All right. I think we're live. Good morning, everyone. I'm Brandon Oglenski, Airline and Transport Analyst here at Barclays, and welcome again to the second day of our 42nd annual Industrial Select Conference , and I'm very pleased and excited to have RXO up next with Drew Wilkerson, CEO, and Jared Weisfeld, Chief Strategy Officer, so I know we're going to have a great conversation. For those in the room, let's just quickly go through the ARS questions, if you don't mind voting on those, if we can queue up number one. Do you currently own RXO? Overweight, market weight, underweight, or no? And Jared, we try to keep the controllers from up here because it's a little bit, and thanks, everyone, for participating. All right, question number two, please. What is your general bias towards RXO right now? Positive, negative, or neutral? All right and then question number three.
In your opinion, through cycle EPS growth for RXO will be above peers, in line with peers, or below peers? And we do share all this post-conference, so pretty interesting takeaways.
Great.
All right. Well, gentlemen, again, thank you for being here. We love to host you here at Barclays. Let me kick it off with maybe a slightly more difficult question, but obviously, Coyote acquisition seemed pretty attractive last year. We think you paid a pretty good price, obviously less than UPS paid for it back in 2015. I think the challenge has been that there's either been deterioration in earnings power of Coyote or core RXO, or probably a combination of both. So can you just speak to where do we sit today with earnings power of the two businesses, and what's really the path forward from here?
When we did the acquisition of Coyote, one of the things that we walked into the acquisition knowing was that their business on their enterprise was priced 5%-7% below what legacy RXO's was priced. Therefore, their gross profit per load, which is an important metric for us to know, was lower than legacy RXO's. We knew that if there was any sort of squeeze within the market, the business would get squeezed harder on gross profit per load than legacy RXO's. That happened. We got hit harder with weather this year than what we did last year. Probably has come down more than what we modeled in. In performance versus what it's done in the market, we've actually been very, very happy. For us, when we did the acquisition, we knew where we were in the bid cycle.
We closed on this in September. Bid season runs Q4, Q1, and new bids are implemented in Q2, so by closing on this acquisition earlier than what we originally projected, we actually go to market as one, and one of the things that we said on the earnings call is next year, we expect rates to be up, low to mid-single digits. We expect to be able to grow volume on a full-year basis. When you look at the long-term earnings power of this business, we've materially and structurally changed overall. We were taking out cost of the business before the Coyote acquisition. We took out roughly $65 million in overall cost. When you look at the synergies, we did again, it's now at least $50 million, so right there, you're over $100 million.
We haven't even gotten to purchased transportation, which we think is going to overall, and if you look at it line by line, purchased transportation will be the largest synergy of what we've got, and then you add on things like cross-sell and the ability for legacy Coyote rep to sell, Managed Transportation , Last Mile , cross-docks. We're seeing wins in those areas right now, so for us, you're absolutely right, Brandon. Gross profit per load came in more than what we would have expected it to initially. We're going to buy the business for the next six months. We bought it for the next six years.
And I guess with those synergies, though, it's just offsetting the headwinds you're seeing in the market.
Gross profit per load, and I think this is something that we have to do a better job of making sure that investors understand. Gross profit per load is such an important metric in our business. You have volume and you have gross profit per load. Gross profit per load is more important than volume. And if gross profit per load moves a dollar on an annualized basis, it's more than a seven-figure impact to EBITDA on an annualized basis. Gross profit per load can move $30, $40, $50 month over month, which is where you can see the big swings, especially in a down market. It also shows you, again, the long-term earnings power as right now, legacy RXO, take out the COVID highs, is sitting 20% below our average on gross profit per load. Legacy Coyote is sitting 15% below on gross profit per load.
So we see significant runway as the market does start to recover.
We've had a few trucking firms at this conference so far.
Did any of them tell you?
No, no one knows.
Yes, I think that that's the one thing that we did say in the last earnings call was that we're coming off the bottom. I don't know what the shape of the recovery will look like because there are so many things that go into what that looks like. But when you look at tender rejections, it's significantly up on a year-over-year basis. It's sitting 6%, 7% right now. When you look at load-to-truck ratio, it's significantly up on a year-over-year basis. When you look at contract rates, they're up on a year-over-year basis. When you look at spot rates, they're starting to climb on a year-over-year basis. So there are things that are moving in the right direction for the market. So I think we're coming off the bottom now. It's what's the shape of the recovery.
If there's a slow stair-step recovery, there's some pain along the way within gross profit per load on that for us. If it's a sharp V-shaped recovery, then you'll see the spot loads on gross profit per load will be significantly more than what it is on the contract side, and that'll more than offset.
Jared, maybe along those lines, how are you guys thinking strategically about contract mix versus spot exposure right now?
Sure. So in Q4, if you look on the full truckload side, contract mix was about 76% of the mix. When you look at the combined organization, we typically will see an increase in our contract mix from Q3 to Q4 based on one of legacy Coyote's largest customers, which we have on a contractual commitment through January of 2030. But I think the important thing is that when you look at the organization and our ability to go ahead and win outsized volume on the spot market when the market turns, I mean, that's what provides that torque to the model when you do get the eventual market recovery that you were talking about. So you look at legacy RXO historically, when we've had recoveries, you've seen that spot mix increase as much as almost 1,000 basis points in a 90-day time period.
I think it's important to note that we're still going to haul the same contractual freight to our customers. Having that large contractual book of business helps us earn that spot volume longer term. We want to have the ability to go ahead and service our customers. We saw some of that in October after Hurricanes Helene and Milton on the legacy RXO side, where RXO was the first call to our customers because of the service that we provide. I think continuing to ensure that we maintain that strong book of contractual volume will allow us to win that spot volume longer term.
Okay. And help us out. I know you guys only provided guidance for the first quarter, but this probably should be the low point in 2025. Is that right? And how do we think about seasonality into Q2?
Q1, our outlook for $20 million-$30 million of Adjusted EBITDA. We've talked about how Q1 historically is the lowest percentage contribution of the full year. When you look at the full year, Q1 and Q3 are typically our seasonally weakest quarters, and Q2 and Q4 are our strongest quarters as a combined organization, RXO plus Coyote. When you think about Q2 versus Q4, sometimes Q2 can be stronger than Q4. Sometimes Q4 can be stronger than Q2, with the biggest variable there being peak season, whether or not we have one, which we haven't had in, call it, three years now. I think those are the biggest variables as you think about it. The big thing to watch, as Drew mentioned, gross profit per load is one of the most important, biggest, and largest variables to the business in terms of profitability.
So depending on where we are from a market standpoint with respect to the freight cycle can greatly influence in terms of what that seasonality looks like.
Drew, maybe can you toss that? Because we do know one of your competitors has actually improved gross profit performance here. I mean, unfortunately, on the public side, we actually back up what everyone's saying, but we can see gross margin improvement at some of your competitors in this environment. I guess what's the differentiating factor here?
I'm not in their boardroom, so I can't speak to what it is. I'm assuming you're alluding to C.H. Robinson, which they've had a good run, and they've made some very good moves since Dave came into the role, and excited to see that. That's actually good for us whenever we've got strong operators that don't compete on being the low-cost provider. That's a good thing for the industry overall, and excited about that. I think one of the things that you see is the benefit of scale that they've got off of that. It helps them from a purchased transportation standpoint. For us, whenever we did the Coyote acquisition, we get the benefit of scale, of going to the third largest broker and growing our volume by 125%.
One of the things that we did in due diligence was knowing how well Coyote was buying on specific lanes. And there were lanes they were buying better than legacy RXO. There were lanes that legacy RXO was buying better than. We recently, over the last couple of weeks, have actually run a pilot where we took 10 Coyote reps, and all we let them do was focus on low-margin freight within legacy RXO, and we saw that there were lanes that they were buying better, and they improved the margins on that business. So we think it's a significant opportunity off of scale. The other thing is, I think as you watch LTL grow as a mix percentage of our business, LTL structurally runs at a higher gross margin percentage, which is what you all see. And that is high teens% to the low 20s%.
And for us, it's only 20% of our business right now. And I know some of our competitors, it's a much bigger piece of their business. And as you see that grow for us, it's the opportunity for the margin percentage to be able to expand during that.
Okay. I think another fear that's come up frequently is, are you losing core employees? Have customers gone away from Coyote, or is that overblown?
Yeah. So I would say one of the things that we highlighted, and I think anytime you do an acquisition, for us, I focus on three things: people, customers, and technology integration. And on people, one of the things we said on the call was voluntary turnover for director level and above was 2%. I did a lot of acquisitions at XPO with the team. And for us, that is performing better than what we have. There's excitement in the building, and we're excited to have some investors roll through the building so that they can see the excitement of what was legacy Coyote now being a part of legacy RXO. So for us, on the people side, that's going better than what we expected it to go, better than what we had modeled it out.
On the customer side, we're seeing wins that are actually an increase on a year-over-year basis, which is one of the reasons that gave us confidence to say that even though volumes will be down because we're still running off of old contracts in Q1, we expect to grow volume for the full year. So that tells you what it has to do in Q2, Q3, Q4 for us to be able to have that confidence. So I'd say on people and on customers, it's going exceptionally well and on the technology integration, we still got a lot of wood to chop, but it's right on schedule.
Can you talk maybe more specifically about the cost synergies and what you've achieved? I think you actually upped the target too.
We did. We did. We started out by saying that it would be at least $25 million. Then we raised it to at least $40 million. Now we've raised it to at least $50 million. And we keep putting the word at least in front of it because we stay in a constant state of continuous improvement. So we're always looking to see what else there is. And specifically, we don't need two technology platforms and systems. There were duplicate roles, duplicate vendors, and all of those things. We're working diligently to make sure that we are set up for the inflection. We've always made sure that we want to have the capacity from a workforce to be able to handle the inflection when it comes. And right now, we're in a position where we could take on 10%-15% more volume overnight.
How important is the technology integration between the two businesses? I think Coyote had a system called Bazooka, which is pretty cool.
They did a very good name, very good name. And I mean, I think when you look at Bazooka, I came up at C.H. Robinson, and C.H. Robinson bought a company called American Backhaulers. And one of the reasons that they bought them was because the technology at American Backhaulers was so good. And it was called Express. It was the system that I grew up on at Robinson. And Jeff Silver, who started Coyote, started Express. He's the one who built Express. He's the one who built Bazooka. So functionally, it was a very good platform. It was very good on their carrier reps and efficiency of what they were able to do. But it was an older system. It was built in 2006. So when you look at Freight Optimizer, it was a little bit newer or a lot newer. It was sleeker, moved faster.
When we made the decision to go with Freight Optimizer over Bazooka, it wasn't a decision that we made lightly. We went in and we said, "What are the best tools in Bazooka that we're going to be able to pull over to legacy RXO, which will allow legacy RXO reps to run more efficiently?" There's carrier routing guides. There's carrier waterfall tendering. There's a lot of things that they were doing on the carrier side that we're taking. We're picking up the tools. One of the reasons it's going to take us a full year to get on one platform is because we are taking the best of both worlds. The Freight Optimizer system will actually be a more premium product than what it was before.
Okay, and Jared, once you get onto one platform, isn't that where you get more cost synergies out of this too?
Yeah, that's exactly right. So going back to your previous question on cost synergies, the at least $50 million that Drew just talked about, those are cost synergies that are running through the P&L, predominantly on the SG&A line. Technology integration, which will be substantially complete by the end of the third quarter, that's when we can really start to unlock the value on cost of purchased transportation . So we talked about how we just ran a pilot with some nice success. When you think about the ability for us as one organization to operate on one holistic system and the ability for us to leverage a set of pricing algorithms for the combined organization, you think about legacy RXO brokerage and legacy Coyote brokerage, it's a $4 billion pool of cost of purchased transportation dollars, right?
So going back to the acquisition that Drew just talked about in terms of American Backhaulers, C.H. Robinson, incredible acquisition within 12 months, improved gross margin percentage by about 150 basis points. We talked about two quarters ago how if we were to just improve gross margin percentage by 100 basis points in the context of the cost of purchased transportation synergies, leveraging those pricing algorithms, that'd be a $40 million benefit to gross profit, which would materially drop down to EBITDA. So you think about the $50 million at least of cost synergies, the $40 million of purchased transportation synergies, layer that onto the run rate EBITDA. When all is said and done, when we execute, we're going to be able to buy down the multiple to mid-single digits, which we think is going to be substantially accretive.
Drew, you mentioned being focused on technology integration and had seen a number of previous integrations in the past. You also mentioned you have pretty good retention across, it sounds like, employees, carriers, shippers, right? Is that technology integration, once you go to one system, is there not some incremental risk that carriers who are not necessarily as tech-savvy and not as adaptive as maybe some other stakeholders in the ecosystem potentially deciding to hang it up?
I think it's actually an opportunity for us, so when you look at legacy Coyote on the carrier digital adoption, they were working with larger carriers, private fleets. Their carrier digital adoption rate was actually higher than what legacy RXO was because of the size carriers that they were working for, so I think it's an opportunity. Legacy RXO was continuing to climb, working with smaller carriers, but I think legacy RXO carriers aren't leaving the platform. When they go on the platform, they actually come back to it 75% of the time within a week, and for us, some of the things that we've done to pull them back to the platform, when you look at RXO Extra and what it does for carriers, it gives them discounts on fuel, tires, roadside maintenance, and it's all based off of service and volume that they're doing with us.
There is a lot of incentives to come back to the platform to do business.
Jared, you'd mentioned the 1% savings and $40 million in purchased transportation , right? I mean, that's kind of at current low-ish in the market numbers, right? We would expect, as the cycle turns, revenue to increase significantly, cost of purchased transportation to increase significantly. Would you not expect additional dollar savings just due to the increased gross dollars that you're going to be spending?
No, that's right. It's a relative concept, right? So I think the way we're going to be looking at it is how are we buying versus market and across market cycles, right? To your point, when the market does finally recover, cost of purchased transportation dollars we procure on a transactional or spot basis will move higher. So you think about what those savings look like, for sure, it will be relative to market. So it certainly is a moving target depending on where we are in the market and how we are buying relative to the market.
What about labor productivity, as we're thinking about, is there some opportunity there as you're integrating? Is that part of the synergy target that you're already discussing?
Absolutely. We talked about last quarter how rolling 12-month productivity for the combined organization was up 16%. When we look out over the near and intermediate term and even the longer term, the ability, if you look at the number of loads per person per day that the organization is doing across the company, there is significant opportunity, so we talked about getting onto one system. Drew talked about some of the pilots that we're running as we think about making sure that the carrier reps, the customer reps climb up the learning curve, less clicks from the mouse, leveraging Freight Optimizer, our internal TMS, leveraging RXO Connect in a way to really drive incremental efficiency. There's significant productivity enhancements over the long term.
One of the things that struck me when I've taken some tours and we're going to go down and visit with you guys here pretty soon, so I hope to learn more, was that it seemed like there was a very good system for incentivizing your sales reps to really drive the right volume, profitable volume. Is there some opportunity there as you're integrating Coyote to try to bring them up to the RXO standard on the sales compensation?
Incentives are something that we look at on an annual basis. I think it's important that you align all the way down to the desk level the reps to what the company's objectives are. So how do we, when you look at it in very simple terms for a rep, it's what are they doing in gross margin dollars per day and what's the volume they're doing, meaning the throughput, keeping it very simple metrics that they can go home every day and understand how much money that they were able to make. Did they make progress with their customers? Did they make progress with their carriers as far as building the relationship? I think that there is opportunity there to create stronger alignment as we continue to integrate on the acquisition. I think that's upside.
We like paying our people a lot of commissions because that typically means the company's doing better.
Maybe along those lines, can we cue up question number four for the audience, please? In your opinion, what should RXO do with excess cash? First, to our M&A, share repurchases, dividends, debt pay down, or internal investment. And Jared, can we maybe talk about the components of cash flow this year from a CapEx perspective and maybe integration costs?
Sure. Absolutely, so when you think about 2025, from a free cash flow perspective, I would say that we talked about, to your point, restructuring in the amount of $40 million-$50 million, and I think it's important to look at restructuring in the context of the synergy target because restructuring charges moved higher, but our synergy target moved materially higher, right, so we're going to go ahead and achieve at least $50 million of cost synergies this year. You've got $40 million-$50 million on the P&L side associated with those synergies, and the cash outlay associated with that is probably going to be around between $50 and $60.
But also remember that cash outlay is also inclusive of actions that we're taking in 2024, as we talked about, and Drew mentioned this as well, where we achieved about $35 million in cost takeouts on the RXO side last year. So part of that is also part of that cash outflow this year. On the CapEx side, we talked about a number around $75 million-$85 million for 2025. Importantly, that includes a $15 million expansion in Charlotte, North Carolina, which houses some of our largest brokerage operations and needed an upgrade, combined with the fact that it also houses our corporate headquarters. It also includes $10 million of legacy Coyote CapEx. I think really importantly, we talked about this a few weeks ago on earnings, heading into 2026, that CapEx outlook comes down significantly, call it $55 million.
Think about this, and this is such a strong historical return on invested capital, 30%-40% + over the last 10 years. We just increased our full truck load volume by more than 125%. We increased our LTL volume by more than 100% with the acquisition of Coyote, and our normalized CapEx number only goes up by $10 million. I think that's the power of scale.
Got it. And I guess longer term, where should we see net margins? So thinking about op income to net revenue.
I mean, when you think, so the way I would think around it is the two main fixed costs to run this business are that $55 million of CapEx and the, call it $30 million-$35 million of interest expense. When we think about free cash flow and the significant potential that we have, once we cover those fixed charges, call it $100 million, every dollar of incremental EBITDA will drop to the balance sheet at $0.75 on the dollar, effectively just normalized for a 25% long-term adjusted tax rate. 2025, to your point earlier, is going to be a little bit noisy because we have the cash payments associated with the legacy RXO restructuring and the synergy targets, which we keep moving higher.
But if you think about it on a normalized basis, once you cover that $100 million and we're doing, call it $400 million, $500 million, $600 million, pick whatever EBITDA number you want, all you have to do is take that $100 million of fixed costs, and then 75% of that delta hits the balance sheet.
Sorry, I was thinking maybe those were integration costs, but it's legacy restructuring. Can you talk maybe a little bit more about that?
Sure. So we talked about over the last two years, prior to this excludes the synergies associated with Coyote, we've taken out $65 million of annualized costs of the model as we looked, and most of those are structural in nature. So when you look to the, it's all about priming the operating model for incremental leverage when the cycle does recover. So the charges this year are specific for the most part to the synergy targets that we outlined. The cash outflow, though, is going to be a component of both synergies as well as the restructuring activities from last year.
Okay. Can we please cue question number five? In your opinion, what multiple of 25 earnings should RXO trade? Thank you all for this. All right. And then question number six, please. What do you see as the most significant headwind facing RXO? Core growth, margin performance, capital deployment, or execution and strategy? And Drew, we only have a few minutes left, but I think we want to come to the long term, though. What is the true earnings power of this combined company, and how should investors frame that?
Yeah, I think we go back to what we said earlier. When you take the $65 million of the acquisition, you take out the at least $50 million of costs, and then you've got to pick your gross profit per load and prove it. When you talk about legacy Coyote being 15% below their average, excluding the COVID highs, you talk about legacy RXO being over 20% below, and knowing that every dollar of gross profit per load is more than a million dollars of EBITDA to the bottom line on an annualized basis. You talk about being able to grow Managed Transportation farm and the synergy that it provides to the rest of the organization. We onboarded hundreds of millions of dollars of freight last year into Managed Transportation and have a pipeline that's over $2 billion.
You talk about Last Mile that is going out in an industry that they're already the market leader and they're taking share in a significant way. The tailwind that that business has right now as we go out, we're very confident in where we're heading for the long term.
I guess, is there a range, though, of potential earnings?
We haven't put out a range of numbers. We put out at the time of spin that it would be $500 million of EBITDA by 2027 organically. Now, when we did that, I don't think we were expecting a three-year freight recession at that point. But the things that hold true for that, for the organic growth of legacy RXO, and that was all organic driven, gross profit per load, volume growth, Managed Transportation farm, and Last Mile improvement in operational EBITDA are all still there. And so could that have gotten pushed out a little bit because of the downturn in the freight recession being longer than what anybody expected? Yes, it could have. But the long-term earning power of the business is still exactly what we thought it was.
Another way to think about it also, Brandon, would be historically RXO's brokerage business has averaged mid-cycle, call it mid-single-digit type EBITDA margins, as low as low single digits during a downturn, during the peak. I don't think any other brokerage has ever done this before. We were double-digit type EBITDA margins. There's no reason with the benefits of scale associated with the Coyote acquisition that we cannot be at least that when you think about the ability to drive further operating that combined revenue of $7 billion plus now and what that means in terms of normalized earnings. Hopefully.
And I know there's also been concern too because I think UPS is a big customer of Coyote, right? And they obviously have their own headwinds this year and next year. Is that impacting the core business as well?
Yeah, for UPS, great customer, long-term relationship. Coyote, obviously. About it being at the time of acquisition around 10% of Coyote's overall gross margin dollars. For us, one of the important things in the acquisition was to be able to lock up a long-term contract with UPS that requires us to give great service, but also has volume commitments with it as well. So we see opportunity, just like with any customer. If we go out, Brandon, and we've got good service, we're creating solutions that work for them, we've got great technology, and we're building strong relationships, there's no reason we can't grow.
Okay. And then I guess we're about a minute left here. Just what do you tell shareholders? Is this becoming like a 2026 story when we really see this lever, or can it be faster?
I think it depends on the shape of the recovery, and I'm not going to call the shape of the recovery because I don't know, and I don't think that anybody knows. It becomes a 2026 story. If you start to think about the strong synergies that are coming out, coming on one system within purchased transportation , and it's a slower recovery within the market, sure, it starts to become a 2026 recovery, but if you start to see volume getting pulled forward with tariffs, if taxes go in and people start spending more money in retail and e-commerce, if there's a weather event that happens and it becomes a V-shaped recovery, which we've seen many times through different cycles, then it's game on.
All right. Well, gentlemen, thank you very much. Pleasure having you here.
Thank you.
Yep. Thanks, guys. Thanks, Drew.