Great! I think we'll get started here. Good afternoon, everybody. For those of you who do not know me, my name is Stephanie Moore. I am the Transportation and Logistics Analyst here at Jefferies. We are very pleased to have RXO with us. We have Drew Wilkerson, the CFO, and Jamie Harris. I'm sorry, Drew Wilkerson, CEO, and then Jamie Harris, CFO.
We swap roles every now and then.
Exactly.
I will kick it over to you guys. I believe, Jamie, you're going to read a quick disclaimer.
Yeah, real quick. Thanks, Stephanie. Thanks for having us. During this presentation, the company may make certain forward-looking statements within the meaning of federal securities law, 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 of the company's website for additional information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures that the company uses when discussing its results. Thank you.
Great. Thanks, Jamie. I'll kick it off with a handful of questions, and then we'll open it up towards the end for any questions in the audience. So just to start, you know, maybe, Drew, talk a little bit about this current freight environment. Clearly, it's probably the most common question that we're hearing today. You know, where are we in the cycle from a supply and demand perspective? You know, what do we need to see for inflection, the likes?
Yeah, so we're still in a market that is a soft freight market. There's still too much capacity out in the market right now, and you've actually seen demand weaken some. So there's some that you could take that, the market that we're in, as a negative market. But we've told you for two years, if you've followed our story, that we've got a playbook for every market cycle. And for us, we just announced that we are acquiring Coyote Logistics from UPS, so the cycle's actually going really well. If you look at buying a good company at the bottom of the cycle, this is going to more than double our brokerage revenue, more than double our brokerage volume, that has a little customer overlap, a little carrier overlap, and a lot of opportunity to improve gross margins by pulling purchased transportation down.
So we're happy with where we are at this point in the cycle.
No, understood. I certainly want to talk on Coyote here, so more to come on that. I guess one area that we get asked a lot, it would be, you know, pre-Coyote, 'cause we, we'll definitely get into that. But, you know, because you guys are unique in that you were spun out, standalone company, kind of at the beginning of what has been a really weak down cycle, maybe help those in the audience to understand how you guys are positioned the next upswing. So, you know, whether that's based on your customer relationships, your digital offerings, cost cuttings in the last year. So maybe just talk about kind of positioning for when the cycle does eventually turn.
I'll start by talking a little bit about the customer relationship, and then let Jamie talk about some of the costs that we've pulled out of the business since we've done a spin-off. But if you look at our largest customers, they've been with us for 15 years on average. And right now, if you look at the market we're in, there's not a lot of spot freight out there, meaning there's not a lot of tender rejections of carriers turning down loads. And if you look at our book of business on the truckload side, it's a little bit more than 75% contractual. And so if you look at who we do business with, we do business with, you know, roughly half of the Fortune 500 companies out there.
These companies, they come back to us year after year, and what they do is, they don't just renew the amount of business, they actually have outgrown the pace at which we have grown at as a company. So these largest customers, that when they're in dire straits and needs, and they're looking at having spot loads, projects, and mini bids, as the market turns, when you're talking about the next market inflection, we are well positioned. If you go back to 2020, when you saw a market inflection, we were growing volume at plus 30%. The same thing in 2021. When there's a tight market, we'll still honor our contractual obligations to our customers, but we'll be in a position to pick up a lot of freight at profitable margins whenever the market turns.
Yeah, in regards to costs, since the spin, which happened November one of 2022, we've taken out over $65 million of annualized cost savings. We spent a total of about $30 million of investment to get that, so it's a really good return on investment. It's everything from duplicative roles, to process improvement, to consolidation of some of our last-mile hubs, where we could service the business even better with a smaller footprint. But we've really adopted a continuous improvement mindset, and our goal in a down freight market is to really position ourselves so when the market does inflect, as Drew says, we've got great customer relationships, we've got a lot of very good contract business, and we have a cost structure that'll allow a lot of contribution margin to fall from the gross margin line down to the EBITDA line.
Great. And then, just as a follow-up, Drew, maybe just remind us how quickly you can shift your business to take advantage of those spot opportunities. Obviously, keeping in mind your contract exposure, but also kind of when spot rates do eventually rise.
Yeah, so the market can turn very, very quickly, and you've seen markets go from load-to-truck ratio from three to one to double digit to one in a quarter-over-quarter basis. And in those times, you've seen our business shift as much as a thousand basis points, quarter over quarter, from spot to contract mix. You know, as I said earlier, we're always gonna honor our contractual obligations to our customers. And because we do that, and because we've delivered strong service, we've given them solutions, we've got the best technology in the industry, we've got strong relationships, they come back to us, and they offer us spot loads, projects, and mini bids when the market does turn.
Got it. Appreciate it. Okay, well, turning back to Coyote, 'cause I do think it's a really important point here. So as you look at the deal, you know, maybe talk about the strategic rationale. I know that's a big question, but, you know, a question that we hear a lot is: Could this have been a you know, a business that you could have won organically? Why is UPS looking to sell it? You know, what should we think about that? You know, more color there, I think, would be helpful.
Yeah. So, could we have done this organically? Absolutely, we could have. If you look at the growth trajectory that we've had for more than a decade, more than 90% of our growth has been organic growth. But we would not have more than doubled the amount of brokerage volume that we were doing over the next five years. And so when you look at buying a scaled player at the bottom of the market, there's no better time than now for an acquisition like this. If you look at the customer overlap, within our top 25 customers, there's only overlap within 3, and even some of that business is complementary of each other. If you look at the carriers that we both do business with, we built our business off of doing business with small carriers, so think one to 10 trucks.
Coyote works more with mid to large-sized players, as well as private fleets, so when you look at the opportunity to pull down purchased transportation, we believe that one of the biggest opportunities for us is to be able to have some of the best gross margins in the industry, and we already have really strong gross margins compared to, compared to the industry right now.
Absolutely. Thank you. Thinking about it from an integration standpoint, you know, maybe a two-part question. In your due diligence process, you know, was there anything from a tech or digital perspective at Coyote that really stood out to you guys that you've seen thus far? At the same time, how should we think about integrating those two platforms?
If you go back to 2006, you know, when Coyote first started, they were actually seen as the people who invested in technology the most, and they built strong products. Now, for us, we've built RXO Connect over the last 10+ years and believe it's the best operating system out there. But the way that we're approaching this is, we wanna have the best of both worlds. What allows us to optimize freight and give our customers the best solutions with the data that we've got? So how do we help them make the best decisions on when they should be shipping loads? What mode of transportation that they should use? For carriers, how do we continue to pull them back to the platform so that they don't have to leave our platform to go find their next load?
And then if you look on the people side, it's very simple. We measure it in loads per head per day, and how do we increase productivity? So for us, it's about creating the best of both worlds. I think, you know, some of the things that I got excited about whenever we were doing demos of Bazooka, which is Coyote's operating platform, is some really good stuff that they're doing on the carrier side. There's some stuff that they're doing on RFPs that I think we'll be able to implement very soon into RXO Connect overall. RXO Connect will stay the operating platform, but we will look at what the brokerages are using between Freight Optimizer and Bazooka to create a best of both worlds as we move forward.
Got it. And then maybe thinking about UPS, I think the understanding is that it'll remain a major customer of Coyote. Any risks there? You know, kind of what protection is put in place, margin profile of the business, or anything else we should be looking at?
Yeah, so if you look at UPS, there's a lot of stable business there, and that was one of the important things for us as we were doing our due diligence, was to make sure that we were protected with a long-term contract there. And if you look at what UPS saw, they saw a partner that they wanted to make sure that they were protected. And so we were able to come to an agreement that was good for both sides, that has us with the business for the next six years, and the opportunity to renew it, going forward from there. And so we're excited about having UPS as a large customer. We think there's a lot of opportunity.
There's opportunities for us to grow and be able to talk about selling our other lines of business to UPS as a customer. You know, the way that we looked at it when we were doing the acquisition was really, what percentage of margin did they make up of Coyote? And I think we said that it was high single digits, low double digits, in that range, at the time that we made the announcement. So it's a significant customer, but there are still a lot of other customers that are important for us to service coming out of the gates.
Got it. And then, Jamie, maybe talk a little bit about financing, thoughts on, you know, leverage pro forma in the deal, timing of closing, and the likes.
Yeah, so we were very, very pleased when we announced the deal back in June, that two of our two largest shareholders came along the side of us as an investor. We saw a few weeks ago that we finalized the equity piece from MFN and Orbis to $550 million. We also announced a few days later that we had put together our debt, a portion of our debt. We extended our revolver out, put a new covenant package in place. We have a $200 million term loan that's on the shelf, awaiting close. Working on the balance of the financing. We feel very good. The process is going well. Don't have specifics to add right now, but a lot to come over the next few weeks.
In terms of closing, we said on our last conference call, first part of Q4, we think will be towards the earlier piece of that, at least. We feel really good about where the process is. We've got some good integration work. We're really focused on day one right now, the cutover. You can't really start the physical integration until the close. We've done a lot of due diligence. During due diligence, we've actually done a lot of integration planning. So we have a good view of what steps to take day one to realize synergies. We did communicate at least $25 million of cost synergies from the deal.
Stephanie, to your point about leverage, very important that we put this together in a way that gives us a very healthy balance sheet on a go-forward basis. We made a commitment that our financing package would be at least credit neutral, with credit defined as what our leverage ratio is, you know, pre- and pro forma from the transaction. All is going very well, and we look forward to wrapping that up over the next few weeks.
Got it. Thank you. Maybe taking a bigger picture, question here, as you think about the brokerage business and the truck brokerage industry overall, how do you see it evolving three, five, ten years from now? Penetration, digital acceptance, kind of a lot of these topics that we've talked about for some time now.
I think the first thing that you're going to see is what I said earlier. Scale matters, and you know, it's not very hard to start a freight brokerage. There's 17,000 freight brokerages across the U.S., but what it is hard to do is capture market share and capture it profitably, and so if you look post-acquisition of Coyote, the top nine players in the industry are going to make up more than 50%, and I think that's one trend that you're going to continue to see happen. Large players are going to continue to win business because they're able to service the business at scale, have strong technology, be able to have strong relationships with their customers, so I think that the first thing is scale matters, and players with scale are going to be the winners in the long term.
Obviously, investments in technology are going to be extremely important. If you look at what we've done, 97% of our orders are either created or covered digitally, and I think technology plays an important part whenever you're dealing with customers, carriers, and employees, and should be one of the key tools, not the only tool, but one of the key tools whenever you're building out your suite of services for customers.
Maybe sticking on that technology front, you almost hate to bring up the terms AI and machine learning in these forums, though I think we've been talking about it for much longer, that it's been just common vernacular here. But maybe talk a little bit about AI and machine learning at RXO.
I think that you're right. You know, we've been using AI for over a decade now, and if you look at our pricing algorithms that have allowed us to have some of the strongest margins in the industry, it's because of the pricing algorithms that we've got on both the carrier and the customer side. You know, the more data that we get, the wider the gap gets between ourselves and the competition from a pricing algorithm perspective. There's a lot right now, when you're talking about generative AI, that we're looking at doing for how do we put more information into our sales reps' hands as they're talking to customers? What are some things that we can do on the back office side, that Jamie's working on, that can continue to streamline our process and efficiencies there?
But AI, as far as machine learning, has been a core piece of the business for us for more than a decade.
What about just the notion of greater price transparency, particularly, at some point, potentially impacting margins over time?
Yeah, I've heard that for the last 15 years that there's going to be true pricing transparency, and I've never been a subscriber to that. I think that the market is a cyclical market, and, you know, it will continue to operate that. But let's just say that that does happen, and you do start to see more pricing transparency. You'll see higher automation, and the people that have strong technology, you'll see the gross margin percentage will actually come down, but your productivity within employees will go up, so the EBITDA percentage as a whole would go up during that period.
No, absolutely. Okay, so I think by default, we often talk about truckload brokerage here, but I think we would be remiss to kind of ignore what's been going on the LTL side of your business.
Mm-hmm.
So maybe talk a little bit about some of the growth you've seen in LTL. You know, what is the size? What is the drivers of some of this growth that you've personally seen, as well as what's, what you're seeing in the industry? Where are you taking share-
Yeah
the likes?
Start by where we're taking share, and it goes back to customer relationships for us and the services that we provide for customers. Large customers that we've done business with for a long time see LTL as a problem, and they see it as the number of claims they're dealing with, the number of lost shipments, the damages that happen within LTL. It's a small piece of their overall transportation spend, but it's a big portion of their time. So large customers are coming to us, and they're outsourcing a piece or all of their LTL business. So that's... Our wins are coming from large customers who have been customers for a long time, who have operated on our technology and are used to it and like what our technology does.
As far as LTL as a business, if you think about truckload gross profit per load, you know, there's volatility within that and what happens within the overall transportation cycle. But in LTL gross profit per load, if you go back and you look at our last earnings deck, you can actually see it's relatively flat over time. So what LTL does is it creates a stable piece of EBITDA business. And so part of what we're doing right now is, we're not just planning for the inflection and for the next upcycle. We know that we operate in a cyclical business, so how do we build higher EBITDA bases for the next down cycle? One of the ways that we're doing that is through LTL. A couple others are through managed transportation and our cross-border freight.
Both of those are stable pieces of EBITDA, so we're not just looking for the next high point. We're also preparing for when the market comes down so that we have a higher base of EBITDA that we're operating off of.
On the LTL front, maybe just for clarification, you know, why is gross profit per load, why does it tend to be more stable?
Yeah, so typically, in LTL, when you look at the rates from LTL carriers, the tariffs remain relatively flat, and LTL is more of a linear. It goes up 1%, 2%, 3% on a year-over-year basis, so customers are more accustomed to that, and there's if you look at the LTL network, there's, like, 50, 60 overall LTL carriers, and, you know, just a little bit more than a handful of national players. If you look at the truckload, there's hundreds of thousands of carriers. We've got over 100,000 carriers in our network, and it's typically small carriers, so there's a little bit more volatility in the truckload than what there is in the LTL.
And maybe touch, you just touched on it, but expand a little bit on the managed transportation front. So, dollars under management, customer overlap, so cross-selling and synergy opportunities organically and the likes?
There's not a business that we're more excited about right now that has, from an organic growth perspective, than what we're doing in managed transportation. If you look at that business right now, it's roughly $3 billion of freight under management. It's mid- to large-sized customers that we are their transportation team. When you look at how we make decisions, we make decisions for the customers. We buy transportation on their behalf, and the benefit to that is because we have such a strong truck brokerage, these customers are coming to us and asking us to use ourselves more. Managed transportation gets to act as a customer to brokerage, to our last-mile business, and really touch all pieces of RXO.
You know, I mentioned earlier, from a stable piece of EBITDA, managed transportation is typically a fee-based business, so there's not a lot of volatility in how it performs. And then the last thing that I'll close with on managed transportation is the reason for the excitement is the pipeline. Our pipeline in managed transportation right now is $1.6 billion. So if you look at just even converting a little bit of that, the growth within that on FUM, Freight Under Management, has got a huge opportunity for us over the next couple of years.
Great. And then maybe on last mile, since you did just bring it up. You know, maybe I know there's been probably some changes in the last year or so within the last mile business, so maybe talk a little bit about some of those changes. Obviously, a big rise during COVID, maybe a little bit of a come to earth and just normal shipping patterns. But talk a little bit about the evolution of your last-mile business, and over the last year or so.
Yeah. So as you said, it did rise, you know, dramatically during COVID, and a lot of people ordered a lot of big goods, which is kind of our target market. That did come back down after COVID. Since spin, we've really put a big focus on growing profitability, streamlining operations, finding cost efficiencies. We announced on our last call, as an example, we had a really big initiative with carrier procurement and being able to bring down the cost of purchased transportation for our carrier base. We were able to do that. We identified over $20 million a year of annualized cost savings just from cost of purchased transportation, as an example. There's dozens of other initiatives. We feel like it's going well. We're seeing customers come to...
Opportunities come to us to grow the business, and it's, it is, something we've put a lot of focus on since our spin, and we've seen good results of that.
And then from a strategic standpoint, though, maybe, you know, talk about how it does fit with the other aspects of your business, whether it's brokerage or managed transportation.
Last mile, if you look at the biggest synergy that we've got there, it's on the commercial strategy, so if you think about large customers who are doing home deliveries, like Jamie talked about, you know, we are the number one player in the last-mile space, and we have been forever, and we've got facilities that put us within 125 miles of the vast majority of the U.S. population, so whenever you are doing home deliveries on a national footprint, you start your conversation with us, and, you know, over the last couple of years, I've had a lot of large meetings with last-mile customers and potential customers about growing that business, but there always is a piece of time where I get to talk about brokerage, and I get to talk about managed transportation, so the commercial synergies is real, and it's high there.
There's not as many operational synergies to date. There is opportunity if you look at being able to leverage the 75 last-mile hubs, and creating space optimization and things that we can do there. There are opportunities, but I would say that it's more on the commercial side than it is on the operational at this point in time.
Great. Well, we have several minutes left. I always have more questions, but I do want to open it up to the audience for if there's any questions, just so I give everybody a chance. Questions in the audience so far?
Thanks. You mentioned most of your carriers are kind of the one to ten size, kind of truck operators.
Mm-hmm.
Are you seeing them kind of leave the industry? And then, do you have any concerns that you won't be able to get capacity or you won't be able to add to your network when you need to?
Yeah, that is not a concern for us. Like, if you look at what we've got within our carrier platform, you've actually seen the number of carriers go up a little bit, and I think that's atypical, and it's something that is RXO-specific. We've got a carrier rewards program that gives carriers discounts on fuel, tires, roadside maintenance, hotels, Sirius Radio, the headsets that truckers wear as they're going up and down the road. That pulls them back to the platform. Our platform's very easy for them to use. They can pick up their cell phone, they can book a load, they can negotiate, they can do all of that with no human interaction. So when you look at it, there's a lot of reasons why you would log on to RXO Connect or Drive RXO to do business with us as a carrier.
In general, in the market, you are seeing carriers exit the market, but I think it, you know, this freight recession's been going on now for two and a half years. I think it's been at a much slower clip than what everybody thought it would as we entered it.
Hi, thanks. Can you just talk about, you were saying your split is 75% contract, 25% spot, like, how that changes with Coyote? Are they similar or more spot things?
Yeah, we haven't put out a specific number. I'd say Coyote is a little bit less contract, but they are large. They have a lot of large contracts as well. So I think it was in the 65%-70% range, and have the same opportunity. If you look at one of the things that Coyote does really well, they've got a lot of relationships with private fleets and with large carriers. So again, the opportunity on purchased transportation-
Mm-hmm. A nd, you know, having lanes that we know that we buy better than Coyote, and having lanes that we know that Coyote buys better than RXO, is a huge opportunity for us going forward with the acquisition.
I have a follow-up. You know, you talk about capacity and capacity exiting the market. Why do you think it's been so slow to see capacity exit? Or are we not looking at the right base because we're not accounting for the amount of capacity that did enter during COVID?
Well, I think we're looking at the bases that we know, right? Like, so everybody's looking at the total number of carriers that are exiting the market. The one data point that I don't think anybody has their hands around yet is the actual trucks that are exiting the market. You don't see whenever somebody goes from 10 trucks to five trucks, from 12 trucks to eight trucks. You don't see when somebody who's got 1,000 trucks parks 50 of them. Like, that doesn't make it as much as whenever you actually see the carrier exits. So I think that's the data point and where you could see this market turn faster than what most people do.
But when you look at why we've been in this for so long, you know, we had a lot of carriers who got a lot of PPE loans, and, you know, I don't think we accounted for that. The carrier rates in 2020, 2021, and the first part of 2022 were at an all-time high. So I think the financials of carriers were healthier than what they had ever been as we entered into the freight recession.
Then maybe, Jamie, switching gears a little bit to free cash flow. Can you talk a little bit about the free cash flow generation of the business? You know, maybe getting back to a targeted 40%-60% conversion rate that you've called out before.
Yep.
And then same, same thing, in terms of Coyote, how its free cash flow profile compares.
Yeah. So the business has the ability to generate significant free cash flow. We're still committed to that 40%-60% range of converting EBITDA to free cash flow. If you look back over the last twelve months, it's been lower than that, primarily because we're at the lower part of the freight cycle, and like any business, we have some fixed cash costs. We've got about $30 million a year in fixed interest cost. We spend, on average, about $40-$50 million a year on capital. So let's call it $75 million of kind of fixed committed investment that we make. Above that $75 million, though, our contribution margin or our flow-through from EBITDA to free cash flow is about 75%-80%.
So we get into the mid part of the cycle or even the upper parts of a freight cycle, the ability to generate cash will be tremendous. If you go back all the way to spin, our lifetime to date since spin is right at 50%, so we're right in the midpoint of that range, and we think that's important to keep in mind. That is a range through market cycles, not every quarter, you know, at the peak or the valley, but through a cycle. As it relates to Coyote, they, you know, they have a characteristic much like we do in terms of, as they grow, they produce a lot of free cash flow. You know, depending on what the final capital structure looks like for this business, we'll get scale out of that business.
If you think about that $200 million term loan as an example, that converts to about $12 million a year in interest. They will have a significantly lower CapEx spend than what we do as a standalone, 'cause we're spending capital not just for brokerage, but we're spending it for last mile, for managed trans, and other pieces. And so I think the scale of the Coyote piece standalone looks very similar, maybe a little bigger because of the lack of the debt. You put them together, we should be, you know, at the kind of the middle to upper end of that range. We see through market cycles an opportunity to really significantly produce cash over the long term, though.
Helpful. Thank you. So last question, and Drew, you kind of started this conversation off by talking about your playbook during the cycle. Big aspect of that is obviously Coyote here and the scale that it brings. So as this cycle continues to kind of bounce along the bottom, you know, what is your appetite to maybe look to expand your presence in brokerage or other capabilities?
Yeah, you know, if you look at where this is gonna put us from a leverage standpoint, we said that we would remain at least neutral, and the keyword in that being at least. If we can improve that, then, you know, there's certainly a good opportunity for us. Acquisitions is not new to us. We've done several integrations, especially within brokerage. If you go to the early part of the time when we were XPO, there was just over ten acquisitions that we did, and we implemented there. So still, if there was something that was the right fit, the right price, the right time, and it was something that was additive for our customers or our carriers, then we would absolutely entertain it.
Great. Thank you. Well, appreciate your time, everybody. Thank you so much.
Thank you.