Good afternoon, everyone. Thanks for joining us today. For those who don't know me, I'm David Hicks. I'm Associate Analyst here at Raymond James, covering transportation. Really excited to have RXO with us today, CFO Jamie Harris, and then Chief Strategy Officer Jared Weisfeld, as well as Kevin Sterling, Senior Market Strategist in the audience, and also helps head up the IR front. So Jared and Jamie, we'd love to just kind of, it's a generalist conference, we'd love for you to just kind of give us an overview of who RXO is, kind of where you've been, and where you guys are going.
Sure. Thanks so much for having us. Really appreciate it. And good afternoon, everyone. So RXO, we spun out of XPO over two years ago now, and we are the third largest freight brokerage here in North America. So we significantly increased our size within the freight brokerage space last year with the acquisition of Coyote Logistics from UPS. And with that, we more than increased our truckload volume by about 125%, increased more than doubled our LTL volume, really providing significant scale and services and capabilities to our customers. Our truck brokerage business, we participate in a large, massive $400 billion for-hire truckload market, and we've got less than 1% share of that market. So still very early days in terms of penetration, and RXO continues to grow and take share within a market that is taking share.
We are supported in the brokerage business by our complementary services, and our complementary services are composed of our managed transportation business, where RXO acts as the transportation department on behalf of our shippers, and we've got approximately $3 billion in freight under management within managed transportation. That business is categorized by long-term, three to five-year type contracts, very sticky relationships with our customers, and then our last mile business, where we are the leader in North America for big and bulky, and continue to grow share there, and stops in our last mile business, we're up high single digits last year, and think about appliances, dishwasher, fridge, fitness equipment type products, where we go ahead and we go in the home, we install on behalf of our customer, and that business is really important in terms of brand representation, where we are acting on behalf of our customers.
Service is incredibly important with respect to last mile.
Great. Great. And we'll obviously hit on the cycle, talk about Coyote, but I actually want to start kind of more topically on tariffs, kind of with all the rhetoric that's been out there, Canada and Mexico starting tomorrow, potential European tariffs, additional Chinese tariffs. Just want to kind of level set, kind of where are your exposures? Are you more exposed to the cross-border side, more at the ports? If there's any color there, it'd be greatly appreciated.
Yeah, so tariffs, I think the thing it does near term, it creates uncertainty more than anything else. To be determined, is tariffs a permanent item? Is it a negotiating tool? If you go back during the last administration, they were implemented in a very strategic manner, ended up not having a material impact in a lot of areas. For us, we think short term is probably a little bit of a tailwind because we get some increased volume that we're handling. We see customers that are kind of scrambling to get ahead of the tariffs a little bit as much as possible, but you can't pull forward with so much inventory. Long term is if, in fact, production moves back to the U.S., we think that's net-net good for ground transportation.
That intermediate term, while there's uncertainty about what to do, where do I put a plant, are they on, are they off, that's a little bit of a headwind. But we think net-net long term is probably good for overall ground transportation.
Great. And then just kind of turning to the cycle, it's been a big kind of one of the most prolonged cycles really ever. And we're kind of starting to come out of it with supply exits. Typically, it's been kind of demand-driven, kind of getting out of the cycle to really get things going. So are you still seeing supply exit? Kind of what are the, and if kind of in combination with that, are you seeing kind of any demand catalysts that you'd like to call out with the potential, I guess, near-term negative of tariffs?
So on the supply side, we are still seeing supply exit, and that's both on the carrier side as well as on the brokerage side. So on the carrier side, I think you're at the point, and you've been at the point, quite frankly, where unit economics for most carriers are unsustainable. If you look at the average cost per mile for many of the carriers, it's somewhere between $1.80-$1.85, excluding fuel versus the current spot rate at about $1.60. So that spread is obviously detrimental to many carriers. So you've seen carrier exits every month for almost two and a half years now. And there were a significant amount of carrier authorities that were started up during COVID, which makes sense in terms of the demand that came out after the pandemic, combined with a very low cost of capital.
You had a lot of the supply. A lot of that supply has been worked through, but we still are in excess supply. I'd say encouragingly, we spoke a bit on this on our earnings call. The market is now more balanced than it has been in the last two and a half years and is more susceptible to changes in demand than any time that it's been over the last two and a half years. You saw that really manifest itself in the month of December of last year, where tender rejections hit 10% for the industry, the highest in two and a half years. You've seen industry KPIs make two and a half year highs. With respect to year to date 2025, even though they've come down relative to December, they still are up nicely year over year.
We're making higher lows, and I think we are making progress as it relates to capacity in the industry.
Yep, that's great color. And then just kind of shifting over, obviously very splashy deal last year with the purchase of Coyote. Would just love to just kind of give us kind of why you wanted to kind of double the size, more than double the size of your brokerage piece, already kind of your crown jewel asset. Kind of what did you see in the Coyote asset that really made it an attractive deal for you guys?
On the strategic rationale for Coyote, ultimately, this is a business that benefits significantly from increased scale. If you think about being able to go ahead and increase our truckload volume by more than 125%, increase our LTL volume by more than 100%, and bringing down our ability and bringing down our cost to serve throughout the organization and increasing efficiencies, right? If you think about duplicate vendors, duplicate roles, leveraging the same back office, being able to go ahead and take that fixed cost base and spread more volume across it.
Ultimately, I think you sort of look at the strategic rationale and the merits of the acquisition with respect to limited customer overlap, very different vertical exposure in terms of food and beverage with legacy Coyote and legacy RXO was much more industrial, automotive, retail, limited carrier overlap, where legacy Coyote was more owner-operators and legacy RXO was more owner-operators and legacy Coyote was larger private fleets. The ability to go ahead and then leverage all of that with a common technology roadmap where we're going to be sunsetting their product, Bazooka, later this year, that's going to yield a significant amount of purchase transportation and sg&a synergies.
So you kind of touched on synergies a bit there. You laid out $25 million kind of at the point of acquisition. Now you're already up to $50 million. And you kind of talked about kind of why those synergy opportunities expanded and then kind of more importantly, kind of what ones are still out there. purchase transportation. haven't really sized it quite yet, but when are we going to start seeing that in the results? Start to hit the results.
Yeah, so if you take the $25 million-$50 million, when we announced the deal, we announced a target of at least $25 million. We believed we could beat that. But anytime you do an acquisition, you have visibility of certain things as we're able to get in and see the entire company. We're able to consolidate some real estate that we thought was there, but we didn't know for sure. We were able to get some savings and some contract sourcing to our procurement teams. We didn't have the perfect visibility. Once we got better visibility, we see that opportunity. And I think as we look at the technology, I mean, we are a tech-enabled business. It is our platform along with our customer relationships. That's what drives our business.
As we made a, I'd say, a very quick decision on moving from Bazooka to Freight Optimizer, which was the RXO platform, it saved us a lot of time, first of all, and we also had a very clear roadmap about where we wanted to go with our technology platform. Those are the big drivers from 25 to at least 50. In addition to the 50, that is an OpEx number. There's another $10 million of opportunity of CapEx primarily from technology CapEx that we'll be able to save. Then you mentioned the purchase transportation, enormous opportunity. We believe we'll begin to see that in the back half or the last quarter of the year. That's really a technology-driven opportunity where today we've got a few loads where we're covering a legacy RXO customer with legacy Coyote procurement and vice versa.
But to do that on a large scalable level where there's real savings, that's really post-technology integration. We have framed that up in the context of not an exact number, but think about we're roughly $4 purchase transportation in our business right now. If you can get 1%, that translates into a potential $40 million number. Could we do better? We could. Could we do slightly less? Maybe. But we think it's in that ballpark. And so we think that is a big opportunity. And as inflationary pressures hit the transportation side, the chance of synergies there is actually even bigger. So we think we're very pleased with where we've landed on synergies. We think it'll be a huge tailwind for us as the market inflects.
I think some of the other kind of opportunities out there are just closing the gap with Coyote up to RXO standards, whether it be on gross margins. You've talked about a 5%-7% kind of behind on pricing. Can you maybe talk to, are there structural components where you can't get the gross margins of Coyote back to RXO levels? And kind of how long is it going to take that pricing gap to really start to converge? Is it going to be years, one bid season, multiple cycles? Would just love some color there?
I'll kick it off and let Jared complete, but if you think about the structural gross margin, when we announced the transaction, it was very clear the legacy RXO margins were higher than legacy Coyote. We knew that to be the case. They've got some pieces of their business that are by definition lower gross margin, still excellent pieces of business. They produce really good gross margin dollars for us. It's pieces of business we want to grow, but it is structurally lower. That being said, there are opportunities to improve the gross margin profile of the other parts of that business up towards where legacy RXO has been historically.
On the second part of the question, how long does it take to implement those types of changes, right? I'd break it down in two components, right? If you think about gross margin percentage, gross profit per load, two components of that revenue on the cost side. On the revenue side, one of the key strategic advantages of closing Coyote early was that we were able to go ahead and approach this bid season that we're in right now unified as one company with one holistic bidding strategy. We've already talked about our expectation of contract rates for 2025, combined org pro forma being up mid-single digits year over year relative to 2024. You're seeing that play out right now. On the cost side, you'll start to see that play out later this year.
The tech integration we are on track to be substantially complete by the end of Q3, and to Jamie's point earlier, once we are on one tech system, the ability to go ahead and bring down purchase transportation is significant, so that's not going to happen overnight, but you think about the learning curve with respect to learning Freight Optimizer, but also an incredibly tenured carrier rep organization at legacy Coyote, so you can certainly start to achieve those synergies once everyone is up on one system.
And then just digging more into the gross margins, particularly for Coyote, they lag RXO. There's kind of, you have a, I mean, your largest customer in that business, the former owner, UPS, makes up, I think you said 10% of gross margins. Would imagine that it's a lower margin business compared to, say, the SMB that you guys have also talked about. Can you just talk about kind of the three buckets kind of on the gross margin side? Is UPS, is that a good profitable customer to have even though it is operating at lower gross margins? Can you kind of just walk us through that?
Yeah, so the legacy customer, legacy owner, I mean, is a great piece of business. We had a great peak season. It's a good business throughout the year. It's a business we want to grow. It does have lower margins, but it has, again, it contributes really good gross margin dollars to the company. It's a piece of business we like a lot. When we bought Coyote, we knew that was there. And it was kind of one of the foundational pillars why we liked the business. The SMB business, typically, as you would imagine, a smaller volume per customer, but it carries with it generally higher margins, good opportunity.
I think personally, I think it's one of the biggest strategic items that we're able to bring from legacy Coyote over to the legacy RXO platform because we really didn't have an SMB platform built out like legacy Coyote does. So that's a huge opportunity. If you think about the balance, which is kind of called middle market slash enterprise, we think there's opportunities to bring that margin profile up in the ballpark of where legacy RXO has been.
And then kind of going back to the kind of people side of things, you've talked about, you've been able to retain a lot of the top talent at Coyote. There hasn't been a lot of customer or employee attrition on that front. But can you talk about the frontline worker? Are they skeptical of their transaction? Is that maybe an opportunity that hasn't been a productivity opportunity? Kind of as your competitor always talks about productivity per head. Can you kind of implement your own productivity into the kind of frontline worker base at Coyote that you've already done a lot of work on at RXO Legacy?
Yeah, absolutely. I mean, we think that is a significant opportunity. I mean, think about legacy RXO. With the spin coming out of XPO, we are returning to our roots as freight brokerage, going back to the original investment thesis in 2011 when XPO was started. Very similar analogy to legacy Coyote now being part of RXO, going back to their roots as a freight brokerage. So I think the legacy Coyote folks are incredibly excited at the opportunity that they have to execute on this massive opportunity within the for-hire truckload market. I mean, we are aligning incentive plans. We are approaching bid season as one combined org. There is a significant ability for them to go ahead and really reignite the volume growth at some of their customers.
And to your point on the productivity side, I think there's been part of the strategic merits of the deal was the ability to, we talk about this best of both worlds approach that we're taking across the org, whether it's people, whether it's technology. We are unifying across the legacy RXO technology system, Freight Optimizer, RXO Connect. But we're also taking some pieces of technology, even though legacy Coyote had their platform, Bazooka, which was founded in 2006 and it's an older system, actually had some very, very good technology that was born in the cloud over the last three to four years that we're able to lift and shift and bring over to legacy RXO and part of this new system.
So, as we think about productivity, we talked about last call over the last 12 months on a combined org was up 16% on a rolling 12-month basis. I think there is a significant ability to continue to advance the ball on productivity. And that can obviously have significant implications as it relates to contribution margins longer term.
Great. And then I just kind of want to shift back to the financials a little bit. Kind of when you spun out of XPO, you kind of gave a long-term target, EBITDA target of 2027, $500 million at the midpoint. Obviously, it's been one of the worst down cycles in memory for certain. Can you still get there organically or it's just more pushed out to the right? And how does kind of Coyote fit into that equation on kind of a non-organic basis?
Well, you're right. It has been a very prolonged freight cycle, much longer than I think anybody, including us, anticipated two and a half, three years ago. I mean, it's clearly been pushed out to the right. We do think, still do believe that there's a tremendous amount of organic growth ahead for this company if you look at legacy RXO standalone. But with the addition of Coyote, this is a new organization with new opportunities. As Jared said, one of the things, many things that attracted us to Coyote was the ability to scale the business. The flow-through of earnings that occurs when we do get an improved freight cycle and we are able to expand our gross profit per load and our margins. Significant amount of flow-through from a gross profit level down to an EBITDA earnings level.
If you think about a dollar of price, well in excess of 50%, could be as high as 70% flow-through from gross margin to EBITDA. Same with volume, so you put these two companies together, clearly that target has moved to the right, but the earnings power and the scalability of this business is significant, and we think it sets us up well for the long term.
Just hitting more near term on the volume growth front. Historically, I mean, you guys were just killing it against the market. It's kind of slowed down here, almost a victim of your own success, very hard to beat the comps that you've been putting up. But kind of you've talked about how we're going to get back to volume growth for the full year. When are we going to see that inflection upward in the positive territory? Is that kind of a 3Q event? And kind of how you've talked about reigniting the volume growth at Coyote, kind of how are you going to go about putting that into action?
When you look at, so to your point, bid season has been going very well, right? And you think about the feedback that we're getting from our customers, you think about the award realization that we're having gave us confidence to endorse volume growth for the full year, 2025 versus 2024 pro forma, so apples to apples, right? So to your earlier question on volume growth, volume growth, legacy RXO has been outgrowing the industry for the last decade, and a large percentage of that is organic. 2024 did take a step back, but part of that was intentional. And we've been open about this where early last year we had a view on market conditions and we took a bid strategy where our pricing moved a little bit higher.
If we sacrificed some volume, we were okay with that based on our view on where the market was going. I think as we think about 2025, we feel good about contract rates being up in mid-single digits year over year. We feel good about volume growth growing year over year for the combined org holistically. And I think that part of the opportunity here is that the ability for us to grow as a combined org we think is stronger where we have the ability to think about the capacity that we offer our customers now across everything from owner-operators up to large fleets and private fleets. Think about the service offerings that we now have the ability to offer all of our customers from Fortune 100 down to SMB.
We are a larger scaled organization, have the ability to grow fast, and we believe that we will continue to outgrow relative to the rest of the industry.
So you mentioned lower mid-singles on the contract side, but you also play into the spot market more notably on the cost purchase transportation. seen that come down pretty significantly over the last two months or so after kind of a strong start to the year. How are you thinking about that in terms of just the guide range that you've given $20 million-$30 million in EBITDA for Q1? Is that kind of going to juice it up towards the higher end just because of that cost of PT coming down for you guys?
is embedded within our outlook was that gross profit per load would improve as the quarter progressed. So we said that on our earnings call, the month of January was significantly impacted by weather. And we saw the same thing actually last year as well. This year's weather was even worse given all of the, basically half the country was frozen for a period of time where it was pretty difficult to move freight, right? So embedded within our outlook of that $20 million-$30 million of adjusted EBITDA for the first quarter was that purchase transportation would improve as the quarter progressed.
And then, moving away from kind of, I just wanted to talk more about the industry backdrop. Purchase of Coyote, an industry consolidating event. 50% of brokers is within the top nine brokers now, very different from the asset-based side on the carrier side, the carriers that you're working with. Can we expect more consolidation in the future? Is it going to be M&A driven or just organic growth? The bigger players are going to continue to get big or bigger with their scale and tech advantages.
I think you'll see a lot of both over time. This industry driven by strong customer relationships and service and technology is the two foundational platforms, and then the people element that goes into that to be able to have new technology to reach out to customers and serve, that is paramount, so as you continue to see the need for scale to offer services and a breadth of services to customers that span a lot of different areas, I think scale is important. That being said, we believe that, speaking for us, we believe we'll win on the organic side. We do think we continue to take market share from both asset competitors as well as smaller competitors in the brokerage community, but there's also strategic M&A. Coyote is a perfect example. That was a company that was out there. It was being sold.
We felt like it was a good time to buy. We felt like it was a great opportunity to scale our business and to provide services for both legacy companies that either did not have, and we think that's an important service delivery model, so we think it'll be from both.
And then kind of on the same front, we've seen brokerage penetration really expand the past decade, kind of now sitting in the low-to-mid-20s. Is that the upper bound or is there still more room to go there? Kind of what are shippers saying about kind of these larger scale brokerages and the service offerings they've had and how those have developed over time and how that's really helped drive that penetration?
We think that is not the upper bound. We think longer term penetration will approach 40%-50%. You think about the ability for a shipper to have more flexibility, access to some of the greatest technology services and functionality that are similar to that of the assets. The ability for for-hire truckload, you've got a $400 billion for-hire truckload market of which the serviceable addressable market to your point is probably around $80 billion-$90 billion. We think that SAM can double over the long term. And we think it is the larger scaled players that are going to continue to gain share in that category. You think about what shippers want right now. They want financially stable partners that can invest across cycles, that can offer services and functionality and suites of products that some of the smaller brokers cannot.
And to Jamie's earlier point, in terms of you look at the competitive landscape, not just against the asset-based carriers, but small to medium-sized brokers, a lot of capacity came in during COVID, but over the last two years, 20% have gone out of business, right? And you think that clearly we're in a soft part of the freight cycle and we have been for the last two and a half years. But I think that has certainly helped transform the industry structure where the top nine players now represent about half the market. And we think longer term, it's more of an industry, a winners take most type market structure with the larger players representing more as a percentage of the industry.
And I'll add, I think there's two, if you think macro, two big trends that I think benefit the brokerage community and brokerage competitors is one, the customers ultimately want more specialization of products. So that means manufacturers and distributors have to have bigger inventory. It has to have a wider array of offerings. That means more transport volume. That's number one. Number two, as macroeconomic cycles condense and the point from the beginning to the end of a cycle, as it gets tighter, that means there's more volatility, more special projects. That plays right into the services that we provide because we can provide good, steady service, but then we can flex up and down as needed. And I think both as macro trends are the benefit to the brokerage community here.
So I think it's been interesting when we're talking about the larger brokerages. We've actually seen, at least among the publics, their volumes have kind of been trending around market to slightly below market. So you don't think it's the smaller guys that are taking shares. It's more of a dislocation to the asset base that's just temporary, just given the strength of the down cycle. Kind of, where do you think that the puts and takes are there?
Yeah, I mean, I'll speak to RXO specifically to start. I mean, we were very open that we took a specific bid strategy last year, which influenced our volumes and ultimately that yielded the volume that it did for 2024. Over the long term, I don't think there's a question in terms of what the trends are looking like, right? If you go back 15 years ago, you were at 5% brokerage penetration and now we're in the low 20s, right? And I think that brokerage volumes will continue to move higher over the long term. That's sort of how we're thinking about it.
So we've hit a lot on brokerage, obviously kind of the crown jewel asset, especially when you layer in Coyote, it's the largest segment by far. Can you maybe talk about last mile, freight forwarding, managed transportation, and how that still fits into the equation and how those interact with your brokerage piece?
From an operational standpoint, the managed transportation business is incredibly synergistic to our brokerage business. We've got about $3 billion of freight under management in our managed transportation business. We onboarded about over $600 million of freight under management last year. And if you think about it, we are onboarding freight under management from our shippers and they view us as an extension of their shipping department. And we are helping them solve very complex real-time shipping problems. And being tied to our brokerage business, our shippers have access to what we view as the greatest service quality brokerage that's out there. So our customers, knowing that they've got dedicated access from a capacity standpoint to our brokerage, that yields synergy volumes. And that's the synergy volumes. We call them synergy loads internally and how we've communicated it.
I mean, those have been growing significantly over the last three to five years. So I think as we onboard incremental freight under management, not only does it benefit our managed transportation business, but it also benefits our brokerage business. And part of another strategic benefit associated with the acquisition of Coyote was that they had deep domain expertise in verticals that legacy RXO was not exposed to. So the ability to go ahead and get that expertise and leverage that and win new business, we're already seeing some really early wins there. On the last mile side, that business has performed exceptionally well, grew stops by about 8% year over year, 2024 versus 2023. Continue to gain share within the big and bulky category. We've got some operational initiatives in place there to reduce carrier costs as well. So we're really excited about the last mile business.
While operationally, it may not have as many synergies relative to brokerage as managed transportation does, commercially, it's incredibly important. We talked earlier about brand protection and when ultimately RXO is stepping into the home of, when we're stepping into the home on behalf of our customers, I mean, we are talking about very high-level C-suite conversations with our customers with respect to last mile delivery, right? We're going to use that opportunity to help cross-sell a lot of our other services, notably brokerage. The cross-selling opportunity within last mile is significant.
Great, and then we only have a few minutes left, so we can't escape capital allocation, Jamie. It's been interesting because we've never really seen RXO in an up market on a public because you guys spun out in late 2022. We'd love just to, I mean, we've seen the splashy deal with Coyote. What can we expect once that free cash flow really does start to flow on the up cycle, or particularly when it's kind of crescendoed and coming down on the down cycles when you really start printing free cash flow? Kind of, where should we expect that cash to go?
Yep, so cash flow is a foundational pillar of our strategic value. We just give some math around it. If you think about, we've said 40%-60% of our EBITDA should convert to free cash flow over the long term through a market cycle. Down part of the cycle, you got to cover some fixed costs. Our interest charges are about $30 million this year. This year we got about $75 million in CapEx committed. Once you pass that, you produce about 75 cents on the dollar flow through. So what do you do with that? Our priorities are organic growth, continuing to invest in technology, continue to invest in maybe penetrating other modes of transportation where we're not quite as strong, strategic M&A as we've evidenced with Coyote. And then we do have a buyback plan in place. We've not utilized a lot of it, but it is there.
That is an option as well. But organic, strategic M&A, top two priorities.
Great. Looks like we're at time. So Jared and Jamie, thank you for being here.
Thank you.
Thank you. Thanks everyone.