Get started with the next presentation. For those that don't know me, I'm David Hicks, associate analyst here at Raymond James, covering transportation. This afternoon, we have RXO with us and presenting, we have Chief Strategy Officer, Jared Weisfeld, as well as Head of IR, Kevin Sterling. Maybe Jared, can you just, it's a generalist conference. I know you've been here the last couple of years, but love just for you to give a kind of brief backdrop of RXO and kind of some of the markets that you play into.
Absolutely. Thanks for having us again. Really appreciate it. RXO, we spun out of XPO back in 2022, and we are now the third largest provider of broker transportation in North America. If you think about how our business is composed, about 70% of our business is truck brokerage, of which a large majority of that is full truckload, and it's about 75% of the business, 25% LTL brokerage. 20% of the business is last mile, where we are the largest provider of big and bulky in the United States. The rest of the business is managed transportation, where we go ahead and act as the transportation department for some of the largest shippers in North America. Think about outsourcing very sticky three to five year type contracts.
Overall, RXO participates in a $750+ billion TAM. Within the brokerage space, it's a $400 billion TAM, of which brokerage continues to grow from a penetration standpoint. RXO continues to take share within that space.
Okay. Great overview. I guess we'll just start on the current environment. Obviously, we've been in the doldrums for three and a half years until about six months ago. The supply driven catalysts. Can you maybe just talk about what that's doing to your business, to your margins, in particular, kind of how you're combating, and what kind of signal that is, kind of looking forward?
Sure. Maybe to help give everyone some perspective, typically, cycles within the truckload space have been about 12 to 18 months. To your point, it's been a long three and a half years when you think about just where we are as an industry. We had the COVID boost from a demand standpoint, combined with a ton of incremental supply that entered the market, given cheap interest rates, combined with federal funding from a stimulus standpoint, which led to the world reopening, mix shift back towards services, away from goods consumption, and all of that excess capacity still very much in the market, which has led to a longer downturn than most were expecting, to your point, three and a half years now. Where are we? What is the State of the Union in terms of the overall truckload market?
We have seen overall industry-wide tender rejections move significantly higher over the last six months in particular. We're now, as of this morning, call it mid-teens in terms of industry-wide tender rejections, which is a good proxy for the overall state of the market from a supply and demand perspective. To give some context, last year, that was in the mid to high single digits. Two to three years ago, that was low to mid single digits.
We've seen a significant increase in overall industry-wide tender rejections going up to mid-teens percentage, which is above its historical average, despite lower demand, which is really important in terms of the implications there, because there have been, which I'm sure we'll get to, a number of changes on the supply front that have taken out a significant amount of capacity in the industry over the last six to nine months, which we expect to further intensify and persist, which is a long-term benefit as it relates to the overall industry structure, but does have the near-term impact on our gross margins when you think about how the business model performs with a large majority of our book being contract in nature, so it takes some time for those contracts to reset. I said a lot there, but happy to dive into anything in particular.
Yeah. I mean, let's hit on that supply front, the supply front, 'cause it's a very different cycle than we've had in the past. Typically, it's demand driven. The precipice of that was, right, a COVID demand overshoot. Let's talk about supply. It's clearly regulatory driven. You have ELP, non-domiciled, and this is kind of went on from May to September was kind of when it started to bleed in. Stocks didn't really react until the data started to improve, and just this past week, with Dalilah Law, Trump mentioned it at the State of the Union. Can you maybe just talk about kind of where that regulatory supply is, kind of where we started six, nine months ago to just the last week, and how this can still be another good opportunity to jump in to transport land?
For sure. I wanna help frame it because these are the biggest changes to the supply front that have happened to the industry since deregulation in 1980. These are very structural in nature. They are long-term beneficiary to RXO and the rest of the industry, as well as certainly improving the safety on the roads. When you think about what is actually happening, this started back in June of last year with an executive order from the administration on rules of the road, meaning that you have to go ahead and be proficient in the English Language, and you have to go ahead and be able to interpret roadsides.
With that, you've had multiple rules come out from the FMCSA, which is affiliated with the Department of Transportation, in terms of what must be true in order to go and have an actual CDL, a commercial driver's license. You've had the final rule, which was passed a couple weeks ago, which goes into effect in two weeks from now, which basically says that you've got 200,000 non-domiciled CDLs that are effectively gonna come out of the system over the next five years, combined with continued enforcement of ELP, that's English language proficiency as well.
You marry that with what you just mentioned, which is, came right after the State of the Union last week in terms of Dalilah Law, which would actually take it another step further, whereby if this were to be passed, and it already has support from the DHS and the Secretary, it would go ahead and require within six months. Every single CDL that's on the road right now to go ahead and be renewed with even stricter standards. That would effectively be another pull forward of capacity exits. This is really, really important in terms of the overall supply-demand balance. It's having a significant impact on near term rates despite a soft freight market, driving those tender rejections up to mid-teens and line-haul rates up to almost, you know, $1.90-$2.00 a mi.
When you think about the impacts of this, what it means for RXO longer term, this means that, you know, this does have the likelihood of a higher for longer freight rate environment. Combined with the fact that as a shipper, you wanna be doing business with a scaled broker that has the compliance standards and the rigor in terms of processes to vet carriers, et cetera. At RXO, with the acquisition of Coyote, we have over 120,000 carriers in our network, a significant amount of capacity that our shippers have access to.
I think just to take it a step further, you know, to piggyback on that, think about the spot it's coming at. As Jared mentioned, it's structural in nature, it's not coming back. If you think about cycles of the past, up cycles, they would last three and four years. I can remember 2004, 2005, 2006. There will be a supply response, but it's much more measured. You know, cycles in the mid-90s would last three and four years. I think we can get back to a situation where we can have multi-year up cycles just because of the structural change in this industry, the spot it's coming at, it's more permanent in nature.
Can we maybe talk about the other aspect of that supply takeout? I get a lot of pushback, particularly on brokers when it comes to that vetting process and how important that is. I think the larger scale players like you guys, C.H. Robinson, et cetera, they do a really good job at vetting those drivers out, so you don't have that non-domiciled exposure or these exposure to these drivers that are getting taken out of the market. Can you maybe just talk about the rigorousness of your vetting process?
Absolutely, it's such a great point because this is so critical, especially when you're dealing with mission-critical freight. Our shippers need to have confidence in the supply network that we have. I mentioned that we have over 120,000 carriers. You can't go ahead and start to apply to get your CDL and then get a carrier authority and then drive for RXO within that time period. We have incredibly rigorous standards in terms of what must be true to drive on behalf of RXO. We wanna go ahead and have a vetting period where we wanna see your SafeStat score. We wanna see, go ahead and make progress as it relates to, you know, driving without incident, et cetera.
Once you finally go ahead and meet the criteria in terms of number of days of having your CDL, having your carrier authority, if you are an owner-operator, you can't then go ahead and just drive for us and book on behalf of us and then book that load digitally. We wanna know who we're doing business on both sides, and that's such an important point when you think about the composition of the model. You know, we've got a two-sided network with incredible scale on the shipper side and on the carrier side. On that carrier side, you know, our shippers aren't gonna have confidence in terms of doing business with us unless we've got a significant base of carriers that are incredible high quality.
I think too, just to even take it a step further, you know, overall what's happening, it's gonna make roads safer, the industry safer, but it's also lately, the past couple of years, we've heard a lot about fraud, the rise in fraud. I think this is gonna help cut down on that as well.
Okay. We've hit a bunch on the supply side. Let's get to demand. I think that's brokers really need demand more than maybe an asset-based carrier would, just because of that supply pinch that you guys are facing on your gross margins. We're here in early March, can you just maybe give us an update, kind of what you're seeing out there on the demand side?
From a demand side, you know, it's continued soft environment, which we talked about on our earnings call a few weeks ago. You know, we think about RXO, our truckload volume has been down pretty similarly in terms of year-on-year declines, call it low double digits for the past few quarters, and embedded within our Q1 outlook is the same type of volume decline year-over-year. I would say, you know, we talked about from an end market standpoint, some industrial and manufacturing last quarter was stronger than the rest. That was down about 1% year-over-year versus overall down 12. Obviously, this morning you saw another strong ISM report with the new orders component being above 50. That's about 20% of our business.
We'll certainly continue to pay attention to that particular metric. If you actually go ahead and look at freight metrics in terms of overall volumes relative to overall macro indicators, there's actually a very strong correlation between industrial- related volume, freight volume, and the new orders component of the ISM. Continuing to see positive expansionary data points with respect to ISM is actually really, really important. We're certainly keeping a close eye on that. I'd say the irrespective of that, what we're focused on is not only, you know, the broader environment, housing is also another strong component with respect to freight and mortgage rates just hit a four-year low last week. What is within our control, and that is our brokerage late stage sales pipeline.
We made a big deal talking about this a few weeks ago on earnings, and I just wanna emphasize that this is the best indicator in terms of the future health of our business, and that is up more than 50% year-over-year when you look at it relative to Q4 of 2024. That's apples to apples with Coyote in both periods, and I think it just speaks to the strength of the momentum that we've been building over the last 12 months.
That's a great overview on the demand front. Getting in more kind of, I think it was 1.5 years ago, the Coyote deal, it's underperformed expectations. Market's been obviously worse than you expected as well. You have outlined a number of synergies, kind of I think it was $70 million in total, $60 million OpEx, $10 million on CapEx. Kind of we haven't yet kind of really seen on the purchased transportation side. Can you maybe talk about that opportunity in front of you and kind of why it's been more difficult to see in the numbers?
Maybe before purchase transportation, you brought up the Coyote acquisition and closing in September of 2024. I think it would also maybe help to ground the audience, as it relates to what's been happening over the last 18 months. This was one of the largest acquisitions that has ever happened in the space, and we moved very quickly from an operational standpoint. We're incredibly pleased with the progress that we've made in terms of the integration of the business. We're on one tech system, we are on one pricing system, the sales force is fully integrated. The integration is materially done, which is a huge accomplishment. To your point, from a financial perspective, results certainly are not where we expected them to be.
I think part of that, no doubt about it, when we acquired Coyote, we thought we were near or at the bottom of the cycle, and the market absolutely took a step function lower in 2025 versus 2024. We think we're dovetailing. I wanna dovetail that into the pipeline commentary that I gave earlier. You know, even though the market took a step back, and you saw our truckload volume decline last year, we are entering in 2026 with significant momentum given the strength of that late-stage sales pipeline. On the cost side, you're absolutely right. We took out $70 million of total cash costs, of which $60 million was operating expenses, and $10 million was CapEx, for a total of $70 million.
The one area of additional opportunity where we are still making a lot of progress towards is on purchased transportation. If you think about the combined purchased transportation cost across the business within brokerage between legacy Coyote and legacy RXO, it's almost $4 billion. Every percent that we can save obviously equates to about $40 million, and with a strong flow-through down to EBITDA. I think the heart of your question was why haven't we necessarily seen the benefit there? We're still making progress on that. We're about 30 basis points of incremental improvement relative to pre-Coyote, which is good, and I think there's very much a path towards 100 basis points. It's really important to remember that that is a relative concept, so it's gonna depend on market conditions.
If you're on an environment like we've been in for the last six months where buy rates are moving higher, it's gonna help offset. It's not gonna act. It'll be more about cost avoidance as opposed to actual flow through in the P&L.
I think on Coyote around a year ago, you were saying there was a 5%-7% price differential between Coyote and RXO proper. Has that gap closed? I know that was part of kind of the volume shedding that happened last year, but has that pricing gap closed? Do you feel kind of confident that the two are completely synced at this point and kind of ready to go to market as one entity?
On the latter, absolutely, to the point where I can't even answer that question for you because the integration is completely done or materially done. When you think about just where we are as an organization, there's no ability at this point to go ahead and look at, you know, existing legacy Coyote contracts relative to existing legacy RXO. This is a true integration, which is materially done. We talked about on the earnings call how our expectation for the combined business was 2026 versus 2025 from a contract standpoint to be up low to mid single digits year-on-year.
The key there is once you then go ahead and, you have that relief on the contractual side, given the cost of inflation with respect to transportation costs has moved significantly higher, you'll get some rate relief, which will help in terms of the gross profit. The question there is: Can we go ahead and capitalize on that large contractual volume footprint and earn spot opportunities, mini-bids, special projects, which are materially more accretive relative to the overall gross profit per load of the company?
One thing you guys are kind of playing catch up on to, say, the other large brokers in the industry, and it's really a function of the spin from XPO and LTL, is that you had very minimal LTL exposure as a brokerage when you were part of XPO, and some of the brokers out there today are 50%, 60% LTL, and I think you just said 25% at the start. Can you talk about that opportunity, what it does for the financials, why you wanna continue to grow into LTL, especially when we're kind of on the verge of a cycle inflection in TL?
Yeah, no, that's a good point, Dave. A good question. As you think about kinda our LTL growth, where does it stem from? It really stems from our existing truckload customers. Whereas you think about the majority of our truckload customers, say 90% of their freight is TL, but 10% of their freight might be LTL. Well, guess where they spend 90% of their time? Is on that 10% of LTL shipment. You think about pricing, damage claims, it's very difficult. What we do for them is we take that headache, we take that pain, we take that pinch point off their plate and handle that for them.
We're able to aggregate a lot of these smaller LTL shipments, we use probably 50 or 60 different LTL carriers, a lot of the regional carriers, a lot of the national carriers, but we're able to do this service for them. It's a fully automated transaction. It just makes their life easier. If you look at some of your larger brokers, you mentioned Robinson, remember Echo, they heavy LTL. We're looking to lean into that and grow that business. That business it's less cyclical. You know, it tends to carry a higher gross margin percent, lower gross profit per load dollar amount, but a higher gross margin percent.
Over time, it'll probably make our business a little bit less cyclical. We're looking to grow into it. It's a steady business. It's fully automated, but it's really stemming, and really what we're doing is solving this problem, this headache for our TL customers, where the majority of their business is TL, but they're spending the majority of their time doing LTL. I think it'll continue to grow for us.
To dovetail off that, which plays into the last part of your question, just because we are focused on growing that LTL business, it's gone from, you know, almost nothing to mid 20% of our volume, does not mean that we're pivoting from truckload, right? When you think about where we are from a cycle perspective, load- to- truck ratio at 10: 1, tender rejections on truckload at 15%, you know, we are aggressively going after truckload business as well as growing the LTL. If you think about the strength of that pipeline that we talked about, that was materially driven by truckload. We wanna do both, capitalize on, when the cycle does turn, as well as continue to grow LTL as a percentage of the mix.
We're not only preparing for the upturn, but for eventually, whenever that next downturn is, how do we trough at even higher levels of EBITDA?
Okay. We can't escape it. If your competitor brings it up all the time, and I'm sure every company here is being asked about AI. Can you maybe just talk about kind of what's needle moving? like you guys have been talking about it too, maybe just not as vocal, kind of what it's done for your business and kind of where you can apply it down the line.
When we think about leveraging artificial intelligence across the business, we firmly believe there is a significant opportunity to structurally improve the margin profile of the company and the industry. It is an incredibly powerful set of tools that will enable us to run at higher levels of profitability. How do we think about AI? We think about it through four key pillars: volume, margin, service, and productivity. At its absolute highest level, how do we think about making our people become that much more efficient, i.e., driving significant volume growth with disproportionately relative to headcount growth, so decoupling volume growth and headcount growth? How do we think about ways to enable incremental revenue and margin to the P&L, but also without adding headcount?
I think a couple tangible real-life examples to the audience which might be helpful, we talked a lot about last quarter, you know, the introduction of our proprietary spot quote agent. If you think about an individual on the brokerage floor, their day is all about exception management. Something's always going wrong with a load and how to go ahead, and they need to clear the board. Naturally, when there are inbound requests, sometimes it can take longer to respond, and there are manual processes involved. How do we go ahead and leverage AI for all of that?
I think what's important, I think that can differentiate RXO versus some of our competitors, it's not just about outsourcing to AI, but it's also about bringing the human in the loop, where ultimately how do we combine the power of the tech, the power of the platform, and then bringing that human in the loop to ensure that we're adequately responding to our customers' needs. I think that's really important and powerful, and that will certainly help unlock incremental margin opportunities longer term. I talked about exception management. We've got an internal proprietary GenAI chatbot, where ultimately instead of pulling disparate types of requests, there's a centralized chatbot for the ability to help from an exception management standpoint, the ability to leverage agentic AI in terms of carrier reps.
We've talked about, you know, mundane tasks that are done on a daily basis on behalf of the carrier reps. Can we have an agent do that instead? We've seen significant benefits in productivity. Last quarter, we talked about on a rolling 12-month basis, productivity was up 19%. We talked about on a two-year stack up almost 40%. Continuing to do more investing in technology and decoupling that headcount growth with volume growth is a significant opportunity.
That productivity measure it's loads per head per day.
Yep, absolutely. We've seen headcount come down over the last, call it, I think it's mid-teens over the last two years or so. Can you maybe compartmentalize that? How much of that has been AI? How much of that has just been lower volumes and cutting, maybe Coyote was a little fat and you had to cut some heads there? Then , looking more forward, is it more all kind of that's all gonna be AI rather than kind of cutting the fat, if you will?
The way I would characterize it is that we've taken out $155 million of annualized costs since we've spun from XPO. In the first two years of spinning, we took out about $67 million of costs with respect to just running a more efficient organization. We spun out with a very healthy cost structure, there were significant opportunities to go ahead and streamline. When you think about the Coyote side, we talked about $60 million of operating expenses that came out. When we talked about in our Q4 earnings report with respect to another $30 million new cost initiative in terms of costs that were coming out on an annualized basis. Altogether, more than $155 million.
You know, you think about the efficiencies, you think about some of the duplicative roles, especially on the synergy side with respect to Coyote. There is certainly an AI component. We haven't talked about what that breakdown is, but, you know, a good percentage of that is, you know, just good old-fashioned, cost-cutting and becoming more efficient. There have been significant efficiencies in the organization over the last six to 12 months, in particular by rolling out AI, and we're seeing the benefits in terms of the P&L.
There's been a lot of chatter over the last two, three weeks in particular about AI disruption for not just freight brokers, but commercial real estate brokers, anything kind of where there's this middleman. Can you talk about kind of what moat you guys have as RXO, kind of the ownership of the data, how important that is that others can't replicate, and why you as a large-scale broker that has their own tech kind of has that advantage over the smaller brokers where they can't really compete with you guys?
It all started with a karaoke press release the other the other week. I was tempted on grabbing one of those karaoke microphones to play off that. When you think about what differentiates RXO and the moats that we have in terms of competitive barriers to entry, this is a two-sided network at scale dealing with Fortune 1000 shippers and over 120,000 carriers. This is not that is something that is replicable in terms of from an AI standpoint. We got a sneak preview of this probably 10 years ago on digital brokers that came into the mix with the notion of disruption. The reality is this business is built on trust, service, and relationships.
If you can't go ahead and deliver high-quality service to these types of shippers that we're talking about, then it doesn't matter whether or not you're leveraging digital technology or you're leveraging AI. I think that it goes back to the earlier point. AI, I actually think, is a huge opportunity for RXO and the industry to really improve the structural profitability of the industry longer term. We're gonna embrace it. You know, when you think about how we define RXO, we are a tech-enabled organization. We are not a technology company, but there is a significant opportunity. We spend over $100 million a year in tech because we do believe that enabling the organization with artificial intelligence, enabling the organization with GenAI, agentic AI, and all of the automation capabilities provides a huge opportunity for us longer term.
Think about it too, just to build on that. You know, the market here, with all the supply that's come out, you know, we help our customers manage chaos and volatility. You can imagine there might be a lot of that happening soon. That's why they're gonna lean into someone that's a reliable service provider that's gonna be there to pick up their freight. You know, as the market turns, I think you're gonna see shippers just really lean on some of their core providers to make sure that service is there.
That's actually a great point. I wanna emphasize we're seeing this in bid season. We are getting feedback from our shippers that they are downsizing the amount of carriers and brokers that they're using, in particular in this bid season. I think that'll accrue to the benefit, certainly of RXO and top brokerages. You're seeing that, and I would imagine that you're gonna see a lot more of that going forward because of all of the policies that are occurring right now in the federal government in terms of supply. If you're a shipper, you want access to the highest quality capacity that's out there.
On that with you guys acquiring Coyote, it really helped bring about more industry consolidation. I think brokerage is now 50% the top 10 make up more than 50% of the market. Very different than kind of the asset-based providers that you're working with on the carrier side. Do you expect kind of more of the big to get bigger, or can AI help these smaller brokers compete with you guys more efficiently?
I think both can be true. To the answer to the first question is absolutely, I would expect continued consolidation. Three weeks ago, you saw Echo acquire ITS. I think the large will continue to get larger. The benefits to scale in this industry are tremendous in terms of bringing down the cost to serve, spreading out more volume across a relatively fixed cost structure. If you think about what sits between gross profit and EBIT, two-thirds of that is generally fixed or semi-fixed in nature. If we've got the ability to go ahead and scale up the organization with incremental volume, there can be strong contribution margins and drop-through.
I think that's really important, and if you think about what that means from a free cash flow standpoint, whether or not we're doing $200 million or $600 million, if adjusted EBITDA, just to sort of put some math out there, our CapEx is generally gonna be pretty close to $50 million, and our interest expense is gonna be unchanged. The cumulative free cash flow generation, I think speaks to how important scale is in this industry. I do think that, you know, this is a winner take most type market structure, and, you think about the top 10 representing about half the market. I would imagine, over the long term, you could certainly see the top five represent that or, and then potentially more.
Yeah, absolutely. maybe we talk a lot about brokerage, but you also have the largest last mile business here in the U.S. Can you just talk about kind of the industry fundamentals in that industry, kind of what you're seeing on the ground there? You have kind of managed transportation. You kind of have some other components just from the spin. Is there any thought to maybe rationalize or kind of rationalize some of those assets, kind of consolidate and double down more, even more into brokerage? Just any thoughts there would be helpful.
Well, we doubled down on brokerage with the acquisition of Coyote. When we think about the rest of the product portfolio suite, we really like our portfolio. When you think about the last mile side, to your point, you know, we are the largest in the U.S. in terms of big and bulky, about a $1.2 billion revenue run rate business. Demand trends post COVID, not surprising to anyone in this room, have been very soft within big and bulky, no doubt tied to the state of the housing economy over the last three to four years. Would love to see, you know, continue to move lower on the long end of the curve, and interest rates now at a four-year low in terms of mortgage rates. Let's see more of that.
I think that's really important for the last- mile business and also really important for the brokerage business. Freight transportation industry is generally 15%-20% tied to that of housing, so any relief there would be a positive. Despite the soft, housing market and soft demand for big and bulky, last mile had a very good year in 2025, outperforming from a stop standpoint with stops actually growing year-over-year, which speaks to the market share gains that we've had. We have seen a slowing of stops, and we do expect that to continue to decelerate just given the tough comps.
But we feel like as the largest provider of last mile in the U.S., we are very well positioned to continue to grow share with our existing and new customers and then capitalize on when the housing market does indeed turn. On the managed transportation side, you know, we had a great quarter in the fourth quarter, onboarding or announcing more than $200 million of managed transportation Freight Under Management, FUM, that came onto the network. It was a really strong quarter. You think about that business, I mentioned earlier, three to five year type contracts, really sticky revenue, and the synergy between managed transportation and the rest of the organization, especially our freight brokerage business, is incredibly strong.
When you think about managed transportation becoming a customer to our brokerage business, we call them synergy loads, which were up year-over-year last quarter. You think about synergy loads, where we go ahead and act as that transportation department for our shipper, and then they know they've got access to dedicated capacity within our brokerage business, and that really is a strong symbiotic relationship.
We just have a few seconds left, maybe just talk about capital allocation. You guys are still kind of a young company in terms of the market since the spin. just a brief overview there, would be helpful kind of once we get the cycle to turn and we kind of get that free cash flow flowing.
Absolutely. We're pretty balanced in terms of how we think about it, and it's been the same guiding principles that we've had since day 1 post-spin. We think about it across three main vectors. Organic growth, we're always gonna invest back into the business. Share repurchase program. We've got an authorization that's out there. We've only used a little bit of it, over the last few years, but that is very much an option. Lastly, opportunistic M&A. We obviously engaged in that in a pretty big way with the acquisition of Coyote, which closed in the back half of 2024. We're gonna engage in a capital allocation philosophy that generates the strongest return for our shareholders longer term.
Great. It looks like we're at time. Thank you guys so much.
Thank you so much.
Thank you.
Appreciate it.