RXO, Inc. Q3 FY2024 earnings call

• Completed the transformative acquisition of Coyote Logistics in mid-September, with integration ahead of schedule and early wins seen. Raised cost synergies estimate to at least $40 million. Balance sheet strengthened with leverage down over 40% due to equity financing.
• Despite a soft market, RXO delivered solid financial results in adjusted EBITDA, adjusted free cash flow, and brokerage gross margin while completing the acquisition.
• Continued momentum in complementary services with significant new customer wins in Managed Transportation and 11% growth in Last Mile stops. Integration of Coyote is ahead of schedule in employee engagement, customer care, and tech integration, with positive customer feedback and early cross-selling opportunities.

Combined revenue for RXO in Q3 2024 was $1.04 billion with a gross margin of 17.3% and adjusted EBITDA of $33 million. Brokerage revenue was $655 million, representing 61% of total revenue, with a brokerage gross margin of 13.7%. Complementary services revenue was $419 million, 39% of total revenue, and had a gross margin of 21.5%. Legacy RXO had revenue of $935 million, down 4% year-over-year, with adjusted EBITDA of $31 million at the midpoint of the guidance range. Last Mile stops grew by an impressive 11% year-over-year.

• Expect fourth quarter adjusted EBITDA to be in the range of $40 million to $45 million. Anticipate a muted peak season and continued soft freight market conditions.
• Technology integration of RXO Connect is expected to be substantially complete within the first 12 months of the acquisition close, with annualized cost synergies raised to at least $40 million.
• Fourth quarter cash balance expected to be approximately $5 million to $10 million. Free cash flow impacted by working capital timing differences, but much of the cash associated with legacy Coyote's working capital headwind has been collected in Q4.

• Prolonged soft freight market conditions affecting demand and supply.
• Macro environment uncertainties including potential impacts on retail inventory and industrial labor markets.
• Potential customer or employee attrition during the integration of Coyote Logistics.
• Impact of market tightness on buy rates and margins, affecting gross profit per load.

Q: About the higher synergy target of $40 million and integration risks, including customer and employee attrition A: Jamie mentions synergy increase from technology integration ahead of schedule and better vendor spend visibility. Drew talks about retaining top talent through retention agreements, spending time with customers for retention, and focusing on tech integration for efficiency.

Q: On the fourth quarter outlook and special projects A: Jared discusses seasonality challenges due to market tightness and increased cost of purchase transportation. Drew mentions special projects in October related to hurricanes and retail, with RXO being customers' first call during times of stress but expecting less carryover to November.

Q: Regarding Last Mile performance and pricing A: Jared states Last Mile stops are expected to grow year-over-year in Q4 but at a slower rate than Q3. Jamie mentions ongoing pricing initiatives in Last Mile with expected incremental impact on P&L.

Q: About cash needs and capturing spot business A: Jamie says cash outflow for synergies is approximately $25 million, with $12-$15 million spent in Q4 and the rest next year. Drew talks about being positioned to capture spot business when the market turns, with strong customer relationships enabling them to receive spot loads and projects.

Q: On peak season expectations and customer conversations A: Jared mentions positive retail inventory positions but weak industrial new orders. Drew says UPS business is profitable but contributes to margin mix decline.

Q: About productivity and headcount A: Jared states productivity in legacy RXO brokerage improved by 15% year-over-year, with significant opportunity for further improvement through technology integration. Drew mentions ongoing efforts to increase productivity through technology tools from both systems.

Q: On volume growth and gross margin convergence A: Drew says RXO has long-term volume growth potential, outperforming the market historically. He notes Coyote's gross profit per load is behind legacy RXO but both groups have opportunities to improve as the cycle inflects