank you.
Your next question comes from the line of Ravi Shanker with Morgan Stanley. Please go ahead.
Thanks, morning, everyone. So the logical transaction is pretty clear, obviously gives you scale pretty quickly. But we have seen with one of your peers that has more scale than anybody, that, you know, they had a little bit of a challenging time with margins and results over the last few years. So maybe scale is not everything either. So can you just help us understand kind of how, kind of, in the bag are scale benefits here versus, you know, idiosyncratic opportunities that you guys have that will help unlock that scale benefit?
There's no question, Ravi, that you take your fixed costs, and you're spreading it out against more load. So instantly, your cost per load comes down. The ability to purchase transportation, whenever you're talking about having little carrier overlap, is instant, and that's something that'll be impactful to both networks. The ability to serve more customers is something that is instant. So for us, we're highly confident that scale is going to be not just a good thing for us, but a great thing for us. And one of the big reasons for doing the deal is because we know that scale matters.
Got it. Understood. And maybe as a follow-up, Drew, I think you said in your opening comments that you expect a lot more consolidation in the industry in the coming years. Can you elaborate on that a little bit more? Kind of why, how, who, when, kind of, you know, what's the, what's, what's the catalyst behind that?
Yeah, I can't tell you the why and the when, Ravi. I don't have a crystal ball for that. But, you know, look, if you look at where it is, customers are going to want to do business with large brokerages that are financially stable, that have built good relationships, that have a strong carrier base. They're going to be the winners in this. And, you know, we think that today's move only positions us even better to continue to go out there and take market share in this market. So for us, you know, when you look at the top 10 brokers making up roughly 50% of the overall brokerage market, you know, over the next three or five years, I think it could be the top 4 or 5 brokers that make up more than 50% of the overall brokerage market.
Understood. Thank you.
Your next question comes from the line of Bruce Chan with Stifel. Please go ahead.
Hey, good morning. This is Matt Milsk going for Bruce. Congrats on the transaction. You've been previously focused on organic growth versus M&A, especially in hitting the midterm targets here. Can you maybe talk a little bit more about what drove the decision to pivot to large-scale M&A at this point? And maybe when you think about RXO's longer-term growth profile now, you know, should we be expecting more of a shift towards M&A going forward? Thanks.
Yeah, M&A has always been a part of our capital allocation strategy. If you go back, our capital allocation strategy has always been to invest into the business, to look at share repurchases and look at strategic M&A. This was an opportunistic buy for us at the right time. So at this point in the cycle, we're doubling down on our brokerage model, and we're taking significant share. So for us, this has always been a part of the playbook, and we talked about early at the onset. We've got 12 acquisitions that have helped set the foundation of who RXO is today.
Great. Congratulations.
Your next question comes from the line of Jeff Kauffman with Vertical Research Partners. Please go ahead.
Thank you very much, and I'll echo congratulations. Love doubling down at the bottom of the cycle here. So in terms of the integration, do we and I know there's a lot to decide before we do this, but do we run this as two separate companies for a period of time? I know you've got RXO Connect. They've got their own TMS operating system. You know, they've got a headquarters. They have a sales force. Over what period of time do we look to integrate, and do we kinda go in with a best practices view, as in we don't know which TMS is gonna be the overriding TMS? Can you give me an idea of kinda timing and how you're thinking about the integration of operations?
Integration starts day one of close, and, you know, we're gonna move fast... and we're gonna work with the Coyote management team to develop a plan that is going to allow us to continue to go out and do what our long, long-term goal is, to take market share and to do it profitably. You're absolutely right, that Coyote has put investments into technology. They have a strong operating system. There's no question that those of you that have followed us have seen the benefits of RXO Connect and what it does for customers, carriers, and employees. And we've got an opportunity to be able to take the best of both worlds, to continue to have the best transportation technology in the world, in my opinion. So when you look for what we're gonna do, we're not gonna disrupt operations.
We're gonna be able to continue to move forward, focus on building stronger relationships with our customers. You talked about having sales force. To me, you can never have too many people that are out there talking to customers. There's a lot of opportunities, and there are still, even with this acquisition, there's a lot of customers that we're not doing business with today that we'll have the opportunity to go out there and get. So excited by the sales team and excited by the sales leaders that I've met within the Coyote organization.
But to the bigger point, and I just want to come back to this, this is gonna take longer than 12 months to integrate. There's some decisions that are gonna take a while to make. When you put out that $25 million year one synergy number, that is just a year one synergy number, correct?
Yes. We think there's more than $25 million available. $25 million is year one, but, you know, if you go back and look at the RXO cost, process, improvement, call it continuous improvement, I mean, we're always gonna be thinking about how to run this business more optimally, and so, you know, we think there's opportunities beyond year one for sure.
All right. Well, again, congratulations, and thank you.
Thank you, Jeff.
Your next question comes from the line of Daniel Imbro with Stephens Inc. Please go ahead.
Yeah. Hey, good morning, guys, and congrats on closing the deal. Maybe to follow up on integration, just as the Street gets comfort with it, Drew, are there certain financials or details that you won't be able to see until you close the deal and look under the hood? I'm trying to think about the certainty or kind of clarity you have into the financials. And then when you think about integration, I guess, what are the expected integration-related costs that would come along with this deal? And maybe how long should the Street expect those to last?
Yeah, so I'll start with this. This is Jamie. Look, when you get inside the business full time, you're always going to see new things. We expect to see a lot of exciting new things that's gonna be providing enormous opportunities for us. We did an extensive amount of diligence. We believe we know the overall plan. I mean, we started working on kind of integration strategy as part of the diligence process.
We feel good about the process of evaluating, you know, the various areas of the business, that we can take the best of both worlds. In terms of the year, you know, as Drew said, starting day one, we actually started already in terms of the thinking and the planning. We'll hit the ground running, and we feel good about we'll be able to put these companies together. And, you know, the scale, as he said, the scale does matter. That plays greatly into the integration. It plays greatly into the synergy opportunities.
Great. And then as a follow-up, you know, Drew, I appreciate, and you guys have done a dozen deals. This is a larger deal than others and kind of in your core business, but maybe you have these long-term EBITDA targets. Will you break out Coyote so we can see what the underlying business is tracking versus those long-term targets as we move closer? Or is it gonna be kind of muddied maybe with this deal?
No, the long-term targets that we put out were always built off of the organic growth at RXO. So as we get closer, we'll roll something else out from longer-term financial targets. And I appreciate that this is a larger deal that is gonna take a lot of work, and we, along with Coyote, have the team to go out and do it and execute in the market that we're in and service our customers well, build great technology, continue to expand on our relationships with our carriers. There's a lot of opportunity for the growth, and there's a lot of excitement right now in both organizations.
Great. Appreciate the color.
Your next question comes from the line of Chris Kuhn with Benchmark. Please go ahead.
Yeah, hi, good morning, and thanks for all the detail on the call today. I'm just curious as to what Coyote's contract spot mix is. Is it similar to RXO's? And what would your ability to change that mix be? Is the ability to change that mix sort of the same as it is for RXO once spot prices start to increase?
Hey, Chris, it's Jared. Good morning. So similar to RXO, Coyote has a heavy contractual mix, but a little bit less relative to RXO. If you, if you look over the last year or so, we're talking about a contract mix that's probably, you know, high 60%, 70%. So a little bit less than a little bit less than than RXO. I mean, I'd say fundamentally, nothing changes in terms of our philosophy with respect to ability to capture the spot volumes, right? And that all comes down to the strength of the customer relationship, servicing that customer well throughout all points of the cycle. We believe strongly that will yield spot opportunities, special projects, mini bids. I think as a combined entity, I don't see that changing at all. So we look forward to executing on that opportunity.
And then, I don't know if you have any sense of what Coyote's pricing philosophy was in 1Q. Is it similar to yours in terms of the thought process that the conditions might improve, and so raising some prices there? Or do you have to do that for Coyote's customers in some areas, and would that put some volume at risk if you did?
Yeah, and hey, we're not gonna discuss pricing strategies. You know, what I think that I told you earlier, right? Year-to-date performance at Coyote has been strong, and volumes are now in line with broader market, and you know, we gave you our expectations in terms of how to think about that business for 2024.
Okay, thanks.
Thanks, sir.
Your next question comes from the line of Kevin Gainey with Thompson Davis. Please, go ahead.
Good morning, guys. Congrats on the transaction. I just wanted to follow up maybe on, as you guys look at the Coyote gross margins, what the opportunity you said, I guess, for getting those up to RXO's pace?
Hey, it's Jared. Good morning. They're pretty similar, right? I mean, I think when you look at the performance of Coyote relative to RXO, we have this in the presentation, you know, they're just under, right? So I think that ultimately, you know, where we see part of the powerful combination is the fact that we are combining two really strong brokerages with premium gross margins, and I think that speaks to and h opefully, this became clear throughout this call. I mean, the ability for us to put these organizations together, benefit from a cost of purchased transportation perspective, I think will only be greater as a combined entity. So, we're really excited to be able to combine these two organizations with already premium gross margins.
And then maybe for Jamie, I don't know if he ever kind of went over it, but modeling-wise, how should we think about the integration costs moving forward?
Integration costs? Yeah, so the $25 million annualized spend, you know, we expect to get it in the first year. We think that's, we think there's upside on top of that. As we said, you know, it does not include what we believe we can get out of cost of purchase trans. You think about it, around a $15 million kind of one-time investment number to get some of those integration costs.
Okay, sounds good. Appreciate the time.
Thank you.
Thanks, Kevin.
Your next question comes from the line of Brian Ossenbeck with JP Morgan. Please go ahead.
Hey, good morning. Thanks for taking my questions. So just to go back to Jamie, can you clarify the leverage range that you're looking at here with this transaction and maybe some of the early indications of cost of what that might be in the market right now?
Brian, we can't hear you real well. We got leverage out of what you said, but that was really all we understood. Can you repeat the question, please?
All right. Sorry about that. Yeah, I was just looking to see if you can clarify the leverage range and sort of the cost of debt you would expect to have for this transaction, just for modeling purposes.
Yep, absolutely. So, if you think about, you know, our comment was neutral. So think about where we, you know, where we landed the first quarter. You know, as you project forward, we intend to kind of structure the permanent capital structure in a manner that keeps that, you know, in the range of neutral. And so if you think about kind of what, you know, kind of mathematically, what that would require in equity versus debt to achieve that. You know, long term, though, very importantly, we said we want to maintain our investment credit metrics, and so that is a goal, and we go back to where we talked at spend. You know, our long-term goal is to be in a 1x-2x leverage range.
As this market influx, we want to design a capital structure that immediately is neutral. But long term, as we see improvement in the market, we'll get back to that 1x-2x and to keep those investment-grade metrics that we have currently. And from a pricing standpoint, you know, I think you can see what's out there in the market. We haven't decided exactly what we're gonna, you know, where we're gonna go for the debt side of it yet. But if you look at our... if you look at the bond market, you know, the bonds right now are in the low 6s range. That's a, I mean, I think that's a proxy you could use regardless of where we go, whether we go term debt, more bonds, I think you're gonna be in that ballpark.
Okay. Thank you, Jamie. And just one more on, just to understand a little bit better on EPS relationship. I don't know if you can give us some rough idea, because I know they're inside of larger company, it's hard to say, you know, how much of a traditional brokerage opportunity they have. I think, Drew, you mentioned they were operating pretty independently. Any more details on that would be helpful. And also, is it big enough, these other end markets, are they big enough to actually impact the seasonality, maybe smooth it out a little bit, when you combine the two on a pro forma basis?
I'll take the second part. No doubt, Brian, when we look at the, you know, strategic merit of the transaction, the fact that there is minimal customer overlap and the fact that we've got different segmentation from a customer perspective across small to medium business and middle market. And when we look across end markets, the fact that our top two verticals are different, I think that all speaks to the diversification benefits of the transaction, which should certainly help, in terms of that smoothing out that you're talking about.
Okay. Thank you.
Thanks, Brian.
And there are no further questions at this time. I would like to turn it back to Drew Wilkerson for closing remarks.
Thank you, Ludy. This is a transformational deal for RXO, and I believe over time, this is gonna prove to be a transformational deal for the entire transportation industry. This is highly accretive acquisition of Coyote. It's gonna make us the third largest freight brokerage in North America. Scale matters in this business, and the addition of Coyote will expand and diversify our customer base and provide those customers with access to new carriers. Our expanded carrier network will have access to more freight from a diversified set of industries. The synergies are significant. We anticipate $25 million of annualized cost synergies, and we also expect to buy transportation better and leverage best-in-class technology. You'll hear more from us in the coming weeks and months as we work to close the deal and integrate Coyote into RXO. Thanks for joining today's call, and have a great week.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.