RXO Aktie

Welcome to the RXO First Quarter 2026 Earnings Conference Call and Webcast. My name is Ellie, and I will be your operator for today's call. Please note that this call is being recorded.

During this call, the company will make certain forward-looking statements within the meaning of federal securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release.

You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional important information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures that the company uses when discussing its results.

I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may now begin.

Good morning, everyone. Thank you for joining today. With me here in Charlotte are RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. There are four main points I want to convey this quarter. First, we're seeing clear signs of improvement in the freight market, primarily driven by supply side tightening despite overall soft demand, typical seasonality and severe weather in the first quarter.

Second, we have significant momentum within the business. Our brokerage full truckload volume improved every month as the first quarter progressed. Additionally, our spot mix increased by 500 basis points sequentially in the first quarter, resulting in a strong gross profit per load improvement. Spot mix also increased in April.

Third, we continue to secure major customer wins. In Brokerage, we're converting our significantly larger sales pipeline. In Managed Transportation, we were awarded more than $100 million in freight under management in the first quarter, and our late-stage sales pipeline increased by more than $200 million. We also saw traction with our new middle mile solutions offering. Lastly, we've accelerated our deployment of Agentic AI, which is driving significant improvements in volume, margin, productivity and service.

I'll start with an update on the freight market. We believe a supply-driven recovery is taking shape. Capacity continues to exit the market, a trend that began to accelerate late last year due to regulatory changes and enforcement. We have even more conviction that these capacity reductions are structural in nature. In addition to improving the overall safety of the industry as well as helping to combat theft and fraud, this has set the market up for a multiyear recovery when demand improves. For now, demand remains soft. Our customers are still managing through macroeconomic uncertainty, and we have yet to see a sustained increase in the demand for goods.

Shippers are becoming increasingly selective about who they work with and are choosing proven scale brokers like RXO. In the first quarter, we were recognized with Carrier of the Year awards from Heineken USA, Graphic Packaging and Rise Baking. Our customers value our exceptional service, our robust and rigorous carrier vetting process and our financial stability. These are the hallmarks of the RXO brand and they're why about half of the Fortune 500 entrust us with their freight.

With that as a backdrop, we launched what has so far been a very successful strategy for this year's bid season. As we said previously, we've been working with customers to optimize service, volume and price. On average, through bid season, contract renewal rates, excluding the impact of fuel, are up mid- to high single digits. These new rates began phasing in, in late Q1 and will continue to go into effect throughout the second quarter, helping to improve the profitability of our contractual book of business. When you take a closer look at contract business that has been awarded to RXO over the last month, rates have increased on average by low double-digit percentage. As a result, we now expect that our full year 2026 contract rates will increase by high single digits. Our prior expectation was for low- to mid-single-digit growth.

We're servicing our customers' freight throughout all phases of the market cycle, and that's translating to real business momentum. Historically, we've had about a 40% win rate on our brokerage late-stage pipeline. Last quarter, we highlighted that the pipeline was up more than 50% year-over-year. I'm happy to report that we held our win rate at about 40% in the quarter, even though the pipeline was significantly larger than it's been historically.

Now let's discuss our first quarter. In brokerage, overall volume declined by 8% year-over-year. Less than truckload volume growth of 5% was more than offset by a 12% decline in truckload volume. Volume trends are improving, however. Our success in converting our brokerage sales pipeline opportunities and improving our spot mix has resulted in full truckload volume that improved every month throughout the quarter. Another encouraging data point is that we've achieved a significant increase in our brokerage spot mix over the last few months. Our spot mix increased by 500 basis points sequentially, which directly contributed to an improvement in gross profit per load.

Spot volume increased as a percentage of the truckload mix every month in the first quarter and increased again in April. This is the power of the RXO model. Our focus on providing exceptional service and deep customer relationships through all parts of the freight cycle is enabling us to win spots, projects and mini bids now that capacity is tight. You can see the results in the rapid increase in our spot mix and gross profit per load in the first quarter.

In complementary services, Managed Transportation continues to win. We were awarded more than $100 million in freight under management in the first quarter. These wins are significant because they result in an increased synergy loads for RXO's other lines of business. Our late-stage sales pipeline is extremely robust and increased by more than $200 million sequentially. This pipeline is composed of high-quality new names and long-tenured existing enterprise customers with whom we built successful deep relationships.

We're also very excited about the early traction of our Middle Mile Solutions offering, which leverages our network of carriers and RXO hubs to integrate first, middle and last mile logistics into a single comprehensive network. The new service eliminates the need for multiple vendors and provides consistent visibility and control, creating stickiness with our customers. We launched this solution in February, and our sales pipeline is already more than $70 million. We've secured more than $20 million in wins.

Shippers continue to choose RXO because we help them solve complex logistics challenges with unique high-tech solutions that leverage our scale and infrastructure. While Last Mile stops declined by 8%, in part due to the impact of severe weather, we're seeing more positive trends within Last Mile to start the second quarter. RXO remains the provider of choice for the best-known brands in the big and bulky space. Our exceptional service and massive scale in Last Mile continue to enable us to gain profitable market share.

Overall, RXO's EBITDA was $6 million in the quarter at the low end of the range we provided to you due to severe weather, which impacted our deliveries in Last Mile. In the second quarter, we expect our EBITDA to increase significantly, driven by stronger volume across the business and a more favorable spot mix and higher contract rates in brokerage. We expect brokerage volume to be about flat year-over-year in the second quarter and truckload volume to resume its outperformance versus the market as early as the middle of the year. Jamie and Jared will talk more about our outlook in detail later in the call.

Turning to technology. In the first quarter, we made significant progress on our road map, especially when it comes to putting AI into action. The systems integration we completed last year have enabled us to move faster to build and launch smart AI tools that tap into RXO's decades' worth of data. Everything our technology team is currently working on is centered around moving beyond basic repetitive task and towards smart, proactive decision-making. We have many examples of how our efforts are already driving real results across the company, and I'd like to share an exciting one.

Late in the quarter, we rolled out an important part of our tech road map, an AI spot agent in reps' inboxes that adds to our already best-in-class quoting capabilities. While it's still in the very early days, the initial results are promising. Reps that have adopted the tool early are seeing an increase in volume and gross profit per load when compared to the rest of the brokerage organization. We expect the broader organization to be fully ramped up on the tool over the next few quarters. As we continue to mature our capabilities, we remain committed to getting these types of powerful tools into more hands. We're focused on multiplying the impact technology brings to every function within our company to improve volume, margin, productivity and service.

In summary, RXO has a unique algorithm for long-term success, larger scale, focus on profitable growth, investments in technology, long-term cash generation and a slimmer cost structure. This is the point in the cycle that really begins to show the power of the RXO model. We remain focused on providing exceptional service, comprehensive solutions, continuous innovation and deep customer relationships. And all of that is enabling us to win spot, project and mini-bid business as the market recovers. We're in the early innings of what we believe will be a sustained robust recovery. RXO is well positioned to be a major winner.

Now Jamie will discuss our financial results in more detail. Jamie?

Thank you, Drew, and good morning. Let's review our first quarter performance in more detail. For the quarter, we reported $1.4 billion in total revenue, gross margin of 14.2% and adjusted EBITDA of $6 million. Gross margin and adjusted EBITDA were negatively impacted by severe weather conditions in the quarter. There was an approximate $3 million impact, mostly in our Last Mile business. Our interest expense in the quarter was $9 million, and our adjusted loss per share was $0.09. You can find a bridge to adjusted EPS on Slide 7 of the earnings presentation. You'll note that we had an $11 million debt extinguishment loss as a result of refinancing our 2027 senior notes. I'll talk more about this in our capital structure later.

Turning to our lines of business. Brokerage revenue was $1.1 billion, up 3% year-over-year and was 74% of our total revenue. The year-over-year revenue growth was driven by increased freight rates, increased truckload length of haul and higher fuel prices. We also captured more spot opportunities in the quarter with our spot mix increasing sequentially by 500 basis points, which is also accretive to revenue.

Cost of transportation increased in the quarter due to a continued tightening of the full truckload market, driven largely by regulatory enforcement and higher fuel prices. These factors contributed to Brokerage gross margin of 11.4% towards the low end of our outlook. Brokerage gross margin declined 50 basis points sequentially, driven by increased truckload length of haul and fuel prices. Higher fuel prices were an approximately 20 to 30 basis point headwind to Brokerage gross margin. Rising fuel prices lead to increased revenue without a meaningful corresponding increase in gross profit dollars as fuel costs are a pass-through over time.

Truckload gross profit per load increased 9% sequentially. This is reflective of the significant increase in spot loads and an increase in contract rates due to tightening capacity. We expect overall gross profit per load to improve in the second quarter given increased spot volume and higher contract rates. Complementary services revenue in the quarter of $388 million was down 7% year-over-year and represented 26% of our total revenue. Complementary services gross margin was 19.8%, down 40 basis points sequentially and 120 basis points year-over-year. Most of the sequential decline was due to the impact of weather.

Within complementary services, Managed Transportation generated $123 million of revenue in the quarter, down 10% year-over-year. As a reminder, last quarter, we talked about the restructuring of our express service offering within Managed Transportation, which explains most of the year-over-year revenue decline in Q1. Revenue associated with this offering is being serviced across other lines of business within RXO. Encouragingly, our automotive business within the Managed Transportation increased slightly year-over-year, and we are well positioned to capitalize on any improvement in demand.

Our Last Mile business generated $265 million in revenue in the quarter, down 5% year-over-year with stops down 8% year-over-year. This was lower than our expectations of down mid-single digits due to the previously discussed weather impact. During the quarter, we also saw continued weak demand for big and bulky goods. While demand generally remains soft, we are seeing more favorable trends within Last Mile to start the second quarter with improvement across our RXO hubs and back of store business.

Now turning to Slide 8, let's discuss our capital structure and balance sheet. During the quarter, we refinanced our 2027 senior notes. The new notes have a maturity of May 2031 with a coupon of 6.38%. At the end of the first quarter, our total available liquidity was $386 million. With the successful refinancing of our senior notes in February and our new asset-based lending facility that we announced last quarter, RXO has a strong capital structure and liquidity position that gives us the flexibility to invest and grow across all phases of the freight cycle. Quarter end net leverage was 3.7x LTM bank adjusted EBITDA due to the lower levels of profitability. We anticipate our leverage ratio to move lower in the second half of the year.

Moving to Slide 9, let's talk about cash. For the quarter, our adjusted free cash flow was negative $15 million and was impacted by lower levels of profitability and some timing considerations. CapEx is higher in the first half of the year, but is expected to decline approximately 30% in the second half, primarily due to lower real estate and software expenditures. In addition, as a result of the refinancing of our senior notes, we accelerated the associated interest payment of $7 million into the first quarter, which usually occurs in the second quarter. Our bond interest will be paid semiannually beginning in the fourth quarter of this year. Given our asset-light business model, we remain confident in the 40% to 60% conversion over the long term and across market cycles.

From a cash balance perspective, we ended the quarter with $21 million of cash. Cash increased by $4 million sequentially with no change to the ABL balance. In the quarter, we had $12 million of cash outflows associated with our bond refinancing and $9 million of restructuring and integration activities in line with our expectations.

Now let's move to Slide 14 and discuss our outlook. Within our Brokerage business, we're seeing improvements as a result of our bid season strategy and the action we've taken to capitalize on spot opportunities combined with increased capacity in the market. As I mentioned earlier, we're also seeing encouraging trends within our Last Mile business in addition to typical seasonality. For the combined company in the second quarter, we expect to generate between $27 million and $37 million of adjusted EBITDA. This reflects the strong contribution margins in our business attributable to both volume and price.

Our 2026 modeling assumptions remain unchanged. Jared will provide more details on our outlook shortly. As we think about the macro economy, we are optimistic. While consumer confidence has recently decreased given geopolitical concerns and higher oil prices, there are many bright spots in the macroeconomic data. Improvements in the industrial economy are noteworthy. The ISM manufacturing PMI has been in expansionary territory every month this year. Additionally, data last week showed a strong increase in capital goods orders, which is a good leading indicator of business investment. Also, year-to-date tax refunds are up double digits, helping to support the consumer.

We're entering the second quarter with strong momentum across all of our lines of business. The truckload market remains tight despite soft demand. Any sustained broad-based improvement will set up for a sharp inflection and RXO is well positioned to win.

Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk in more detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. Let's start by reviewing our quarterly brokerage performance in more detail. Overall brokerage volume declined by 8% year-over-year. LTL volume increased by 5% year-over-year and represented 28% of brokerage volume in the first quarter. Truckload volume declined by 12% year-over-year and represented 72% of brokerage volume. Truckload volume was in line with the expectations that we communicated to you last quarter. Importantly, full truckload volume improved every month throughout Q1. Year-over-year trends have started to improve and truckload volume in the month of April was down only 2% year-over-year.

Spot represented 33% of our truckload volume in the quarter, increasing by 500 basis points sequentially and 600 basis points year-over-year. Spot increased as a percentage of the mix in every month during the quarter and increased further in the month of April to 35%. Contract volume was 67% of our overall truckload volume in the quarter.

Moving to revenue per load on Slide 10. In the first quarter, truckload revenue per load increased by 8% year-over-year. This was the fastest increase in 4 years, driven by supply side tightening. Note, this excludes the impact of both fuel prices and length of haul. Revenue per load benefited from a richer mix of spot freight and new contract rates also went into effect as a result of bid season. Revenue per load growth accelerated in the month of April, increasing by 12% year-over-year, excluding the impact of higher fuel prices and length of haul.

It's important to note that industry-wide line haul rates have increased by approximately 20% since the third quarter of last year, primarily due to supply side market tightening. We continue to work with our customers to optimize service, volume and price. Given the current environment, we now expect contract rates to be up high single digits, which compares to our previous forecast of up low to mid-single digits just 90 days ago. This, combined with a higher spot mix, should result in even stronger revenue per load trends.

Let's now discuss current market conditions and brokerage margin performance on Slide 11. The truckload market remains tight. Freight market KPIs were at their highest level in 4 years and industry-wide tender rejections eclipsed 15% in the quarter. Importantly, this tightness was despite muted demand and a seasonally slow quarter. Tighter market conditions have been primarily driven by structural supply side changes largely due to enforcement actions related to non-domiciled CDLs and English language proficiency.

From a profitability standpoint, truckload gross profit per load increased by 9% from the fourth quarter as a stronger spot mix offset the squeeze in our contractual book of business. We expect our spot mix and gross profit per load to improve again in the second quarter. Of note, in the month of April, truckload gross profit per load was approximately 10% higher when compared to the first quarter.

Turning to Slide 12. As we just discussed, truckload gross profit per load increased by 9% in the first quarter, given a richer spot mix, offsetting the squeeze in our contractual book of business. This was the largest sequential improvement in truckload gross profit per load in more than 3 years.

Moving to Slide 13. RXO's LTL brokerage volume continues to outperform the broader LTL market. We're winning LTL business with existing truckload customers and new customers that trust us with their freight because of our excellent service, increasing the stickiness of these relationships. Last year, we grew our LTL volume significantly. Recently, we've expanded the scope of some of that business and transitioned it to Managed Transportation. This is another example of the power of the RXO model. Once a customer is on the RXO platform, we can quickly adjust to their business needs by providing complementary services. Doing so increases the stickiness of our customer base.

For our outlook, I'd like to review the significant progress we made in the quarter, increasing the adoption of Agentic AI solutions, which you can find on Slide 6. We continue to focus our technology investments on driving improvements across our key pillars: volume, margin, productivity and service. Starting with volume and margin. As Drew mentioned earlier, we broadly deployed a new proprietary spot quote agent and the early results are encouraging. Reps that are using the agent are seeing an increase in both volume and gross profit per load as the agent helps unlock incremental volume opportunities with strong contribution margins.

We also extended the adoption of our proprietary spot bot and API tools. Continued investment is yielding tangible results. The amount of truckloads that were quoted digitally improved by 30% sequentially. We also continue to streamline our tech to make it easier for carriers to do business with RXO. Last quarter, we began testing a new matching algorithm. And as a result, digital offers from carriers have increased by about 15%.

From a productivity standpoint, we continue to expand our Agentic AI deployments, which automated more than 500,000 phone calls in the quarter. Our people are becoming more productive and spending more time with our customers and carriers to drive creative solutions for their business. We're also innovating to drive even better service and decrease risk. We introduced an AI fraud protection agent in the quarter, providing additional protection for shippers that rely on RXO to move their high-risk freight. We continue to apply AI to structurally improve our long-term margin profile by driving more volume through our business at a lower cost to serve.

I'd now like to give you some more details on our second quarter outlook, starting with brokerage. Given our success in converting our late-stage pipeline during bid season, we expect truckload year-over-year volume trends to materially improve in Q2. We expect sequential growth in volume, which will translate to approximately flat volume year-over-year. We continue to expect our truckload volume to resume its year-on-year outperformance versus the market as early as the middle of the year. We also expect our LTL volume to be approximately flat year-over-year. This accounts for the part of the business that has recently transitioned to Managed Transportation. Importantly, based on the strength of our LTL pipeline, we anticipate LTL returning to year-over-year volume growth in the second half of the year.

Moving to truckload gross profit per load. We expect tight market conditions to persist for the remainder of the second quarter. However, given the team's strong execution, we expect a higher spot mix and the phasing in of higher contract rates to result in another quarter of truckload gross profit per load improvement. That is despite an expected moderation from April to May given seasonal market tightness and DOT checkpoint week.

Let's now talk about complementary services. In Managed Transportation, we're winning new business and the pipeline remains strong. Our automotive business has also returned to growth, and we expect Managed Transportation results to improve when compared to the first quarter. In Last Mile, while big and bulky demand generally remains soft, the second quarter is our seasonally strongest quarter, and we're seeing improved business momentum. We expect Last Mile stops to be down a low single-digit percent year-over-year, improving from the first quarter.

Putting it all together, we expect RXO's second quarter adjusted EBITDA to be in the range of $27 million to $37 million. We see a clear path to achieve the high end of our outlook. The midpoint of our range assumes market conditions that are similar to those that we've experienced over the last few years with gross profit per load compressing from April to May, no meaningful uptick in demand. While we're encouraged by the anticipated rapid sequential growth in EBITDA, we're even more excited about our path to normalized earnings and the market setup.

To close, we're entering the second quarter with strong momentum, improved profitability and a growth mindset. In Brokerage, truckload volume is firmly on a trajectory toward growth and outperformance. Managed Transportation continues to win new awards with a growing pipeline and automotive has returned to growth. Last Mile is seeing improved trends, and we have a huge opportunity within the middle mile. We are aggressively investing in artificial intelligence, leveraging our massive scale and proprietary data. And the supply side changes occurring in the truckload industry represent the biggest structural transformation in almost 50 years and are setting the stage for a multiyear recovery. RXO is capitalizing on these changes by staying close to our customers, delivering superior service and winning spot opportunities. RXO is well positioned to deliver strong shareholder returns over the long term.

With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Your first question comes from the line of Stephanie Moore of Jefferies.

I guess with your spot mix up, I believe you said 600 basis points year-over-year. I mean this is a pretty stark contrast to your largest competitor where contract exposure was up 500 basis points. So maybe -- so how are you thinking about your strategy at this stage in the cycle? And what, I guess, company-specific actions are driving your ability to execute on the increased spot volumes?

First, obviously, we've got a lot of respect for Robinson and the team, and they've had good results. But we've been very clear for the last several years that this is the part of the market that we win in. We've got a model that's built on service. When you think about service, we talked about several customer awards that are awarding us with Carrier of the Year awards. You're seeing it in our pipeline. You're seeing it in the conversion of a larger pipeline. We talk about solutions. There's always optimization that goes into customers' freight and making sure that we are looking at the different modes of transportation that we can service them from. But even the different lines of business, you saw us convert some customer business from Brokerage into Managed Transportation. You see the new middle mile solutions offering.

On the technology side, we're using AI to continue to get more efficient within the business. We're driving more loads. You heard me talk some about that. And the most important thing is relationships with customers. Our top customers have been with us for 16 years on average. They trust us. They know that when there's any disruption in the market that there are spots, projects and mini-bids that RXO is the place that they turn. We're in the early innings, and we're just now starting to see the lift off of that.

That's helpful. And actually, a pretty good follow-up to a question that I had or a pretty good segue into a follow-up that I have. As you think about some of the investments that you have and that you just called out, especially in AI and just technology, how do you balance, I guess, AI and tech investments with your people and your relationships, particularly at this point in the cycle?

We value the relationship first. We are a relationship business. We win because of the relationships that we have with customers. Customers come back to us because of what we've done before and it's the people that they do business with. When you look at the tightening that happened in the market in December and January, it was our team and our people that they were reaching out to. But we're using technology to fundamentally change the business and drive more productivity within it.

You saw our productivity was up 15% on a year-over-year basis. You continue to see us be able to quote more loads with the quoting tool that I talked about, the adoption that we've already got on that, the people who are using it are winning 15% more volume versus what they were winning. So we see clear ways to improve the relationship off of the technology that we're using.

Your next question comes from the line of Brandon Oglenski from Barclays.

Drew, I get it was a difficult quarter, but just looking even at the guidance for 2Q, I think at the high end, earnings are still down year-on-year. I know you got a lot more spot mix, which I thought historically is what really can drive that incremental gross profit as you look forward. So -- and again, maybe 2Q is still not where you want to be. But I think even Jared was alluding to it earlier. Just what is the right normalized earnings power for this business, if you don't mind?

Yes. Brandon, we've been very consistent on normalized earnings. At a midpoint in the cycle, this is a mid-single-digit EBITDA business. And at an up cycle, it's a high single to low double-digit EBITDA business. Even on our Q2 guide, we are multiples away from what normalized earnings, but we see a clear path, and we see that we're in the early innings of heading towards that.

Okay. I appreciate that. And then maybe -- Jared, can you elaborate more on the spot business and how that impacts profitability here? I thought maybe with how much it improved in 1Q, maybe things could have been a bit better, but maybe we're misinterpreting that.

Sure, Brandon. So when you look at the progression of spot mix, we increased spot mix by 500 basis points sequentially from Q4 to Q1. That was up 600 basis points year-over-year. We saw spot increase as a percentage of the mix every month throughout Q1. That momentum continued into Q2. April spot mix was up again relative to March and relative to Q1. We are assuming that we have spot mix increase again in Q2 as a whole relative to Q1. And that spot mix carries a very strong incremental contribution margin. When we think about that spot mix relative to contract at this part in the cycle, it is multiples that of contract.

And to Drew's point earlier, we're servicing our customers freight exceptionally well throughout all parts of the freight cycle, and that's what's allowing us to win. And we're doing this, and we believe that's idiosyncratic to RXO. I think one point I want to reiterate, this is still a very soft part of the freight cycle, and we're able to show a significant improvement in our spot mix, and that's allowing us to achieve almost a 6x increase in terms of adjusted EBITDA from Q1 to Q2 at the midpoint of our outlook, and we also see a clear path to achieve the high end of our outlook.

Your next question comes from the line of Ravi Shanker of Morgan Stanley.

Drew, as you highlighted, there are a number of new regulations impacting supply on the TL side, but there are some potential catalysts that may be impacting supply on the brokerage side as well, particularly a renewed focus on Canadian carriers and the potential Montgomery case in front of Supreme Court. Would just love your views on how much of an endemic issue is this and what impact there could be for the brokerage industry and maybe even RXO, both as a risk and opportunity going forward?

Yes. I'll start with the current regulations, and then I'll move on to the Montgomery case. If you look at the current regulations, it's clear that it's driving a higher quality of carriers across the network. We've got a very robust, rigorous carrier vetting process. We built the business off of just-in-time automotive shipments, off of high-value cargo shipments. So the bar to haul loads for us is very high. We continue to increase the standards on being able to haul loads for RXO, and I think that's been a differentiator for customers. When customers look to who they're doing business with now with everything that's going on, they want to talk through what is your carrier vetting process and who you're using. And we're winning because of that right now.

Shifting to the Montgomery case. I think from my opinion, it is clear that the side of the industry is the right side. I think the law is clearly written off of that way. But running our company, we've got a playbook for everything, and we're prepared for anything. And if the case goes on the Montgomery side, I think that will drive out the tail on brokers and will create a lot of opportunity for organic growth very quickly in our business, and it also creates some opportunities on the M&A side for consolidations.

Got it. That's very helpful. And maybe, Drew, I think you said that your Agentic tools made 500,000 phone calls in the last quarter, if I got that stat right. Can you just give us a frame of reference, like what percentage of total calls was that? And kind of is there a target for where that goes over time?

It's a very low percentage of the number of calls, Ravi. And I think that that shows how far we can go and that we're in the very early innings of this. We're just -- the journey is just starting, and we've got a lot of upside off of what we're doing there.

Your next question comes from the line of Chris Wetherbee of Wells Fargo.

I want to dig a little bit more on to the spot moves because that seems to be sort of the big piece in the quarter here. So I guess when you think about competitively, where do you think the share is coming from? Because it sounds like you still think the sort of demand environment is muted. So it doesn't feel like it's kind of organically coming through with more volume, it just seems like you're capturing share from other folks. Just kind of curious how you're thinking about that market dynamic.

Yes. On the spot market, a lot of times, those are open bids. So it's not a clear indication of where it's coming, but we're also not picky on where it comes from. Our goal is to service the customer and make sure that we are the ones that they are calling. I think you're still in the early innings. Tender rejections are still sitting in the low to mid-teens right now. And that, in my opinion, will continue to rise when you look at the capacity that is coming out of the market. And any signs of demand returning will take it even higher. So I think there's more opportunity that is coming down the pipe off of that.

For us, it's about how well we position ourselves. And are we the ones who customers come to and that they trust whenever those -- there are those opportunities. And we've got a team that set up war rooms of different solutions that we could provide for customers as the market was tightening, different ways that we could service them in the spot market. We've seen where carriers are handing back a lot of freight as the market tightens, and we've been the place that customers have gone as that's happened.

Okay. Super helpful. And then I know you mentioned contract high single digits. Just want to -- any sort of color in terms of how that process is going and then maybe what sort of the exit rate of bid season might look like if it's sort of above that high single-digit number? Just kind of curious because obviously, we haven't seen demand come back. It seems to be mostly driven by supply. It seems like there's upside potential if things get a bit better. I'm just kind of curious your thoughts around that.

Yes. This has definitely been a supply-driven recovery. This is the first time in 20 years of doing this that I've seen a supply-driven recovery that has been sustained. When you look at demand, demand is a catalyst to take it even further off of where we are today. Right now, on the supply side, I do think that supply will continue to come out, which, as I said earlier, I think will take tender rejections up even farther.

Contract rates, when you look at what the exit rate was over the last 4 weeks, we were in the double digits. We've had several that have been in the low teens, even mid-teens coming up. And we're largely through the pricing piece on bid season. we're in the implementation phase of going through the second quarter, which will continue throughout the second quarter.

And I'll say that this year is a little bit different. This has been an ongoing conversation with customers about what's going on in the market on the regulatory side, what to expect from a capacity standpoint, what are we doing from a carrier vetting process. So I think this will be a yearlong of conversations, and we've got a tool in the curve that customers view as their truth serum of what's going on in the market.

Your next question comes from the line of Scott Group of Wolfe Research.

So I get all the spot mix stuff. But if overall volume in truckload is down 12% and spot mix is up 6%, I think the math implies that contract volume is down something like mid- to high teens. So maybe just, Drew, some thoughts on why we're seeing such big declines in contract business and how you think about that sort of evolving going forward? And maybe just along the same lines, I think you said LTL volume flattens out in Q2, but then reaccelerates. So maybe just color on LTL as well.

Yes. So Scott, like if you look at it, demand is still soft. It's a muted environment on the demand side. And so the fill rates are not there. If you look at the overall industry tender-wide rejections, they're sitting in the low teens right now, especially as you're implementing new bids. And we've said all along that we're optimizing service solutions and price for customers, and I feel good about where we're executing off of that market. On the LTL piece, we talked about that being roughly flat on a year-over-year basis in the second quarter. I think we'll get back into growth mode as we get into the back half of the year on that. The pipeline is strong there.

Okay. And then when I just think longer term, I think you said earlier, mid-cycle mid-single-digit EBITDA margin, peak of the cycle, high single. If I just look back '21, '22, right, last peak, we got like a 5% or 6% EBITDA margin. So what's changing here? Maybe it's Coyote, I don't know, but what's changing here that we get meaningfully better sort of peak margin this time around?

Scott, I'll have to let Jared or Jamie weigh in. But in '21 or '22, I know for the Brokerage business, the margins were much higher than the numbers you just tossed out. As a matter of fact, in '22, we highlighted on one of the XPO earnings calls that brokerage margins hit double digits.

Yes. You have it, Chris. So Scott, that's the right way to think about it. Historically, if we look at our peak EBITDA, you can think about, call it, high single digits, low double digits. We do also think that there is an opportunity to continue to leverage AI to fundamentally improve the structural profitability of this business. So it's not a mix issue. And when we think about where we are right now, entering Q2, certainly with improved momentum and significant EBITDA growth, to Drew's point, we are still multiples away from normalized earnings.

And Scott, with more scale, I think the margins can go higher with what we're doing on the AI side. We talked about the spot quoting tool that our team is using now and the team that has ramped up on that first to seeing volumes up 15%. That's going to pull down cost to serve. So I think those are all things that can be upside to the numbers that we're talking about.

Your next question comes from the line of Tom Wadewitz of UBS.

So I've got two. I wanted to -- you touched a little bit, Drew, on Montgomery. I want to drill down on that a bit further. I think there is a sense that kind of heads you win, tails you win on this case, right? Like if you lose -- if CH loses Montgomery, then small carriers exit. But I just want to see if you could elaborate a bit further on the mechanism for that pressure on small brokers. It seems to me like the insurance costs that brokers are paying today are not very large. I'm guessing you pay a couple of million dollars a year in insurance. And so even if it doubles, it's like -- I just -- I don't know if that's the mechanism to drive small carriers out? Or is it like shippers just won't use them and so they lose the demand side. I just want to see if you could drill down a little bit more on how you think that might drive small carriers out if CH and TQL lose the Montgomery case? And then I had one follow-up after that.

Yes. So again, I want to be clear. We think that the industry is on the right side of this and that the law is clear on how it is written and it should be ruled in favor of the industry. If it does not err on that side, insurance costs, I wish our insurance costs were a couple of million, Tom. They're definitely more than that. And I think that, that is definitely something that would be a headwind for smaller players. Shippers' requirements will also go up. And the carrier vetting process is we're already seeing that play out with shippers right now given what's going on in the regulatory. I think that's something that will kick it into high gear even faster than what it has been. And they're going to want to look to do business with people who have scale, who have good technology, people that have delivered for them in the past and people who have financial stability. And thankfully, we check all of those boxes.

Yes. And I would add to that from an insurance market standpoint, the carrier -- the insurance carriers are going to be looking to brokers who have good vetting processes, have invested in carrier compliance and the requirement for more insurance that Drew talked about will be harder for smaller players to acquire or procure from the market, I think.

I guess if you're a small broker and you work with small and midsized shipper, do you think they will have the higher requirements, too? Or is it more like large shippers that drive the pressure?

I think large shippers will set the tone, but the small shippers will certainly want to follow what the benefits that large shippers are receiving.

Okay. All right. Yes. Other question is just on kind of like what the mix of loser loads or kind of negative gross margin loads looks like. I think -- is that pretty elevated right now? And is that something like you see that improve quite a bit as you look forward? I think it's just like looking under the hood a little bit, just kind of what's happening with that in terms of kind of what's normal and where are you at for negative gross margin loads?

Yes. Negative gross margin loads are definitely up. The other thing that is also up is our high-margin winner loads that is also up significantly, and those go hand in hand. If I think back to 2022, that was our strongest profitability. As I just highlighted to Scott, that was our highest negative margin load percentage as a business. And again, because customers trust us because we deliver for them, that was also our highest high-margin loads during that time period as well. So it's about creating solutions for customers, being the carrier of choice for customers as the market tightens. And I think that this is the first inning of us proving that that's who we are.

We've told you for multiple years that as the market tightens, customers will come to us with spots, projects and mini-bids. This is the evidence that, that is happening, especially as things are getting re-rated and turned back to customers, we're seeing big wins there, both on the spot and the contract side. So yes, negative gross margin loads are elevated, but so are high-margin loads. And we look at the customer as a total profitability, not off of one load.

So you don't necessarily need the bad loads to go down, it's just you're making more money on the broader mix? Is that kind of the way to look at it?

We look at the total customer profitability. I think it would be shortsighted to look at it on a one load basis.

Your next question comes from the line of Ari Rosa of Citigroup.

So I wanted to go back to this point about truckload volume being down 12% year-over-year. Just I was hoping you could help us contextualize that number. Maybe you could give your view on kind of how much the overall market was down relative to that 12%? And just help us understand like how much of that was RXO being -- making a deliberate decision to move away from certain loads? Or like how are you moving relative to the market? And what gets you back to taking share?

Yes. We talked about some headwinds in the business heading into it. So I think off of memory, Cass Freight Index was down around 6% and our truckload volume was down around 12%. But you also see the rate of change where we talk about it being flattish on a year-over-year basis in the second quarter. So the rate of change exiting from Q1 to Q2. And the biggest thing driving the rate of change is, one, our conversion on our sales pipeline, we're winning there, and we're winning in big ways off of big numbers. And we're also seeing a lot more spots. So I mean, I think there's two things that are driving the improvement in the rate of change from what you're seeing from the first quarter to the second quarter.

True, but what is it that's driving the delta between the 6% and the 12% in the first quarter? Just because that's what I'm not clear on.

Yes. I think whenever you look at the 6% to the 12%, we talked about the pricing strategy last year. And I think we highlighted that two or three earnings calls ago where we said that this was going to be the position we were in. And there wasn't a lot of spots out there in the fourth quarter. Spots really started to come on in February. So you saw December and January where there wasn't a lot of spots and you were still seeing contracts hold up. As soon as the spots started to come in, that's whenever you started to see the rate of change in the business. I think it's obvious whenever you saw that April was down too.

Okay. Got it. Understood. And so just as a second question, I was hoping you could talk a little bit more about your approach to AI. It sounds like you're getting some traction there. That's great. Obviously, people have responded well to that in the market. Help us understand what it is that RXO is doing different? Like how much of your approach to AI is built off of proprietary technology? How quickly you expect it to scale, et cetera? If you could just give us more color there, I think it would be helpful.

Yes. I'll let Jared come over the top on some of the tools. But I mean, when you look at our AI strategy, it's built for who we are. It's built to be able to adjust with what's going on in the market. It's built tailor specific for our customers, especially large enterprise customers. We've built new tools as we start to ramp up the SMB parts of our business. We're building things in there on the carrier side. Anything that is customer, carrier or employee-facing, we view as secret sauce. And those things we really want to lean in and use proprietary tools. If there's something that we view that is not as critical, then we're open to using some things off the shelf there.

And Ari, to build on what Drew was saying, the four key pillars that we talk about have remained consistent between volume, margin, productivity and service. We're a tech-enabled organization. But as we highlighted earlier on, it's all about the customer relationship. It's all about the carrier relationship and then how do we leverage technology in a way that makes our people more productive. We saw our productivity was up 15% over the last 12 months, measured by loads per person per day. We're really excited about some new tools that we've launched recently, including our Agentic AI e-mail spot quote functionality where we've seen significant traction over the last couple of months, and that's still in the very early innings.

So as we go ahead and start to broadly deploy these tools across the organization, and we think about the opportunity to decouple volume growth from headcount and make our people that much more productive, it speaks to the long-term contribution margins that are attributable to AI and technology.

Your next question comes from the line of Ken Hoexter of Bank of America.

So you set the scale for EBITDA outlook for 2Q. Thoughts on maybe seasonality, pace of growth, maybe a little further out third quarter, full year. And then, Jared, on that last point, as you get more automated on quotes, thoughts on staffing. I don't think you disclosed headcount, but how are you thinking about early efficiency gains on reshaping the workforce?

Sure. I could start. So as you know, Ken, we give an outlook one quarter at a time, but can certainly provide a little color on Q3. Typically, Q3 does decline when compared to Q2 in last mile. Q2 is the strongest quarter of the year from a seasonal perspective. But I would certainly say there's nothing typical about this year, right? As Drew just mentioned, starting in Q3, you'll see the full implementation of the contract rates that we're talking about right now in Q2, which are coming in right now, to some extent, low double-digit, mid-teen type increase. So that will continue.

Volume will be a function not only of the market, but also our successful conversion of the pipeline that we've talked about. Managed trends, also implementing new awards in the second half of the year and any sustained increase in demand, including automotive, could be substantially better than that. So last year, Q2, Q3 went down about 15% sequentially, but would certainly reiterate that we've got a lot of strong momentum in Q2 right now, and we'll see -- we expect further momentum in Q3. And on the -- what was a follow-up on technology, Ken?

Yes. Just your thoughts on staffing, right? As you become more automated, does that -- since you don't disclose that count, how do you think about early efficiency gains reshaping that workforce?

If you look at our brokerage headcount, Ken, it was down double digits on a year-over-year basis. I think we've talked earlier in the call about this being a relationship business. Relationships matter in this business. Our people matter to this business. But what's going to happen is they're going to get more productive over time and the more tools that we implement. So the rate that we add heads will not be at the rate as we start to grow -- outgrow the market, which we've said we'll start to outgrow the market around the middle of the year, maybe sooner.

Wonderful. And then just one follow-up quickly, if I can. The truckload volume improved each month in 1Q. Is that a year-over-year comment? Is that in line with normal seasonal or sequential progression?

That comment with respect to -- on an absolute basis, we've seen an improvement within our truckload business every month throughout Q1. That is then translating into an expectation of a sequential volume increase from Q1 into Q2 from a truckload perspective, driven by the success that we've had converting that late-stage pipeline. And then Ken, that will then translate to about year-on-year flattish from Q2 -- in Q2 relative to Q2 last year, which is certainly significantly improved relative to Q1, and we then expect to start to resume our outperformance versus the truckload market as early as the middle of the year.

Our last question comes from the line of Bruce Chan of Stifel.

Maybe just to follow up on the headcount productivity question. It seems to me like you're in a better position to implement a lot of these tech and AI programs now that the tech stacks are more harmonized. You listed a lot of different initiatives. Maybe if you could just help us to quantify the impact of those? Any KPIs that you're seeing in terms of productivity or GP per head or maybe margin contribution that you can give us to help kind of illustrate what the impacts might be to the bottom line?

Bruce, it's Jared. So on the productivity side, we're seeing some real tangible benefits. Productivity in the second quarter was up about 15% when compared to the prior 12 months, benefiting from those investments. And I'll go back to those four key pillars that we talked about earlier in terms of how we think about our technology strategy across volume, margin, productivity and service.

And the one tool that we've been talking about that we're quite excited about is some of the benefits that we're seeing from the Agentic AI e-mail spot quote functionality because not only does it enable incremental volume and margin opportunity, it comes with a pretty strong contribution margin to the business. So as we think about scaling the business longer term, decoupling volume growth from headcount, it could really add some pretty strong contribution margins longer term.

I would now like to hand the call back to Drew Wilkerson for closing remarks.

Thank you, Elli. RXO has significant momentum across all of our lines of business. Our full truckload volume improved every month of the first quarter. We're winning more spots, projects and mini bids, thanks to the exceptional service we provide and our spot mix increased by 500 basis points sequentially in the first quarter and 600 basis points year-over-year. We've had an outstanding bid season and expect full year contract rates to increase by high single digits year-over-year. We expect to resume our market outperformance when it comes to brokerage volume as early as the middle of this year.

In complementary services, we continue to win. We've secured more than $100 million in new managed transportation awards, and our new Middle Mile solutions offering has already built a $70 million pipeline in just its first few months. Our technology is a force multiplier. We put Agentic AI in action and our proprietary tools, including our AI spot agent have already delivered increases in both volume and gross profit per load for our reps. We're at the beginning of the recovery, and we're uniquely positioned to be a major winner. RXO has significant long-term earnings power.

Thank you for your time today, and we look forward to seeing you at the upcoming conferences.

Thank you for attending today's call. You may now disconnect. Goodbye.

All right. We're going to go ahead and get started with our next presentation here or Q&A rather. We have RXO here on stage, Jared Weisfeld, Chief Strategy Officer; Kevin Sterling in IR and Strategy as well. So thanks, guys, for making the trip here.

Maybe let's just jump straight in and talk about demand. That's been the thing we've all been waiting for to help turn the market. We can get to the supply side in a little bit later. But what are you seeing in terms of the demand aspect? Any positives as we look into the second quarter, even wrap up the first quarter from some of your key end markets or customers?

Sure. So thanks for having us, Brian. When you think about the demand environment, we talked about on our earnings call how we were operating still in a prolonged soft freight environment from a demand standpoint. You saw January was down 7% year-over-year from a Cass Freight Index standpoint. I think it came out this morning or the day prior that February was also down 7% year-over-year. So that was, of course, contemplated in our Q1 outlook. When you think about what we're focused on, I'd say a couple of things.

To your point, in terms of green shoots, the industrial sector of the economy has certainly had two positive PMI readings now to start the year at the highest levels in 4 years, especially that new orders component flashed 57 in January and was hot again in February. That tends to have about a 2- to 3-month lead time relative to actually seeing the orders, and that's important for RXO. It's about 20% of our business within brokerage is the industrial manufacturing sector of the economy. And then on the consumer side, you have seen a move higher to start the year on consumer confidence, and we obviously have to see how everything plays out with all the geopolitical noise over the last couple of weeks in terms of consumer confidence readings, et cetera.

But I think the key for RXO is that our late-stage sales pipeline is up more than 50% year-over-year, and we talked a little bit about this on the earnings call. And this is across the company with the integration of Coyote materially complete, having the ability to focus on this late-stage sales pipeline, which historically runs at a pretty healthy conversion rate. And this is not just law of small numbers. This is hundreds and hundreds of millions of dollars up more than 50% year-on-year. I think just speaks to a lot of the idiosyncratic levers that we have heading into Q2 and the rest of the year.

And Brian, just to piggyback on Jared's comments, particularly as you think about ISM strength, I know you know this, but look, what's going on flatbed rates. Well, we don't have a lot of flatbed business. But if you kind of look at general industry flatbed rates, they are really, really strong. I think that's also a good leading indicator of kind of some of this industrial strength that Jared is talking about.

So I do want to ask about the late-stage brokered sales pipeline. So maybe you can define that a little bit more, like what goes in there? How is quantify like what type of projects you're seeing? And you mentioned there's a pretty high conversion rate. Like what does that roughly translate into over time?

Sure. So it's the first time we've talked about it externally. And to give a little bit more color, the reason why we talked about it last quarter was we made a statement on the earnings call that we expect to resume truckload outperformance versus the broader market as early as the middle of the year. And to make that kind of statement, we thought it was appropriate to give some backing of why we were so confident in that. So to speak to that late-stage sales pipeline, what is that? It's composed of deals that are already in pricing, late-stage qualification with customers.

So that will hit as early as Q2 and stage throughout the rest of the year, and that runs -- this is also -- this excludes the pre-pipe. This is a later-stage pipeline. So it does -- we haven't given that percentage in terms of what it runs at from a conversion standpoint, but it is very healthy. And importantly, it is composed mostly of full truckload, and it is very diverse in terms of the composition of that. So we feel very good about the health of the pipeline and what that means with respect to truckload volume. And I think importantly, for RXO, if you go back over the last 10, 15 years, RXO DNA is all about profitable growth, truckload outperformance. We took a step back last year with numerous headwinds that we're facing the business, but we're very excited to getting back on the path for truckload outperformance versus the market as early as the middle of the year.

So most of that is full truckload, I would assume a lot of that is contract as well. I mean you wouldn't really necessarily put spot in there.

Yes. That's exactly right. This is contractual in nature, but the -- it's an important point when you think about the mix of the business, which last quarter on our truckload business was about 72% contract, 28% spot. Our fundamental belief is having that large contractual book of business will lead to materially accretive spot opportunities, special projects, mini bids when the market does become tight. And we're seeing that right now, right?

When you think about just where the overall industry is versus last year, 2 years ago, 3 years ago, despite that muted demand environment that we just talked about, to Kevin's point, not only are you seeing elevated rates across other modalities such as flatbed, but in the overall dry van market, you're seeing 14%, 15% tender rejections coming out of the slowest freight month of the year. So I think it does speak to how much supply has really come out of the market.

And Brian, just to take a step further, talk about the contractual book of business. And it's very important to make sure you service that contractual book of business for your customers so that when there are spot load opportunities that Jared is talking about, you're that first call because that shipper is going to know like, hey, Kevin does a good job, I'm going to get that first call versus randomly using someone may or may not be there. So it's so important you service that customer's contractual freight so that when the spot opportunities are there, you can really capitalize.

So how are the -- obviously, the spot rates jumped in remain elevated. You mentioned the rejection rates. So how are conversations with shippers starting to change? Or have they already changed? Because before it was like, well, it's just weather and we're going to debate about the impact. And now it does seem like at least our conversations, they're more willing to accept it or recognize it, obviously, not jumping up and down to pay more unless they have to. But like how is that progressing from like your side of these conversations?

Yes. So it's been constructive. We put out our monthly curve or our quarterly curve report a few weeks ago when we talked about how we have now moved to an inflationary rate environment. We talked about on our earnings call that we expect contract rates to be up low to mid-single digits for 2026, Combine that with the curve report where we talk about entering in that inflationary part of the cycle, which has obviously been a soft freight market for the last 3.5 to 4 years. I think the -- I think it's safe to say with tender rejections sitting at 14% in the middle of bid season, that is a favorable backdrop with respect to renegotiations and existing bids.

And I think the -- because it's a 2-way conversation, right? The shipper and for RXO, it's large Tier 1 enterprise class shippers. They want to put in rates with large strategic carriers that they know can get serviced throughout all types of cycles. So they want to have confidence that their routing guide is going to hold up. So I think we talked about the contract rate environment moving to an inflationary phase. And certainly, that will provide relief on our gross margin when you think about just how our model works. You have to get through the repricing, which we're in the middle of right now. And then post repricing, you'll see an improvement and relief on our contractual gross margin.

And then you combine that with an elevated tender rejection environment and what that means for spot opportunities. I think it's a pretty robust environment to think about the opportunity to capitalize on spots relative to 2, 3, 4 years ago when tender rejections were sitting at 2%, 4%, 6%. And when I say robust environment, I'm not saying from a demand standpoint, I'm just talking about overall freight KPIs at much healthier levels than they were over the last few years.

So when we think about the tender rejections, are these carriers -- because it's a little bit different with brokers, right? Like carriers just make less money if they take a load that they can make more money later, but brokers can get squeezed, right, because of the way the contract works. So are we seeing other brokers that are just walking away and redoing bids? Like how far along are we in this process?

Yes. I can't speak to other brokers, but what I can say is that industry-wide tender rejections are sitting at mid-teens. And when you think about RXO, how do we service our freight. We want to go ahead and put in rates where we can service our customers, certainly to the extent -- and then to the extent you start to see pressure on waterfall routing guides, you'll see the ability for RXO to capitalize on those spot opportunities.

So we saw an increase, small in December relative to November, an increase in January relative to December. And you think about just how the market has developed with industry-wide tender rejections sitting in, call it, that 14%, 15% level, I think that does provide a nice jumping off point heading into and the rest of the year.

And Brian, sometimes too, there are certain regions of the country which are really tight. For instance, take the Midwest, very, very tight right now. So you can go lane by lane with the shipper as well. You don't have to go with a blanket price increases, kind of go lane by lane, like, look, it's really tight here and they can see it. So you can -- we have that ability to drill down lane by lane.

And I want to hit on that also because it's a really important point that Kevin brought up where you think about -- and you mentioned this a little bit, the impact from weather in Q1, right? I mean for 2 out of the 3 months in the quarter, most of the country was frozen and shut down. It doesn't matter if you were in New York where we are or the middle of the country or even the Southeast where Kevin is, it had an impact, right? So -- but to your point, Brian, post weather, the country is starting to reopen, I think there was an expectation by some that you would see a moderation in tender rejections, a moderation in rates, and they continue to move counter seasonally and hold in.

So you think about an environment where demand is soft and we're still holding at 14%, 15% tender rejections in the weakest freight month of the year, I do think that it just shows, and I think the language that we used on the call was that this market is the most susceptible it's been to changes in demand than it's been in the last 3.5 years. On one hand, that's not saying much given how weak it's been for the last 3.5 years. But on the other hand, I think it just speaks to how much capacity has come out of the market.

Well, just to touch on that point, there's been, of course, a lot of regulatory enforcement and focus and probably more to come. How have you guys seen that play out other than we just talked with spot markets and maybe the elasticity or at least is less elastic than it has been in the past. And do you think this is something that can accelerate the impact throughout the year? Like how are you thinking about that?

It's fitting that we're here in D.C. and the final rule from the FMCSA went into effect last night with respect to non-domiciled CDLs and what must be true in order to go ahead and keep the road safer and have the requirements to get a nondomiciled CDL. So the FMCSA has identified about 194,000, 197,000 drivers that will be coming off the road between now and the next 5 years. And the reality also is there's also some self-enforcement associated with this. So it could certainly be faster than those 5 years in terms of all of the checkpoints that are now across the roads -- across the country when you think about enforcement by state and local officials to abide by the new final rule.

And then there's also movement in Congress right after the state of the union, there was the proposal of the Delilah's Law, which would take it another step further and effectively have to recertify all of the CDLs across the country and going through the same SAVE system at the federal level. So I think there's a lot of developments at work to go ahead and remove some of this tangential supply, the shadow capacity that has been in the industry for the last, call it, 10-plus years. And not only will it make our roads safer and reduce theft and fraud, but this capacity removal is structural in nature, and it's not coming back. So it does certainly set up for a higher for longer freight environment on the other side.

Yes. And just to piggyback on that, Brian, and you can probably remember this, too, cycles in the old days would last 3 and 4 years. I can remember '04, '05, '06, fantastic freight cycle. Why was that? There will always be a supply response, but it's more gradual, more responsible. Think about when ELDs hit in '17, '18, now looking back, we realized that freight only cycle last year because all the supply came flooding in.

But you step back 20 years ago or so, the cycles -- supply would come back, but it would be very rational. And so I think to Jared's point, the spot is coming out. It's more permanent in nature, structural in nature. It's not going to come back. So we could set up where we could see what we used to see cycles that last 3 and 4 years. Truckers used to tell me in the mid-'90s, cycles would last 3 and 4 years. So it would be nice to get back to those days.

That would be a nice change. Well, we had 4 years down, so maybe more likely to be up next time, I don't know. Well, in terms of the other big impact coming out of D.C., potentially, the Supreme Court hearing, I guess, most people refer to Montgomery case, but like broker liability. So I don't know if there's a specific view you guys have internally in terms of how that could shake out, but let's just say it goes forward and brokers have to have more liability basically overnight. How does that impact the industry? How does it impact RXO? I mean there's a bunch of different things I can think of, but would love to get your thoughts on this.

Sure. I'd say, firstly, I think we continue to remain optimistic that the Supreme Court will rule in favor of preemption. And you'll certainly hear more from us after we know more and we see everyone looks like. To your point, to the extent that it does not, it's really interesting because I do think that it will become very difficult for small subscale and quite frankly, even medium-sized brokers to compete in the industry.

So I think in that scenario that you're outlining, and again, we remain optimistic that the court will rule in favor of preemption, but there's a scenario where that actually could favor the top 10 brokers in a pretty meaningful way to the extent that the court rules against because ultimately, it will shake out the competitive landscape, I think, in a pretty interesting backdrop, whereby if you're a small, medium-sized brokerage and the compliance costs, the operations in terms of processes and procedures that you need to operate in that kind of world, it just becomes prohibitive.

So I think that would certainly -- we've always stated that we believe that this is a winners take most type market structure where right now the top 10 players in brokerage represent almost half the industry. And we think over time, the top 5 probably represent a higher percentage of that. To the extent what you're outlining plays out, that could certainly accelerate it.

But from a risk perspective, though, I guess, brokers would need to put more price into the market basically overnight. Would you expect smaller carriers who may not be able to comply with the new standards, the checks and all the rigor that's going to go around to vetting them because now if you're responsible for them in a different way, like could that actually have a supply impact as well?

Yes, I don't want to go too far down the road on hypothesizing of a potential verdict, but I would certainly say, going back to my prior comment on why this would benefit the top 10, you think about how we do business today, we are extremely strict in terms of what must be true in order to go ahead and do business with RXO. And I would assume it's pretty similar for the top 10 as well. I think we might actually be -- have some of the strictest standards because it's a 2-sided competitive marketplace. And we take those moats, we think, are real, and there's a lot of effort to go in to make sure that we're servicing our customers' freight because we want them to obviously have a great experience and give us more freight going forward.

And that can't be true if you're not using a reliable carrier network. So on RXO, we've got access to more than 120,000 carriers post Coyote across the combined network, spanning from owner operators up to large-sized fleets. And I think making sure that you've got the compliance guardrails, the right onboarding procedures to make sure that you've got a high-quality network is even more important in the world that you're outlining.

And Brian, to take that a step further, I had this question posed to me, could shippers ultimately be liable too? And I bring that up because if you're a shipper, you're more likely to do business with an RXO or a large broker, someone you know has a strict compliance and vetting process. So that's something to keep in mind as well.

Well, just that was the next question in this...

I can read your mind.

Well, I don't feel you can do that too much. In terms of the shippers like, okay, so they could potentially get impacted, but are they thinking about this right now? Maybe the bigger ones are? Does it come up in any of these conversations? Or is just...

I think everyone in the industry is paying attention to it. And I think depending on the size of the shipper is likely to dictate whether -- how closely they're paying attention to it. But I think to your point, depending on the market environment that you're in, does this -- could this be inflationary from a rate standpoint because ultimately, just the cost to do business goes higher.

Okay. It wasn't too long ago when we were talking about AI favorably. And then overnight, it became like unfavorable.

I thought you're going to have a karaoke machine up here.

I think it's in the back somewhere, but we can see if we can roll that out because evidently, that's part of the disintermediation risk that we were not paying attention to. But what are some of the, I guess, the moats as we think about AI is certainly a tool, but there's all sorts of ways to use it, and there's other things that are probably preconditions, I would suspect, to using it effectively as opposed to just ramping up the curve to get like, I don't know, 80% effective, and there's always that last piece, which is pretty significant.

So what are some of the moats that you believe to be true that will really not change for yourselves, for the industry, for the scale players as we get more and more of this AI adoption with or without Karaoke machines?

We've had a -- the freight industry has had a sneak preview of this probably about 10 years ago with the threat of digital brokerages and what that would do to the industry with the notion being there would be increased price transparency and the gross profit dollar pool available to the industry would decline, and therefore, there's a terminal value problem, right?

Ultimately, that was 10 years ago and what's happened. All those digital brokers for the most part, no longer exist. And I think the RXO philosophy has always been we are not a technology company. We are a tech-enabled service provider, and we invest in technology aggressively. We spend more than $100 million a year in technology. We spend it across all aspects of tech from not only artificial intelligence, but also Gen AI and Agentic AI, which I'm sure we'll get into, in addition to our pricing algorithms from machine learning techniques, and we've been doing that for a while. So I think the fundamental premise is that this -- I think you characterized it quite well, this is a 2-sided network with moats on each side. And overnight, you cannot scale up a carrier network to 120,000 type carriers. And you also think about like this is a business that is built on service, relationships and trust.

We continue to have such strong customer relationships. If you think about our top 20 shippers, they've been with RXO for the last 16 years on average. And that is because of those deep personal relationships and the service levels that follow. And no doubt -- I mean, what's interesting right now is you think about sort of that perfect order in terms of what is totally touchless. We haven't talked about what percentage that is, but it's been growing over time. So it's already part of the network. But I think the harsh reality in the world of freight transportation is something is always going wrong with the load, right?

So exception management is a huge part of our day when you think about our customer reps and our carrier reps. Is there a significant opportunity to automate that and help with respect to decreasing the amount of man hours associated with rudimentary tasks 100%. Are we deploying Agentic AI aggressively to go ahead and capitalize on that opportunity? Absolutely. Does that replace the human? No.

And Brian, just we talked about service, and that's a key theme here that we've touched on. And just think about this as the market probably seems like it could be turning and things may get a little chaotic. And once again, if you're that shipper, to Jared's point, we manage exceptions, we manage chaos. We manage volatility. That's what we -- really, that's our guiding principle to help our customers. And as the market kind of gets chaotic, gets volatile, who are they going to turn to? A reliable partner that they can trust. That's so important.

So in the spectrum of everything is disrupted in a race to the bottom versus, well, this is just the next nothing burger, somewhere in between, it feels like is where AI and technology will probably be in the near term, maybe medium term for brokers. So like what does that mean for you guys? Is that more Agentic? Is it more productivity? Like how do you see the, I guess, the practical applications that have financial impacts and productivity impacts for the business?

Yes. I mean it's all of it. I mean, at this point, especially for a top scale broker, AI is table stakes. So you need to be investing in Agentic AI capabilities. You need to be investing in generative AI capabilities. You need to be investing in machine learning techniques to help from a pricing algorithm standpoint. And you think about how we're doing that, we talk about the 4 key pillars and the principles that we abide by internally at RXO across volume, margin, service, productivity. It's all because of those aggressive investments.

And I mean, at its highest level, how do we go ahead and increase volume through our network by 20%, 30%, 40%, 50% and decouple that from headcount growth. Because when you can decouple that, the incremental margins are significant and can be as high as 70% to 80%. So you think about what that means, and that's the beautiful part of our business model and having a platform that is so scalable with respect to -- we've been hit hard clearly over the last few years in terms of deleveraging the of the P&L because if you look between the gross margin and EBIT, 2/3 of those costs are either fixed or semi-fixed. It obviously works the exact opposite way on the other side. And if you can releverage the model even further by having that scalable tech platform and dropping through that volume with minimal headcount additions, the contribution margins at that level on a business that right now is doing low single-digit EBITDA margins, obviously, can be quite impactful.

So that's how we think about the business. And then the other angle is productivity. We've talked about over the last 12 months, our productivity is up by 19%. On a 2-year stack, it's almost 40%. And then layering on a lot of the capabilities that we've been investing in, specifically on spot quote agents, et cetera, across the network that are being deployed right now, I think there's a lot of opportunity for incremental margin unlock.

And how are you guys measuring productivity? And those are like KPI that everybody uses or reports on uniformly across the industry, but is this like loads per headcount or what's the...

Loads per person per day. Who is involved associated with that -- the life of that order? And if they are involved, we'll burden the productivity number with that headcount. And we've had -- and we think we are still in the very early innings with respect to productivity. If we look at our most productive rep, and I mean, going back to your point on the fears of AI disintermediation and Karaoke Day, if you actually look at the stats in that press release, I think they talked about someone that was doing 8 loads a day, right? I mean I think that was probably accomplished about 20 years ago at RXO.

So like you think about our most productive rep, you're talking multiples of that -- many multiples of that. So how do we then bring up the average across the base where we've got our most productive rep. And as you can expect, the more tenured you are, the more productive you are, there are certain loads in certain verticals that are more accommodative for higher productivity. But in general, there is so much room on that productivity scale in terms of loads per person per day.

And Brian, in the old days, if you're a good salesperson, we'd hire a sales assistant to help book freight as a market turn. If you're really good, we'd hire 2. We don't have to do that now. We can lean in technology. And that to Jared's point, you're just going to see us leverage and lean in that loads per head per day should continue to move higher.

So a couple more questions, but we can see if there's any audience after this one. Clearly, there's a bunch of headwinds. As we look at the first quarter, the margin squeeze, eventually will be a good thing. Spot market seems like it's -- I mean what we heard this week at the conference seems like there's maybe a little bit of an offset from volume opportunities that maybe weren't there in the fourth quarter to kind of make up for that margin compression. But where are you in terms of expectations for this quarter and where we go from here and you're sort of tracking relatively in line with what you initially thought based on what the market is doing right now?

Sure. So we're not going to give a mid-quarter update, but we gave an outlook for Q1 of $5 million to $12 million of adjusted EBITDA for the company. And within that outlook included a variety of market assumptions with respect to the tighter market conditions persisting throughout the quarter. Obviously, weather has been a headwind as well. And as you think about tender projections operating to your point, in that mid-teens, that obviously has the impact of squeezing our brokerage gross margin, which is why we gave that $5 million to $12 million outlook.

But I think importantly, for RXO, you think about the base that we're building off of the Q1, I'll go back to what I started with. Our pipeline is up more than 50% year-over-year. So that will clearly be a tailwind from Q1 into Q2. We talked about on the earnings call how Q1 is historically the weakest quarter of the year and also the weakest percent contribution from a full year perspective. So you think of off of that Q1 base, historically, that's been -- can be up as much as last couple of years, it's been up 100% sequentially. And obviously, it's now a law of small numbers. So the percentages get a little bit wacky. But you think about the building blocks, higher pipeline we talked about.

We then talk about the opportunity for rate relief in terms of the negotiations that were ongoing as part of bid season and the opportunity to reprice given the current environment that we're in. Building on that, managed transportation is seasonally a better quarter into Q2 from an automotive standpoint. And we also talked about new wins that were awarded in Q4 of last year. We awarded more than $200 million of freight under management and managed trans has significant momentum. And then last mile, Q2 is the seasonally strongest quarter for the for the company. So I think a lot of opportunity for us as we exit Q1 into the rest of the year and into 2027.

Brian, I remember a few years ago, I had a transportation executive tell me once, February is our 12th best freight month of the year.

And it all comes down to March, so...

It comes down to March. But I think importantly, it's the momentum building from March into Q2 and into the rest of the year. And I think importantly, for RXO, we do have some company-specific tailwinds irrespective of the broader freight market with the integration behind us, the focus is entirely on profitable growth, driving that pipeline higher and then converting that pipeline, yielding tangible results across the business, all with a much more efficient cost structure because we've taken out more than $155 million of costs since we've spun.

We took out $65 million in the first 2 years post spinning from XPO. We took out $60 million of operating expenses from a synergy standpoint with Coyote, and we announced a new $30 million cost out in Q4. So putting it all together, you think about just those contribution margins that we were talking about earlier and how this model is prime for incremental operating leverage. It's also prime from a standpoint of a very efficient cost structure.

Okay. Any questions? We got one here in the middle here, if you can get the mic, please.

You hit on 2 topics that I'd like to touch on. One has to do, you said your late-stage pipeline is up 50%. And actually, at the end, you just now said you're dramatically focused on conversion. What is the conversion rate at the late-stage pipeline if you're allowed to share that? And then the second question, you also talked a little about too, you're under repricing. Can you give some color around what you're seeing as the sensitivities and upsides for getting repricing in this environment?

Sure. So on the first question with respect to the late-stage pipeline, we haven't quantified what that conversion rate was historically. But what we have said is that if you look at the overall pipeline, including pre-pipe, et cetera, that generally has been low single-digit type conversion, and this would be multiples that. So you think about just the fact that these are qualified opportunities that are already in the pricing stage. So I think there's good line of sight across the board and the fact that the pipeline is composed of opportunities that are very diverse. We're not one -- there's not one opportunity that is dominating that overall pipeline. I think gives us confidence in terms of executing against that pipe and yielding results as early as Q2.

On the second question in terms of contract price increases. So I'll go back to what I said earlier, it's a 2-way conversation. This is a partnership. There's a reason why our top 20 customers have been with us for the last 16 years. We need to be able to put in rates that we can service throughout all freight markets. And when we're in the tighter environment right now, to your point, Brian, I mean, shippers don't like paying higher rates, but it's ultimately the environment that we're in right now, and you've had so much capacity come out that is structural in nature. And despite softer demand, we're sitting at 15% tender projections.

And we talked about in our Curve proprietary report, which is available at rxo.com if anyone wants take a look, a little plug there, that it is -- we are now entering that phase where we are inflationary in nature in terms of what those contract rates look like. So -- but it's -- I think Kevin brought up this point earlier. I think it's important to note, this is not just holistic price increase across the board, and therefore, we're going to put that through. It's customer by customer, geography by geography, lane by lane, and we're going to look at the customer holistically where ultimately you think about being able to service certain contractual freight and if that leads to the opportunity to yield incremental spot volumes, that could make a lot of sense. But I think in terms of the contract repricing, we talked about that low to mid-single-digit increase. I think the confidence level there is very high.

Maybe just on that point, if there's no other questions. I guess 2 quick follow-ups to sort of wrap us up here. The timing of the contract renewals or the repricing opportunities, are these some things that can show up this quarter because you're moving some lanes around? I mean, typically, we don't see these things progress until several quarters and it takes some time to really get through the whole system. So maybe some comments on that. And then also, is there managed trans in this late-stage pipeline that's moving some of the numbers as well? I just wanted to clarify that.

On the first point, you're exactly right. It is staggered in nature, right? So what I'm talking about in terms of contract rate increases, et cetera, this is not a Q1 type comment, right? This is going to be staggered in nature as early as Q2 in terms of the benefits associated with relief on the contractual side of business with getting the repricing into the book. That's meant to be more Q2 and onwards.

And then in terms of managed trans, now the brokerage sales pipeline is up more than 50% year-over-year. Managed trans, we isolated and that pipeline is very strong at almost $1.5 billion. So the momentum across the business between the late-stage sales pipeline and brokerage, a managed trans pipeline, also late stage of, call it, $1.5 billion, of which we had $200 million awarded in Q4. And then certainly, from a seasonality standpoint, last mile will start to improve not only with the weather falling out, but Q2 is the seasonally strongest quarter.

Okay. That's helpful to clarify those. In terms of just maybe last mile and managed trans don't get as much attention. So maybe 2 minutes worth we can do here to wrap up. You mentioned the seasonality, you mentioned some of the things that are just more normal course of business, but like what are some of the other initiatives or growth opportunities like the $200 million you mentioned earlier about new wins. Like how is all that shaping up? And like what are sort of the initiatives that are flowing through these 2, I call them sectors but -- or segments, but like business lines?

Yes. So one segment company, but we do have complementary services, which is composed of our managed transportation, where we act as the control tower and the transportation department on behalf of our shippers, where we manage about $3.5 billion of freight under management. Momentum in that business exiting the year was quite strong with more than $200 million awarded in Q4 and a late-stage sales pipeline that is almost $1.5 billion. And the reason why that is particularly important is we talk about synergy loads within the company, whereby managed transportation can be a customer to our brokerage business.

And ultimately, the brokerage customer or the managed transportation customer then has access to dedicated capacity within our brokerage business. So it's a pretty symbiotic relationship and very synergistic. On the last mile side, demand for big and bulky has been and is soft, which should not be surprising to anyone. If you think about -- you've had a little bit move lower on the 30-year with respect to mortgage rates. But overall, that's going to be tied to housing market and big and bulky is soft. In 2025, we significantly outperformed from a stop standpoint, onboarding existing new customers and new business with existing customers. But we did feel an acute slowdown last year on the last mile side, really after Labor Day in terms of just overall big and bulky demand.

So I think the initiative there is as we think about across RXO, and we put out a press release a few weeks ago talking about RXO middle mile solutions and how we can leverage our RXO hub network across the country in ways that can deliver incremental solutions to customers, how we can effectively leverage that real estate footprint, I think, is a very strategic priority because the contribution margins, given obviously the fixed asset nature of the business can be quite high.

Okay. Well, guys, we're out of time, but thanks very much for joining us, Jared and Kevin. I appreciate making the time for us.

Thanks, Brian.

Thank you.

Joining us for our last session of the conference, you have RXO with us, which we're thrilled to have you guys. I actually think it's -- from my perspective, it actually works out great because you guys have such a broad deep view of the trucking market that I think it will be a nice way for us to bring together a lot of the concepts that we've heard. So we have Jared Weisfeld, Chief Strategy Officer; and Kevin Sterling, who is market strategist. What did you -- Jack of all trades -- exactly. Kevin wears a lot of hats within RXO. So thank you both for joining us. Thrilled to have you.

Maybe let's start on just the broader demand environment. There's been a lot of confusion, certainly a lot of optimism, I think, is fair to say, right, that the supply side is tightening a bit. At the same time, some questions around demand. And even this morning, we heard Walmart come out with an outlook that I think was a little bit tepid on the consumer. Just help us square that because again, you guys have a really broad view of the U.S. freight landscape.

Absolutely, and thanks for having us, Ari. Glad to close this out here. So from an overall market environment standpoint, from a freight perspective, it's really been a tale of 2 cities where when you think about just the intersection of supply versus demand. On the demand side, to hit that one first because I think that's, in some ways, a little bit more straightforward. It's been a soft demand environment for a while now. We've been in a freight recession for 3.5 years. You have goods versus services mix has been very low, actually at 15-year lows. A lot of questions on consumer confidence and the impact associated from Liberation Day given the tariffs and the impact of high inflation. So we've been dealing with a muted soft freight environment from a demand standpoint for quite some time.

And to your point, I think there are certainly reasons for some cautious optimism out there. We had the highest ISM reading 2 weeks ago that we've had in 4 years with a new order component flashing at 57. I'd like to see a few more of those. That's generally a very good leading indicator for the freight economy. You've had consumer confidence over the last couple of weeks start to bounce back. You've got some optimism in terms of potential stimulus ahead of the midterms. And you've got benefits associated from The One Big, Beautiful Bill as it relates to both bonus depreciation and tax refunds. And if there's any type of stimulus associated with housing, given the impact that has on the freight economy, those are all reasons to be optimistic and I think very different from the last few years.

On the supply side, I think that's where it gets really interesting because if you look at the freight economy as a whole, industry-wide tender rejections 6 months ago were sitting at mid-single-digit percentage. As of this morning, they're at 14% in the middle of February. February is the softest freight market of the year. Demand remains soft, yet tender rejections have more than doubled. And why is that? We've had enforcement occur based on new policies and regulations from the government as it relates to non-domiciled CDLs, English language proficiency that have really taken out a significant amount of supply. So you think about -- I think the words we used on the earnings call a few weeks ago was the fragile state of the market from a supply-demand perspective where any incremental demand could really go ahead and move the overall market balance just given how much capacity has come out.

So that's really good setup, and there's lots of talk about in there. Let's start just kind of continue to push on the demand side. You gave an outlook for volume to be down 5% to 10% year-over-year in the first quarter. Is that a reflection of that demand weakness or at least the demand uncertainty? How should we think about the opportunity to kind of outperform that number? How much of that is a reflection of the broader macro versus things that are kind of unique to RXO?

So that's pretty consistent in terms of the underlying trends that we saw in the fourth quarter. In the fourth quarter, overall volume was down 4%. And to your point, Q1 outlook calls for volume to be down 5% to 10%. But if you unpack that a little bit in terms of the brokerage business, truckload volume in Q4 was down 12% year-over-year. Our Q1 outlook calls for a very similar decline in terms of low double-digit year-on-year. So really similar trends on most of the business on the truckload side. The real big difference from the Q4 to Q1 decel really is just tougher comps in LTL.

In Q4, LTL was up 31% year-over-year. We onboarded a lot of business in Q1 of '25, and we're facing those tougher comps in Q1. So we are going to be -- we talked about up about mid-single-digit percent year-on-year in LTL. So it really is just the tougher comps that yield that down 5% to 10%. But the second part of your question is why we're really excited in terms of specific to RXO. We talked about -- if you look at RXO over the last 10, 15 years, we've always outgrown the truckload market in terms of -- brokerage is taking share from the asset-based carriers and RXO is taking share within brokerage. When you look at the strength of our late-stage sales pipeline within brokerage with the integration of Coyote materially complete and behind us, we are in growth mode, and that late-stage sales pipeline is up more than 50% year-over-year. And that's what really gives us confidence to start to resume our outperformance versus the broader market as early as the middle of the year.

So I really want to dig into that kind of longer-term outlook, but let's stay on Q1 just for a little longer. The Q1 outlook calls for adjusted EBITDA in the range of $5 million to $12 million. Give us some context for how we should think about that. To what extent is that reflecting some of the pressures, especially, I think one of the things that I think is starting to be well understood, but in the early cycle of an inflection, when tender rejections start to go up, obviously, it tends to squeeze broker margins. Talk about how significant that is? And what's kind of baked into that $5 million to $12 million EBITDA projection?

I mean that's -- to your point, that's how the business model works. So in some cases, it's largely mechanical. If you think about how the unit economics of our brokerage business work, we've got for most of our business, contracts with our customers. Contract as a percentage of our business on the truckload side is 72% of our business in Q4. So we've got 12-month contracts with our customers, and we procure transportation on the spot market. And what we saw based on the enforcement actions that I was just talking about, late Q4, you saw a supply shock and you saw spot rates from November to December industry-wide move up by 15%.

That's the largest move we've seen in industry-wide buy rates from November to December in 16 years. So when you have that kind of supply shock and a business that is largely contractual, brokerage gross margins get squeezed. And unlike typical cycles, there was no demand component to help relieve that, where when you get squeezed historically, there is -- there are spot loads to help offset that squeeze. We didn't have that. So what you see reflected in the Q1 outlook of $5 million to $12 million of adjusted EBITDA, not only do you have a typical sequential decline from Q4 to Q1, but you're really talking about those tighter market conditions persisting for the entire quarter that materialized late in Q4.

Got it. So let me follow that with maybe a little bit of a tough question, but just a realistic question as we look at the environment where supply is being squeezed, that puts pressure on your purchase transportation cost. At the same time, the demand seems a little more uncertain. How does that flow through? And how does that not create kind of a challenging operating environment that could extend beyond Q1? Should we be worried about that? And then within that, talk about kind of what's the process for resetting contract rates higher? What's the timing for that? And how much of an offset can that have to some of these pressures?

Sure. So obviously, I can't control, we can't control when demand is going to return. But this kind of plays back into what we're talking about earlier and why we're so excited, irrespective of the market backdrop, we are in growth mode, and we are growing our pipeline in a pretty large way, being up more than 50% year-on-year. So this is a late-stage pipeline, all incremental growth, new growth with existing customers, new growth with new customers, and that is up more than 50% year-on-year. So could the softer demand environment persist throughout Q2 and all those reasons for optimism that we just talked about not come to fruition? Sure.

But if you think about what is within our own destiny in terms of the pipeline that we've built now that we are back in growth mode and where we have that line of sight to resuming truckload outperformance, that's a lot of opportunity to capitalize on. And what we're also seeing in this environment, which I think is a huge opportunity for a large-scale broker like RXO, and Kevin can certainly chime in on this as well, we're seeing customers continue to consolidate the amount of carriers that they're working with, especially in light of the new regulatory environment where you have to go ahead and make sure that you as a shipper are dealing with highly qualified carriers that have access to significant capacity.

Yes. And Ari, I think about it, too, what's happening with the government regulations and the changes to supply, it's leveling the playing field for large brokers like us. And so there's probably 17,000, 18,000 brokers in North America. A lot of them are small and a lot of them may have relied on this fringe capacity, if you will.

Well, us as a publicly traded company, dealing with Fortune 500 companies, we can't. We've got to make sure we have a very strict compliance and vetting process. So we're using high-quality carriers already. And so what the government is doing taking out some of this fringe capacity, it could hurt some of these smaller brokers who may have relied on that. And now we're all for it because it levels the playing field, so to speak. Does that make sense?

It absolutely makes sense. And I definitely want to dig into that point about industry consolidation, but let me ask about the pipeline first because -- it's up 50% you mentioned.

More than 50%.

More than 50%. So that's a big number, right? What is driving that number? Is that you guys proactively going out and pursuing business? Is that customers saying, hey, I'm kind of deemphasizing the smaller brokers that I've maybe relied on in the down cycle. How should we think about kind of what's driving that number? And then what it implies for kind of earnings and top line as well as we kind of move through the year?

It's both of those. And it's also shippers who wanted to, in some cases, maybe just -- let's see how the integration went. And we're 12 months out in terms -- more than 12 months out in terms of the completion of Coyote. Service levels have been great. We've finished the integration materially in terms of technology and pricing and people and operations and the service levels are there. So customers are awarding us new Existing customers are awarding us new business. New logos are coming into the pipeline. So we talked about 12, 18 months ago, one of the largest opportunities for One RXO post Coyote was to go ahead and take that existing book of Coyote business, stabilize it and then grow.

And when you look at just how large the for-hire truckload market is. And to be fair, it did certainly take us a little bit longer than we expected to stabilize the legacy Coyote volume, but we've seen that stabilization now for the last couple of quarters. Truckload volume for the combined company, Q2 versus Q3 was up sequentially, Q3 to Q4 was up sequentially. It will be down seasonally into the first quarter off of that stabilized base. But then we look forward to Q2 and the rest of the year in terms of that commentary that I gave on being able to resume outperformance versus the broader market. And then you start deconstructing that pipeline, it's largely led by full truckload. And there's not one customer that composes a disproportionate percentage of it. So it's very broad-based. And it's new logos, it's existing logos. It's really encouraging to see.

And just the level of interactivity and connectivity with our customers is quite strong. So going back to your earlier point because I think this was part of your first question or your prior question, building off of that Q1 base, how do we sort of build from there, right? So Q1 is typically our slowest month of -- our slowest quarter of the year. It's our lowest from a percent contribution standpoint with respect to full year EBITDA historically. From Q1 into Q2, every line of business is seasonally stronger from a volume standpoint. Managed transportation will have better automotive volumes, and that business has stabilized. We've talked about that. We've talked about last mile, strongest quarter of the year is typically the second quarter. brokerage, we're going to have all of those new awards that we talked about in terms of onboarding, combined with positive seasonality from Q1 to Q2.

So we've got some, I think, pretty strong momentum hitting from Q1 to Q2. The one thing we can't control, obviously, is broader industry-wide demand and how to think about when that returns and the impact that will have on gross profit per load.

How should we think about the incremental profit opportunity or what the margin profile looks like or kind of however you want to frame it on that -- on those new business wins versus the existing book of business?

Sure. So I mean the way we think about pricing is we price in line with market, and we go ahead and procure transportation more effectively to go ahead and deliver a great solution for our customer and strong contribution margins for RXO. And the way that manifests itself is for every dollar of incremental gross profit that comes into the P&L within the brokerage business, it can be anywhere from, call it, 50% to 80% plus incremental margins depending on whether or not there's headcount associated with respect to the addition of that type of growth.

So the incrementals are quite strong on a business that right now is doing low single-digit percent EBITDA, right? So the deleveraging clearly has been hard on the way down. But when you start to think about the cycle potentially turning and think about what the releveraging of that P&L looks like based on how strong the contribution margins are, right, it doesn't take much to move the needle when you're dealing with a business that's at low single-digit EBITDA margins right now.

So let's dig deeper on that. With the understanding that there's still a lot of uncertainty out there on the macro demand what is the normal seasonal step-up look like? You mentioned first quarter is usually kind of the weakest quarter of the year. What does the normal seasonal step-up look like from first quarter to second quarter? How should we think about kind of longer term if the cycle inflection is real and weigh in on like how real or what's your level of confidence on like the cycle turn being real this time? Because I know it's -- we've had a lot of head fakes in that regard.

Yes. I'll take the second part first. And if anyone is coming up here with any level of confidence on this being real, I mean, I think I left my magic 8 ball at home and my crystal ball at home. I don't know, right? What I do know is we can just look at the facts. Spot rates are up from $1.55 to $1.90 on ex fuel in terms of line haul. Tender rejections are sitting at 14%. Load-to-truck ratio this morning was approaching 10%. These are all positive cyclical indicators that a year ago were materially lower.

So all the freight KPIs are flashing in the right direction. But we're still in a soft demand environment. So I would sort of flip back to the question in terms of what do I need to see to have confidence that it is real? I want to see improved demand. I want to see another 2 readings of industrial ISM above 50. I want to see improved consumer confidence, improved trade clarity, restocking on behalf of retailers, improved automotive demand and improved housing sector. You start seeing that, then I think the confidence will be there that there's a true demand recovery. On the first part of your question, I've certainly come to appreciate over the last couple of years, there's no such thing as seasonality in this business because you're going to be -- we are going to be at subject of what's going on in the overall freight economy.

But what I can certainly tell you, just to help frame cyclicality and how fast this business can move, I mean we've had years where 1 quarter could be mid-single-digit percentage of total year EBITDA. right? So I'm going to refrain from giving typical seasonality from Q1 to Q2. Certainly, it's up, the magnitude of which is going to be a function of the broader demand environment. But depending on how steep the demand curve looks like, you could have a very sharp recovery to the point where on a full year basis, 1 quarter could be just mid-single-digit percentage of the full year.

And Ari, let's take a little bit step further kind of talking about the cycle dynamics. And what we're seeing on the supply side, it's probably going to be a permanent reduction in supply. The supply is not going to come back. So if you think about 2017 when ELDs probably took out about 4% to 5% of industry capacity. '18 was a phenomenal freight year, great freight year, great freight stocks. But then what we didn't know, we know now a lot of capacity came flooding back in the market and killed it.

But if you kind of look at cycles of the past, '04, '05, '06, that was a 3-year cycle. Cycles 20 years ago used to last 3 and 4 years. Truckers would tell me all the time, in the mid-90s, cycles would last 3 and 4 years. There would always be a supply response, but it will be more gradual. I think whenever this cycle does turn, we may get back to cycle of yesteryear when you could see a multiyear cycle because supply will come back in, but it will come back in a more rational pace, not like it did in '18, where it just flooded the market. That's exciting, too, I think, looking forward.

Yes, the supply contraction feels real, right? That doesn't seem like it's [indiscernible]. I think it's more of a demand question. So let's talk about some of those different scenarios, right? If supply constraints, but demand remains kind of soft. What are the implications there for RXO in terms of if you want to talk about an EBITDA standpoint or an EPS or a free cash flow standpoint? And then in a slightly more favorable environment where ISM continues to flow through at kind of, let's say, low 50s, mid-50s, what could that imply for RXO?

And what are kind of the metrics that investors should be looking for, right? Like with the understanding it's been a challenging down cycle. You've had a lot of obstacles with -- or maybe obstacles is not the fair term, but there's been a lot of uncertainty over the last 12 to 18 months, right? And we've seen it put a lot of pressure on earnings relative to what I think people were hoping for. Where could that go in an up cycle under those different scenarios?

So on the first scenario where supply remains tight and there's no improvement in demand, that's going to squeeze our brokerage gross margins, and you're not going to have enough spots to offset. But what we will have is certainly some of the self-help associated with the new books of business that we're onboarding given the pipeline strength that I talked to you about. So I think that's a really important point. We're not just sitting here waiting for the cycle to turn. It's like a really bad strategy, right?

The playbook is it's a $400 billion for-hire truckload market. We're the #3 player and still the share that we have is so small relative to the most -- the rest of the market. We can add value to our customers every single day. There's a huge opportunity to grab profitable market share and do so within a soft market, especially given some of the dynamics that I talked to you about earlier where shippers are looking to consolidate the amount of brokers that they use. So I think that's a significant tailwind for us even if it's a softer demand environment, but no doubt about it, if that's the broader backdrop that we're talking about, that will be pressure on gross margins. And the question is then how much incremental business can you bring on to help offset.

The second scenario is certainly an easier one to get your arms around because it's basically the current environment, but then you start to see an increase in volumes from here and then you start to see spot volumes increase as a percentage of the mix and provide relief in terms of the overall profitability of the business. You asked the question, I'm sure this one or the prior one in terms of just the renewals and the contract rates. And I think that's a really important point. We talked about on the earnings call, contract rates being up low to mid-single digits year-on-year 2026 versus 2025.

And that will be staggered, as you can imagine, the pricing conversations that we're having now versus 60 days ago are clearly more inflationary, just given how strong the market has been from just an overall freight KPI standpoint. And what's fascinating to watch is we're sitting here third week in February, the effects of tropical -- or not tropical winter storm Fern are behind us and all the weather are behind us and tender rejections are moving lower. And in some regions of the country, you'll see tender rejections anywhere between 20% and 30%.

These are levels that we haven't seen since 2021 and 2022, which further reinforces the notion that so much capacity has come out. So I do think that's when you start to think about the overall contract pricing to the book of business, that will help provide relief on the contract gross margin per load. But then from there, the question becomes, does the market tighten? And if it tightens, how do we think about bringing on the spot?

So we've seen the largest broker in the industry kind of posting mid-single-digit EBITDA margins. Do you think that's a feasible target or kind of in an up cycle? Is that something that we could realistically expect from RXO? And talk about the process of getting there?

Yes. That was the last part of your question. That's right. So no doubt about it, they've been executing well. So hats off to them for sure. I think it's also important to think about various mix differences between RXO and other brokerages in the industry where some brokerages can have 50%, 60%, 70% of their volume in LTL, right, which runs at higher gross margins, highly automated. You can ramp up productivity very nicely. We love the LTL business. It's grown significantly for us, but it's still only about 1/4 of our truckload -- of our brokerage business.

So I think there's a huge opportunity to grow that business. When you think about RXO long term, as the broker that is the third largest in North America, there is no reason mid-cycle, we're not talking about at least 5% to 6% type EBITDA margins. And when you start thinking about normalized earnings, it's not just taking current revenue levels and putting a 5% to 6% EBITDA margin on the business, right? I think you need to back up and think about how we are below trend line for volume. We're below trend line from an industry from a volume standpoint. Goods versus services is sitting at 15-year lows. Gross profit per load for RXO in the month of December on the truckload side was 30% below our 5-year average. So revert all of that to the mean. And then you take a -- God forbid, Kevin's right, and you talk about a multiyear up cycle and then you give credit to the $155 million of cost-outs that we've taken out of the business over the last 3 years post spin from XPO, there's a lot of operating leverage in the business.

Can we put some more specific numbers on that? I mean is there like -- like -- and again, I understand it's not like a 2026 target or a '27 target, but like what should we think of as like the mid-cycle earnings potential of the business?

Yes. We haven't refreshed sort of a dollar figure in terms of EBITDA level in terms of what mid-cycle can be. Hopefully, gave you some of the inputs in terms of how we think about for the business, but goes without saying that we're talking about a level of profitability from an EBITDA standpoint that is multiples of where we are right now. So there's a lot of leverage in the model.

And then the free cash flow aspect of the story is where I think we get quite excited because whether or not we're doing $200 million of EBITDA or doing $600 million of EBITDA, when you think about the cash outflow that we have as a business, that $30 million of interest expense and $50 million of CapEx, that $50 million of CapEx will certainly move a little bit higher as the business grows, but not materially. So the ability to generate significant free cash flow, especially if it's a multiyear cycle and you're in "normalized" earnings for a multi -- for a longer period of time can be quite significant to the enterprise.

Fair. So I can respect that, and I'll put numbers on it and -- so is there anything structurally, I guess, that keeps RXO from being able to achieve kind of a mid-single-digit EBITDA margin kind of in more normalized trucking environment. And in terms of the free cash flow impact then, it sounds like given the numbers you just gave, Jared, we're talking about $100 million plus of free cash flow in that environment that seems very reasonable to expect.

So on the first part of your question, I would take the opposite perspective in terms of what can we do in terms of leveraging technology and operating efficiencies to go ahead and make sure that mid-cycle when we are operating as efficiently as we can, we can be doing north of 5% EBITDA margins. I think there's opportunity to structurally improve the profitability of this business, leveraging technology, leveraging AI and doing it in a more efficient way that I think is a long-term tailwind for EBIT and EBITDA margins in terms of the math that you were doing on free cash flow.

I mean if the math works out such that the only cash outflows that we have are $50 million of CapEx and $30 million of interest, the free cash flow generation can be quite powerful. The only thing to keep in mind is that during an upturn, we are an initial user of working capital as the business grows. And then as the balance sheet shrinks during a downturn, you have a release of working capital. So you do get that onetime use and the onetime release. But through cycle, it's pretty powerful in terms of the free cash flow generation of the business.

Ari, we talk about an EBITDA free cash flow conversion of 40% to 60%. So use that as your guide.

And that's a pretty reasonable number to think of as kind of a mid-cycle number that doesn't change with kind of where we are in the cycle.

Look at 2025, we did a 43% adjusted free cash flow in 2025 despite these levels of profitability. So when you start thinking about the business getting to the point where we're doing multiples of what we're doing from an EBITDA standpoint and free cash flow generation, to Kevin's point, is quite high.

And just piggyback on all this, Jared, you talked about us growing our LTL business, growing our SMB business. That's going to make -- over future cycles is going to make our business less cyclical too.

So that's a great point, Kevin. That's one of the things I wanted to talk about. So the LTL business, you grew that 31% year-over-year in fourth quarter. I understand maybe there was some kind of idiosyncratic RXO-specific things there. But we saw, again, one of your big public competitors also growing LTL volumes in excess of truckload volumes. Could you talk about the different dynamics between those 2 segments? Obviously, the truckload market is much larger, but is there actually, in some ways, more opportunity on the LTL side from a profitability standpoint? Or how should we think about kind of how those 2 markets differ and how RXO would like to be positioned between truckload and LTL.

Well, I think so I think LTL is going to be a very nice growth story for us for many years to come. If you look at some of the large public LTL carriers, who are some of their larger customers? It's a 3PL, 4PL. And so we aggregate a lot of smaller LTL shipments, but really, our growth -- it's an RXO story. And so how that story goes is we do such a good job with our large truckload customers, and maybe a small part of what they do is LTL. So let's assume you take a large customer where 90% of their business is TL, 10% is LTL. Well, guess where they spend 90% of their time. It's LTL. LTL pricing, it's like the eighth wonder of the world.

You got to deal with damage claims. It's just very difficult. They come to us and they're like, Jared, please help me. Take this headache off my plate. We do it for them. It's a fully automated transaction. And so we make their life easier. They can focus on their core, which is truckload where -- and take -- really save them a lot of time. And so that business will continue to grow. As we grow our truckload base, you'll see us continue to grow that LTL base. So that's where it stems from. And we're very excited about it because to Jared's point, it's higher gross margin, it's less cyclical. It's just a stable business. And we probably use 50 to 60 different LTL carriers.

We use a lot of smaller regional carriers to provide fantastic service. And so we can go to our customers and probably get better pricing than they could on their own. But the main thing is we're taking -- we're solving a big problem for them, taking a headache off their plate.

That's really helpful, Kevin. Let's talk about industry structure a little bit. You had mentioned the long tail of smaller brokers for years, I think people who have been following the industry have been talking about there's going to be consolidation in the industry. At the same time, right, and we've heard this actually from a number of the asset-based guys who we've spoken with over the course of the week, they say, well, things like cargo theft, things like certainty of delivery, partnering with an asset-based carrier, some shippers right now are kind of shifting their business more towards wanting to partner with asset-based carriers. I don't know if you guys would agree with that or not. But how do you think about both in the near term and kind of over a longer-term multiyear horizon, what the kind of consolidation in the industry might look like?

I can start, and Kevin, if you want to come on top. I would say that we fundamentally believe that this is a winners take most market type structure. The top 9 players post the acquisition of Coyote represent about half the market. You saw some more M&A activity in the space over the last couple of weeks with larger players acquiring more larger players continuing to scale up. So I do think that the advantages of scale in terms of decreasing your cost to serve, being able to offer services and solutions to your shippers that small to medium brokers can't is pretty beneficial.

And I think you're going to continue to see further consolidation in the space organically and inorganically, where you'll see further M&A and you'll see small and medium brokers that just can't compete and can't invest go away. And to Kevin's earlier point, when you think about some of the brokers that are out there that were leveraging some of this non-domiciled CDL capacity and shadow capacity, those business models now completely go away based on new regulations. So I think that will help clean up the industry structure when we think about just who the winners are longer term.

In terms of your other question in terms of shippers thinking about leveraging assets more versus 3PLs, typically, you'll see depending on where you are in the cycle, shifts from brokers to assets and vice versa. But if you look over the long term, brokerage penetration was at 5% 20 years ago, at 20% now. Industry projections have that going to mid- to high 20% in the next 5 years. We think longer term, there's probably headroom up to 40% because the reality is we, as RXO, given our scale, can offer the same services, if not more, than a lot of the asset-based carriers, but we do it with more flexibility given access to effectively infinite capacity.

And think about this, just to build on that, dreaming of when the market turns, we can all dream. So when the market turns, an asset-based carrier, they're going to struggle with capacity because they're just not going to have any more drivers. There's kind of a ceiling there, right? Because they're going to have hard times getting more drivers, whereas a large brokerage like us with access to 120,000 carriers over 1 million power units, if a shipper needs 50 trucks next week in Miami, we can be there with 50 trucks where an asset-based carrier might say, hey, we're only got 10 in the area. So that's when you're going to see, particularly when the market turns and things get chaotic and we love chaos and volatility, that's when we shot. We'll be there and we're going to solve -- once again, solve those problems with the shipper.

I don't think there's anything more polarizing in the transport world right now than talking about tech and AI and its role in brokerage.

Save that for the end.

We still got a couple of minutes. We can drag this out.

Was there news in the space?

There's a little bit of news.

Give me your take on that. Obviously, we saw a lot of noise last week around that. I think most people have kind of come to a conclusion it was probably an overreaction. But kind of taking a step back, right, it does seem like there's a lot of disruption underway. How is RXO positioned? What -- so I guess, really kind of 2 parts. What have you been able to achieve through AI? What's still left to go? And then how do you see that kind of playing out in a broader sense? It seems like that is one of the major drivers of consolidation in the industry. But even among the large players, there seems to be some differentiation between who might be the winners and who might be the losers or who might be the laggards in that sense. Give us a sense of where RXO is positioned there and kind of for people who are invested in RXO, how do they get comfortable with that risk and that RXO can be a winner in that environment?

I think the fundamental question that you're asking is how do we think about the potential disintermediation risk associated with AI and how does it impact the business? And the reality is that this business is fundamentally built on relationships and service. Our top 20 customers have been with us for 16 years on average. They trust us to make sure that we are servicing their freight throughout all market cycles. And that is something that we take extremely seriously. At the end of the day, you think about the moats that we have around the business, we're operating a 2-sided network across our carrier community and our shippers.

And how do we think about enabling that service, thinking about all of the solutions and services that we provide to be incrementally more sticky to that shipper, whether it's modal conversion between TL and LTL and intermodal, whether it's leveraging a managed transportation sale, whether it's leveraging last mile, middle mile, whether it's customs brokerage, whether it's warehousing, domestic services. There's so much that we offer and the stickiness of that relationship is so important. So I think that's critical to just understand at the core of our business, its relationships, its trust, its service and its proprietary data.

And then you think about how we go ahead and leverage all of that with aggressive investing in technology. We are a tech-enabled organization. We've said that from day 1 since our spin. We are not a tech company. We are a tech-enabled company. So taking those services that we offer, the relationships that we have, the trust that we've built and then applying the $100 million a year that we spend on technology across the 4 pillars that we talk about between volume, margin, productivity and service and doing so not just through typical technology investment, but through transformational AI capabilities. That goes back to the earlier comment that I made when we think about long-term earnings power and the ability to actually add upside to longer-term margins because we're investing so heavily in technology, that's where things get really excited.

So you think about some of the capabilities that we're deploying across the organization from a generative AI standpoint, from an agentic AI standpoint. This business is all about incremental margins. So when we think about last 12 months productivity being up 19%, productivity defined as loads per person per day within our brokerage business on a 2-year stack up almost 40%. How can we decouple headcount growth from volume growth over the long term, so we can add 20%, 30%, 40% of volume for the network with adding a far less rate from a headcount standpoint and having those incremental drop margins drop to the P&L from an EBITDA standpoint. That's where the math is very powerful. So hopefully, that gives you a little bit flavor in terms of how we think about things. I don't know if you want to add anything?

No, I think summed it up well.

So it sounds like the technology is really important, but you see the role of relationships still being kind of paramount within the industry.

100%. This industry is built on relationship with everyone in the organization, at least at RXO we sell. We build relationships with all of our top customers because our customers have such complex needs, it's not transactional. I think that's another key point. This is not a transactional sale. That's not what we're looking for. We're looking to build long-term holistic deep relationships with our customers so we can make sure that we're delivering service and solutions throughout all market cycles.

And you think that's durable 5, 10 years out?

No, I think it's durable. I think that AI is going to help in terms of the competitive moat with respect to the top players in the industry. When we talk about that long tail of brokerages going away and the large brokers that are remaining, leveraging their proprietary data in a way that could help from a profitability standpoint, that can help from a sourcing and capacity standpoint. I mean the application of that data can be so powerful. So I think it's absolutely durable in terms of how we think about the business.

And just think about when the market turns, things do get chaotic and crazy. Shippers are going to want that salesperson that they know they can call 24 hours a day, text 24 hours a day. They just give them reassurance.

And one other thing to mention on that point because I think it's sometimes forgotten when you think about AI risk and you think about digital brokerage -- I mean, digital brokerage risk, what I saw last week reminds me a little bit of 10 years ago where digital brokers are going to go ahead and disintermediate the industry, and we've obviously seen what's happened over the last decade, and that only reinforces our view that the way we think about the business long term is the right way, and it's being proven out time and time again that this is -- the through-cycle economics work because this is all about relationships and service.

But one other thing to keep in mind, and this ties directly into the regulatory environment that we're in with respect to sourcing and capacity, you start up a brokerage and you try and go ahead and envision a world where it's purely digital. You start onboarding carriers purely digitally and you think about not really knowing who you're doing business with on the other side, you talked about theft and fraud. I mean that's something we take incredibly seriously at RXO. So you got to be -- you can't go ahead and join RXO as a new carrier and book your first load digitally. We want to know who we're doing business with. I think that's a really, really important fact where if you think about anyone that's trying to create a digital brokerage, et cetera, and they're just onboarding from a digital perspective, especially in light of the current regulations, you really don't know necessarily which carriers you're actually working with.

We only have a couple of minutes left. I want to make sure we hit on this. You recently restructured your revolving credit facility. Give us some color on why that was done and kind of what's enabled by doing that?

Sure. So we went ahead and we replaced our existing unsecured revolver with our new secured ABL revolver. So went ahead and -- which are securitized by the receivables of the company. Reality is it just increases the flexibility of our capital structure throughout all market cycles. So we're going to go ahead. And with this new structure, we're going to save about 35 basis points from an interest expense perspective relative to the prior structure. And then importantly, when we think about the prior unsecured revolver, they had maintenance covenants -- it had maintenance covenants such as our leverage covenant ratio and our interest coverage ratio.

Those no longer exist. So the availability actually under the new ABL is almost 2x that of the prior unsecured revolver, whereby we have full access to the $450 million ABL, whereas prior under the revolver, we had lower access because of those covenants. So this is -- we're really excited in terms of what that provides in terms of incremental liquidity and flexibility for the company.

Got it. That's helpful to understand. So we don't have a ton of time left. Jared, Kevin, I want to give you guys an opportunity to give some thoughts that bring this all together, how you're thinking about the opportunity going forward at RXO, what are you most excited about? And maybe it would be helpful, and I apologize because it's on my list of questions and I wanted to get to it, but we just didn't have time. The last mile business, the managed trans business, those seem to have a lot of momentum. How does that weave into the kind of broader RXO story?

Yes, we didn't even get to the complementary services. So when we -- I mean, to boil it down as a takeaway, when you think about how RXO is positioned into 2026 and for the long term, I think it's really exciting right now. When you think about the fact that the Coyote integration is materially done and the operations, the technology, the pricing, it's all on one system, and we are looking at a market opportunity that is $400 billion in terms of its size with us as the #3 player. We're entering in 2026 with renewed momentum. We are all about growth, profitable growth. That's what we've been doing for the last 15 years. But now we've got the pipeline to support that heading into '26 with pipeline up more than 50% year-on-year within brokerage.

I think that provides us a ton of momentum in terms of new business wins. We're operating more efficiently. We've taken out over $155 million of costs. So we're going to go ahead and have significant operating leverage, managed transportation within complementary services. We onboarded more than $300 million of freight under management last year, and the automotive business has stabilized and is no longer a headwind. And in last mile, we are -- we had -- while we're dealing with a soft environment from a big and bulky perspective, we continue to take share, and there are significant opportunities within last mile in particular, to go ahead and just improve the profitability as we think about leveraging the hub network more effectively across the organization. So we then combine that with a new ABL facility and a refinanced capital structure. We just refinanced our notes last week. I think we are set up to win for 2026 and beyond.

And I would just wrap up by -- the integration of Coyote is largely complete. we're going to market as one RXO ready for the turn.

Just if I could ask or squeeze one more question in there. So just as we think about some of the pressures that you're facing on, again, that margin squeeze that could happen, are we really looking at -- I think, Jared, you had said kind of tale of 2 halves. Like are we looking at like a second half that looks materially better than first half? And then does that create runway into 2027? Is that what we should really be like excited about? Is that kind of from an investment standpoint, what we should be focused on as analysts as people observing the company?

I think what you should be focused on from an investment standpoint is the normalized earnings power for this business is materially higher from current levels, and we've got enormous tailwinds based on the pipeline, based on our operating structure and how we think about growing this business.

And when we think about the business, we think about it on the long term. We don't think about it quarter-to-quarter. We don't think about it from -- I mean we obviously think about it. But when we think about how we're running the business and what we're striving for in terms of long-term goals, and how our top investors think about it. They think about it through cycle, normalized earnings power. And from that standpoint, you think about the ability for this then to potentially be a multiyear cycle to the extent that, that supply capacity is coming out. I think there are a lot of exciting opportunities ahead for RXO.

That's wonderful. Well, we're certainly excited to see what the up cycle brings and not just for RXO, but for a lot of our companies, we think there's a lot of excitement around what the potential could look like there. So Jared, Kevin, thank you both for joining us, and we are thrilled to have you as well.

Thank you. Appreciate it.

Well, good morning, or almost good afternoon here. Welcome to Day 2 of Barclays Industrial Select Conference. I'm Brandon Oglenski, airline and transport analyst. Next up, we have RXO and joining us from the company is Jared Weisfeld, Chief Strategy Officer; and Kevin Sterling, Senior Market Strategist, Head of IR. And before we get into this, we'll just do the audience response questions really quick. I'm sure if you guys have been through a fireside, just pick up that little remote there. Sorry, Kevin, we don't have one for you. But if you can queue up, question number one, please. Do you currently own RXO? Yes, overweight; market weight; 3, underweight; or 4, no. And go ahead and vote. Appreciate everyone participating, too. Okay. And then question number two. What is your general bias towards RXO right now? Positive, negative or neutral. All right. And then question number three, please. In your opinion, through cycle EPS growth for RXO will be above peers, in line with peers or below peers? All right. Well, Jared and Kevin, thank you guys so much for coming down. I know Drew Wilkerson tried to be here. I guess he's stuck in karaoke session.

Karaoke is room for me forever. But no, Drew is exactly where you want him right now, meeting with customers. So appreciate the invite. Thanks for having us.

Well, thank you again for coming down. And I guess the karaoke joke was really talking to the volatility that your stock and a lot of other asset-light transportation stocks saw last week with a supposed that AI company has built code and going to take over the world. But can you talk to maybe the reality on the ground and even how RXO is actually leveraging AI today?

Absolutely. So the reality on the ground is that when we think about how we're leveraging technology and artificial intelligence, we fundamentally believe that leveraging AI and tech will go ahead and improve the structural margin profile of the company longer term. And we think about it in 2 ways: how we go ahead and improve productivity, how we go ahead and then unlock incremental revenue opportunities. But before I even go there, I just want to back up and talk about just the fundamental premise of our business model is predicated on relationships and service. If you think about the relationships that we have at RXO, we deal with the largest shippers in North America, Fortune 100, Fortune 500, Fortune 1000 shippers, and the top 20 customers on average have been with us for 16 years.

When you think about the service level requirements, you think about dealing with high-tech vertical, you think about dealing with hazmat, you think about dealing with complex needs. The nature of the game is all about exception management and how you service your customer freight throughout market cycles. So we're going to leverage technology aggressively and we're going to do it to the benefit of the P&L. We're going to do it to the benefit of our customers and our shareholders. But at the fundamental core, if you do not go ahead and service your customers' freight exceptionally well built on trust and those relationships, no amount of tech can solve for that.

Okay. Can you talk about earnings that have been a little bit more challenging in the last 2 quarters or at least in the fourth quarter and the guidance for 1Q. It's pretty difficult to be fair. But you guys are effectively saying that you're seeing the squeeze in the market as truckload rates have come up. Can you talk through that dynamic?

Absolutely. I mean -- so if you think about the underlying business model within RXO brokerage, we've got our contractual book of business with the large shippers that I just talked about, and we're 70% plus contractual in nature on the truckload side, and we're dealing with enterprise-class shippers, generally 12-month contracts. We procure our cost of purchase transportation on a spot or transactional basis. And you think about the month of December alone, industry-wide buy rates were up 15% month-on-month from November to December. That's the largest buy rate movement we've seen in the last 16 years from November to December. So when you've got that book of business that's contractual in nature and you've got that buy rates going up so dramatically, that squeezes the impact on our brokerage gross margin. But that's temporal. That happens at every point in the cycle.

We're seeing the impacts of that certainly in Q1, which is always the seasonally slowest quarter for RXO, but then you magnify that, to your point, from a squeeze perspective, which resulted in our Q1 outlook of $5 million to $12 million of adjusted EBITDA, but that's largely mechanical. And this is the squeeze that we've been waiting for, for the last 3.5 years after we've spun out from XPO, we just didn't think we'd get here this way in terms of really a supply shock driven squeeze. The one thing that's missing is an improvement in demand. Because if you think about a typical squeeze, every cycle, you always see the contractual book of business, profitability moved lower, but you'll then have spot loads to help offset. But because this is effectively a supply shock, which we can talk about in terms of all of the recent policies and regulations coming out of the Department of Transportation, which overall is a very long-term positive. You don't have that demand in the near term to help offset.

And Brandon, let me piggyback on that. We're going through bid season. And so you want to put your best foot forward with that customer. And so you want to make sure you're servicing that customer's freight. So we're approaching it from a position of strength, not weakness. You make sure you're there for that customer's service, that customer's freight, and it kind of gives you that advantage going into bid season and to Jared's point, as the market inflects and turns, we're going to be there to clean up on the spot opportunities because we're going to be the first call because the customer knows that, hey, we were there service and that contractual freight. So it's very important, particularly right now with bid season to put your best foot forward.

Okay. But you guys did guide to volumes being negative in the first quarter. Is that right?

So from a Q1 perspective, we guided volumes down 5% to 10% year-over-year. If you unpack that from Q4, we were down about 4% year-over-year. Truckload in Q4 and Q1 will be down about the same amount. We talked about down low-double digits. It's really that LTL component, where we are facing much tougher comps. In Q4, we talked about LTL being up 31% year-over-year. We onboarded a huge book of business in 2025. So when you think about the tougher comps, LTL will be up 5% year-over-year in Q1, plus or minus. So that really is driving the sequential move. I think the biggest takeaway I want to leave you with from the earnings call is that with the integration of Coyote materially behind us, we are entering in 2026 in a much different position relative to 12 months ago.

Our late-stage brokerage sales pipeline is up more than 50% year-over-year. And we wanted to give that stat out there, not something we typically talk about, because we also made the comment that we expect to resume truckload outperformance versus the market as early as the middle of the year. And that's a -- when you think about RXO for the last 15 years, we've been doing that every year except last year. So we wanted to give you some confidence when you think about where our pipeline is. Truckload has been underperforming for the last 12 months for a number of reasons, but we now have line of sight to resuming outperformance versus the broader market as early as the middle of the year.

And I guess, what's giving you the confidence in driving or motivating you to share that stat with us?

We didn't think it was fair to make the statement that we're going to go ahead and claim that we're going to resume outperformance without giving that composition of the backlog up or pipeline up more than 50%. And when you unpack that pipeline, it's materially driven by truckload and this is talking about new incremental business that excludes all incumbency. We're talking about new business with existing customers and new business with new customers being up more than 50%. This is qualified. This is already in pricing. If you think about a broader pipeline, which includes pre pipe, that generally can have a win rate of low-single-digit percentage. This historically is multiples of that. So the confidence level is high in terms of visibility on this new book of business. And when you think about it, over the last 12 months, the first 6 months of 2025, it did take a little bit longer than we expected to stabilize some of the legacy Coyote volume.

But in Q3, it was -- truckload volume was up sequentially. In Q4, it was up sequentially. We'll be down seasonally into the first quarter. But building on that, shippers have confidence that the integration is complete, the service levels are there, the technology is functioning to give us more business, and we're seeing that as a result in bid season.

And Jared, that's going to be starting in the second quarter or when do we think...

The language that we used is as early as the middle of the year. And when you think about just the strength of the pipeline, the success we're seeing in bid season, also think about it just from a comp standpoint or comps on truckload start easing pretty significantly in April. So I think we want to build the framework to think about just outperformance versus the broader market as early as the middle of the year. And then building on that, as we think about just the growth algorithm for RXO, it's truck -- freight brokerage is taking share from asset-based carriers, penetration has gone from mid-single digit to 20% and then RXO gaining share from that overall pie, which we've been doing for the last 15 years, sort of resuming that growth algorithm with the integration complete is where we're focused right now.

And I well, I shouldn't assume, but I guess that, that outlook is coming with higher profitability as well.

Profitable growth is how we're thinking about this business. It's how we've always thought about this business. And I think not only are we driving profitable growth in terms of pricing in line with market, procuring transportation effectively, driving strong margins, but then also making sure that we see real operating leverage. We've taken out more than $155 million of costs post spin from XPO back in the back half of 2022. So as we think about going ahead and driving incremental top line growth, doing it in a way where volume growth is decoupled from headcount growth to really drive some strong contribution margins.

Okay. And that could show up as early as mid this year?

The big wildcard that we don't know is demand, right? But -- so there are certainly reasons to be optimistic heading into this year, you look at the ISM reading from 2 weeks ago, the new orders component, the highest level since 2022. You look at consumer confidence moving higher over the last couple of weeks. You look at any kind of stimulus that might happen as a result into midterms. Inventories are generally pretty lean across the supply chain. So I think it is a pretty healthy backdrop from a -- potential backdrop from a demand standpoint. But I go back to what we're just talking about earlier. We're not waiting for demand to improve with -- the organization is moving full speed ahead in terms of driving growth in the business organically right now. And you look at what we have accomplished in terms of the strength of that pipeline growth from new and existing customers, we feel really good about the opportunity ahead of us.

And Brandon, think about it like this, too, post Coyote the foundation is set. We -- we went very fast to integrate Coyote. Now we're pretty much fully integrated. We're ready to capitalize on this market as it's turning. So it's like building a house, you got to build the foundation first.

David, did you have a question?

Yes. I guess one question. You mentioned on the supply side earlier. I mean if we assume the government regulations is going to hit kind of at the lower end of the trucking market, maybe people that aren't as compliant with all the rules and regulations, most of your carriers are. Do you feel like that's an opportunity for larger brokers like RXO to take a little bit more share and that you'll have more of your carriers available relative to what a smaller broker might?

It's a great point, David, and the answer is absolutely yes. If you look at the RXO network, it's almost 120,000 carriers. And if you look over the last 6 months, industry-wide tender rejections went from mid-single digits to as of this morning, 14%. And that is all in the backdrop of a muted demand environment, which I think speaks to how much capacity has come out structurally due to all of the changes that have happened at the Department of Transportation, which is a very long-term positive with respect to safety, fraud and theft and ultimately just a healthier supply-demand balance. And then you look at one of the competitive advantages for a broker like RXO in terms of access to this massive amount of capacity and you think about it because it's not just about having the mass amount of capacity, it's about having high-quality capacity, especially if you're dealing with verticals that are incredibly, in some cases, difficult to cover freight when you think about high-value tech.

You think about hazmat. You think about nuances associated with any particular type of freight, our shippers want to make sure that they're dealing with high-quality carriers. We'll have shippers that want to make sure when they go ahead and we're covering freight. Not only are we going to go ahead and give them background on the carrier that we're using, they'll sometimes want to see a license of what that -- of the individual driver matching all the documentation. You cannot go and drive for RXO with your first load digitally, just to give a sense in terms of the compliance procedures that we have internally. We want to get to know our carrier. It's a trusted partnership across the board.

And think about it, too, from a perspective, like maybe some smaller brokers who were using some of this capacity out there that wasn't quite legal per se, whereas us and other large brokers, it's more of a level playing field now. We kind of -- we have to use high-quality carriers and everything. But now the government is leveling the playing field, by taking out some of this fringe capacity.

That's also a great point. You think about some of the -- I mean, there are 20,000 brokers that are out there. But the top 9 represent almost half the market. So if you think about any of these smaller brokers that were leveraging this capacity that's no longer valid, their business models now go away. So I think it speaks to the moat that gets created, especially for the larger brokers that are out there.

And then on the gross piece, I mean, previously, you talked about double-digit volume growth as being a kind of medium-term goal. Do you have a line of sight to getting back to that type of goal?

Absolutely in terms of how we think about the growth algorithm for the business. I think we think about it more from the standpoint of outperformance versus the market throughout market cycles. And historically, RXO has grown about 1,000 basis points above market. I think we've talked about with Coyote, law of large numbers as the #3 provider of brokerage transportation, maybe that comes down a little bit. But certainly from where we are right -- in terms of outperformance versus the market. But from where we are right now, you look at our truckload volume in 2025 with respect to being down double digits, the base at which we're operating from, we've now stabilized the volume. The pipeline is incredibly strong at up more than 50% year-on-year, line of sight to significant onboardings, existing and new customers and then growing as a percentage of that because you look at RXO's share and you look at overall freight brokerage share, both are still very low in what is an underpenetrated industry, and we are still in very early days in terms of adoption of brokerage as a service.

And Jared, I hate to harp on this, but I guess could there still be a circumstance where maybe your volumes aren't necessarily up but just outperforming the market later this year? Is that the message you're potentially sending?

The message we're sending is that we have very strong confidence in terms of outperformance versus the market. I can't tell you what demand is going to do in 3 months from now, 6 months from now. I think we'll all look at the cash freight index, which I think is a good barometer of what's going on out there. And in Q3 and in Q4, RXO truckload outperformed on a sequential basis, the cast freight index, overall volume growth outperformed driven by the strength of LTL. And when we look at the strength of the pipeline, I think our confidence level is extremely high that we're going to outperform the market. What the market is actually doing, I can't control. But when you think about the diversified book of business that we have, 20% industrial, 25% retail e-commerce, 20% food and beverage, automotive at high-single digit. I think there's a lot of reasons to be optimistic heading into 2026.

And Kevin, from your perspective, the demand just hasn't improved yet in the current environment?

It hasn't and just think about -- you and I have been doing this a long time. Have you ever seen an environment like this where tender rejections, load-to-truck ratios go up like this without demand? It tells you it's all supply driven, right? And so you think about some of the drivers of demand that could occur this year and while we're optimistic and housing, what is it? 7 to 8 -- every new house is built 7 to 8 new truckloads of freight, you saw the positive ISM. So if we get that demand on top of all the supply that comes out, it's not going to take much on the demand side to really drive this market higher. And so that's exciting. And one other point, too, and I think when you go back and look at previous cycles, like for instance, in '17, when ELDs said it probably took out about 4% to 5% of capacity. I think what you're seeing now is going to take out a lot more than that. And '18 was a great year for freight, a great year for stocks, but didn't last long because all this capacity came flooding into the market.

Now we realized it wasn't -- it's kind of the shadow a fringe capacity. But think about like '04, '05, '06, that was a great -- those were great freight years. Cycles that lasted a couple of years. Truckers would tell me even the mid-90s cycles would last 3 and 4 years. Supply comes back, but it came back more rational. I think we're getting to a point where a lot of the supply is coming out, it's more permanent in nature, and we will see a supply response, but it's going to be more rational. So we get that demand, we could see cycles like we used to 20 years ago.

Is this something where you can go to your customers though and say, look, the price for entry has changed, and we need to get more from you or...

Customers are very well aware of what's going on in terms of non-domiciled capacity, English language proficiency and what that's resulting in, in terms of the broader market. So we've talked about 2026 contract rates being up low to mid-single digits year-over-year. As bid season has progressed, I think it's safe to assume we're now more inflationary than not relative to 3 months ago because the market has changed in a pretty big way and the fact that we're sitting here middle of February to Kevin's point, in what is the weakest demand environment of the year seasonally. And we're sitting at 14%, 15% tender projections, speaks to how much capacity has come out and I think the language that we used a couple of weeks ago on the earnings call was the market is extremely fragile from a supply-demand standpoint.

It will not take much demand to go ahead and really alter the state of supply versus demand and where that equilibrium is. So when we think about having those conversations with our shippers, we need to make sure that we're able to service their freight. We also need to make sure that we're earning a fair margin. So I think it's a very dynamic conversation. It's 2 ways. It's iterative. Our top 20 customers are not with us for 16 years on average. It's not a coincidence, right? We do that because it's a true partnership throughout all market cycles, working with customers to make sure that we can service their freight. And to that earlier point, when you think about a fragile balance between supply and demand, if there is any improvement in demand, you can certainly start to see some pressure on these waterfall routing guides, which we really haven't seen from a shipper standpoint in about 4 years.

So it is certainly something that we need to make sure that we are educating our customers about and we're working with them to make sure that we're creating solutions and services to be able to provide to them.

All right. Can you talk to the results at Coyote because we had pretty big ambitions when you guys bought it, but obviously, we know where the earnings picture is today. And on top of that, I guess, synergies have been realized, but can you talk through maybe some missteps there? Or how maybe you could have done it differently?

So on the -- I'll take the second part first. So we moved very quickly, never let a good downturn go to waste. And we moved expeditiously with respect to the integration. So this is one of the largest integration that's ever occurred within the asset-light space, and we were materially complete within 12 months. Operations, technology, people, pricing, all now on one system. So to be able to go ahead and operate in this environment and then potentially operating in a tighter environment being on one system and having that behind us is a huge competitive advantage heading into 2026. So when you think about the integration, it's been a very strong result in terms of being able to do that so quickly and retention of talent has also been strong in terms of voluntary turnover.

We talked about being in the low to mid-single-digit percentage. We've retained almost every individual that we want to be part of the combined organization really going in eyes wide open. Doesn't matter if your legacy RXO or legacy Coyote, who is the most talented individual that can help deliver stronger returns for customers and shareholders over time. That's really the approach that we took. So from a synergy standpoint, we talked about $60 million of operating expenses out of the model that is fully realized heading into 2026. The total synergy number was $70 million, split between $60 million operating expenses, $10 million CapEx. We did announce another new initiative in Q4 of last year with the synergies being complete in terms of additional opportunities to take out more costs about $30 million of operating expenses, of which there was a partial impact in Q4.

You'll see the full run rate of that realized in 2026 versus 2025. So we are really operating very efficiently right now to drive significant margin improvement when we do have better top line growth. And even irrespective of the broader environment, the fact that our pipeline is up so strongly, we're going to be able to drive some really strong contribution margins. To the first part of your question in terms of overall results, no doubt about it. As well as the operational integration has gone, financial results are behind where we thought they'd be. And when you think about what's happened in the model, I think 2 things. One, we talked about how it took a little bit longer than we expected to stabilize the Coyote volume. But encouragingly, we saw sequential volume growth on the truckload side in Q3 and in Q4 and have done a really good job staying close to our customers to drive really strong pipeline.

And when we think about the gross profit per load, which is the other side of the equation, I mean, in the month of December, when you think about just how the book of business works, we talked about earlier, December buy rates were up 15% for the industry versus November. And you have a squeeze on your brokerage gross margin. Our truckload gross profit per load was 30% below our 5-year average, excluding the highs from COVID. So when you get that kind of deleveraging in the model, we do have below gross profit line, a pretty fixed cost structure, where 2/3 of our costs are fixed or semi-fixed. So when you have gross profit that's declining because of gross profit per load, you can't cut it off calls [indiscernible] want to because we want to make sure that we're able to service customers during the upturn. So that really was the -- those were the 2 main drivers.

And all that deleveraging, you've seen that Jared's talking about, it will flip when the market turns. That's -- it will be will be on the upside of the operating leverage.

Okay. I think you guys had spoken to purchase transportation synergies as well. So how do you put that in the context of that gross profit per load being down 30%?

Yes. So on the COP -- so if you think about some of the synergies we talked about as a result of the Coyote acquisition. Number one was on the cost side. When we talked about $70 million of cash synergies that have been realized. And then you talk about purchase transportation. And purchase transportation is going to be not as explicit as cost because it's going to be a relative concept. So it depends on what's happening in the market. If you're in a tightening environment like we're the one that we're in right now, it's more about cost avoidance, i.e., opportunity cost of -- or cost avoidance in terms of not flowing through the P&L.

If you think about a loosening environment, you can bring down PT faster and then you'll have that realized P&L flow through the P&L. So from a COPT standpoint, we talked about 100 basis points of improvement when we're all said and done, I think we talked about a couple of quarters ago being up 30 to 50 basis points since we did the carrier cutover on May 1 of last year. And I think we're -- we feel very confident in terms of the path towards that 100 basis points, but you also have to remember, it's also an iterative process where you think about the carrier reps at legacy Coyote who we decommissioned the old tech platform, Bazooka. We transitioned everyone to RXO Connect and Freight Optimizer, our internal proprietary system.

There's a learning curve, right? If I would take everyone's Bloomberg terminal away in the audience and replace it with a different tool, it would take some time. So you just sort of think about that learning curve, getting to know the freight that's on the network, getting to learn the tools. And then we talked about last call in particular, continuing to augment a lot of the capacity that we have, one of the great benefits associated with Coyote was their access to dedicated and private fleet capacity, which comes at a structural cost advantage. So continuing to augment capacity and bring that into network, I think there's a lot of opportunity to continue to improve our PT and buy versus market.

If we could queue up question number 4 for the audience, only a few minutes left here. In the back, question four, please? In your opinion, what should RXO do with excess cash? Bolt-on M&A, larger M&A, share repurchases, dividends, debt paydown or internal investment? And Jared, while get the response to this, you do run relatively higher CapEx compared to some of your competitors. Can you talk about the components of that?

Sure. So if you think about our capital expenditure profile, last year, we gave a range of $65 million to $75 million. We actually came in nicely below the range at $57 million. This year, we got it to a further reduction to $50 million to $55 million in CapEx. If you think about the business of our scale, to be -- the beautiful part about the model is that we're going to spend about $50 million to $55 million in CapEx this year through cycle, $50 million is probably the right way to think about it. And I think you got to look at it in the context of normalized earnings, where whether or not we're doing $200 million of EBITDA or whether we're not -- whether we're doing $500 million or $600 million of EBITDA, that CapEx profile is not going to differ materially. It will go up a little bit, certainly with the higher profitability levels as we invest into the business.

But that speaks to the free cash flow generation characteristics of the company, where you think about $500 million type of EBITDA number in the context of our fixed cash outflows between $50 million of CapEx and $30 million of interest expense that can generate a lot of cash flow. And to Kevin's earlier point, we get to a world where cycles are lasting for more than 12 months. That's a lot of cumulative cash flow that can build on the balance sheet.

Okay. In the back, question number five. If the audience doesn't mind here. In your opinion, what multiple of 2026 earnings should RXO trade? We have the ranges there, you all can vote. Unfortunately, there's not a lot of EPS this year, I think. But I guess we're trying to turn that around, right? Okay. And then question number 6, please. What do you see as the most significant share price headwind facing RXO? Core growth, margin performance, capital deployment or execution and strategy?

All right. Well, gentlemen, thank you for coming. And Jared, we just have 1 minute left here. I don't know what can you leave us with? It sounds like things are looking better as we get through 2026 for RXO. Is that fair?

Yes. I mean if I had to leave you with one impression, we are entering in 2026 with significant momentum in the core brokerage business. Our pipeline is up more than 50% year-over-year. That's late-stage pipeline that's attributable to incremental growth above and beyond the base business. The integration is behind us. We are focused on growth [indiscernible] that can allow for significant margin improvement. So when you think about just the core algorithm for RXO, it's profitable growth and driving significant cash flow and earnings growth over the long term, and we're pretty well positioned heading into this year and beyond.

All right. Well, thank you both for coming down. Appreciate it.

Appreciate it. Thanks, Brandon.

Appreciate it. Thanks, Brandon.

Welcome to the RXO Q4 2025 Earnings Conference Call and Webcast. My name is Ina, and I will be your operator for today's call. Please note that this conference is being recorded.

During this call, the company will make certain forward-looking statements within the meaning of federal securities laws, which, by the nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release.

You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional important information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures that the company uses when it's discussing its results.

I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may begin.

Good morning, everyone. Thank you for joining today. With me here in Charlotte are RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld.

This morning, I want to cover 3 key points. First, we continue to take decisive actions to mitigate the effects of the prolonged soft freight market and significant capacity reductions, which are squeezing our brokerage gross margin. We have a rigorous, disciplined approach to optimizing our cost structure and our gross profit per load. We're taking steps to augment our carrier base, grow brokerage volume, grow businesses that are stable sources of EBITDA and leverage our deep customer relationships and last mile hub network to design unique solutions for customers.

Second, we've got a strong brokerage late-stage sales pipeline for new business, which grew more than 50% year-over-year. Most of that growth is driven by full truckload. Our managed transportation business continues to win and also has a very strong pipeline.

Third, we finalized a new asset-based lending facility which replaces our revolver. Our new facility is right-sized for our needs, decreases our cost and provides us with increased flexibility across all market cycles.

Now let's discuss our fourth quarter results. In brokerage, overall volume declined by 4% year-over-year. Less than truckload volume growth of 31% was more than offset by a 12% decline in truckload volume. Brokerage gross margin was 11.9%. In complementary services, managed transportation was awarded more than $200 million of freight under management, and last mile stops grew by 3% year-over-year. Complementary services gross margin was 20.2%.

Overall, RXO's EBITDA was $17 million in the quarter, below our expectations, primarily due to a more pronounced brokerage margin squeeze towards the end of the quarter. This was primarily driven by capacity exits, which led to the largest November to December increase in industry-wide buy rates in 16 years. In December, rates increased by about 15% month-over-month, much faster than our contractual sale rates.

At the same time, demand remains soft, with not enough spot loads to offset the rise in purchase transportation costs. [ Sonar ] tender rejections and the load-to-truck ratio reached the highest levels of the year in December and both increased further in January. Because our book of business is largely contractual with enterprise customers, this affected our near-term brokerage gross margin performance. That said, winning contract business is a hallmark of our brokerage model because it positions us to win accretive spot opportunities, mini bids and special projects.

The capacity reductions in the industry represent one of the largest structural changes to truckload supply since deregulation, and should set the market up for a sharper inflection when demand recovers. The regulatory actions will also help improve the overall safety of the industry as well as help combat theft and fraud, but they do put pressure on near-term results.

We're continuing to take decisive actions to navigate the market. Specifically, we remain disciplined when it comes to cost and optimizing our gross profit per load. We're expanding alternative sources of capacity like private fleets to help reduce buy rate volatility. We're working closely with our customers to optimize volume, service and price this bid season. We're also working to convert the strong late-stage brokerage sales pipeline, and we're developing more creative ways to leverage our hub network within last mile to provide customers with customized middle mile solutions.

I remain extremely positive about the actions we're taking to mitigate this part of the freight cycle and all those we're taking to position RXO for future outperformance. More importantly, now that we're past the bulk of the integration, we're more unified than ever with the singular focus on returning to growth mode, leveraging our scale and outperforming the market. We'll do that through our differentiated approach to sales and customer service and our unified tech platform.

Our multilayered sales team focuses on building exceptional customer relationships. This helped us grow our late-stage brokerage sales pipeline by more than 50% year-over-year, strong momentum as we start 2026. This pipeline is composed of high-quality new names and long-tenured existing enterprise customers, for which we have built successful solutions in the past.

While bid season is not yet complete, we've seen early wins. The strength and makeup of our pipeline gives us confidence that we will resume year-over-year truckload volume outperformance as early as the middle of this year. In managed transportation, we also continue to win. We were awarded more than $200 million in freight under management in the fourth quarter and still have a very robust pipeline of opportunities. These wins will result in increased synergy loads to RXO's other lines of business.

We're very proud of the strength of our customer relationships across RXO. Recently, we received awards from blue-chip customers, including Kellanova, [ Lowe's ] and Electrolux.

Another reason I'm excited is our team is now operating on an integrated platform, which includes our CRM, our pricing tools and our proprietary systems, RXO Connect and Freight Optimizer. The integration work we've done over the past year is now providing unparalleled visibility for our sales and operations team. It has enabled us to leverage decades worth of proprietary data from both legacy RXO and legacy Coyote to power our pricing algorithms and recommend the best truck for each load.

We're positioning RXO for the long term through our investments in transformational AI capabilities. Our vision is that RXO will lead the next decade in freight by arming expert people with the best-in-class intelligence to solve problems before they happen, delivering a level of speed and flexibility that makes the old way of thinking unimaginable. Later in the call, Jared will talk more about the rapid progress and real results we're seeing from our initiatives.

RXO has a strong balance sheet, and we took steps in the fourth quarter to further improve our capital structure. We finalized a new asset-based lending facility which replaces our revolving credit facility. We have tailored the new facility to better align with our business needs, securing better pricing and greater financial flexibility across all parts of the market cycle. Jamie will walk you through these details later.

In summary, we continue to take strategic actions to better position RXO for both the short and long term. I remain confident in RXO's ability to deliver outsized earnings growth driven by 5 key factors. Scale. Scale allows us to purchase transportation more effectively. Our technology platform and the Coyote acquisition have helped decrease our cost to serve by more than 20% since our spin. We also expect buy rate favorability to continue improving.

Profitable growth. We're focused on gaining profitable truckload market share, and we're expanding the parts of our business that are stable sources of EBITDA like managed transportation, SMB and LTL. In the fourth quarter alone, LTL volume grew 31%, the fourth consecutive quarter of double-digit growth, underscoring our momentum in this area.

Technology. We invest over $100 million annually in our best-in-class tech, all in service of achieving our future state tech vision which will be driven by AI. Once fully implemented, our capabilities will fundamentally change how our people get work done, and provide customers with a faster, more seamless way of managing their freight.

Cash generation. Our asset-light model is resilient. Despite soft market conditions, we achieved adjusted free cash flow conversion of 43% in 2025 within our long-term target rates.

Cost structure. Since becoming a stand-alone company, we've taken out more than $155 million in cost through targeted initiatives, including AI investment, real estate optimization and productivity. We're not done yet. Notably, brokerage head count declined by a mid-teens percentage year-over-year. Over the last 12 months, we also achieved a 19% increase in productivity. Our streamlined operations will provide us with substantial operating leverage.

While we're not satisfied with near-term results in this soft environment, we're very excited about the path ahead for RXO. We've shifted from integration mode and are returning to growth mode to take advantage of our larger scale. We continue to adhere to the formula that has driven our success for over a decade, exceptional service, comprehensive solutions, deep customer relationships and cutting-edge technology. RXO has a unique algorithm for long-term growth.

Now Jamie will discuss our financial results in more detail.

Thank you, Drew, and good morning. Let's review our fourth quarter and full year performance in more detail.

For the quarter, we reported $1.5 billion in total revenue, gross margin of 14.8%, adjusted EBITDA of $17 million and adjusted EBITDA margin of 1.2%. Gross margin and adjusted EBITDA were negatively impacted by the increase in cost of transportation within our brokerage business and soft demand within last mile. Our interest expense was $9 million. For the quarter, our adjusted loss per share was $0.07. You can find a bridge to adjusted EPS on Slide 8 of the earnings presentation. Of note, we had a $12 million goodwill impairment associated with the restructuring of our express service offering within our managed transportation business. This impairment was noncash.

Turning to our lines of business. Brokerage revenue was $1.1 billion and was down 14% year-over-year due to continued soft freight market conditions. Brokerage represented 72% of total revenue in the quarter.

Cost of transportation increased in the quarter due to the tightening of the full truckload market, primarily driven by regulatory developments and associated capacity exits. This occurred without a meaningful corresponding increase in sales rates, [ our ] sufficient spot opportunities causing a margin squeeze on our contractual book of business. Jared will provide more details later in the call. Given the market tightening and resulting margin squeeze, brokerage gross margin was 11.9%, slightly below the low end of our outlook. Brokerage gross margin declined 160 basis points sequentially and 130 basis points year-over-year.

Complementary services revenue in the quarter of $431 million was flat year-over-year and represented 28% of total revenue. Complementary services gross margin was 20.2%, down 110 basis points sequentially and 90 basis points year-over-year, primarily due to weakening demand within last mile and the impact of the fixed cost structure of our last mile hubs. Within complementary services, managed transportation generated $133 million of revenue in the quarter, down 6% year-over-year. Encouragingly, our year-over-year automotive headwind eased as company-wide automotive gross margin dollars declined by low to mid-single-digit percent year-over-year.

Our last mile business generated $298 million in revenue in the quarter, up 3% year-over-year. Last mile stops also grew by 3%. As we communicated during our last call, big and bulky demand weakened towards the end of the third quarter, and that continued throughout the fourth quarter.

Turning to the full year. We reported $5.7 billion in total revenue, gross margin of 16.2%, adjusted EBITDA of $109 million and an adjusted EBITDA margin of 1.9%.

Now let's discuss cash. We ended the quarter with $17 million of cash on the balance sheet, in line with our expectations. Cash decreased by $8 million sequentially, with no change to the revolver balance. As a reminder, in the quarter, we made our semiannual bond payment of $13 million and we had a $9 million cash usage associated with restructuring, transaction and integration activities.

For the quarter, our adjusted free cash flow conversion was 6% and for the trailing 6 months, it was 39%. As you can see on Slide 9, adjusted free cash flow for the year was $47 million, yielding a solid 43% conversion from adjusted EBITDA. This was primarily driven by disciplined strategic capital deployment and favorable working capital. Net CapEx for the year was $57 million compared to our outlook of $65 million to $75 million. We also harmonized working capital processes across the organization. Given our asset-light business model, we remain confident in a 40% to [ 60% ] conversion over the long term and across market cycles. We're very pleased with our full year conversion at this point in the freight cycle.

Turning to Slide 10. Quarter end net leverage was 3x LTM bank adjusted EBITDA. Our LTM EBITDA [ maybe ] lower as profitability was impacted by the brokerage gross margin squeeze.

On Slide 11, I'd like to spend time walking through our new asset-based lending facility which we announced this morning. The ABL is a $450 million facility and replaces our previous $600 million revolver. The ABL provides us with more flexibility through all market cycles.

There are a few important points and key benefits associated with the new ABL facility. First, we intensely structured the credit facility to $450 million of capacity based on the needs of the business, saving approximately $400,000 of annual unused commitment fees. This facility also has a $200 million accordion feature available. We have access to 100% of the facility to use for our cash needs and letters of credit requirements. At current utilization levels, our interest rate is approximately 35 basis points more favorable. Lastly, all covenants under the revolver, including the leverage and interest coverage covenants, have been replaced with a fixed charge covenant that has minimal impact on our ability to borrow.

Now let's move to Slide 16 and discuss our outlook for the first quarter and our full year 2026 modeling assumptions. Similar to last quarter, our outlook continues to reflect weak freight demand across all our lines of business. Within our brokerage business, we're not assuming a meaningful increase in either spot opportunities or sell rates in the first quarter. Additionally, our outlook reflects elevated purchase transportation costs. For the combined company in the first quarter, we expect to generate between $5 million and $12 million of adjusted EBITDA. Jared will provide more details on our outlook shortly.

For our 2026 modeling assumptions, we expect the following: CapEx to be between $50 million and $55 million; depreciation expense between $65 million and $75 million; amortization expense between $40 million and $45 million; stock-based compensation between $25 million and $35 million; net interest expense between $32 million and $36 million; and cash tax outflows of approximately $6 million to $8 million. We anticipate restructuring, transaction and integration expenses to be between $25 million and $30 million. It's important to note that approximately 1/3 of these expenses relate to actions taken in prior periods. The associated cash outflow with these actions is expected to be approximately $30 million to $35 million, about half of which is related to prior periods. We expect a fully diluted share count of approximately 170 million shares.

To summarize, while elevated purchase transportation costs are squeezing our contractual brokerage gross margin and impacting profitability, this is a positive development for the long-term health of the freight market. As we think about the macro economy, we continue to see many developments that have the potential to stimulate demand. These include lower short-term interest rates, new tax legislation, proposals for housing affordability and domestic investment announcements.

As an example, [ Monday's ] ISM report showed many positive developments in the manufacturing data, a key leading indicator for the U.S. economy, the transportation industry and an important vertical for RXO. Specifically, U.S. manufacturing activity in January expanded by the most since 2022. While it's difficult to predict the timing of the demand recovery, any significant improvement in demand could set up for a sharp inflection, and RXO is well positioned to benefit.

Now I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk in more detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. As I typically do, I'll start with an overview of our brokerage performance in the quarter. Overall brokerage volume declined by 4% year-over-year, outpacing the cash freight index, which declined by 8% year-over-year. LTL volume increased by 31% year-over-year and represented 26% of brokerage volume in the fourth quarter.

Truckload volume declined by 12% year-over-year and represented 74% of brokerage volume. As a percentage of our brokerage business, truckload volume increased by 500 basis points sequentially. As a reminder, in support of a seasonal ramp with some customers, our brokerage business typically sees higher truckload volume in the fourth quarter when compared to the third. Truckload volume was impacted by our continued efforts to optimize price, volume and service with our customers as well as broader market weakness.

Let's now discuss what we saw within the verticals we support within our truckload business. Industrial and manufacturing trends continue to outperform our broader truckload trends. Volume within this vertical declined just 1% year-over-year, benefiting from some special projects and opportunities. We remain well positioned to capture our customers' special project freight due to our close relationships and excellent service.

As Jamie mentioned, the year-over-year headwind in our automotive business eased in the quarter. Automotive volume and brokerage declined by a mid-teen percentage, easing from declines earlier in the year of almost 30%. And from a company-wide standpoint, overall automotive gross margin declined by only a low to mid-single-digit percentage.

Contract volume was 72% of our overall truckload volume in the quarter. Contract business increased by 100 basis points sequentially. Spot represented 28% of our truckload volume in the quarter. Total spot volume on an absolute basis increased slightly sequentially as we capitalize on some additional spot opportunities. However, these were not meaningful enough to offset the significant margin compression in our contractual business. I'll talk more about this shortly.

Before reviewing our financial performance and market conditions in more detail, I'd like to highlight the results from our transformational AI efforts that Drew described. We deliver technology that drives improvements across 4 key pillars: volume, margin, productivity, and service.

During the quarter, we made progress further enhancing our AI capabilities across each pillar. We recently introduced a new proprietary AI spot quote agent, which will unlock an incremental margin opportunity. We continue to make improvements to our pricing engine. And in the quarter, we extended pricing tooling with increased automation and launched the contract pricing model view for enhanced decision-making. We rolled out agentic AI capacity sourcing in the quarter as we continue to attract qualified carriers to the RXO platform. And we also automated thousands of tracking updates via agentic AI tooling and delivered a generative AI assistant to support customer sales and operations.

Here are some of the results we achieved. We saw a 24% increase in digital bids per carrier with a new AI-based load recommendation in RXO Connect. We enhanced our theft prevention processes across thousands of loads in high-risk cargo areas by deploying an agentic AI solution, and we performed thousands of customer tracking updates in the quarter by leveraging agentic AI. We're applying AI to structurally improve the long-term margin profile of the business.

Let's now review our brokerage financial performance and market conditions in more detail, starting with revenue per load on Slide 12. In the fourth quarter, truckload revenue per load trends remain muted. Year-over-year revenue per load, excluding the impacts of changes in fuel prices and length of haul, increased by 1%. This reflected a continued weak demand environment and limited accretive spot opportunities. Additionally, our cost of purchase transportation increased at a faster rate than revenue per load.

Let's discuss that more on Slide 13, which shows brokerage margin performance. Truckload gross profit per load decreased by 10% from November to December alone as margins in our contractual book of business were squeezed. This squeeze was due to a significant tightening of the truckload market in the fourth quarter, and industry buy rates were up 15% in December, month-over-month. Industry KPIs also moved higher, which has persisted into the first quarter. In fact, this week, tender rejections exceeded 13%, a level not seen since early 2022.

Tighter market conditions have been primarily driven by supply side dynamics as overall demand remains soft. This tightening in supply is largely due to enforcement actions related to nondomiciled CDLs and English language proficiency. Specifically, following regulatory changes effective in June of last year, English language proficiency violation rates have climbed back to pre-2016 levels, near 3%, with the out-of-service enforcement rate spiking to over 30% from less than 5%.

Turning to Slide 14. As we just discussed, truckload gross profit per load declined in the fourth quarter given tighter capacity and continued soft demand. Our truckload gross profit per load in the month of December was about 30% below our 5-year average, excluding [ COVID highs ].

Moving to Slide 15. RXO's LTL brokerage volume continues to outperform the broader LTL market. In the quarter, LTL gross profit per load also improved sequentially. We continue to grow our LTL business with existing truckload customers and new customers that trust us with their freight because of our excellent service, increasing the stickiness of these relationships.

I'd now like to look forward and give you some more details on our first quarter outlook. We're assuming continued soft demand across all our lines of business. Starting with brokerage. We expect total brokerage volume to decline 5% to 10% year-over-year. It's important to note that our truckload volume has stabilized. On a sequential basis, we outperformed the cash freight index in the third and fourth quarters. While we do anticipate truckload volume to seasonally decline in the first quarter, given the strength of our late-stage brokerage pipeline, we expect our truckload volume to resume its year-on-year outperformance versus the market as early as the middle of the year.

Turning to LTL. We expect LTL to grow by mid-single-digit percentage year-over-year. Recall, we have tougher comparisons due to the large LTL onboarding from last year, and year-on-year growth can be lumpy depending on new customer wins.

Moving to truckload gross profit per load. In January, market conditions tightened to the highest levels in 4 years, and we captured incremental spot opportunities, helping to mitigate some of the margin pressure on the contractual book of business. This resulted in January brokerage truckload gross profit per load slightly higher when compared to December. We expect tight market conditions to persist for the remainder of the first quarter. We anticipate that brokerage gross margin will be between 11% and 13% in the first quarter.

Let's now talk about complementary services. Managed transportation has strong sales momentum. However, please note that Q1 is seasonally a softer period for managed transportation. In last mile, we expect big and bulky demand weakness will continue. We expect last mile stops to be down mid-single digit percent year-over-year. The first quarter is also typically the weakest quarter for last mile.

Putting it all together, we expect RXO's first quarter adjusted EBITDA to be in the range of $5 million to $12 million. The main drivers of the sequential decline from the fourth quarter to the first are the seasonal decline in truckload brokerage volume and last mile. The winter storms also impacted the month of January.

To close, capacity exits and tighter market conditions are impacting the near-term profitability of our brokerage business. This supply-side shock is a result of continued enforcement of non-domiciled CDL restrictions and English language proficiency. These changes represent a major structural change to the industry, which we expect will lead to an increased freight rate environment. Continued enforcement will also improve safety and reduce theft and fraud. Longer term, this is a very positive development for large-scale brokerages like RXO that have access to massive high-quality capacity.

While the current demand environment remains soft and it's difficult to predict the timing of the recovery, the supply-demand balance in the industry is fragile, with generally lean inventory positions. Any significant improvement in demand could set up for a sharp inflection. We are also not waiting for the market recovery. We are taking aggressive actions to improve results, including reducing buy rate volatility, going after new profitable truckload volume, growing our SMB business, growing stable sources of EBITDA, including LTL and managed transportation, and leveraging our hub network. With our focus on best-in-class service and continued investment in transformational AI capabilities, we are well positioned to drive significant long-term earnings and free cash flow growth.

With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] And your first question comes from the line of Ravi Shanker from Morgan Stanley.

So Drew, you mentioned the 50% increase in the late-stage brokerage pipeline. Can you just unpack that a little bit? What drove that? What kind of customers are they? What kind of timing do you think will that start to come on? And what kind of pricing is that it like?

Ravi, when you look at the pipeline apples-to-apples from last year, it's up more than 50%. And I think it speaks to the focus of the team. Last year was a big year for us in terms of the integration of Coyote into the organization. It's the largest acquisition that has ever happened in the brokerage space. And this is all about us returning to what we do. It's returning to growth mode for the organization. It speaks to the strength of the relationships that we have with our customers. Our largest customers have been with us for more than 15 years on average. So a lot of the pipeline is existing customers. And then we do have some new names in there as well. And these are big new names and attractive new names to do business with.

For us, the pipeline is important because you don't get the spot opportunities without having a significant presence on the contract side. And so when you look at that, that's a huge opportunity for us.

Your second part on the timing, the bids are typically implemented throughout the second quarter, which is why we speak to the optimism and the confidence that we've got about being able to return to outperforming the truckload market around the middle of the year.

On the pricing side, I think in line with what most other public companies have said, you're talking about something on the contractual side in the low to mid-single digits. On the spot side, we expect it to be significantly more than that.

Got it. And then maybe as a quick follow-up kind of on the AI initiatives you spoke of what you're doing there. I think late last year, you had spoken about a kind of midyear inflection in that productivity coming through. Can you just talk about what the second half of the year looks like? And maybe kind of how much this AI is helping with our SMB outreach?

Ravi, it's Jared. So we are making significant progress with continued investment in transformational AI capabilities. We really look at it across 4 key pillars: volume, margin, productivity, and service. And you hit it right on the head because it's really 2 components. When we think about the ability to go ahead and improve the cost structure of the business by leveraging AI efficiently, we look at productivity in 2025, up 19% year-over-year, on a 2-year stack, up almost 40%. So being able to go ahead and drive incremental throughput throughout the network at a rate that is disproportionate to volume growth. When you think about that volume growth really decoupling from head count growth, bringing those strong incremental contribution margins, really important, and we think we are still in the early innings.

The other key aspect to it, to your other point, was driving incremental margin opportunity across the business, and we look at the initiatives that we have across the company, especially on the volume side. We talked about rolling out agentic AI capabilities in the quarter, and we feel really strong as we think about the second half of the year into the rest of the year with rolling out these AI capabilities and what they mean from an incremental margin standpoint.

And your next question comes from the line of Stephanie Moore from Jefferies.

Maybe as I think through the results and your commentary, I mean, I think it's very clear that there's kind of 2 dynamics underway right now. The first, the cycle does appear to be turning. And then second, I mean, you guys do have kind of numerous company actions underway. I mean you called out a lot of them, your AI actions, the Coyote integration, buy rate improvement. You also have easier comps in 2026 as well. So can you speak to how and when these 2 dynamics can maybe start working together in 2026, meaning can your own actions start to offset some of the market dynamics near term? Or do we need to see the market improve first?

Steph, it's Jared. I can start, and the rest of the team can come in. When we think about RXO entering in 2026, to your point, we're certainly seeing some positive developments as it relates to the macro. Earlier this week, Jamie talked about encouraging results from the ISM hitting its highest level in 4 years.

But we're not waiting just for the macro to turn, and we do have company-specific initiatives, and I would point to that late-stage pipeline that Drew just talked about, more than 50% year-over-year, with high-quality enterprise accounts, existing customers, new customers, the ability to go ahead and drive growth and resume our historical outperformance versus the truckload market. The team is very confident on executing on that pipe and resuming our truckload app performance.

Great. And then maybe just as one follow-up. I know you called out a little bit of winter weather activity in the first quarter and certainly not -- I'm certainly very familiar with that activity. But maybe talk a little bit about any impact that it could have had in the first quarter thus far.

Yes. Stephanie, this is Jamie. We did have some -- a lot of winter weather in the Southeast, Southwest had 2 major snow ice storms back to back, which is very unusual. We've quantified it through January to the tune of about $2 million of EBITDA impact to the negative. So it's definitely impacted.

Stephanie, just to add to that, it's not just on the brokerage side that it impacts. If you think about the last mile section of the business, it has a huge impact on there whenever driveways are iced over and you can't get into them. So the brokerage piece is one on the purchase transportation, but it also has an impact on our last mile business as well.

And your next question comes from the line of Scott Group from Wolfe Research.

So Drew, a couple of things. For a while, you've been saying, once we get these tender rejections north of 10, we're going to start seeing spot volume. Why do you think -- it's been a couple of months now, why do you think we're not seeing the spot volume? And then I get in 1Q squeeze, I get that, like what I'm not sure how to think about is if this market stays tight and we get some seasonal demand improvement, like how much of a bounce in EBITDA earnings do you think is realistic as we look out a quarter or 2?

Yes. Thanks, Scott. When you look at tender rejections being north of 10, I would say you are starting to see spots. And when you look from the third quarter to the fourth quarter, you saw an increase in spot loads. And a lot of that was driven in December when you saw the tender rejection start to climb right there around 10. You saw that increase continue into January. But it has not been enough to offset the compression of what we've seen on the contractual side of the business in terms of gross profit per load.

I think that we're in the early innings of continuing to see that. As you look out this week, tender rejections continue to climb. When you look at what's going on in the regulatory side, we think that you're setting up with any sort of demand to where you're going to see tender rejection come and the spots will be more robust. We're already starting to see it in the waterfall routing guides, where it's making it past the first, second, third, fourth carrier. So you are starting to see some waterfall routing guides breakdown.

On the impact to EBITDA, Scott, we talked about gross profit per load being more than 30% below our average, excluding the COVID [indiscernible] off of that. And when you look at that, we've said in the past that for every dollar that gross margin per load improves, is well north of $1 million in EBITDA annualized. So when you think about the earnings power during a recovery, it's extremely strong.

Okay. Just a quick follow-up. Can you just say like what are spot volumes tracking up or down year-over-year so far in Q1? And then maybe just, Jamie, can you just walk us through puts and takes and cash and confidence in free cash flow -- positive free cash flow this year?

I'll take the first part. The spots are up on a year-over-year basis as we look into January, and then I'll turn it over to Jamie on the cash.

Yes. Thanks, Scott. Cash, we ended the quarter with $17 million and had a great year from a conversion standpoint, 43%. As we look into next year or actually this year now in '26, Q1, you heard it in our guide. If you take the midpoint of the guide, we'll use low single-digit amount of cash for the quarter. But I think as you look at the company over to kind of the annualized basis. If you take our cash outflows which we've given in our guide, and you just apply, let's just say, '25 EBITDA as a proxy, that ends up being in the 45% range of free cash flow conversion. And we had a positive free cash flow. If you can then extrapolate that to what the cash flow production of this company will be in an up and mid-cycle. It will be significant. Short term, cash is good. We've had a good cash year, good cash quarter, but look forward to still being in that 40% to 60% conversion rate over the long term.

So you think you'll have positive free cash flow on a reported basis this year?

It obviously depends on where the earnings line up. But absolutely, we believe it will be a strong cash year.

And your next question comes from the line of Lucas de Servera from Truist Securities.

So you took steps this quarter to streamline parts of managed transportation. How should we think about the earnings contribution from that business going forward after those changes?

Lucas, I don't know if I got the full question, but I think it was on managed transportation and the earnings of that business going forward. As some of our higher EBITDA margin business comes through our managed trans solutions business and so -- that's the first piece that I would say. It's measured on a net revenue basis, not a [ gross ]. So when you look at that business, we continue to grow our [ FUM ] on a year-over-year basis.

But importantly, for managed transportation, it's the synergy that it provides to the rest of the organization. And if our brokerage team and our last mile team have the right service, have the right rate, they've got the opportunity to grow with managed trans as a customer. And for every new win, it doesn't just impact managed transportation, it impacts the rest of the organization. So that's the beauty behind managed transportation is you actually get to touch a customer across multiple lines of business.

And your next question comes from the line of Ari Rosa from Citigroup.

So Drew, you've mentioned a couple of times that you expect truckload year-over-year volume performance to improve. I'm just curious how you define outperformance in that context? Like what should we be looking for from kind of a pricing standpoint, from a volume standpoint and from an EBITDA standpoint, in terms of what we could be looking at for second half of the year and into 2027?

Yes. So I mean, the way that you broke it up was volume, pricing and EBITDA on the outperformance. So first on the volume side, I think there's very clear external metrics of how well you're performing [ first to ] market. And so when we say outperforming the market, that's what we mean. External metrics is something that we've got a history of doing over the last decade plus. We've been one of the largest share takers in the industry. And now that we've got Coyote largely integrated into RXO, we expect to return to growth mode. The pipeline supports that, what we're hearing back from customers on the wind supports that.

On the pricing side, I said earlier that I think that we're setting up for somewhere in that low to mid-single digits on the contractual side. And what we're paying close attention to is what happens on the spot rates because those are the rates that if you've got the contractual book of business, customers understand that typically, during tighter times, you see contraction on that gross profit per load where you more than make up towards on the spot side. So I expect those rates to be significantly higher.

And on the EBITDA, I think it goes back to Scott's question. It's -- the biggest driver there is in gross profit per load. And so when you look at what that does, that every dollar of gross profit per load improved on an annualized basis is well north of $1 million of EBITDA. So for us, there's a lot of earnings power behind that as we continue to improve gross profit per load. We're not just sitting and waiting on the market to return to improve gross profit per load either. When you look at what we're doing on the purchased transportation side, expanding the utilization of private fleets. You look at the investments that we've got in AI and the way that we're sourcing capacity, we expect to continue to improve our purchase transportation versus market as well.

Okay. That's helpful. And then just as a follow-up, I was hoping you could talk about the different dynamics that you're seeing in LTL versus truckload. I understand that there's some things that are unique to RXO within those numbers given kind of the evolution of the business. But we saw a similar trend from one of your main competitors who reported recently. Just talk about how those dynamics are different and why the strength is so much greater on the LTL side?

Well, I think typically, when you think of LTL in the brokerage market is transactional loads, and it's a lot driven by SMB type customers. We built out LTL in a different way. It was customers that we have really strong relationships with and a lot of them of the enterprise nature. And these customers came to us and said, LTL is a pain point. There's a lot of touches. There's a lot of different carriers. We're having to track down claims, lost shipments and damages. And so it became more of an outsource of a piece or all of their LTL. And so when you look at our LTL, it's going to be lumpy because it depends on when the onboardings happen. You saw us on board several large customers last year. The pipeline in LTL is robust right now, but it will depend on the timing of that as far as what that goes.

On the truckload side, those bids are typically implemented throughout the second quarter, and which is why we point to the confidence being able to return to outperformance on the truckload volume around the middle of the year.

And your next question comes from the line of Ken Hoexter from Bank of America.

Drew, if you can just maybe expand on that last answer, right? So the volumes down in truckload versus peer significantly outperforming and growing. I know you talked about flipping to growth and not using price. Is that -- is this something different in your end markets that you want to highlight? I guess how should investors view the different compares we're seeing here?

And then especially maybe -- expand on that, sorry, just let me throw it all in at once. But the -- in a view of where your first quarter outlook where EBITDA is getting worse sequentially, right, fourth quarter to first quarter, and I think well below consensus. So I guess maybe just helping people understand why the -- why the differential pressure points are continuing to expand?

I think, one, we've got to acknowledge that the [indiscernible] reference in [ C.H. Robinson ] is executing well, and they had a great year last year. For us, our year was about integration and making sure that we were holding on to the people, to the customers and integrating the technology, and we executed on that strategy when you look back at 2025.

When you look at integrating Coyote, we thought that we would stabilize the volume decline faster than what we did. But as you start to look at what happened in Q3 and Q4, we actually outperformed the truckload market on a sequential basis and what happened there. So I think when you look at that, we've stabilized the business, and it's returning to growth mode for us, and it's something that we have done in the past, something that we're confident in. And it's not just blind confidence. It's confidence based off of the feedback that we're getting from our customers.

When you look at the last part of your question -- or 2 more parts of your question, the end markets as well as the EBITDA, the end market is a diverse pipeline, and we're touching a lot of different things. But where we're seeing some great wins is in high cargo value in technology. We've seen some recent wins come over in the automotive side, and there's a strong pipeline in industrial and manufacturing as well right now.

On the EBITDA Q1, when you look at it, obviously, we've talked about the squeeze that is happening in the brokerage business. Last mile is a business that typically sequentially goes down from Q4 to Q1. That's being magnified this quarter because of the weather. So I think when you look at it, that's where we're pointing towards the optimism as you start to get towards the middle of the year and you start lapping some of these things.

Good. Seems like a gap. The restructuring costs seem to be still ramping up maybe a little more aggressively than I would have expected. Is there -- maybe walk through what the costs are and where that should head?

Yes, Ken, this is Jamie. So year-over-year, we are -- we do have some restructuring there. We've still got some initiatives going on. But our restructuring charges are actually down, about 60% year-over-year. Of that number we gave, 25 to 30 for the year, about 1/3 of that relates to actions taken last year that is running through the P&L this year. So those actions we've already talked about.

And then we are -- a couple of initiatives, and we've still got some transformation work going on where we think there's some good opportunities for process improvement. We're still not 100% done with all the technology side of the integration, so that's to come. And then we're really putting a big focus on our footprint, our real estate, and we've got some plans to consolidate even some more real estate to make us more efficient there. And so those are the 3 big buckets.

But keep in mind, down 60%, 1/3 of that number that we gave as a guide is really actions that carry over from prior years. So we feel like we're in a good spot and we collect -- we've got some really good initiatives to produce a good ROI on it going forward.

And your next question comes from the line of Tom Wadewitz from UBS.

Drew, I wanted to get your thoughts on just how much of it, I don't know, visibility, it's tough to visibility in these markets. But how are you thinking about second quarter -- and both from a gross margin perspective and then just kind of how much visibility on improvement in loads? I mean, seasonally, you can see some pressure with spot rates going up in May and road check and things like that, stronger freight. So seasonality might say gross margin percent could be lower 2Q, but if you get some catch-up on contract prices going up a bit, that could help. So I mean, do you think gross margin could be -- show a little less pressure in 2Q?

And then I guess on the volume side, I don't necessarily recall brokers talking a lot about like pipelines. I think of that for more like logistics or a little longer cycle businesses. But how good of an indicator do you think that is? Is that -- I mean -- so you're bidding on a lot more business, but are you confident that, that will actually flow through? It's just not necessarily something I -- I don't know how good the REIT is from that.

Yes. Tom, I think I'll break the question up into 3 parts. First, on the second quarter gross margin. I think it depends on what's happening in the market and where we're sitting at in tender rejections. I think there's certainly opportunity whenever you start talking about the contractual price going up on a year-over-year basis, whenever you start talking about spot loads, there's certainly a strong opportunity there, and we're ready to execute and we're ready to execute in any market.

On the second part on the improvement in loads, high confidence in improving loads from Q1 to Q2.

On the third part, pipeline indicator. So the way that we break down the pipeline is there's a pre-pipeline. And when you look at the pre pipeline, that's what you're digesting this all coming in from the customers and there's big, big numbers. But that's more of what we would call a spray and pray method where you're just putting out rates and seeing what comes back.

As you get into the late-stage pipeline, this is where discussions become extremely targeted. It's a lane-by-lane basis, it's the value that you're adding to the customer, it's how much capacity you have coming in to a certain inbound lane, it's how much capacity that you've got to be able to reload certain lanes. Whenever you're doing drop trailers that you have trailer capacity that you're able to do, what are you able to do from a consolidation standpoint. So when we get to the late-stage pipeline, our confidence is pretty high.

Okay. Yes. That's helpful. And then just one other one. On the cost side, so you've got a lot of tech initiatives happening. Is there a way to think about translating those to kind of operating cost reduction, whether that's like an impact in '26 or a kind of multiyear impact?

Yes. So this is Jamie. I'll start and turn it over to Jared. It definitely has from a pure cost out standpoint. So some of the things I talked about finishing up the -- completing the integration, totally sunsetting old systems. We're way down the field on that. Got a little bit more work to do that we'll finish early '26.

Secondly, we've got a lot of initiatives and just bring automation to the table. But all of those have good cost reductions. But Jared talked about kind of what our overall tech -- overall AI strategy is, a lot of opportunity there to grow on the 4 pillars, and it definitely includes cost and really honed in on productivity and service.

That's right. And Tom, when you think about the other side of this, not only is -- have we taken significant actions, to Jamie's point, on removing over $155 million of cost post spin. But then you think about leveraging technology to make the organization more structurally efficient, it's all about the incrementals.

So like we talked about earlier, how do we decouple volume growth from head count growth because the incremental margins in brokerage, for every [ dollar ] that comes in and gross profit can be as high as 80% in terms of flow-through to EBITDA, so making our people more productive by leveraging that tech, it's not just about the cost out, but it's how to make our people more efficient to benefit from the incremental margins.

Okay. But there's not necessarily a frame in terms of how much cost impact this year, it's maybe more further out, you can -- we can have a little more visibility to that, I guess?

I think that's fair. But to Jamie's point earlier, we do have some cost benefits, '26 versus '25, based on the actions we've taken, and we continue to drive incremental productivity that we expect to benefit in 2026.

And your next question comes from the line of Brian Ossenbeck from JPMorgan.

Maybe 2 quick ones for Jamie and then a strategy one for Drew. Jamie, can you just talk a little bit more about -- I think you said restructuring in the express service line. I don't know if that was related to maybe some of the high-value automotive stuff? So maybe you can elaborate a little bit more on that? And then what's the cash component of restructuring and integration costs for this coming year?

Drew, it would be great to get your context on these customer conversations. Given the capacity squeeze we've seen here recently, is there any tilt towards asset-based carriers? Are they indicating to have any more preference to that maybe away from brokerage? Or does that not come up in these conversations?

Yes. Yes. This is Jamie. I'll start. The goodwill that you're speaking of wasn't an express service line that we had inside the managed transit. We restructured how that service was delivered. We spread the customers out amongst other service lines in our business to continue to do a good job there. We had some old goodwill that related back to an acquisition that was over 10 years ago that required an impairment because we restructured how we deliver that. You did not specifically relate to -- of our auto business.

In terms of cash and the restructuring charges for this coming year, we think -- kind of in the $30 million range there. Half of that relates to actions taken prior to '26. You think about -- we take a charge to -- for the P&L, some of the cash flow, we'll trail that as payout. So think about half of that number is cash out related to prior years. And then a couple of big initiatives, footprint consolidation on the real estate and just our general restructuring, some cost savings initiatives will be the reason for the rest.

Yes. And Brian, on the context on the customer conversations that we're having, obviously, we are very bullish about what we're seeing in the late-stage pipeline. And if I think of conversion from asset based to brokers, I mean, those conversations were the conversations in the early 2000s. And if you look at what's happened over the last 20 years, brokers have taken significant market share in the truckload market. It's gone from mid-single digits to the mid-20s. Right now, the conversation with customers is all about consolidating the carriers and finding the right carrier for the right load. And brokers, large brokers, financially stable brokers offer a lot of flexibility in a market like this where you can flex capacity up and down.

As you start to have brokers like RXO who have a strong trailer pool, we're actually able to flex capacity up and down on [ drop ] trailers and take business that was typically held by large asset-based carriers. So for us, like we like the setup we're in. And as you go into a tighter market, that sets up for brokers to take more share.

And our last question comes from the line of Bruce Chan from Stifel.

This is Matt Milask on for Bruce. Just piggybacking off one of the earlier questions. We're curious, to what extent you believe demand recovery is ultimately needed to really drive some more spot opportunity? And I guess maybe barring that demand improvement, how much would supply need to tighten before you see the spot opportunities really flow into the business?

Yes. So I think when you look at what's happening on the regulatory side, you're basically going from mid-single-digit tender rejections to double-digit tender rejections with a decline in demand. And so for the first time, you're seeing pressure on the supply side that is causing spot loads.

Typically, you do need a demand-driven inflection and demand will certainly help. We're watching a lot of the data out there. When you look at what's going on and the ISM data, when you look at what's going on from some of the reports on the homebuilding side, when you look at where inventory levels are, demand will obviously be something that can be a catalyst there. But you've got into double digits that what was strictly happening off of the supply side.

Great. And then as a quick follow-up. If you could maybe provide sort of a diagnostic of the synergies that you expected from Coyote? And if that's been sort of realized at this point, how you might bridge any differential between what expected EBITDA could have been pre-integration versus maybe where it is now?

Yes. So I'll just -- I'll take kind of where we are at '25 and roll into '26. We talked about around $70 million of synergies, $60 million of which was to hit OpEx, $10 million of which to hit CapEx. A majority of that has flown through the P&L in '25, we see about an incremental $10 million of additional P&L realized in '26 versus '25 related to synergies alone. The other $10 million of CapEx spend, we see -- you see that through in our guide for CapEx in '26. That's where we're making capital investments on kind of both legacy RXO legacy Coyote that has now been put into one. And so we continue to see those savings that will continue throughout. They have obviously not been enough to offset the change in gross margin that we've had over the last couple of years, but we see that as really positioning the company cost wise. When we see demand inflection, we'll see a lot of flow through the P&L.

We have reached the end of the question-and-answer session. I'll hand the floor back to Drew Wilkerson for any closing remarks.

Thank you, Ina. Our team has taken the right actions to navigate the current market conditions. We're in growth mode and focused on converting our very strong sales pipeline. We expect to get back to outperforming when it comes to truckload brokerage volume as early as the middle of this year. We're operating on one tech platform, which is providing better data to our people and unparalleled visibility to our customers and carriers. We're making significant investments in our technology and are seeing real results from our AI initiatives. We have a slimmer cost structure that we continue to optimize, and our capital structure provides us with more flexibility across all parts of the freight cycle.

We will continue to focus on what differentiates RXO, exceptional service, comprehensive solutions, deep customer relationships and cutting-edge technology. I remain confident in our ability to deliver outsized earnings growth over the long term. Thank you all for your time today, and we look forward to seeing you at the upcoming investor conferences.

And this concludes today's call. Thank you for participating. You may all disconnect.

Good morning. Once again it's Jordan Alliger, and I'm pleased to be able to kick off the logistics portion of the transports with RXO. To speak to us about RXO and logistics markets and the ongoing transformation post Coyote, we're very pleased to have Jared Weisfeld, Chief Strategy Officer; and Kevin Sterling, Senior Market Strategist to discuss the story. And I don't know if happy to go right into Q&A. If you had a few remarks, whatever makes the most sense.

Only remarks are, thanks for having us. Happy to get right into it.

Well, before we get into some of the nitty-gritty of the truck broker fundamentals, maybe set the stage for us a little bit. You did your transformative deal with Coyote a couple of years ago or a year or so ago. And obviously, things have been tough in the markets. But as we get past the downturn, can you maybe talk to the big picture setup for RXO over the next several years, whether it be in the context of long-term potential, margins, however you want to put it in a context, once we get to that inflection point, how do you think about the business?

Sure. Maybe it helps to sort of frame how we thought about Coyote a year ago when we closed in September of 2024. So now RXO is the third largest provider of brokered transportation in North America. And when we acquired Coyote, the thought process was increased scale, the ability to go ahead and benefit from that increased scale in terms of reducing our cost to serve, ability to execute on buying purchase -- buying transportation more effectively, very limited customer overlap, very limited carrier overlap, the ability to go ahead and diversify in terms of mix towards food and beverage and transportation as well as increase some of our SMB exposure. So truly becoming the third largest provider of broker transportation and executing at that scale, the ability to invest throughout cycle and stay close to your customers, invest in technology, that really transformed the company.

So to your point, Jordan, what does that mean longer term, especially in the context, which I'm sure we'll get into of a lot of the changes that have been happening over the last 6 to 9 months on the regulatory side with respect to the ability to go ahead and make sure that shippers have the trust to work with large brokerages really gives us that confidence. So I think it's going to speak to higher earnings power over the long term and the ability to execute against this massive opportunity, right? It's a $400 billion for-hire truckload market and brokerages are only about 20% penetrated. And even within that brokerage space, it's still highly fragmented. So the top 9 brokers post Coyote acquisition represent about half the market. And we think longer term, it's going to be a winner take most type market structure with the larger players continuing to go ahead and gain more share because of the advantages from scale.

And Jordan, what I would add, too, as you think about kind of RXO, what we've done is now we've pretty much fully integrated Coyote. Before you build a house, you got to build a foundation. That's what we've done. We've built this solid foundation. And at some point, this market will turn. I think we're getting much closer to that every day. And when it does, we're ready. We're going to go as one unified company. And we probably -- we did this integration very fast, about a year. Normally it could take a lot longer, but we went very fast and the downturn allowed us to maybe go a little bit faster than normal. But we're ready. We're ready to approach it as one RXO. And I think like I said, think of it as like the foundation is built. We're ready.

You mentioned some of the penetration numbers and maybe the advantage of scale. I mean, are you actually seeing small to midsized truck brokers shake out right now? And is that something that will keep happening it is?

Absolutely. I think the data is very conclusive that over the last 3 years, you've seen effectively most of the capacity that entered in the brokerage space during COVID has left the market. So over the last 2.5, 3 years, the brokerage industry has shed about 10% capacity in terms of brokerages that no longer exist. And if you think about it, right now, we've been in a softer demand environment. So what do shippers want to do? They want to consolidate the amount of carriers and brokers that they're leveraging.

And then also in the context of the current environment, it's very difficult in terms of unit economics for a lot of the asset-based carriers. So you've seen failures on the asset-based carrier side as well. So if you're a small to medium broker, you're getting squeezed on both sides. Your shippers are consolidating the freight among larger brokers like an RXO and your carriers, unlike RXO, where we've got access to 120,000 carriers, high-quality carriers and 1.6 million power units as a combined entity with Coyote, some of these smaller brokers have half a dozen carriers. So you're getting squeezed on both sides. And it's just becoming an increasingly difficult environment, I'd say, cyclically and structurally for small- to medium-sized brokers.

And Jordan, to some of these smaller brokers may have gotten a little bit too far from their skis and their balance sheets right now are pretty levered.

Yes. Okay. Well, I imagine, too, technologically, it's difficult for them to keep up as well.

For sure. I mean that's one of the -- I spoke earlier about the benefits to scale associated with the acquisition of Coyote, the ability to invest throughout the cycle. We spend more than $100 million a year in technology. That's across CapEx and OpEx. So you think about the -- I'm sure we'll get into this. So when you think about the ability to invest in AI, the ability to go ahead and really transform the business and improve margins longer term, that's something that a small and medium broker just doesn't have the ability to do.

So maybe pivot a little bit. Obviously, freight transportation, people want to get an assessment of demand. And I know it's been generally subseasonal for most. Can you maybe give your updated assessment, if any, on demand and maybe what you're looking to, to feel confident that perhaps we can get to that, that we're approaching an inflection point.

Yes. So I don't -- the one thing I don't know is I don't have the crystal ball, so I don't know when that inflection point is going to be in terms of demand. So let's sort of talk about the current state of the freight market. We reported just a few weeks ago, and the way we characterize it is we are still in a prolonged soft freight environment. If you look to the month of October, which was the most recent Cass data that's out, Cass freight shipments were down 7% year-over-year. Year-to-date, Cass shipments in 2025 haven't been this low since going back to almost the great financial crisis despite the macro economy doing pretty well when you think about what's going on from a services-related economy, data center-related economy, very different from what's happening in the goods-related economy.

So we talk about a demand environment that has been soft. We talked about our expectations for a muted peak season. And I think the key indicators that I know you look at and that I think everyone should pay attention to from a freight economy standpoint really are tender rejections, load-to-truck ratio and linehaul spot rates. So what's interesting is that we are in a, I'd say, pretty unprecedented time in terms of what's been happening over the last few months because you've had demand that's been weak, but all of those freight KPIs have been going up into the right. Tender rejections sitting at 7% despite weaker demand. We talked about our brokerage business getting squeezed pretty hard in the month of October despite that weaker demand, historically, it's a pretty variable cost line in terms of purchase transportation.

When there's weaker demand, our purchase transportation cost goes lower. October was the exact opposite because so much supply had come out in part due to a lot of the regulations surrounding non-domiciled CDLs that we actually saw purchase transportation costs go up despite the weaker demand. So it's unprecedented times. And if you look at over the last 4 weeks or so, what you've seen is a continuation of spot rate increases. I think we're now -- we've eclipsed in terms of industry-wide spot rates are now, as of this morning, I think at the highest level since July. So you're seeing that move higher. We've had these episodic squeezes, right, for the last 3.5 years, and this now has been persisting since September. So I think to your point, Jordan, the question now becomes how much capacity is going to continue to come out and when do you get that demand inflection to truly start to see tender rejections getting back to the double-digit percent range, which is where we typically see spot volumes.

And Jordan, you know this. It's a question of not if, when. And it's always hard to know when. But you've seen this, there's been a cycle ever since deregulation in 1980. So it's a matter of when, not if.

I mean do you have any read from customers in terms of next year at this point? Or is it too early?

I think it's too early. We're not going to speculate in terms of 2026. But I do think that what's interesting about our setup into next year and beyond is -- and this goes back to your question on Coyote, think about 12 months ago. We were -- just completed the acquisition of Coyote. But underneath the hood, we are still obviously very early on with respect to the integration. So still 2 companies getting integrated. Fast forward to now, the integration is materially done. We are one sales force. We are one ops in terms of operations. We're one back office.

The technology integration on the carrier side has been done since May. On the shipper side, it is now materially done. We're on CRM. We're on one ERP. So we're on one pricing tool. The combined -- the data set across Coyote and RXO is now combined. So you think about us entering into bid season this year relative to 12 months ago, irrespective of the market environment, I think we are in a better position in terms of our ability to outperform from a volume standpoint. If you go back over the last decade, RXO has historically outperformed the market on the truckload side. In 2025, we took a step back in terms of truckload volume for a variety of reasons. But when you look into 2026, I think we are positioned as one RXO with the integration behind us, combined with the fact that automotive for us on a year-on-year basis stops being a big headwind in Q1 and our truckload comps ease materially starting in Q2.

I was going to ask about this later, but you brought up a couple of times the integration and it's largely done and the pace was -- actually you did a lot in the year. So I guess the question is, net-net, did it wind up coming in ahead of schedule? You said materially done. So I assume there's little left to do in terms of what's left to do? I mean where are the gaps left, I guess?

So from an operational standpoint, this has been the largest integration of an asset-light brokerage to ever occur in the space. We had an aggressive time line out, and we hit it. So within 12 months, we are materially done. To your point, a couple of things here and there in terms of a few shippers left to go in terms of the cutover, but we are vast majority, vast, vast majority done, which is great in terms of the ability to go ahead and think about opportunities -- in the bid season and the ability to go ahead and continue to roll out new products and technology, et cetera.

So the ability to just move faster with the integration done is clearly there. But I think it's also important to separate out the operational execution and the financial results because operationally, I would agree, we've done a ton. We moved incredibly fast and we hit our time lines, and we did a really, really excellent job. But the financial results are certainly not where we had expected them to be 12 months ago nor where they need to be in terms of making sure that we're going ahead and earning higher highs and higher lows over time. And if you think about and you go back to the time of the acquisition, we talked about at the time, we thought we were near or at the bottom of the freight cycle. And we were certainly off by a little bit. The market took a step lower -- a big step lower in 2025. And some of the pricing actions that we talked about on the call on what we did on the contract rates certainly hurt us from a volume standpoint into 2025.

Had we known the market was going to be as soft as it was, we perhaps did not need to be as aggressive as we were on some of the price increases. So you put all that together, I think it's just important to put in context that operationally, really, I think, excellent job across the board. Financially, the results are not where they need to be, but that's the opportunity because the Coyote footprint across all of these large Tier 1 enterprise shippers is massive. Even though the volumes are down year-over-year, we are active with virtually all of those customers, I think 99 out of the top 100.

So you think about the ability to go ahead and stabilize that volume, which we've done, Q3 truckload volume was up sequentially from Q2. Q4 at the midpoint of our outlook is up again, taking that volume that we've stabilized and then outperforming from there, getting back on to that cadence, which RXO has been doing for the last decade of growing in excess of the market, we feel really good about.

And Jordan, when you do the integration of the SaaS 2 in particular, one of the first things we focused on was the carrier cutover. We did that May 1 because when you do that, you want to make sure, to Jared's point, we didn't have the customer attrition, but you want to make sure you service your customers free. Don't -- never want to have any hiccups because that's the easiest way to lose business is if you have any hiccups and truck doesn't show up. And so knock on wood, we were there and did not have any service failures.

It's a good point, too, just to continue on the theme. It feels like technology cutovers is sometimes the biggest hiccup when you do a big transport acquisition. But -- and you have 2 completely different platforms, the Coyote platform and the RXO platform, you made your decision which one to go with. I mean, how is that -- how did that process wind up moving?

A lot of the work was done ahead of time in terms of the planning, right? Where we announced the acquisition in June of last year. It's hard to believe it's been 1.5 years, and we got to work immediately in terms of planning and really diligencing and going in eyes wide open, what is the best platform of record to use? Is it RXO's platform in terms of Freight Optimizer, which is our proprietary TMS and RXO Connect? Or is it Bazooka, which is the legacy Coyote platform. And the team road mapped everything, did the stop gap analysis, and it was a clear choice that we're going to move over to RXO Connect month and month of planning, doing it in multiple phases, right?

This was not just pushing a button and then crossing your fingers and hoping everything this is going to work. It was going ahead and methodically planning out in multiple phases as we think about the carrier side, as we think about the customer side, as we think about ERP and CRM and back office. And it's been an incredible job from an execution standpoint, being able to go ahead and decommission Bazooka, merge on to RXO Connect and do it, to Kevin's point, without any service values.

And the feedback from the prior Coyote customers who have migrated over to your new system?

Feedback has been positive, right? I think the bigger lift was internally, we had a lot of employees that were using the Bazooka system for, in many cases, 10 to 15 years, right? So it's not unlike you or a lot of the investors in this room who have been using Bloomberg for the last 10 years. If you were to rip that out and go to a different system, it will take some time, right? So -- and I think that actually speaks into the purchase transportation opportunity that we have. When Kevin talked about that carrier cutover that we had on May 1 earlier this year, you have carriers now, carrier reps internally at RXO that are operating on one system. They're all operating on RXO Connect.

They're all covering loads within one system. That's going to take some time in terms of the legacy Coyote rep who was using Bazooka for a long period of time, need to learn the new system, need to learn the new workflow, need to go ahead and understand the freight that's on the other side of the network. And by the way, what we did also, and this is the best of both worlds type approach, take a lot of the workflows, take a lot of the tools. Even though we decommissioned Bazooka, there was a lot of interesting tools and functionality that was within the platform, and we then went ahead and migrated that and brought that onto the RXO Connect platform. And as time goes by, our confidence level is high in terms of reaching that 100 basis points of incremental buy rate favorability on purchase transportation. And I think that speaks to just learning the platform and the iteration that's associated with that.

Got it. And maybe flipping a little bit back to the macro. Your LTL business has been growing. LTL industry has had some struggles of late. Can you maybe talk a little bit to your LTL factors?

Yes. Jordan, I think if you think about our LTL business, so where is our growth coming from? It's coming largely from our truckload customers, where, let's say, 90% of their volume is TL, but 10% is LTL. Well, guess where they spend 90% of their time? It's on LTL. LTL pricing is the eighth wonder of the world. It's very difficult to figure out. You've got to monitor damage claims. So it consumes a lot of their time. So they've come to us and be like, RXO, you guys do a great job with TL. Can you help with LTL? And that's what we do. We help them, we take it off their plate so they're not spending all their time on such a small part of their business.

And we use, gosh, 50, 60 LTL carriers. Everybody out here probably thinks there's -- oh, there's only 4 or 5, but there's a lot of great regional carriers that we use to provide very good service. And so we can help them find the best service at the best price, just really -- it's an automated transaction seamless, and it really takes a headache off of their plate. And so if you think about kind of what we're doing from an LTL carrier perspective, think about what we're doing, it's similar to what the IMCs do for the rails. The IMCs are essentially that sales channel for the rails. In a way, we're that sales channel for the LTL carriers. If you talk to any large LTL carrier, ask them who some of their largest customers are, they'll tell you it's a 3PL, 4PL.

Yes. That makes sense. It's interesting, you guys had some interesting comments on the capacity side, and we touched on it a little bit capacity rationalization and structural changes that could be underway from a driver perspective, whether it be non-domiciled CDLs, English language proficiency. Can you maybe expand on that a little bit because it does seem to be the topic that generates the most discussion these days?

Yes. There have been -- and rightfully so, there have been 2 major developments in 2025. The first was the executive order, the rules of the road executive order in May of this year, where a driver now needs to be proficient in English, so English language proficiency and needs to be able to go ahead and interpret road signs. And then there was the interim final rule by the DOT late September on non-domiciled CDLs. And those 2 in totality have significantly reduced the amount of capacity that's on the market, and just to sort of frame things up, there are 3.9 million CDLs that are out there, commercial driver’s licenses.

The FMCSA has identified about 200,000 that would be at risk as it relates to the interim final ruling in late September, where ultimately just not in line with the standards in terms of what must be true to hold the non-domiciled CDL. There have also been further developments in terms of multiple states revoking, in some cases, thousands. California recently revoked 17,000 non-domiciled CDLs. There have been, even over the last 48 hours, recent developments in other states such as Minnesota. And even the Transportation Secretary on Monday talked about now targeting some of the CDL mills that are out there. And I think the number that they put up on their website was almost half of the schools that are out there, about 15,000 of them are now at risk of being closed in the next potentially 30 days.

So really significant changes that have happened and occurred on the supply side. And ultimately, if this enforcement sustains, we believe -- which we believe it will, and we believe that will be the largest structural change to happen in the industry, basically since deregulation in 1980. So a lot has occurred for a broker like RXO, it's a long term -- not only is it a long-term positive development in terms of just safety on the roads and decreasing fraud and decreasing theft, but I think this speaks to one of the benefits of being a large-scale broker transportation provider.

The fact that we're the third largest in North America, shippers want confidence that carriers and brokers have very strict compliance standards in terms of the ability to go ahead and actually drive on behalf of RXO. And this is going to be -- you think about just what this means in terms of steady state, it's painful right now, certainly for -- we talked about that squeeze that's occurring in our brokerage business for -- in the month of October and what's reflected in our Q4 outlook. But you fast forward to steady state, this does speak to a lower supply environment and potentially a longer -- higher for longer rate environment on the other side of this.

And Jordan, maybe in longer term, there's talk too that they might kind of federalize the CDL compliance issuance system similar to passports. So you have one standard across the entire country versus every state is a little bit different as we can see. I didn't even realize, to Jared's point, there's 15,000, 16,000 of these CDL schools. I noticed that -- that's a big number.

I guess sort of 2 related questions. Do you see any impact to your network carrier base? And then do you expect the time line to accelerate to the point where can the structural change potentially on supply without demand change the dynamics of the markets?

So let's take that into 2. On the first point, our supply base has generally been pretty stable, and I think that goes back to the high-quality carrier base that we have at about 120,000 carriers and 1.6 million power units. You think about one of the attractions on the Coyote acquisition was not only for the lack of customer overlap and the ability to go ahead and scale the business, but the carrier overlap was also not -- very little and very complementary. So you think about legacy RXO, more owner operators, legacy Coyote, larger, medium-sized fleets and the access to private fleets as well.

So I think that really speaks to the breadth of the diversity across the organization. And then your second question was basically, can we have supply-driven inflection, right? For a true sustained reflection, our fundamental belief is we do need an improvement in demand. But I think the market is showing you right now that despite weak demand, despite what we believe is a muted peak season, you are seeing rates move higher. So you're certainly seeing spot rates be inflationary in the context of weak demand and lower supply. The question then becomes for that next leg, I think we could certainly see more supply come out, which would be a tailwind for more rate volatility. But for a true inflection, we're going to need an improvement in demand.

And Jordan, another point to piggyback off that is kind of think about kind of large brokers like us, if you're a shipper, why you use a large broker, strict compliance, strict betting. Some of our shippers now are requesting a copy of driver's license before that driver shows up. So it's very, very strict. And going back to that earlier discussion, we're talking about some of the small brokers, that's -- if you're a large shipper and using a small broker, is that a risk you're willing to take, whereas like us or any other large broker, like you can -- as a shipper, you have more confidence that there's much better compliance and [bidding].

The margin squeeze dynamics are kind of interesting. Usually, when things are soft, you're not getting squeezed as much as the industry is getting squeezed. So what market conditions have to happen to sort of get the balance back so that you're selling -- I mean, shouldn't your selling prices follow? I mean they should, you think sooner than later. I don't know how your bid process is going or where we are in that. But anyway, maybe share some holistic thoughts around this.

If you think of a good rule of thumb in terms of what must be true to go ahead and start to see some accretive spot opportunities, you want to see tender rejections punch above double digits, right? Right now, they're about 7%, by the way, higher year-on-year, higher versus 2 and 3 years ago despite demand being weaker across that time period, which speaks to the supply that's come out. But you want to see tender rejections not only hit double digits, but sustained. That's when you'll start to see at a minimum, some minimal -- some accretive spot opportunities.

And then for contract rate inflation, you're going to want to see spot get at a premium relative to contract and then contracts start to move higher. I think we're in the middle of bid season right now. Our book turns over on the contract side roughly every 12 months, and the majority of the bids are between November and -- October, November and February time frame. So I think it's going to be customer by customer, right? There are some customers who will tell you to price for the environment that you're in. There are some customers who will tell you, you need to price for the next 12 months to make sure that you can service that freight. I think the reality is when you think about just the levers that we have, the levers that the industry has, it comes down to the ability to go ahead and think about where contract prices need to be so we can sustainably and reliably service freight and also earn an acceptable margin.

And then ultimately, if we get to a tighter environment and you start to see some accretive spots finally enter the mix, you'll see -- and we saw this during COVID, you see this during most upturns, imagine almost a sign curve where that will mimic the profitability of the contractual book of business. And when things get tighter, the profitability of the contractual business declines. But to your point, what then typically happens is you have spots that not only offset but more than offset.

And COVID was a great example where the contract book of business was hurt from a profitability standpoint, but it's also the highest profitability in the company's history because the spots came in and really more than offset that. So what's going on right now is unprecedented because you're having weaker demand combined with higher PT costs, which is why I sort of fast forward to what this means in terms of steady state. It's a really good thing longer term, but clearly painful in the near term.

Remind again where we are in your contract versus spot mix? And then how does that flex when we get to an inflection?

So last quarter, our contract mix was about 71% of our total truckload volume. And that's on the higher side. And what typically happens is -- and this is an important point, when the market tightens, we're still going to haul the same contractual freight, but then you're going to have the ability to actually have some spot opportunities.

So it's not like we're purposely flexing to go to spot away from contract because our fundamental belief and our premise is that we're going to get those spot opportunities. We're going to get the projects, we're going to get the mini bids because we're servicing that contractual freight so well. And last quarter, we made the point on the call to mention that industry-wide tender rejections were 6% plus in the quarter. RXO's internal tender rejections were only 2% because you need, especially during tough times, you have to service that freight from the shipper standpoint very well.

So squeeze may continue. The good news would be that you're just pumping more into the higher-priced spot market to we offset that.

Absolutely. The squeeze is ultimately a very good thing, right? We've had these episodic squeezes for the last 3.5 years. We talked about the bad squeeze versus the good squeeze. The episodic squeezes that have occurred over the last 3.5 years, it's you get an event, whether it's Road check week, whether it's an event in terms of storm, whether it's 100 days of summer. And then what happens is you see elevated tender rejections and then you always revert back to the prior period baseline.

This has not been happening for the last 3.5 years because there's been too much supply relative to demand. Fast forward now, I mean, this has been now going on since September, we'll see if this sustains. But if this gets to the point where we continue to get squeezed, right? Ultimately, if the squeeze is sustaining, but then that means that there's pressure on waterfall routing guides and it means that there's spot opportunities, that means there's a potential for contract rate increases in the future, that's a really good thing.

Right. And Jordan, I think just so much supply has come out. We're in a pretty precarious situation where it won't take much on the demand side to tip this market.

Yes. No, agreed. Before I move on to another question, I just wanted to ask on the PT side of the equation, can you remind a bit on the time line for when you start -- you believe you'll start to see real gains made on that?

So on purchase transportation, combined basis between RXO and Coyote, our PT spend within our brokerage business is about $4 billion. And we believe and we talked about at the time of the acquisition that over time, we believe that we were going to achieve about 1% PT savings. So 1%, $4 billion, $40 million. I think it's also important to recognize that this is -- unlike cost synergies or operating expense reductions, this is a relative concept. So it depends on what's happening in the market. If you are in an inflationary time period where rates are moving higher, it will serve as cost avoidance.

If overall market rates are flat or moving lower, obviously, you'll have the financial impact and it will drop through down to the bottom line from gross margin down to EBITDA. So we've achieved thus far from that May 1 time frame, which is when we announced that we did the cutover on the carrier side, about 30 to 50 basis points of incremental buy rate favorability. We always buy better than market. The belief was that post Coyote, we will buy even better than the market to the tune of 100 basis points. So we've achieved about 30 to 50 basis points. And the time frame to getting to 100 basis points, we believe, is about a 1-year mark from the time of carrier cutover, so call it May next year.

Okay. All right. Good. Sort of in the broker world, the logistics world, a lot of discussion on AI across the universe. Can you maybe talk a little bit about AI, your uses of technology, what -- maybe some of the things you've done and tease perhaps of what's to come next? And how do you equate that to tangible benefit at this point?

Yes, I would love to. We fundamentally believe that AI has the ability to structurally improve operating margins for RXO longer term. We've embraced leveraging different types of AI techniques for a long, long time, started with our machine learning algorithms over a decade ago. More recently, it's leveraging Agentic AI, it's leveraging Gen AI. It all starts with clean data. As my CTO constantly reminds me, you need to make sure that it's a clean data set, and we have now migrated that data from legacy RXO and legacy Coyote into one clear data lake.

Building on that data lake, you then have an orchestration layer and then sitting on top of the orchestration layer, you've got the ability to deploy multiple agents across the organization. So the ability to go ahead and leverage AI to improve productivity. Our productivity over the last 2 years is up 38%. And we are in the early innings if we look at who -- the most productive rep in the company versus the least productive rep, that gap is wide, and there's the ability to go ahead and close that gap significantly over time. We think productivity will continue to be a benefit for RXO over the near and long term. But then you think about other ability -- ways to deploy Agentic AI internally, not only from a cost or a productivity standpoint, but the ability to unlock incremental margin in terms of top of funnel, how do we go ahead and make our people more productive so that there are AI agents that are living inside your inbox that are not only -- and it's not just about leveraging an agent. It's leveraging an agent with our proprietary data. That's what's so key.

So the ability to go ahead and leverage that proprietary data, respond to customers in a very quick way, unlock that margin opportunity, I think, is very significant. We talked about on the earnings call how we're already leveraging it within our last mile business. If you think about a home installation, go ahead and make sure that everything is installed correctly and then inspecting that on the back end, how can we leverage AI to go ahead and do that instead of on a manual basis, leveraging it on the carrier side in terms of agentic AI, we've talked about reducing over 10,000-plus hours of human labor associated with that. We've talked about deploying millions of lines of code leveraging AI. I can talk about this for a long, long time because we are really excited about it, and we do believe that heading into 2026, we are reaching closer to an inflection point on our ability to deploy not only some of the tools that are already in the organization, but additional tools that can help both unlock incremental margin dollars on the top line as well as improvement in productivity and SG&A.

And Jordan, just going back to the conversation of like scale and everything, that's our advantage that we have and other large brokers have once again compared to smaller brokers.

I mean is it -- clearly, the productivity benefits are -- make a lot of sense. Is it -- from a headcount perspective, does it just mean the existing worker works better, so you need to add less people when things get better? Or do you actually manage headcount at some point through AI?

Yes, I'm glad you asked that because I want to emphasize this point. We are not a technology company. We are a tech-enabled organization and our fundamental belief that we are going to be successful longer term by marrying technology with the best people and operators in the business. So we are deploying tech. We are deploying AI to make our people more productive, not replace our people. And then longer term, how do we go ahead and make sure that we are earning a proper ROIC and we are investing over $100 million a year, there's an expectation that those individuals can be more productive longer term because this business is all about incremental margins.

If you think about our incremental margins in the brokerage space, they can be depending if it's volume or price, anywhere from 50% to 85%. So if we have the ability to go ahead and deploy AI, deploy tech, make our people more productive, grow volume longer term, grow headcount longer term as well, but not nearly at the rate of our volume growth because we're leveraging that tech effectively, those incremental margins on a business that's currently generating low single-digit EBITDA margins is pretty impactful to the P&L.

Well, somehow, we've run out of time here. Maybe next time we should start with AI, although we might not get fundamentals. But any final words before we end it?

Thanks for having us. And I want to just reiterate one of the points that I mentioned earlier. When you think about how RXO is set up for long-term success, the integration of Coyote is behind us. We believe it is a transformative acquisition that positions us incredibly well over the long term as the third largest provider of brokered transportation in North America, and we're looking forward to getting back to the path of significant volume outperformance and profitable growth longer term and believe that longer term, as the third largest provider and managed in broker transportation in North America, we have a huge opportunity to execute against the $400 billion market.

Great. Thank you.

Thank you so much.

All right. We're going to go ahead and get started with the next, I guess, fireside chat here. And we have Jared Weisfeld, who's the Chief Strategy Officer for RXO.

Jared, thank you for joining us. Always good to have RXO at our conference. We appreciate your time. And a lot of interesting topics in brokerage and truck at RXO as well to talk about. So maybe just to kick things off, if you want to offer some thoughts about kind of what you're seeing in the freight markets and how you're looking at activity in 4Q.

Sure. And Tom, thanks for having us at your conference. Really appreciate it. So when we reported a few weeks ago when we talked about still being in a prolonged soft freight market and you look at some of the indicators that we were referring to, the month of October, if you look at cash freight shipments, cash freight shipments were down 7% year-over-year. And -- so it took another step back relative to September. And what's interesting is if you go back and you look at year-to-date 2025 cash freight shipments, you're approaching great financial crisis lows going back to 2008.

So you think about over the last almost 15-plus years, overall shipments are really weak when you think about just the freight economy and the divergence that's occurred relative to the broader macro economy, which is reasonably healthy, right, positive GDP growth, slowing inflation, services economy is strong. And I think that speaks to the fact that goods relative to services are sitting at 15-year lows relative to consumption.

So still in a prolonged soft freight market. But the one thing that we talked about on the call was that we believe the changes that are happening on the supply side are structural in nature and are something certainly to be paying attention to when you think about the FMCSA sizing about 200,000 nondomiciled CDLs, potentially coming out of the market over the next few years. That's a big deal, and enforcement actions have sustained state by state.

And I think the DOT is taking corrective actions to ensure safety across the board for our roads. And I think that has the near-term implication of what's transpired into our business because we procure capacity on the spot market as a truckload brokerage and we've got a heavy contractual book of business.

So what we saw embedded in our Q4 outlook, which I'm sure we'll get to, is that when you think about Q4, we've got this contractual book of business and the cost of purchase transportation moved higher in the month of October as it relates to a lot of the supply tightening that I just referred to occurring. So sort of I said a lot there, overall state of the industry, and we can certainly dive into it.

So how do you think about, from an activity perspective, I guess if you look at some of the other industry kind of characterizations, metrics, whatever we want to look at, does it seem like it's kind of shaping up as you would have had anticipated? Or do you think it's kind of -- do you see indications it's much different.

So if you look at the industry-wide metrics over the last, call it, 4 weeks load-to-truck ratio, [ tender ] rejections have all moved generally higher, tender rejections sitting around 7%, line haul spot rates have moved higher as well. They took a little bit of a dip here in November and then over the last few weeks, have seasonally moved higher. So you're seeing the spot rates move higher ex fuel. So all the freight KPIs are certainly moving, have been moving higher, which is good in terms of when you think about what must be true for a better environment related to spot opportunities for someone like RXO, we typically talk about tender rejections hitting that 10% plus level and load-to-truck ratio hitting 8:1.

So -- and then getting contract versus spot spread closer to parity. So all of those are moving in the right direction. I think the question is how sustainable is that as you think about that into 2026. And I think certainly a part of what's been going on in terms of these key metrics moving higher has been the supply side. When you think about all of the supply that's come out, both cyclically and structurally over the last few months, so I think that's sort of how we see it right now in terms of tighter market and all of that was contemplated in our Q4 outlook. When you think about the range that we gave for Q4, we talked about sustained tightening market conditions embedded within our outlook.

What about from an activity perspective? Is it -- do you think it's kind of a normal peak season developing? I mean, are normal maybe -- that's the right word, again, given the kind of broader weakness we've seen, but do you see that kind of seasonal uplift it would be characteristic of the peak season.

We talked about a muted peak season. And I think if you look at just overall industry-wide volumes, this is not an RXO comment. You've seen overall tender volumes move higher over the last few weeks. Tough to tell if that's really attributable to peak season or more of a normalization of demand post government reopening with respect to the shutdown ending. So you've seen the normalization on outbound tender volumes from an industry-wide standpoint, and that goes back into what I was saying earlier in terms of some of the key metrics in terms of load-to-truck ratio and tender rejections moving seasonally higher, but I still think it's -- we call it for a muted peak season with respect to our Q4 outlook.

And I think the -- heading into 2026, it all depends on, as we think about the intersection of supply and demand does the enforcement actions -- do the enforcement actions sustain into next year? What happens by vertical, which certainly we can explore.

Right? Okay. But in terms of that expectation of a muted peak, it sounds like broadly, that's the way it seems to be playing out from a industry perspective?

Yes. I mean what I would say is the outlook that we gave for Q4 was $20 million to $30 million of adjusted EBITDA, and we talked about how in our brokerage business, we typically see an increase, and we are going to see truckload volumes grow sequentially from Q3 to Q4. That's contemplated within our outlook. But what you're seeing is the typical seasonal uplift that we generally see from an adjusted EBITDA standpoint, embedded within the outlook is that is muted because of the rising cost of purchased transportation.

We talked about that squeeze that really was severe in the month of October, and that is embedded within our Q4 outlook that, that sustains throughout the rest of the quarter. So that offsets some of the positive momentum from truckload volume moving higher. And then in our last mile business, we talked about how typically we see an increase from Q3 to Q4 from an adjusted EBITDA perspective. But embedded within our outlook is a decrease based on some of the slowing demand activity that we really saw after Labor Day.

Right. Okay. So $20 million to $30 million sounds like kind of broadly tracking against that, that does embed some tightening. How do you think about government shutdown? And was that actually a big impact, is kind of a depressing impact in October that you would make sense of what you see in November that there'd be some lift as you gotten beyond that? Or do you think it seems hard to gauge whether that was really meaningful impact of freight or not?

Yes, from a direct exposure standpoint, it wasn't that much for RXO. But on the margin, as you think about just consumers' willingness to spend and what that means for overall consumer confidence and overall freight volume activity, I certainly think that marginally freight demand was impacted by the government shutdown. I think certainly a positive that the government reopened and you think about one of the more obvious use cases with respect to government funding in terms of SNAP benefits, right?

You've got 40-plus million Americans that are dependent on SNAP benefits. So when you think about food and beverage type exposure that was definitely impacted by government shutdown. With the reopening of the government and those funds continuing to flow, I think that was certainly a positive in terms of just overall industry volumes.

Right. Okay. I think we look at the pattern in the last couple of years for spot rates and truckload market tightness. It is difficult to see some tightening in December. I think part of that seasonal activity, part of that's probably drivers late December, kind of go to the sidelines and during the holidays that seems to carry into January. So if you just look at the chart of dry van spot rates ex fuel, it seems pretty regular in the last couple of years as you see that pick up now.

Maybe this is a touch earlier than that, but how do you kind of distinguish between, hey, this is normal seasonal pattern versus the regulatory actions are really starting to bite and affect capacity?

What's interesting is that what's been occurring over the last 2 to 3 months is effectively unprecedented. When you think about overall industry volumes being so weak all year, and you have tightening KPIs such as load-to-truck ratio and tender rejections moving higher, that's not intuitive, right? So when you think about in the month of October as a great example, with cash freight shipments down 7% year-over-year, taking another step back relative to September.

And despite that, you saw load-to-truck ratio and tender rejections move higher. That gives, I think, certainly us confidence that you're seeing supply come out with respect to some of the structural and cyclical dynamics that are playing out. When you think about from this baseline here throughout Q4 into Q1, it's a great question, and I think it's going to be a function of a couple of things.

Over the last few years, you've definitely seen line haul ex fuel rates move higher from Q4 to Q1. Weather has been a big factor for the last couple of years. So I think we'll -- I mean without getting into [ La Niña ] predictions for the first quarter and the Southern stratospheric warming that may or may not occur over the next 30 days and what that means for for winter storms. I think you got to just put that in context where I'm not really sure what normal is anymore as it relates to the cadence from Q4 to Q1 on spot, but weather has definitely been an impact.

We talked about that earlier this year in terms of impacting the month of January. And I think most of the truckload space talked about that as well. What's interesting, though, is that you're still having carriers operating below where they need to with respect to breakeven, right? So all of the -- we put out the RXO curve, which came over from legacy coyote, it used to be the coyote curve. And one of the stats that we put in the release a couple of weeks ago is that you look at carrier rates in terms of spot rates over the last 10 years, basically flat in terms of overall freight rates.

But the cost to the carrier is up 34%. Insurance, tires, maintenance, overall inflation. So you're at an environment that is not sustainable for many reasons, just based on how economics work. So you think about some of the ORs that are out there for some of the trucking companies operating anywhere between probably [ 95 and 115 ]. So it just, I think, speaks to the fact that we're operating in an environment right now that is very painful for many carriers, given where unit economics are and ultimately speaks to the need for rates to move higher longer term to achieve acceptable margins longer term.

So what do you see in your own carrier base in terms of attrition that would result from this pressure? Is that something where there's been a change in the pace of attrition that's been meaningful. I think just kind of like headline type things. It does seem like you've seen more bankruptcies of kind of midsize trucking companies, I don't know, over the last 6 months, I would say.

It was a large 1 last night, yes.

Yes. So the new slow does seem to reflect that. It's kind of qualitative, but you guys have a lot of data and metrics. Are you seeing in your carrier base that there's like a higher pace of attrition.

Our carrier base has generally been pretty stable. The overall RXO network has about 120,000 carriers and 1.6 million power units. And we take so much pride on the restrictions that we have in terms of what must be true to drive on behalf of RXO in terms of compliance and screening and onboarding processes really thorough. And ultimately, you as a shipper you want that thoroughness. You want to be comforted by the fact that you have a betting mechanism that is in place to go ahead and ensure that it is the highest quality drivers.

We can go ahead and start a trucking authority and get our CDLs. But you're not -- we're not going to be able to drive for RXO on Day 1 after receiving your CDL. We have very strict requirements. It's going to be at least 3 months before you're even driving on behalf of RXO. And then as you assume, you have to go ahead and work your way up to earn the right to drive highly lucrative and profitable freight. So we've actually seen some -- it's been pretty stable in terms of the RXO core.

And I think that's one of the advantages of being the third largest provider of broker transportation in North America having access to massive amounts of capacity. And ultimately, the shippers longer term, when you think about all of the structural changes that are ongoing right now, what does the steady state look like when we get to the other side of this you as a shipper, and we hear this from our shippers.

They want to do business with large-scale carriers, large-scale brokers that have balance sheets and the ability to invest throughout cycle and have access to massive amounts of high-qualified capacity.

So I mean it's favorable, you have broad access to capacity. Obviously, that's to your advantage. I guess what makes a lot of sense to me or less intuitive to me is that with that larger capacity base, why would you not see attrition? When it seems like there's so much pressure on the carriers.

Well, I think when you -- you have to look into who is exiting the market right now. A lot of the exits have been nondomiciled CDLs, capacity that may or may not -- should potentially not even be in the industry, right? There are -- there's a ton and this has been widely reported in terms of individuals that have -- first name is no last name and name given, right? You think about who is getting some of these CDLs. This speaks to the pretty strict processes that we have internally in terms of who is driving on behalf of RXO.

So no doubt, over the last few years, you've seen overall carrier attrition a little bit based on the cyclical pressures that we've talked about. But in general, it's a pretty stable base. And I think this also speaks to one of the advantages that we saw with respect to the purchase of Coyote last year, the carrier base for Coyote is very different from that of RXO. So legacy RXO more owner operators, legacy Coyote more medium-sized to larger carriers access to a lot of these private fleets.

And as you know, to drive on behalf of private fleet, you're really going to be an employee and not have a nondomiciled CDL. So it speaks to the fact that we've got access to not only a massive amount of capacity, but very high-quality capacity.

What's the advantage of using more owner-operator versus kind of midsize and private fleet? Or is it just kind of like you get some advantage using everything?

I think it's the latter. It's just the -- the way the businesses were built -- RXO was built on getting access to power lanes across owner operators throughout the country, and legacy Coyote was more of centralized capacity as it relates to medium to larger-sized private fleets. RXO, we tried to crack into the private fleet market, and we weren't as successful as legacy Coyote was. So when we saw that difference in terms of the carrier networks and how complementary they actually were sort of just different ways of building up the density that both networks had and I think pretty complementary to each other.

Okay. How do you think about coyote, RXO cayote synergies and opportunities, how much impact is there when you look in 2026.

About cost synergies?

Cost synergies, cost of purchase transportation, just overall impact EBITDA in '26 versus '25?

Sure. So let's set the stage in terms of the cost efficiencies throughout the organization. So since we spun from RXO we've taken out over $125 million of annualized operating expenses, that includes about $60 million of operating expenses from Coyote. We announced a couple of weeks ago in earnings that we are instituting a new $30 million cost takeout on an annualized basis.

So that brings the grand total from $125 million up to $155 million. when you think about the flow-through into 2026, sort of 2 components to think about. There is the actions that were taken in 2025 from a synergy standpoint that will be fully realized into 2026. And then you think about the cost actions that we took in -- that we announced a few weeks ago that are being taken in the fourth quarter with the full annualized impact in 2026. Taken together, those combined numbers should be around $30 million, $35 million of annualized costs coming out of the model.

And I think that really does speak to us operating at a very efficient cost structure highly. And when we think about sort of incremental leverage associated with that, we're talking about from gross profit down to EBITDA with respect to volume, it could be $0.60-plus on dollar with respect to price, it could be $0.85 plus on dollar with respect to -- on the brokerage business.

One other thing to keep in mind in terms of the $35 million year-on-year tailwind that we'll have 2026 versus 2025, holistically across both operating expenses takeout and synergies there is certainly inflationary pressure in the business.

When you think about just overall cost inflation, that stat that I gave you earlier in terms of you think about insurance and tires and maintenance for a lot of the carriers, some of those certainly are true for us when you think about insurance and merit, et cetera. So you won't see all full $35 million year-on-year, '26 versus '25. But certainly, we continue to take out aggressive -- take out costs aggressively. And even when you look at the last quarter, you look at last quarter versus the full quarter when we closed Coyote in Q4 of last year, SG&A is down about $15 million or $60 million on an annualized basis, pretty big number.

So you mentioned $30 million to $35 million. How do we think about cost to purchase transportation and synergies from that? Is that -- when it gets that gets tricky when you say, well, spot rates are going up, and we're going to get squeezed. But we're getting a benefit from combined. So it's probably harder to decouple. But is that a factor we ought to consider for '26? Or should we just say, hey, let's not focus on that because we know cost of purchased transportation overall is going up.

You should absolutely consider it for 2026 and beyond because it was part of the strategic rationale associated with the acquisition of Coyote. You think about the combined pool of purchase transportation dollars across legacy RXO and legacy Coyote, almost $4 billion of [ PT ]. The ability for us to improve spend can drop from gross profit down to EBITDA. So that is a huge focus of the organization. We talked about last quarter how year-to-date, we're seeing since the carrier cutover, which occurred on the technology side, the first, over the last, call it, 5 months, we've seen about 30 to 50 basis points of incremental buy rate favorability.

We've given some framework where by May of next year, which is the 1-year anniversary of that carrier cutover and just to help frame things and put things in perspective for everyone, we did the technology transition in multiple phases. One of the first phases was making sure that all carrier reps across legacy RXO and legacy Coyote, we're covering freight in one system, which is the RXO system, RXO Connect and our proprietary TMS freight optimizer that occurred in -- on May 1. And it's also a pretty iterative process where over time, you'll have the ability for the carrier reps to improve productivity think about some of these carrier reps out legacy Coyote, almost tenured in the industry doing this for 8 to 10 years operating off of Bazooka.

So it takes some time to go ahead and learn the inner workings of the newer system and learn the freight that they have access to. By that 1-year anniversary of May, we feel comfortable that we'll get to about 100 basis points of incremental buy rate favorability. But you also bring up a very important point that you need to distinguish the cost synergies and the cost takeouts from that of purchase transportation synergies because purchase transportation synergies will move with how the market is performing. So ultimately, if you are in an inflationary rate environment, it will serve as incremental cost avoidance.

If you are in an environment that is status quo or perhaps loosening, you have the ability to benefit from incremental PT savings.

Great. Okay. How do you think about the kind of algorithm for 2026 overall? Is it base case -- you get a little bit of growth in freight, you get some tightening in the market, you get some rate increases. I don't know, what are some of the pieces that could come together in addition to what you've talked about on the cost side?

This is the longest freight recession on record. So I think we're not going to get into predictions for 2026 and what is already a very unprecedented environment. But what I can talk to, and I think this is really important, is our ability to outperform the market. And if you think back 12 months ago, we just completed the acquisition of Coyote. But underneath the hood, it was still clearly 2 separate companies with us first beginning the tech integration journey, the operation integration journey.

If you think about where we are right now, the integration is effectively complete. We are integrated from a sales standpoint, integrated from an ops standpoint, carrier integration complete, shipper integration on the customer side, materially complete. One CRM and one ERP, one pricing tool, combined data set of both legacy RXO and legacy Coyote in 12 months.

This is the largest integration that's ever occurred in the asset-light space. And we hit operationally our time line in terms of tech integration, which was a very robust and aggressive time line to begin with. So heading into next year as 1 RXO with the integration behind us, if you think about RXO over the last 10, 15 years, profitable growth has been our algorithm.

Outperformance in the brokerage market has been our algorithm. If you look back over the last 10 years, we have significantly outperformed the truckload market heading into 2026. The business has very good momentum as it relates to conversations with shippers and an integrated company across the board to go ahead and resume that outperformance that we've been accustomed to for the last decade.

How much visibility do you have to that? I think when Drew talked -- has talked about this year, he said, okay, we thought rates would go up. They didn't go up as much as we thought or they didn't really go up the market stayed soft. And so we probably underperformed a bit on maybe market share or volume relative to the stance we took on rates. You have done some heavy lifting and putting the pieces together, but it's also now a new entity versus what it was when you had the strong track record of growth.

So kind of what gives you confidence that you can go back to being growth above the market as you go '26, '27.

So you think about, as 2025 progress, to your point, we took a stance on rates earlier in this year and the market took another leg lower. So we think about where we are now versus 12 months ago at the time of the Coyote acquisition, we thought we were at or near the bottom of the freight cycle, and we thought that the market would move higher. It's taken a little bit longer. And there have been consequences as it relates to our truckload volume growth year, which first quarter was down 8%; second quarter, down 11%; second quarter down -- third quarter down 12%.

And at the midpoint of our outlook, we talked about down double digits again. So we've underperformed this year on the truckload side, to your point, no doubt, based on some of the pricing strategies that we engage. And if we knew if it was going to be a softer market, we certainly did not have to be as aggressive as we were on some of the price increases earlier this year.

But you sort of fast forward to where we are right now. And you think about the automotive headwinds that have impacted -- I want to be clear, it wasn't just legacy Coyote, right? Legacy RXO, we are the largest provider of managed expedite in North America for automotive. So legacy RXO, you look at our automotive volumes for the combined basis in 2025, they're down 20% to 30% year-over-year.

So fast forward to 2026, automotive stops being a headwind materially starting in Q1. Our truckload comps eased materially starting in Q2 of next year. And then in terms of your question on visibility, I think the conversations we're having with our customers have been very constructive. We've stabilized the volume. We talked about Q3, our truckload volume was up 1% sequentially. Q4 will be up again embedded within our outlook. And then when you think about off of that base, then being able to outperform the market irrespective of market conditions, we feel very good about that.

What we don't know is the demand environment where ultimately, if the demand environment still remains soft, we could have a very good bid season. But ultimately, what we call fill rates, right, would be challenged, whereby customers have a view of demand and ultimately, if the shippers forecast is off because the consumer deteriorates as an example, their demand goes lower and therefore, our demand would go lower, even if you had that award. But in terms of the ability to continue to stay close to customers, servicing that freight exceptionally well now as one RXO we feel very good about.

Let's spend a little bit of time on the regulatory side. I know you look at a lot of the details of what's happening in the specific regulatory actions, you're thoughtful about how that manifest and how big the impact can be. What's your latest thought on what are some of the key regulatory actions that are taking place and how you think that is base case, how it tracks market in 2026?

I think the biggest regulatory action that has been taken over the last, call it, 6 months, I'd say, have been twofold. One was the executive order, the Rules of the Road executive order in May of this year, which required English language proficiency on behalf of truck drivers and the ability to interpret road signs. And the second was the interim final rule from the DOT in September, which effectively paused the issuance of nondomiciled CDLs. Those are very significant in terms of the potential implications to the truckload industry, and we saw a preview of that in October in terms of the capacity that's come out.

So sizing that up I think the FMCSA has sized up 200,000 nondomiciled CDLs being impacted by the interim final rule on a base of 3.9 million, that's about 5% of overall capacity. But then you sort of break down that denominator, which is about 3.9 million CDLs that are out there, what is the true denominator of the [indiscernible] higher truckload market, excluding private fleets, probably somewhere close to anywhere between 1 million and 2 million. So it's a significant amount of capacity that could permanently leave the market, and that has long-term implications, which are positive for many constituents. One, it's positive for the road and positive for driver safety.

It's positive for large-scale carriers and large-scale brokers like RXO when you think about the ability for -- like we were talking about earlier, shippers wanting to do business with carriers and brokers that have very rigorous training processes and qualification processes in order to go ahead and drive on behalf of RXO. And you think about what that could mean longer term. There's also brokers that are out there that leverage this nondomiciled capacity, and those business models might now go away.

So you think about what that means in terms of market structure, I think it's a really good thing for the industry. And I think it's a really good thing for a large-scale broker like RXO, the top 9 brokers post the acquisition of Coyote represented about 45% -- 50% of the overall industry structure. Longer term, we think the top 5 probably represents 50% to 70%. So I think winners take most type market structure with respect to having the ability to invest throughout cycle, having the balance sheet, having the ability to stay close to customers and are having access to that massive capacity to weather a lot of the structural changes. But those are the 2 biggest changes that have occurred in 2025.

It seems like DOT and FMCSA keep discovering kind of -- or maybe identifying kind of, if you want to say, fraudulent or questionable, approaches, whether it's self-certification of ELDs. So perhaps you and I [indiscernible] the use, right? driver schools that are inadequate. So it's kind of the nondomiciled CDL issuance that states weren't following rules or some states weren't. So it's kind of this and that. And the other thing. Do you think those other elements are pretty significant too? And do you think that there's just like so much momentum that has got to have a big impact? Or is it still unclear what this does?

No, no, I very much agree with the former in terms of all of the actions in totality have the potential to be very significant in terms of what happens to the overall supply balance for this industry longer term because you're right, it's not just about the executive order on the rules of the road and English language proficiency. It's not just about nondomiciled CDLs. I mean even in the last 24 hours, you've had the DOT identify almost half of the schools that are teaching these drivers to get the qualifications potentially be ineligible going forward.

It's about 15,000 driving schools in the U.S. and almost 7,000 or 7,500 have been identified that hit last night. I think yesterday also, the DOT identified Minnesota issuing 1/3 of their nondomiciled CDLs as potentially being problematic. So it's not just 1 issue. It is multiple. And I think this is all in the name of improved driver safety, improved road safety, reducing fraud, reducing theft.

This is a very good thing for the industry and longer term, steady state. It's -- and I think that's an important point because you think about in the near term, no doubt it's impacting our business because you've got what I talked about earlier in terms of a current unprecedented situation with -- you look in October as a great example, load-to-truck ratio and tender rejection is moving higher despite weaker demands because all of the supply is coming out.

So it's painful in the near term for us in terms of financial performance because we're getting squeezed on the buy side with weaker demand environment. So there's no real accretive spot opportunities to help offset that squeeze. But that's also mechanical, right? That's what happens when you've got a large book of business with Tier 1 enterprise shippers and no spot environment. You then fast forward to steady state if you've got an environment that is cleaner from a supply standpoint with higher quality supply, higher-quality brokerages that is a good thing for freight rates longer term, and it's a good thing for road safety longer term.

So in this framework where you have kind of flattish freight, but you have capacity coming down, you could have a good outcome for rates. However, it can be challenging for brokers. How long do you think -- like each cycle is different, but if you look at historical cycles, how long do you think the squeeze last? I mean just like you're getting squeezed in October, getting -- starting to get squeezed in 3Q. I mean is this -- this runs through 2Q next year? Could this run longer than that?

Is -- I mean it would be nice to -- I think you say it's what is it a good squeeze or something or good whatever term you use, but good and bad. But you'd like to get through the bad or the challenge and get to the good news on the other side. So any thoughts on how long that might last.

Yes. I don't have the crystal ball in terms of how long the squeeze will last. We are in unprecedented times in terms of going on year 4 of this freight recession. But I think we gave some color on the earnings call in terms of last time we had a squeeze like this. Within 2 quarters, we have that rebound. But ultimately, every cycle is different, and it comes down to supply and demand. So does supply keep coming out at the rate that it's been coming out? And do you see any kind of rebound in demand across the key verticals that we serve, which are food and beverage, industrial manufacturing and retail e-commerce.

The key signs that I look for are what's going on with the industrial manufacturing PMI, especially the new orders component, what's going on with building permits as well as consumer confidence. And really, the housing market is also really important for the freight market, as you know, about 15% to 20% of overall freight demand in every new truckload or every new home, sorry, is the equivalent of 6 to 8 truckloads.

So getting that long end of the curve to come down in terms of mortgage rates would be helpful. We are sitting at 12-month lows in terms of mortgage rates, and you've seen a recent increase in applications. So to the extent that sustains that will be good for our brokerage business, and it'll also be good for the last mile business given our exposure to big and bulky.

So what's the prior period you referred to as an analogy from when there was a squeeze?

We're going back to, I want to say, the -- I think the 2019 time frame for legacy RXO when we talked -- when we saw that gross margin performance dip and then the 2 quarters [ subsequent then ] rebounding.

2018 or '19?

I think 2018, 2019 around...

Okay.

And that also speaks to the earlier question that you had, Tom, on why it's so important to continue to focus on our ability to procure transportation effectively, right, regardless of what happens in the market as we strive to hitting that 100 basis points of improvement of long-term productivity gains -- sorry, long-term purchase transportation gains that will clearly help offset some of the squeeze to the extent that we can achieve that faster. So when we think about our business model, you're never going to avoid the squeeze, right? We've got a book of business that's 70% plus contractual in nature, and our book of business we've got a little SMB, but it's mostly large Tier 1 enterprise shippers. So when you've got that large book of business with higher PT costs, that's what happens on the gross margin line in terms of the squeeze impact.

And to your point, the good squeeze versus the bad squeeze. We've had multiple episodic squeezes over the last 3-plus years since we've spun and it's been because you've had every time there was an event you think about road check week or any kind of winter storm, it's always met with rising rejection rates, rising load truck ratios, but you always get back prior to -- you always get back to the prior baseline because ultimately, too much supply relative to demand. So we'll see how long this squeeze lasts. This has now been. We start to see a little bit of tightening into September, and now we're in December, and rates are still moving higher. So we should see if this sustains.

Okay. We've got a little less than 5 minutes left here. I want to ask you about AI. So when we look at transport who can benefit, just structure what they do from use of technology in AI, we think C.H. Robinson is kind of blazing the trail of driving a lot of productivity gains you see in their pretty big headcount reduction numbers, 30% headcount reduction overall versus '22.

And I think it's hard to decouple how much is lean versus AI starting point. The asset-light model does seem conducive. So I think eventually, you'll see expeditors benefit from that? I know there's some dispute on that, some debate. But my own view is C.H. isn't the only one that can realize AI gains. The degree, of course, is different and whether you have lean, but why shouldn't RXO also be a name that can see some real benefits from that. I mean I tend to think we probably were pretty focused on Coyote integration. So that's the reason maybe it wouldn't be as transparent.

But I know some of it's starting point what we're already doing. But help me think about why you shouldn't be able to do that? Or is there a kind of big future opportunity from use of generative AI, agentic AI.

Absolutely agree with the premise that RXO has the ability to go ahead and benefit from leveraging AI in a strategic way that's transformative across the organization that improves our operating margins longer term. So I think the premise absolutely sound. I mean we spent more than $100 million a year on cash technology spend. That's not just -- so that's across OpEx, CapEx. And we think about the investments that we've been making across the board goes back 10-plus years ago on the machine learning side in terms of some of the pricing algorithms, but specifically to your question on agentic and gen AI.

We believe that we are entering an inflection point heading into 2026 with the rollout of many tools that we've been investing in for years. And it's not just the Coyote integration that, to use your word, sort of masked the investments that we've been making because we've been making these investments, and I would make the case that we've actually accelerated our time line and our road map with the Coyote acquisition.

One of the added benefits was when we bought the company, we saw it was on some of their tech road map. And it was actually -- and we saw it was on ours and in some cases, one was already on the other road map and vice versa. So the ability to go ahead and leverage best of both worlds, processes and order flows and workflows rather into the combined tech data set, I think, is really, really important.

So it all starts with having a clean set of data, right? If you think about building upon an integrated data lake, RXO data, Coyote data, that's all one. On top of that, you have an orchestration layer. And then on top of that, you've got multiple agents that can go ahead and effectively increase productivity across the organization as well as introduce the ability to unlock incremental margin from top of the funnel opportunities.

It's not just a cost play. It's also a revenue in terms of incremental margin play. And it's also a productivity play, right? Our productivity over the last 2 years is up 38%. So -- and we think we are still very much at the early innings of AI. So we've been rolling out GenAI and agentic AI and machine learning for a long time. This year, in particular, I think we talked a little bit about this on the earnings call.

If I look at some of the tools that have been implemented, we've leveraged agentic AI solutions from from a carrier rep standpoint already, saving 10,000-plus man hours associated with the deployment of that technology. We've rolled out millions of lines of code in terms of leveraging some of the AI tools that are available to us as opposed to leveraging -- or in addition to leveraging some of our engineering talent.

We've leveraged it in last mile in terms of image association and identification with respect to home installs. So it's across the board, and we are very much at the early innings with the opportunity to unlock significant potential heading into 2026 and beyond.

So what inning do you think you're at?

If we're doing this right, we're always in the first inning, right? Because ultimately, not to be cliche, but AI is -- we fundamentally believe that AI has the ability to structurally improve our margin profile longer term. I think it's also an important point that we are not a technology company. We are a tech-enabled company. How do we go ahead and invest aggressively in AI, aggressively in our tech road map and then marry that with the best operators in the industry to have that solution where we're leveraging tech effectively, and we're doing it with the best operators to have structurally higher margins longer term.

Right. Okay. That makes sense. Jared, thanks so much for joining us.

Thank you so much, Tom. Really appreciate it.

Yes. Thanks for joining us. Appreciate it.

Thanks.

Welcome to the RXO Q3 2025 Earnings Conference Call and Webcast. My name is Michael, and I will be your operator for today's call. Please note that this conference is being recorded.

During this call, the company will make certain forward-looking statements with the meaning of federal securities laws, which by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release.

You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures the company uses when discussing its results.

I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may now begin.

Good morning, everyone. Thank you for joining today. I'm here in Charlotte with RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. This morning, we announced our third quarter results. Year-over-year, overall brokerage volume grew 1%, driven by less than truckload volume growth of 43%. Brokerage truckload volume declined by 11% year-over-year, but increased by 1% sequentially.

Last mile stops grew by 12% year-over-year, the fifth consecutive quarter of double-digit growth, and we added cash to the balance sheet and had 56% adjusted free cash flow conversion. Brokerage gross margin was 13.5% and RXO's EBITDA was $32 million in the quarter, below our expectations. Contrary to our assumptions on last quarter's call, the market tightened in September.

Capacity began exiting in certain regions driven primarily by regulatory changes and enforcement. About 2/3 of RXO's freight in the quarter came from regions where buy rates increased, and this impacted our results. BA rates increased faster than our contractual sale rates with no meaningful corresponding increase in accretive spot opportunities. We take our commitments to our customers very seriously and continue to honor the service commitments we made in the quarter.

Industry tender rejections in the third quarter were 6%, RXO were just 2%. This build trust and strengthened relationship with our customers, and you can see the impact of our efforts in recognition we recently received from blue-chip customers, including United States cold storage, Owens Corning and Altonium, reliably serving our customers' freight at this point in the market cycle will position to win more spot loads in mini bids as the market recovers.

Now I'd like to provide you with the details on our fourth quarter expectations, including EBITDA between $20 million and $30 million. The biggest driver of the sequential decline is volume weakness within our last mile business, which is counter to typical seasonality. While we posted another quarter of impressive double-digit stock growth in the third quarter, since Labor Day, we've seen a weakening in demand for big and bulky goods. Jamie and Jared will discuss this in more detail later in the call.

In brokerage, we expect the squeeze dynamic to intensify into the fourth quarter. At this point in the cycle, roughly 70% of our truckload brokerage business is contract primarily with enterprise customers. So the squeeze on our gross profit per load has been acute. In addition, we have not yet seen a meaningful increase in accretive spot opportunities. When demand ultimately recovers, spot loads will increase, which will be accretive to gross profit per load helping to offset the higher cost of purchased transportation.

The big question is whether these changes to the industry capacity are permanent. If the regulatory changes hold and enforcement continues, we believe a significant amount of truckload capacity will permanently exit the market. This will help improve the overall safety of the industry as well as help combat theft and fraud.

This has the potential to be one of the largest structural changes to truckload supply since deregulation and could result in a higher for longer freight environment. RXO is well positioned to capitalize on that if it occurs because of our larger scale as the third largest provider of broker transportation.

However, for a sustained freight market recovery, we need increased demand for goods, and we aren't seeing that yet. Demand trends weakened throughout the third quarter and remain below typical seasonality. In fact, during the month of August, cash freight shipments reached their lowest level since 2020.

We continue to take strategic actions to position RXO for both the short term and the long term. We've greatly improved RXO cost structure throughout the downturn and took additional action in the third quarter. Since we've become a public stand-alone company, we've removed more than $125 million of cost. That is a significant improvement to our cost structure. Right now, the impact is being masked by the market-driven declines in gross profit per load. We're looking at our actions holistically.

Some examples of our initiatives include investing in artificial intelligence that frees up time for our team to focus on our customers' most challenging problems, optimizing our real estate footprint, and rightsizing our teams to ensure the optimal balance between current demand and ensuring we're staffed for growth.

Given the sustained soft freight market conditions, we've been moving quickly to streamline our costs within our brokerage business. As an example, in the third quarter, brokerage headcount declined by approximately 15% year-over-year. Our actions to date, including our investments in technology have already yielded substantial productivity gains in brokerage.

Productivity increased by 19% over the last 12 months and by 38% over the last 2 years. These are sticky changes to our business that will yield benefits in the future. I remain extremely confident in RXO's ability to deliver outsized earnings growth over the long term because of 5 things: our improved cost structure, larger scale, continued focus on profitable growth, best-in-class technology and ability to generate cash.

First, our much more efficient cost structure will provide us with significant operating leverage when the market improves. Second, we have a much larger scale. Scale is a differentiator in brokerage, and I'll highlight 2 examples.

Scale enables us to purchase transportation more effectively. Our common technology platform is helping us capitalize on additional power lines while providing the best truck for each load. During the third quarter, our incremental buy rate favorability was similar to last quarter, and approximately 30 to 50 basis points better when compared to the period before the carrier migration. Those improvements were more than offset by the September market tightening I mentioned earlier. We expect our buy rate favorability to further improve as we increase productivity across the organization. We remain confident that over time, our favorability will increase to approximately 100 basis points. Another benefit of scale is a decreased cost per load.

This was one of the guiding principles of the Coyote acquisition, and we achieved results in this area. Since our spin, our cost per load has decreased by more than 20%. We're effectively leveraging our increased scale and technology platform, and we'll continue to bring down our cost to serve.

The third driver of long-term value creation for RXO is profitable growth. This is part of our DNA, and we have continued opportunities to drive future growth. In addition to growing our core truckload business, we will also grow by offering valuable premium services that deepen relationships with customers. We're also in the early stages of growing more consistent sources of EBITDA, including managed transportation and LTL because they reliably bring in strong and more consistent profits through market cycles.

In the third quarter, we grew LTL volume by 43%, while LTL volume has grown significantly, it only represents about 10% of total brokerage gross profit dollars. We have a long runway in LTL. We have an exceptional track record when it comes to growth. Over the 5 years prior to the Coyote acquisition, RXO grew total volume by 72% organically and 11% CAGR.

Fourth, our technology is the differentiator, customers and carriers constantly tell us that our tech is the best and easiest to use in the industry. We invest heavily in this area, spending over $100 million every year. This technology powered by AI and machine learning helps our employees be more productive, freeing up their time to focus on our customers and carriers. It also enhances our customer experience and drives our pricing engines. And fifth, our asset-light business model enables us to produce strong cash flow.

In the quarter, despite the soft market conditions, our adjusted free cash flow conversion was 56%. We remain confident in delivering 40% to 60% conversion across market cycles.

In conclusion, although we're in a challenging market environment, and we're not satisfied with our near-term performance, we've taken decisive strategic actions. We remain focused on what has made us so successful over the past decade plus. We provide exceptional service, a comprehensive set of solutions, cutting-edge technology and deep customer relationships. All of this provides RXO with a unique algorithm for long-term growth. Now Jamie will discuss our financial results in more detail.

Thank you, Drew, and good morning. Let's review our third quarter performance in more detail. Our results were slightly below our outlook. The quarter, we reported $1.4 billion in total revenue, gross margin of 16.5%, adjusted EBITDA of $32 million and an adjusted EBITDA margin of 2.3%. Gross margin and adjusted EBITDA were primarily impacted by the increase in cost of transportation, further broad-based demand weakness and continued headwinds in the automotive sector.

As Drew mentioned, cost of transportation increased without a corresponding increase in cell rates or accretive spot opportunities. This caused a margin squeeze on our contractual brokerage volume during the month of September. Jared will provide more details later in the call.

Automotive was a continued headwind and represented an approximately $5 million year-over-year margin impact in the quarter. As we discussed over the past 2 quarters, this freight is time-critical and with high service requirements and typically carries a higher-than-average gross margin with strong flow-through to EBITDA.

Below the line, our interest expense was $9 million. For the quarter, our adjusted earnings per share was $0.01. You can find a bridge to adjusted EBITDA on Slide 7 of the earnings presentation.

Now I'd like to give an overview of our performance within our lines of business. Brokerage revenue was $1 billion and represented 70% of our total revenue. Overall, brokerage volume growth was 1% in the quarter. We had strong LTO growth of 43% which was offset by 11% decline in full truckload volume. The year-over-year decline in truckload volume was impacted by overall demand weakness, softness in the automotive sector and efforts we undertook with customers to Optimus price, volume and service.

Given the market tightened in September, brokerage gross margin was down 90 basis points sequentially to 13.5% at the low end of our outlook. Complementary services revenue in the quarter of $442 million increased by 5% year-over-year and was 30% of our total revenue. Gross margin within complementary services was 21.3%.

Now let's discuss each line of business within complementary services. Managed Transportation generated $137 million of revenue in the quarter, down 9% year-over-year. Managed Transportation continues to be impacted by lower automotive volume in our managed expedite business. Our last mile business generated $305 million in revenue in the quarter, up 14% year-over-year. Last mile stock grew about 12%. However, over the past few months, we have seen a weakening in the big and bulky demand. This trend has worsened into the fourth quarter.

Let's now discuss cash. Please refer to Slide 8. Adjusted free cash flow in the third quarter was $18 million, yielding a strong 56% conversion from adjusted EBITDA. As a reminder, our semiannual interest payment is not due until the fourth quarter which benefited our third quarter conversion. Year-to-date, our conversion is 50%. We're very pleased with our conversion at this point in the freight cycle.

Given our asset-light business model, we remain confident in a 40% to 60% conversion over the long term and across market cycles. We ended the quarter with $25 million of cash on the balance sheet which increased by $7 million sequentially, with no change to the revolver balance. We grew our cash balance despite $9 million of restructuring, transaction and integration cash outflows.

As you can see on Slide 9, our liquidity position continues to be strong with $590 million of total committed liquidity, of which approximately $375 million is currently available. Quarter end, net leverage was 2.3x LTM bank adjusted EBITDA, up slightly when compared to the prior quarter. I'd now like to talk about the actions we've taken to optimize our cost structure.

We've taken actions to achieve more than $125 million of annualized expense savings, including $65 million of post-spin cost and $60 million of cost synergies related to the Coyote acquisition. Today, we announced that we're taking additional actions that would yield more than $30 million of incremental annualized savings.

Collectively, this means a total reduction in annualized expenses over the last 3 years of more than $155 million. We're optimizing our cost structure, operating more efficiently and automating key processes.

Now let's discuss our expectations for the fourth quarter. Our outlook reflects a fluid macroeconomic environment with weakening freight demand and a continued increase in the cost of purchase transportation. For the combined company in the fourth quarter, we expect to generate between $20 million and $30 million of adjusted EBITDA.

While we would typically see a sequential increase in brokerage adjusted EBITDA in the fourth quarter, that has been more than offset by higher cost of purchase transportation. We are also expecting the decline in complementary services, driven by slowing demand in last mile, which is counter to normal seasonality. Jared will provide more details on our outlook shortly.

Slide 14 includes our fourth quarter modeling assumptions. There are a few things I want to highlight. We expect CapEx of approximately $20 million, we're tracking towards the low end of our previously discussed $65 million to $75 million outlook for the full year 2025.

For 2026, we continue to expect CapEx to be between $45 million and $55 million, down materially year-over-year. As we discussed, we're taking additional cost actions that will result in more than $30 million of annualized expense savings. In conjunction with these actions, we expect fourth quarter restructuring, transaction and integration expenses to be approximately $15 million. Below the line, we expect net interest expense of approximately $9 million an adjusted effective tax rate of approximately 30% and fully diluted shares of $170 million.

To summarize, recent accelerated capacity exits are putting upward pressure on our cost of purchase transportation and squeezing our contractual brokerage gross margin. This impacts near-term profitability given our large footprint of contract business with Tier 1 shippers. We are reliably servicing our customers' freight and are well positioned to win spot opportunities in special projects when demand recovers.

Longer term, as we think about the broader macro economy, we do see positive developments such as lower interest rates, new tax legislation domestic investment announcements and improving clarity on trade. Lower interest rates specifically can spur freight activity in many rate sensitive industries such as the housing sector.

As an example, according to the American Trucking Association, every new home built requires between 6 and 10 truckloads at Giles to be shipped. Mortgage rates recently reached 12-month lows and any recovery in the housing market would be positive for ground transportation and RXO. We are closely monitoring the macro environment and are positioned to benefit when demand strengthens.

Now I'd like to turn it over to our Chief Strategy Officer, Jerry Weisfeld, who will talk in more detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. As I typically do, I'll start with an overview of our brokerage performance in the quarter. To make the comparisons more useful for you, I'll give you combined numbers that include Coyote's results in the prior period. Brokerage volume in the quarter was up 1% year-over-year, outpacing the Cass Freight Index. LTL volume increased by a strong 43% year-over-year. LTO represented 31% of brokerage volume in the quarter, up 900 basis points year-over-year and down slightly from the second quarter. Truckload volume was down 11% year-over-year and represented 69% of brokerage volume, up 100 basis points sequentially.

Similar to last quarter, truckload volume was impacted by a decline in automotive efforts we undertook with customers to optimize price, volume and service and broader market weakness. From a vertical perspective, automotive volume was down 22% year-over-year. In the industrial and manufacturing vertical, encouragingly, we saw a slight pickup sequentially, which was largely driven by special projects.

Industrial manufacturing volume declined by 3% year-over-year. Contract volume was 71% of our overall truckload volume in the quarter. Contract business declined by 200 basis points sequentially and 100 basis points year-over-year. Spot represented 29% of our truckload volume in the quarter, up 200 basis points sequentially and 100 basis points year-over-year.

This was partly tied to the Coyote technology integration. As we migrated shippers to RXO Connect from Azuca, we benefited from an increase in API connectivity. This enhanced connectivity will also benefit the combined organization when the freight market eventually recovers. However, given the weakening demand environment, the spot opportunities were less robust when compared to the second quarter and not enough to offset the squeeze on our contractual book of business.

Before reviewing our financial performance and market conditions in more detail, I'd like to talk more about some of the technology offerings that we've rolled out in the quarter. We delivered technology that drives improvements across 4 key pillars: volume, margin, productivity and service. We've been developing and enhancing our artificial intelligence and machine learning capabilities for years, utilizing our proprietary data.

During the quarter, we made progress further enhancing our AI capabilities across each pillar. We enhanced our proprietary and differentiated pricing model, which leverages the combined data of RXO and Coyote. We implemented genic AI solutions to streamline carrier inquiries, reducing manual effort by tens of thousands of hours. We've deployed AI image solutions in last mile to ensure delivery and install quality, which has the opportunity to fully automate thousands of manual photo validations per day and our engineering teams have been leveraging AI tools that have generated millions of lines of code. We're applying AI to structurally improve the long-term margin profile of the business.

Let's now review our brokerage financial performance and market conditions in more detail, starting with revenue per load on Slide 10. In the third quarter, truckload revenue per load moderated year-over-year revenue per load, excluding the impact of changes in fuel prices and length of haul increased by 1%. The demand environment also weakened in the third quarter, negatively impacting revenue per load.

Let's move to Slide 11 and discuss brokerage margin performance and current market conditions. As Drew mentioned, the truckload market tightened during the month of September. This squeezed the margins in our contractual book of business resulting in a moderation in gross profit per load and third quarter brokerage gross margin at the low end of our outlook.

From a market standpoint, buy rates and industry KPIs moved higher in the quarter. Tighter market conditions have been entirely driven by supply side dynamics as overall demand has weakened. This tightening in supply is largely due to enforcement actions related to nondomiciled CDLs and English language proficiency.

From a seasonal standpoint, buy rates typically ease during September. This year, however, the market moved counterseasonally and buy rates moved higher in September. This trend not only continued but was even more pronounced in October despite weaker demand.

For the quarter, approximately 2/3 of our freight came from outbound states with buy rate increases. For example, we saw a cute tightening in California and Texas. Over the last 2 months, industry-wide line haul spot rates have moved up by approximately $0.06 per mile with no increase in fill rates or a corresponding increase in accretive spot opportunities. While RXO continued to procure transportation more favorably than the market, we are not immune to market squeezes given our large contractual book of business with Tier 1 enterprise shippers.

As it relates to purchase transportation savings from the Coyote acquisition, our incremental buy rate favorability was similar to the prior quarter at approximately 30 to 50 basis points. Our customer and carrier representatives continues to increase their familiarity and productivity within RXO Connect. We remain confident in our ability to achieve 100 basis points of incremental favorability over the long term. As a reminder, in tightening market conditions such as the current market, incremental favorability serves as cost avoidance.

Turning to Slide 12. As we just discussed, truckload gross profit per load moderated in the third quarter, given softer demand and tighter capacity. This market tightness intensified recently. And to put in perspective, our truckload gross profit per load in the month of October was approximately 25% behind our 5-year average, excluding COVID highs. Incremental margins attributable to a gross profit per load increase are very strong in excess of 80%.

Moving to Slide 13. RXO LTL brokerage volume continues to outperform the broader LTL market. In the quarter, LTL gross profit per load also improved sequentially. We have many opportunities to continue to grow LTL volume with existing and new customers. I'd now like to look forward and give you some more details on our fourth quarter outlook.

We're assuming a muted peak season and weak demand trends across all our lines of business. Starting with brokerage. We expect overall volume to decline by a low single-digit percent year-over-year with continued soft truck volume trends partially offset by strong LTL growth. Market tightness intensified in the month of October and is expected to persist throughout Q4, pressuring brokerage gross margin and gross profit load. We anticipate that brokerage gross margin will be between 12% and 13%.

Let's now talk about complementary services. In Managed Transportation, while business has strong sales momentum and an expanded pipeline managed expedite automotive headwinds continue to impact us in the near term. In last mile, demands within big and bulky have weakened after Labor Day, and we're taking that into account in our outlook. Putting it all together, we expect RXO's fourth quarter adjusted EBITDA to be in the range of $20 million to $30 million.

While we would typically see a sequential increase in brokerage adjusted EBITDA in the fourth quarter, that is being more than offset by higher cost of transportation. We are also expecting a decline in complementary services, driven by slowing demand in last mile, which is counter to normal seasonality. Taken together, the impact of these 2 items is approximately $15 million.

Similar to previous quarters, we thought it would also be helpful to share some options underlying our fourth quarter outlook. The low end of our adjusted EBITDA outlook assumes a further moderation of our truckload gross profit per load. This would include a continued increased buy rates and no corresponding increase in accretive spot opportunities. The high end of our outlook assumes an increase in our gross profit per load improvement in brokerage gross margin. This would include accretive spot opportunities to offset the squeeze.

To close, we continue to operate in a soft demand environment. On the supply side, continued enforcement of non-domiciled CDL restrictions and English language proficiency would result in a major structural change to the industry. While our brokerage gross margin is impacted in the near term, assuming enforcement continues, this could result in a sharper inflection when demand eventually recovers.

Longer term, this could be a very positive development for large-scale brokerages like RXO and it would strengthen safety, new steps and fraud. Our actions over the last several years have improved RXO's cost structure, which will lead to higher earnings across market cycles. We have taken actions to remove over $125 million of cost. We announced more than $30 million of new cost initiatives today to enhance operational efficiency. We've improved brokerage productivity by 38% over the last 2 years. Our brokerage cost per load has decreased by more than 20% -- spend and we are committed to investing in technology, including AI with a strong return on invested capital.

More than ever, shippers want to do business with large-scale brokerages that have the resources, capital and ability to invest throughout market cycles with a continued focus on profitable growth, a more efficient cost structure, larger scale and a cutting-edge technology platform, we are well positioned to drive significant long turnings and free cash flow growth.

With that, I'll turn it over to the operator for Q&A.

[Operator Instructions]. Our first question will come from Stephanie Moore with Jefferies.

I want to get a sense, I guess, just on the underlying market dynamics and specifically the supply environment, which you've touched on here, but there's a lot of debate on whether these federal enforcement actions will be enough to shift the supply-demand balance. So the first question is, do you think the axis are sustainable and enough to structurally reduce market supply. And then second, if this is, in fact, the final squeeze that we would expect to see at the bottom of the cycle, if demand doesn't materialize near term, what actions can RXO take just to manage gross profit for loads for say, the next couple of quarters?

Stephanie, it's Drew. I'll take the first part on the reducing capacity and Jared will take the second part of your question on the -- gross in dollars and gross profit per load through a quarter. When you look at what's going on, on the supply side, as I said in my prepared commentary, I think is the biggest structural change potentially in transportation, compare it to something like ELDs. And when ELDs were enforced, drivers had a hoist of whether or not they were going to invest into their equipment and continue to haul.

At this point, they don't have a choice, being pulled off the road if they're nondoncile drivers or English language proficiency doesn't meet the requirements. So I think it's a much bigger change than what anything that has happened in the industry in the past. And it is something that will take out capacity in a major way in large percentage points. The one thing that we still need is for demand to return overall. As demand returns, what that does is it creates a much sharper inflection as the market comes back.

And Stephanie, on your second part of the question in terms of if it's the final squeeze, but demand doesn't recover, what actions can we do? I would point to the $30 million of new cast cost initiatives that we announced this morning, more than $30 million, where you'll see a partial impact here in the fourth quarter. We continue to streamline the cost structure of the business, and we see significant opportunities as it relates to improving that cost structure longer term.

As you think about additionally heading into next year, I think Drew touched on this in the opening remarks, our cost of purchase transportation benefits as carrier reps continue to gain incremental efficiencies on RXO Connect and Freight Optimizer, the ability to go ahead and become more productive and benefit from a PT standpoint. I think are very clear.

And then the last thing I'd close with is, I think Jamie touched on this Ultimately, we are seeing lower interest rates and the benefits associated with the bills that were passed through -- Congress as it relates to potential investments in the U.S. as well. So if you think about what this is setting up for when supply eventually continues to normalize combined with a demand inflection, it would be pretty strong on the other side, but enforcement does need to sustain.

Our next question comes from Brandon Oglenski with Barclays.

Drew, this is going to come off a little critical, but I think it's probably for the betterment of everyone on the call. I mean let's take a face value, your adjusted EBITDA guide here is down about 40% at the midpoint year-on-year, and that's a year in the Coyote. We really thought Coyote was going to be transformative, a pretty big acquisition for a company of your size. I guess, looking back, are there things that you maybe wouldn't have done? And I mean, maybe to exemplify it, I think the last couple of years, you guys have said, look, a is usually a lot weaker than 4Q. Is that what we're to infer here? And if that's the case, I mean, I guess investors are probably going to look for more tangible actions here on earnings.

Yes. Bren, thanks for the question. If you look back at the Coyote acquisition, on people, customers and technology, we have done extremely well. But the financial results are not where they need to be. And the biggest miss off of that was whenever you went into the 2025 market we made a decision on pricing. And we took price up off of that. I made the wrong call on that one. And that is something that has impacted overall volumes. And if you go back and you look at our history, we've outgrown the market for several times. I look forward to us getting back to the days of where we are the market leader, and we're the transportation leader from a growth standpoint of taking market share.

Clearly, 2025 is not where we want it to be overall. As you go from 4Q to 1Q, first, I would say we'll start with the third quarter. Typically, from the third quarter to the fourth quarter, you see brokerage and last mile go up from an EBITDA perspective. That is not what you're seeing this year. So the headwind going from 4Q to 1Q is not the same as what it typically would be.

We also have the cost actions that we have taken that will be impacted from 4Q to 1Q. So I don't think it's an apples-to-apples. Demand is still in a known as we go into Q1 and are we still getting squeezed as we go into Q1, that's unknown. But ultimately, what is happening in the business right now is setting up for a very, very good thing.

Well, I appreciate that, Drew. And Jamie, can you talk to your adjusted leverage calc that I think speaks to some of your covenants. And is that going to be a challenge just given the earnings outlook here into the fourth quarter, especially as you move forward?

Yes. Thanks. Yes. So we ended the quarter a leverage of a net 2.3. If you look forward to the midpoint of our range at the end of Q4, say, 20 to 30 to 25, you'll be about 2.8. Our covenant is 4.5, so we've got a lot of headroom. We have a very strong balance sheet. We got access to several hundreds of millions of dollars of capital. So we're not concerned about that.

One thing I would point out, we had -- as Drew said, we had a strong cash flow quarter, 56% conversion, added cash to the balance sheet. As we look forward to fourth quarter, we will have the semi-annual bond payment, which is normally due in Q4, which will make that. And so we'll use some cash in the fourth quarter. But as you look at '25 holistically, one thing that's really important to point out. There's about $65 million or $70 million of cash outflows in 2025 that will not reoccur in '26.

3 drivers. Number one, in the first quarter, we had $25 million of cash usage to finish paying for transaction fees related to the Coyote acquisition that happened in '24 as purely down. Secondly, our total spend on restructuring and integration will go down approximately $30 million year-over-year. And then third, our CapEx will go down $10 million to $15 million.

So if you think of all those together, we fully got $65 million or $70 million of cash outflow in 2025 that will not reoccur. If you put that in context of the '25 midpoint of the range for the full year, that means we would be producing $20 million to $25 million of free cash flow in '25.

So if you think about at the bottom of the cycle, very strong. It really sets up nicely as the cycle improves. That number will go up. And so all that taken together, we have a very strong cash flow business. We have a very strong balance sheet, and we always watch the balance sheet closely, but we're -- it's not something that we're overly concerned about right now, but we do pay close attention as is expected to.

Our next question comes from Ravi Shanker with Morgan Stanley.

So the bit of an AI arms race out there in the brokerage space, it's all about how many Agentic AI bots you have and how many press releases you put out. But you said that your customers are telling you that you have the best and easiest tech out there. Can you just unpack for us the process of going out there and selling your tech platform to your customers? Like, what are they looking for? How do you drive conversion? And kind of how do you differentiate yourself with what else is out there from a tech world because sometimes it is hard to see for us in our seat.

Yes. Ravi, one, I appreciate the question. The only thing I would level set on is it's not about press releases for us just about results for employees, it's about results for customers. It's about results for carriers. And we are hitting an inflection point with our AI investments that we have been making. Not only have we been running an integration, we have been investing in AI, and we've been investing in it heavily. When you look on the ability of what we're able to do on the pricing side, it is something while we had a very strong pricing algorithm that's allowed us to outperform the market from a margin perspective for a decade plus, it is getting better. when you look at the way that we are communicating with carriers. It is changing, and it is allowing our reps to spend more time focusing on solutions.

And then the last thing is even if you look at our last mile business, we've done things like whenever you're doing an installation versus a person going in there and getting a photo and checking it, we've been able to actually do that with an AI bot that is checking everything from an installation standpoint, which is critical to our customers and consumers and how that process unfolds.

So for us, very excited about hitting an inflection point with AI and what it will actually mean from an operating margin perspective to the business. and look forward to hosting you next week and let you actually see it on the floor of how it impacts carriers lives, how it impacts customers and how we're interacting with them so that you can see it live and in person.

Great. Looking forward to that as well. Maybe a super follow-up. Your 4Q guidance is predicated on the current demand-supply equation holding, right? So if for some reason, the supply side or the enforcement drops off or supply side gets looser, your 4Q gross margin will be better than guided.

Ravi, as you think about the range that we provided for Q4, $230 million of adjusted EBITDA, the midpoint assumes that current market conditions in terms of the intensification that occurred in the month of October with respect to market tightness given the supply dynamics that we talked about that sustains throughout the rest of the quarter. The low end assumes that the market further tightens in terms of that squeeze impact without a corresponding increase in demand in spot opportunities. So that environment would result at the low end.

And for the high end, to your point, as you think about either the market tightening to the point where it results in some pressure in waterfall routing guides and some spot opportunities and/or if there is an easing in buy rates that would allow gross profit per load to improve from current levels to get to the high end of our guide for Q4.

Our next question comes from Chris Wetherbee with Wells Fargo.

I guess I wanted to ask a question about operating expenses and your ability to maybe sort of rein those in a little bit as you go forward in this weaker market. Maybe you can talk a little bit about the potential opportunities you have. It looks like if I just sort of zone in on direct OpEx and labor expenses, those have been relatively flat in this market over the course of the last few quarters. Is there work that you can do there to try to adapt to what has been obviously a more challenging outlook?

Yes. This is Jamie. We've taken a lot of cost actions in spin, $155 million in total, including the synergies we've got from the acquisition. We're constantly looking at our expenses. If you look at our P&L, a lot of the direct OpEx that you see in the P&L relates to our last mile and our managed transportation business SG&A that shows up in the P&L across all the business lines. There's still plenty of actions that we can take, and we've talked about automation. We've talked about process improvement, one of the things that we're constantly working on, Drew mentioned in his remarks, footprint, how do we consolidate footprint so we can give the same level of customer service in fewer square feet of space and fewer facilities. Those are the type of things we're constantly working on.

And yes, there is more that we can do and we're constantly working on those type of activities. And you can see it with the $30 million that we announced today, I mean, that's a constant process that we're going through.

Okay. That's helpful. And then I guess, maybe, Drew, if we could sort of zoom out a little bit and try to get a sense of maybe how we come out of this dynamic that we're in right now. I know that we typically see the cycles turn simply driven by the supply coming out, and it seems like that's happening without any demand, I guess. Maybe help us a little bit as you think about the next couple of quarters as you guys are planning for the sort of demand environment. What do you see out there? You obviously need demand? Where do you think it comes from?

Yes. I think, Chris, there's a lot of things that we're watching on the demand, as Jamie alluded to in his prepared comments, we're watching what happens on the interest rates. We're wanting what is happening in the homes. We're paying very close attention on the automotive side. As you know, in automotive, there is the managed expedite portion. And that's when everything breaks down and you have to get something to a plant to avoid shutdown. That's a big piece of our business.

And when you look at what that piece of the business was during the peak, it was around 13% of our gross margin dollars in brokerage came from expedite loads. Right now, we're sitting at around 1% or 2%. So to see where the business can go to getting back on track from that perspective. we've always had a big presence in retail and e-commerce, and we have a lot of great relationships there.

From the Coyote acquisition, we gained a lot of exposure to food and beverage. And one of the things that we've been really focused on, on the sales side is expanding in the technology vertical and expanding in the high cargo value goods area. And we have got a very good pipeline. We're seeing good wins in those areas and look forward to the results.

The second part of your question, I think, was more on the market and what's going on. And what I would say is this is not an episodic squeeze. This is not DOT checkpoint weak. This is not produce season. This is not a weather impact this is a structural change that is taking place in the industry if it persists. And so supply coming out is real, it's happening.

And on the other side of that, with the demand, that sets up extremely well for large carriers, specifically brokers who have good relationships with their customers who provide good service, can provide a comprehensive set of solutions and have great technology. We fit -- we check the box on every one of those. So this is mechanical and part of what we go through at this point in the process, but we know it's on the other side of it.

Are you willing to sort of venture a guess what the capacity rationalization might look like in terms of percent of the fleet?

Chris, we're watching a lot of the same things that you're watching. And I mean if you take out the private fleets and the large carriers, there's numbers out there that could be 15% to 20% of capacity. And if that happens, that is a big change within the industry and a lot of capacity that we'll be exiting.

Our next question comes from Ken Hoexter with Bank of America.

So Drew or Jared, I just want to understand kind of the messaging here for the fourth quarter. Is this just the squeeze of the spot price that shifted quickly? Are you seeing an acceleration in the demand falling away? Just it seems like such a significant -- more significant change for a fourth quarter outlook than we've heard from other carriers that have also reported within the past week. So I just want to understand what you're seeing maybe that's a little different. Is the cost exposure unique to RXO in terms of 2/3 of the cost came from regions where the buy rates increased? Is that maybe something more particular to RXO than your peers? Or is it the capacity tightening more in Texas and California? So any thoughts, I know it's a long question, but any thoughts on that would be helpful.

Ken, it's Jared. So when you think about the bridge from Q3 to Q4, typically, both brokerage and last mile are up sequentially from third quarter to fourth quarter. This year, we are assuming that they are both down sequentially, and that's a function of both of what you cited in terms of lower demand and higher PT costs.

So on the demand side, we are seeing lower demand across the business. We saw that play out throughout Q3, and we are expecting the same in the fourth quarter. I'd say specific also to last mile, we did see a drop off, call it, after the Labor Day time frame with respect to goods for big and bulky.

So last mile is seasonally up into the fourth quarter. and we are expecting that to decline sequentially given that decline in big and bulky demand. With respect to the question as it relates to purchase transportation costs, right? So when you think about our business, to your point, we did see about 2/3 of states where we were moving goods from an outbound standpoint, our PT costs going higher in the third quarter. So I'd say it moved modestly higher in the month of September. But that acute tightening really did happen over the last 4 weeks after the emergency order on nondomiciled CDLs came into effect at the end of September. And we've seen that play out with gross profit per load and gross margin compression within the brokerage business in the month of October.

And what makes this interesting and unique to Drew's point, where this is very structural from our standpoint because this is not an episodic squeeze like we've seen over the last 3 years, where -- whether it's seasonality due to produce season or DOT checkpoint. This is a lot of capacity that is coming out of the market. And ultimately, it's happening at a point where we are having weaker demand trends. So you don't have routing guide pressures to allow for accretive spot opportunities. So that's really what's playing out here, Kevin.

So just to clarify that, Jared, because again, I'm just trying to compare it versus what we've heard from some peers, right? So the lack of spot opportunities, but are you seeing that core demand fall faster? I'm just trying to differentiate kind of why we're seeing maybe some cost for some margin accretion at some relative peers versus the continued pressure. I get the cost side, I think you've made that quite clear in terms of the speed with which this is happening. So is anything also happening on the demand side?

So yes, demand has weakened. I would also -- when you look at our mix, mix is very different across different businesses and different brokerages, right? So for RXO our contractual book of business, which was just north of 70% of our volume in the third quarter from appropriate standpoint, really, if you think about largest shippers in North America, Tier 1 enterprise-class shippers not as much SMB, right?

One of the benefits associated with the acquisition of Coyote was we did get an SMB business, but ultimately, that's probably around 10% of total volume. The big bulk of our exposure really is large Tier 1 enterprise-class shippers. So I do think that mix is also important. And I go back to the earlier question as it relates to automotive, which certainly has been a headwind for the business as well as an example, throughout the year. I suppose with the managed expedite type freight. So I would certainly highlight mix is a big difference.

Ken, I would also -- I'll expand on it a little bit. I think there's a lot of public data out there that shows what's going on with demand. If you look at the cash freight index it shows that it is down 7% if you want to dive specifically in the truckload, Freight wave sonar has got a product out there that shows down sitting around 17% right now on the truckload side. So I think it's not necessarily taking our Workforce just looking at the public data out there available on the truckload market.

Our next question comes from Scott Group with Wolfe Research.

Thanks. So again, just sort of like a big picture. We're talking about a tightening market. And at the same time, like your truckload rev per load goes from up 3 to up 1. Drew, you've been doing this a long time. Have you seen this before where the market tightens and your buy rates go up, but like industry spot rates or sell rates don't move. I don't know that I've seen this before. And then ultimately, I guess what I'm trying to understand is like it's a typical squeeze for your business is a quarter or 2 and then eventually you sort of like benefit from it, like do you think this is a -- if it's supply driven, is it a longer squeeze this time? Or do you think, hey, this dynamic of buy rates up and sell rates not moving can't last. And at some point, the sell rates are going to have to start moving pretty quickly.

Yes, Scott, I think that everything that you just said points to it being a structural change that has happened in the industry because it is something that we all have not seen before. and shaking out this way. As far as how long the squeeze is Yes, I don't think it will be wise of me to venture a guess on how long the squeeze is because I don't think that anybody saw the upside and the downside of the cycle lasting 5-plus years at this point.

So I don't know how long the squeeze will be. But yes, we are in the thick of it right now is something that impacts our margins. I'll tell you if you go back and you look at the time of ELD, you actually saw our margins fall to 11.5% during that time and within 2 quarters, you saw more than it make up for that on the recovery side. Now there was demand there. So I think that demand is a key point. But I do not think that the capacity coming out in this situation is the same as ELD. I think it's in a much bigger way because at ELD, you had a choice of if you were going to spend the money and invest in your equipment to meet federal mandates. This time, you don't have a choice, you're just coming off of the road.

All that makes sense. Can I just ask 1 quick follow-up. I think you mentioned that buy rates have gone up like $0.06 or something. How -- is there any like sensitivity like every penny of by rate equals how much of operating income or EBITDA, any sort of sensitivity there?

Yes. I mean, for us, Scott, the industry went up $0.06. We were much less than that. And I think that goes to the benefit of the Coyote acquisition of being able to buy better than market. So for us, in a quarter, every penny that it goes up is $2.5 million of EBITDA.

Our next question comes from Jordan Alliger with Goldman Sachs.

Yes. Just maybe just a follow-on thinking about the purchase transport and the squeeze. Obviously, there's decent squeeze going on. PT is going up. I mean doesn't that read that as we get into the contract season next cycle, which I presume starts in earnest in early next year or March or something that we should see significant increase in -- or at least an increase in contract rates and the squeeze should be going away?

Yes. Jordan, I think it will still depend on what happens with overall demand and bid season is underway right now. We're in the middle of some of our largest bids yesterday in Charlotte, we had 7 of our largest customers. And we spent a lot of time talking about our pricing strategy with them. talking about how we could draw synergies between the customers that were in the room from a capacity standpoint, talking about what was going on with the federal mandates. So for us, we look at every customer as their own story as we get through bid cycle.

So are there the opportunity for rates to go up? Absolutely. But I think some of it depends on what's going on in the market as that customer's bid is going on. So I'm not going to forecast on where rates are going to go for next year. But what I will say is as routing guys start to break down, that's where spot loads come in at, and those are at a much higher revenue per load.

Well, I guess, just as a quick follow-up, I mean, I mean given what you're seeing in purchase transport, I mean, is the -- do you feel that the customers you're talking to are understanding that you're going to need to push rate up?

We're -- we have very close relationships with all of our customers. Every one of them is their own story. And for us, it's about providing a solution for them and for us that works for both the long -- short and the long term. So our customers are very well aware of what's going on in the market right now.

Our next question comes from Tom Wadewitz with UBS.

So wanted to swing back a little bit to just kind of how we should view the run rate in 4Q and what that implies for '26 or just progress how to think about '26. If you kind of take midpoint of your EBITDA guide for 4Q added up with the 3 you reported, you get $117 million per EBITDA base in '25. If you kind of put seasonality on the $25 million 4Q, it's probably well below $100 million. So I guess, I know you've got the $30 million of cost saves, you've got other initiatives. But I mean do you think 26% EBITDA is more closer to $100 million or closer to $150 million? Or just it seems like hard to know what's the right ballpark even to be in given 4Q so tough?

Yes, this is Jamie. As you know, we did 1 quarter at a time. As we think about '26, as you know, there's a lot of unknowns. Heading into next year, we got the volume demand. Where does it go? We got the cost of purchase trends. How long does the squeeze endure, how does it get a little worse? Does it get better and when.

You mentioned this, we do have a significant amount of cost that we've taken out of the business. some piece of that is a run rate into '26. We've got the purchase transportation opportunity. Drew talked about 30 to 50 basis points. To date, much of that is showing up in the P&L as cost avoidance that will translate. We will get more of that. We will get to that 100 basis points. And so I don't think you can take kind of Q4 project into a Q1 or Q2 because, again, Q4 is subseasonal. We would expect both last mile and brokerage to be up sequentially from Q3 to Q4. It's not -- it's down.

That being said, what that translates into a Q1 is not going to be normal also as it relates to the rest of the year. And is this demand -- as this market sets up, as Drew talked about on the capacity side, when demand comes back, and it will come back, there are a lot of things going on in the macro, the demand will come back. When we don't know for sure. But when it does, we're set up very well to be a beneficiary of that.

Tom, I agree with everything that Jamie just said, but one thing that I would add is if you look at what's happened in the industry over the last 7, 8 weeks and the impact of that has had to financials. -- it's running in the negative way. It works the exact opposite whenever the market starts to turn on the positive way. And this is an industry that turns very, very quickly. And you've got the opportunity as the market recovers to expand margins in a big way.

Yes. Okay. That -- it seems like you could have a setup for a big improvement in second half '26, right? So that seems like a thing worth considering as well as a tough run rate coming in. I wanted to ask for like a second question to follow up. How do you think about what's important on enforcement and supply side? I mean I think I wonder if there is some avoidance of enforcement areas where the capacity that's questionable in the market understands where the enforcement is taking place and then you avoid that. So part of the capacity doesn't leave the market, but kind of sits on the sidelines or maybe just avoids -- or maybe given the way the interstates flow, they're across multiple states and you can't avoid enforcement. Just wanted to get a sense on that because it seems like it's a big question. And the potential impact is so large, but just kind of hard to know if it all comes or not?

Yes. I mean, Tom, we're watching it extremely closely, and it's something that we support. When you look at what this does for the industry, it makes it a safer industry, it eliminates fraud. It reduces theft. So this is a positive thing for the industry. It also puts something front of mind for our customers. And customers are going to look at who they're doing business with. They're going to look to do business with large, financially stable companies that have provided them with great service. They provide them with solutions. They've got good technology that allows them to make better decisions as a customer, and they're going to go back to the people who have delivered for them in the past. And we think that we set up very, very well on that market.

Do you have any visibility on kind of avoidance? Or is that hard to measure from the carriers?

Yes. This is Jamie. I mean firstly, what I see going on with the enforcement and I think what the industry sees going on right now is I don't think they're going to -- this is not a state-by-state enforcement issue. This is more of a federal enforcement issue. And so regardless of where a carrier may be, I think they're subject to being taken off the road wherever, and it will take some time. But we are seeing impact of the capacity and it impacted it very quickly. And so I don't think we would say there's any one spot that folks can go run lows in that is not under risk of being cost. And so I think it will be a continued enforcement.

Tom, just remember, you only have to drive a few hundred miles in any direction to be in another state line.

Yes, right. Well, that's where it seems like it's may be tough to -- maybe some states are easier, but hard to avoid states that are enforcing pretty significantly.

Our next question comes from Jeff Kauffman with Vertical Research Partners.

Group question, I know nobody can predict how long this squeeze is going to go on. But I guess kind of following Scott and Jordan's question a little bit, if things just stayed static where they are right now, where the market is I know you talked about 1 to 2 quarters, 2 to 3 quarters. How long would it take you to price up to where this was not impacting franchise any more if it didn't get worse from where it was.

Yes. I mean the biggest thing that we're watching right there is what happens on tender rejections. And if you look, even though demand is down significantly, tender rejections have gone over 6%. So right now, you are starting to see capacity put it towards those -- and it's not necessarily much on the contract rates that you're watching it. There's more what happens on the tender rejections whenever routing got starting to break on the spot. So that's with demand extremely depressed you're starting to see pressure on tender rejection. So that's mostly what I'm watching right now, Jeff.

And where do we need to see normally tenders to get to where you can push price? Does it need to be above 8? Does it need to be above 10? Kind of where is that historic kind of breaking point?

Yes. It needs to be in or above. That's typically whenever you start to see tender rejections called spot loads, whenever it gets into the mid-teens, excessive spot loads. And if you get back into a COVID like environment, it was -- I think it was sitting in the high 20s, low 30s during that time frame.

But your point would be in the long run, this is a good thing. And when the market does stabilize, we're better off. What would be the...

In the long run, this is not a good thing. This is a great thing. You're talking about the carriers that customers are doing business with. The people who have been there for them that they now have the right qualifications on who they're doing business with. That's what they're looking for. And for us, the quality of carriers that we work for, the bar is extremely high. This is not something that we just started doing because of the thorough mandates. If you go on and you look at our website, you can't go on and start a trucking company and do business with today.

A lot of the large brokerages, you can go on and start doing business with today. We want to be able to monitor your safe site score. We want to be able to see a history of what you've done. A lot of other brokers, you can go out there and you can do your first loads with them digitally. And while digital is an important aspect of being able to do freight. The first thing that we want to do is get to know the carriers that we're doing business with. So we don't allow your first few loads to be booked digitally. We want to know who we're doing business with has come on to the platform.

We built the business off of high cargo value off of automotive. So the vetting process for carriers for us has always been very strict. It always been above federal guidelines. And so we think we're in a very good position to win off of that.

Thank you. That appears to be our last question. I'll turn the conference back to Drew Wilkerson for any additional remarks.

Thank you, Michael. We're at a squeeze, but I remain extremely confident in RXO's ability to deliver out earnings growth over the long term. Our improved cost structure, larger scale, continued focus on profitable growth best-in-class technology and ability to generate cash are differentiators for RXO. We remain focused on what has made us so successful over the past decade plus. We provide exceptional service a comprehensive set of solutions, cutting-edge technology and customer relationships.

Thank you all for your time today and look forward to seeing you soon.

Ladies and gentlemen, this concludes today's conference call. Thanks for your participation. You may now disconnect.

Great. So let's resume with transportation content. And next up, we have RXO and very happy to welcome back Laguna. CEO, Drew Wilkerson; and Chief Strategy Officer; Jared Weisfeld. Gentlemen, thanks so much for coming back to Laguna.

Thanks for having us. Always great to be here.

Absolutely. So maybe you can start out by just running through what you're seeing out there. Obviously, a lot of focus on the 2Q to 3Q transition, whether we saw any pull forward into 2Q where there's been a normal seasonality into 3Q or not, data is a little bit over the place. So kind of what do you see from your perspective?

Yes. I mean, I think it starts with -- as we all know, we're still in a soft freight market. And so as you look at Q3, around the holidays, there's been pockets of tightness. That's not always a great thing whenever there's pockets of tightness and there's not spot loads to correlate on the other side. But there's also been times in the market when there's been loose and those are times that you're able to focus in on purchase transportation.

And it really has varied for us of what we're seeing around different parts of the country, especially as you look at a month like July, as you're coming out of produce season. If you think about the southern states, the West Coast states, of what's happened in the produce side, that is something that is -- was impactful -- more impactful this year than what we've seen in the last several years

Got it. Can you remind us again kind of what your segment exposure is like, obviously, we've heard from industrial exposed companies about that side of the business being a lot harder in the consumer side of the business. So what's the like for you guys? And kind of what is the difference you're seeing out there.

If you look across our business, call it, 20% to 25% industrial manufacturing, 20% to 25% retail e-commerce, 20% to 25% industrial manufacturing and then food and beverage. So those 3 are about 75% of our exposure. Also a little bit of homebuilding and then automotive is about high single-digit percentage of our truckload brokerage business in terms of volume. And if you look across the board, I think you're exactly right, when you think about the freight economy over the last 12, 24 months where it's been different trends across each vertical, right, where industrial manufacturing, I think all eyes are on the industrial PMI.

And you saw a little bit of a positive last month in terms of finally getting above 50% on that new orders component. We'll see how sustainable that is heading into 2026. But you then compare that to the consumer, right, where spending on big and bulky has not been robust. And when you think about the housing market, which has been soft, and I think the rule of thumb is, right, every new home is equivalent to 7.5 truckloads, right? So to have housing economy as soft as it's been has certainly played into the extended down cycle in the freight market.

Got it. Understood. So from that perspective, do you think like what happens next week and 24 or 50 bps kind of does that help the cause? And kind of do you think it moves the needle? Or do you think it's just a little -- too little...?

I mean, if there's a -- not to hypothesize on what the Fed will or will not do next week, right? But if there's a jumbo side cut next week and it's 50 basis points, could that help stimulate demand? Let's see what happens to the long end of the curve. And does that continue to help mortgage rates, which have been falling. And as you think about 2026, to the extent that you see that continued trend in mortgage rates, which are on 10-, 11-month lows, that could certainly be a positive. But I don't want to hypothesize what the Chairman may or may not do next week.

Got it. Understood. Drew, I think you said on the 2Q call that you're seeing -- you're hearing cautious optimism from customers on tariff clarity. Do you think what we've heard in August and September so far constitutes clarity and kind of what are your customers telling you? Like is that optimism continuing? Or are they like we don't know yet?

Clarity may have been a strong word. I think that having some sort of a direction of where they are going and landing somewhere around 15% for a large portion of it, I think, was a good thing because when you first saw the trade war start, there was so much unknown, and we saw so many different things from customers. I mean we saw some customers who were working fiercely before the trade war started to pull inventory forward.

We saw some who didn't and they're trying to pull it forward as things were announced. We saw some that just were a slow drip as things started to come through. And we saw some large customers that just completely paused until there was a little bit more around the percentage that they would be paying. So I think that it's a moving target at times. So clarity may have been a strong word, but I think having some sense of a direction allows them to plan for their budgets. And I think as you look at some of the high numbers that were put out, especially for small to midsized customers of ours, they weren't sustainable for them.

Got it. And so looking ahead, do you have a sense of what peak season is looking like for you guys? Obviously, it's been a little bit of a mixed message you think the parcel guys sound a little bit bearish. The PL guys are saying we are seeing some charging business. So from your vantage point, what are you seeing?

I think it's still too soon to call right now. We'll have better clarity as we get on to our earnings call. As we sit here today, like I've had some customers on the retail side who have been optimistic, and they think they're going to have a strong peak season. I have some others who have been very pessimistic.

And so as I sit here today, like I don't see anything in terms of overall demand that would drastically change peak season from what we've seen from the last couple of years. So as we sit here today, if I was forced to make a comment on it, I would say I would expect another muted peak season going into this year. But also, there is still a lot to be done in a lot of conversations we have with customers on it.

Got it. Are you able to sense -- see any patterns between the guys that sound good and the guys that sound bad?

Are you saying the ones who are more positive?

More positive on...

Yes. I think if you go down a level to some of your -- not your highest event on cost to retailers, some of them are more positive going forward.

Okay. Got it. Understood. So another big trend that you guys have been focused on is the growth on the -- in the LTL business for you guys, and you said 45% in the last quarter. What's the driver of that? How do you maintain that going forward? And kind of what are the catalysts we can look forward to.

Well, if you go back at the time of spin, LTL was like 10% of our overall volume. Right now, it's sitting at 32% of our overall volume. You're going to continue to see that go up. I think I said on the call that I see this getting to 50 or higher percentage points. And from a financial side, what we like on it is the stability in gross profit per load, which equates to stability in EBITDA. We've seen other companies who have done this well, and we've learned from it.

We've done it in a different way than what -- I think we thought we would have started out. If you think of some of the companies who do LTL well, a lot of them built it off of transactional small to midsized customers. Ours has been different. It has really come in off of demand from our large enterprise customers who we have really, really strong relationships with. They've seen our RXO Connect platform. They're comfortable with it. And they may be working with 3 or 4 national providers right now.

But when you look at LTL, it's a really small piece of their overall spend. So our sales pitch to them is this is a small piece of your spend. But when you think about claims, lost shipments, damages, logging on to multiple platforms, it is a big times up compared to truckload, which is your bigger size.

All that complex.

Right. And so when you look at it from that side, it is not a hard sell. And we've actually -- it started of customers coming to us, do you have a platform that we're able to use. And so RXO Connect has become a platform that I think will continue to see large growth out of LTL. It will be lumpy because these are large deals. So there will be times that you see it, like you see it right now where it's going up 30%, 40%, 50% on a year-over-year basis. And then there are times that it will be much lower than that because it will depend on the timing of the deal whenever they're coming on.

This is more -- it lives in brokerage, but it's almost become for us a managed trans light product. So for us, very excited about where we're going for LTL, what it means for us as a company. It allows us to still have the torque on the truckload volume, but it helps us build out more stability. We talked early on in the downturn on investing in a downturn and like LTL is an investment for us. Managed transportation is an investment for us. So that for the next downturn, we've got a stronger base to be able to build off of.

Got it. Just a follow-up there, kind of you mentioned RXO Connect a couple of times, you said kind of quasi managed trends. In these effects...

Managed trans light. Managed trans light, get out of [indiscernible]...

Managed trans light. So is this a quasi-tech solution that is driving the share towards you and that you maybe have a better connectivity than the carriers, the LTL carriers themselves do that bringing the business to you? Or is it just the fact of where you are in their supply chain?

It's largely a tech solution. Like when you think about it, the customer is able to come on to the platform. They're still able to work with some of the same carriers. They're also able to work with the regional providers that they may have not been working with prior to this. They're able to have visibility to all of their shipments. They're able to get data on all of their shipments. And then they're able to take that data and be able to look at it and say, you know what, I just shipped out 3 LTL loads. I could have done that in truckload.

Yes.

We're able to have better conversations with them off of them being able to do that. So again, I think that when you look at it, this is largely a tech solution and technology is something that we've been investing in for over a decade. I should have also said one of the tailwinds that we've had coming out of the spin is not being under XPO of being able to sell LTL. As I'm sure everybody in the audience knows, selling LTL as a brokerage under XPO, there's probably a lot of other LTL providers that didn't necessarily want to work with us from that. And we've seen that go away coming out of the spin.

Got it. And just kind of on that point, this may be an unfair question, just heads up, but a lot...

Thank you. I appreciate that.

A lot of the TLs have historically kind of almost blamed brokers for putting pressure on pricing on the TL side. And is there a risk that kind of LTL pricing might also -- honestly, you guys bring transparency to pricing, right, which is a good thing for everybody. But do you think there's a risk that LTL pricing under pressure?

Yes. I don't agree with that sentiment at all because I think when you look at it, brokers still have 22%, 23%, 25% of the overall market. Asset-based carriers have 75% or more of the market. So who sets the pricing off of that? Asset-based carriers set where the market price is. Our job is to go in there and be able to find out where market is and be able to procure capacity at better than what market is off of having relationship carriers, off of getting people home, off of a backhaul, getting larger carriers to another customer's load, finding the right truck for the right load.

And I think I'd even double down on that and say that it's not just something that of asset-based carriers. If you think about part of the problem that we ended up with in a capacity being too much for -- I don't think capacity is in a bad place right now overall. But when you think of the first 2 years coming out of the pandemic, in '23 and '24, and you're talking about having too much capacity, why do we have too much capacity? Because during the upturn, asset-based carriers did what? They went out and bought trucks.

Yes.

So I think whenever you look at it, like to me, that was the driver of a lot of this.

But kind of -- on that point, kind of where do you think the asset-based to asset-light share goes over time? Kind of some of that is cyclical, some of that is structural. You guys have been saying that using the asset-light has been taking share. Kind of where do you think that normalized level peaks out at?

I'm almost at 20 years of doing this. I'm coming up on that this year. And whenever I started in the industry, brokers have -- I think it was 6% of the overall market share. And today, it's at 22%, 23%. So to me, it's unquestionable that brokers have been taking share from asset-based carriers.

As you look forward, when you think about solutions that brokers are able to put together, whenever I started, I couldn't even put together a drop trailer solution because that was largely held at an asset-based carrier. We have a large trailer pool now that for some of the largest companies in the world, we look and feel like an asset-based carrier. They don't care what the front of the truck looks like. They care about the trailer. So that allows us to be able to take share.

When you think about -- it's 11:00 here, but on the East Coast time, it's 2:00 right now. If you call a load where I'm from, picking up in Charlotte, North Carolina at 2:00, and asset-based carriers' capacity is largely spoken for.

Okay.

So having the flexibility of capacity to be able to move up and down on a market, I think you're going to see brokers continue to take share. I think that over the short term, especially in the upturn of a cycle, you'll see brokerage get up into the 30s. And I think longer term, you'll see it get up into the 40s.

Got it. So Drew, just to kind of wrap up the discussion on 3Q and maybe even 4Q, if you can. It looks like trends have been reasonably stable from 2Q to 3Q. What are we looking at from a gross margin perspective, kind of given -- again, it seems like truck pricing was fairly stable through August. But at the same time, August is a seasonally weak month. So on our numbers, at least it looks like it actually beat seasonality, right? So how do we think about that sequential walk on the gross margin?

Sure. So we gave a wide range for that very reason in terms of when you think about the bridge from Q2 to Q3, a lot of moving parts for RXO. When you think about it specifically from a brokerage standpoint, which I think is the heart of your question, what must be true for the midpoint is we anchored towards the end of July through September. And if we saw typical seasonal volume growth from July through September, we'd be at the midpoint. If it was a bit lower, we'd be towards the low end. And if it was a bit higher, be towards the high end.

And then to Drew's point, as it relates to what we've seen from a market standpoint, I think it really depends on region and when you sort of look at holiday-related events, Labor Day, et cetera, you saw certainly a squeeze in the market where you got up to 6%, 7% on tender rejections without any kind of corresponding spot loads, which typically happens. And then what you typically -- and then what we've seen now for the last 3.5 years is every time there is any kind of episodic squeeze, we just basically return to baseline, albeit at higher levels versus the year ago period.

So we are making progress from an industry standpoint in terms of making higher loads, but it's just been taking a while, right? So -- and then when you go ahead and you sort of revert back to the baseline, what does that tell you? It tells you that we're still in a very soft freight market. So we'll see what happens here into Q4 and whether or not it is again another muted peak. But the range that we gave from 33% to 43% encapsulated a lot of those scenarios that you're talking about.

Got it. Let's shift gears a little bit and talk about what I suspect is your favorite topic, which is Coyote and how that integration is going. Any surprises, positive or negative in the time that you've now kind of almost completed the integration?

Well, I think first, start with like what are the most important parts of getting an acquisition right. And an asset-light business, people. And so when you think about director level and above, I think our voluntary churn is around 4%. So the people are excited, and that is going extremely well.

The second piece is on the customers. We talked on the earnings call about like when you look at the company, like of the top 100 customers from pre-acquisition, 99 are still with us, and they're still sizable. We still got a great footprint into their overall transportation spend.

When you think about technology, it's extremely important because we've been investing in technology, but putting one company onto another company's platform is a big lift. And this is the largest acquisition that has ever happened from an asset-light company to an asset-light company. And I think when you look at the speed of which we've done it, it has been faster than what some of the ones that were much, much smaller than us have been. Within 8 months, we were able to have all of carriers being able to book out of one platform. As we wrap up Q3 in the early parts of Q4, we'll largely be done with the customer side of the integration.

So like whenever I think of people, customers, technology, it's been a home run. The part that has not gone as well as what we had hoped is the profitability of it, right? Like I think when you look at the profitability of where we thought it would be, we understood when we bought Coyote that they were priced below market. And we understood why they were priced below market. The sales process was launched in January, that bid season. Like we -- conceptually, we got that and probably would have done the same thing in that market.

But when you look at what happened in Q4 and Q1 from how we modeled it, we looked at Q4 and Q1 from the prior year and said, "Hey, there were weather events." Can't get worse than what it got in Q4. So we don't think gross profit per load can move. We still see that as an opportunity. Well, weather events were worse in Q4 and Q1. So gross profit per load took a stronger hit than what we expected it to. As you got into Q2, we told you we're going to take price. We're going to get the gross profit per load right. You saw that gross profit per load increased 7% sequentially from Q1 to Q2. As we took price, we lost a little bit of volume off of that. And that -- we lost more than what we anticipated on that.

The good thing is we've still got the footprint with the customers to be able to go out there and grow with them. And I was prior to coming down here, I was on the phone with 2 very, very large customers, and it's not bid season, but these customers are running a bid right now. And this is typically when they would run a bid and kind of off cycle for them. Like the feedback that we're getting from them is very, very favorable of the position that we're sitting in. So I think like as I look at that, that is going well overall. But I think we have to acknowledge that the profitability of the business is not where we thought it would be or not where we modeled it out to be. But I would also caution you, we hadn't even hit our year anniversary yet.

Yes, fair enough.

Next week, by the way.

That's true. But so how much of that gap is, to your point, idiosyncratic to Coyote given how that business was run versus the cycle?

Well, I think there's definitely a cycle component. We knew we were buying at or near the bottom of the cycle. The cycle took a leg lower. So like I think there's definitely a market component to that. And I think even at legacy RXO, we've always had a healthy gross profit per load. We saw our gross profit per load come down as well. So I think there's 100% a market component.

But whenever you look at what we saw out of Coyote, we knew that the power of purchase transportation would allow us to be able to buy better versus what was happening in the market. And if we could get on one platform, we'd be able to see that. And we saw in the first 5, 6 weeks, like we were able to improve how well we're buying versus market by like 30 to 50 basis points overall. And so we saw a significant opportunity that through a cycle over the long-term, we're going to structurally improve our gross profit per load versus what's going on in the overall market.

Got it. Understood. And just to follow up on your point that you said the customer migration will be complete by end of 3Q, early 4Q.

Largely complete. There's a couple of pockets, but largely complete.

Got it. How do we think about what happens outside? Is there like a switch and like a wall of customers that kind of convert off of that? Or is it -- what does that look like?

Yes. No. So like if you think of the carrier side, we pulled it in a day. We literally -- now there was a lot of training that went up into the leading up of carriers coming on, carrier reps coming on. We were training everybody for weeks leading into that. We have people who are sitting on the floor as the carrier reps who are booking their first load. Legacy RXO reps who have been on the platform for 10 years. We're sitting beside legacy Coyote reps, showing them the shortcuts and how to use the system...

Okay.

In real time. On the customer side -- and again, that was important so that we could start to realize purchase transportation.

On the customer side, it was a different approach. And it was always planned to be a different approach. We started with the small customers, and we're gradually phasing them in. And we're knee-deep in that already. And like there is no hiccups to report as we've been rolling that out. And we continue to learn. We take feedback from the customers. As customers are onboarded, we're having calls with them. How do you like the platform? How do you like the system? As reps are doing it, we talk about what are the tools that you used to have? Do you understand that there's a similar tool and you can use that, and that's still a shortcut. So it's a lot of training that goes into it, but we'll largely be complete by end of Q3, early Q4.

Understood. And just on the synergy side, obviously, you guys have raised the synergies a couple of times already on the cost side. Is that largely done kind of in the bag? Or do you think there's more opportunity there?

Well, I think I saw Jared, he was fumbling at the mouth to speak right there, but I'm going to jump in real quick. I think, no, it's not -- we're not stopping at $70 million, right, $70 million in cash. We're going to run well past that. But that becomes more of who we are as a company and a company that lives in a continual state of improvement. That number, as we look back on it a year from today, will be much larger than $70 million. And I think it's one of our levers as you start looking into what's going to happen in '26, this idiosyncratic best, that's one of the levers that we'll talk about.

No, I think you nailed it in terms of me fumbling up the mouth talking about the opportunity as well as just you think about what's available to RXO, right? We've raised the synergy estimate multiple times, and we're now framing it in the context of $70 million, more than $70 million in terms of cash synergies. $60 million of operating expenses, $10 million of CapEx. You break that down. CapEx comes down materially 2026 versus 2025, about $20 million in aggregate from a company standpoint and going to about $50 million next year.

From an operating expense standpoint, you look at the Q2 outlook that -- or the Q2 results that we delivered, that had the full run rate of about $50 million of operating expenses or about $12.5 million per quarter. Another $10 million here in the back half of the year associated with the tech platform as we decommission Bazooka, the legacy Coyote platform with the integration being largely complete on the shipper side, we'll have $10 million of incremental operating expense savings heading into 2026.

And then to Drew's point, we're now viewing -- we view this company holistically as one. So it's less about synergies. And now as we think about the benefits to scale, as the third largest provider of broker transportation, how do we run this organization even more effectively from a cost standpoint, leveraging the cumulative investments that we've made from a technology standpoint. We spend more than $100 million per year in technology. How do we think about -- we're not going to be the company that talks about what that AI road map looks like externally because ultimately, a lot of it is proprietary. But how do we think about leveraging Agentic AI? How do we think about leveraging automation? How do we leverage that incrementals, right?

Last quarter, we delivered a 2.7% adjusted EBITDA margin, but the incremental margin in our brokerage business can be as high as 75% to 80%, right? So how do we go ahead and prime the model for incremental operating leverage and doing it in a way that you can enjoy the benefits of scale, where last quarter, our productivity in terms of loads per person per day was up 45% on a 2-year stack. So I said a lot there, but I think that's just goes to Drew's point in terms of how excited we are about the opportunity to really deliver higher lows in terms of -- and higher highs in terms of operating margins through cycle.

Got it. I'm going to get a tech in a sec, but just want to follow-up to what you just said. What is the time line for the scale benefits ramping up to the full synergy level as well?

So when you think about the $60 million of operating expense synergies that we talked about, $50 million is embedded within the Q2 results that we delivered with another $10 million here in the back half of the year. When you think about incrementally on top of that, to your point, which I think is the heart of your question.

Yes.

I think we are -- that's one of the levers that we have that's idiosyncratic to RXO heading into 2026. I think we're -- when you think about what 2026 could look like, right? Whether or not there's a market recovery, we want to make sure that we have the ability to go ahead and deliver EBITDA growth in the context of what could be another flattish market. We don't know, right? So how do we just make sure, we think the opportunity is significant in terms of running this business more effectively and taking actions to make sure that we can deliver EBITDA growth regardless of the market environment next year.

Understood. So let's talk about tech, right? Because that's always been very close to you guys had kind of back in the XPO days. And so what are some of the most exciting initiatives you're talking about right now? Are you not talking about it enough compared to maybe some of your peers, kind of how do you think about how you put that out there?

I mean we've taken tech seriously since day 1, right? I mean that's part of, to your point, the DNA of this company is built on technology. So we spend north of $100 million per year from a technology standpoint. And we've been pretty consistent in terms of how we've talked about it externally across the last few years, where 3 specific cohorts that we think about, right, our carriers, our customers and our employees.

And how do we go ahead and deliver that increased productivity to yield higher operating margins over time? How do we go ahead and make sure that we've got seamless connectivity with our customers where you think about 97% of loads created or covered digitally on the legacy RXO side, some moving parts here relative to legacy Coyote. You think about some of the differences across the networks and now that we're going to be on one tech platform, we'll be able to communicate that on a go-forward basis.

But then also on the carrier side, right, making sure that we've got RXO Connect, which is RXO Drive, which is the platform for carriers to go ahead and bid on loads and do so not with a human on the other side, but with our pricing algos on the other side.

So leveraging machine learning techniques from a pricing algorithm standpoint has been at the heart of what we do for a while now. But then you sort of think about the developments in AI, which have been very rapid in a short period of time and how are we leveraging Agentic AI, right? How do you think about the sales enablement function where ultimately the ability for our top salespeople, which we think about that customer relationship is sacred, right? Our top 20 customers have been with us for 16 years on average.

So we don't want to endanger that customer relationship. We cherish that. But can we make that salesperson far more efficient by leveraging agents instead of humans? I think that's certainly something that not only we're thinking about, we're already doing, right? So leveraging Agentic AI to think about can this business run at structurally higher operating margins long-term? I think that's definitely the case.

Have you guys done any kind of quantification about what an ideal number of transactions per headcount or what headcount could look like relative to volume growth over time, that spread looks like by leveraging AI?

Well, I think, no, we have not put out a target on that externally. But when you look at it, look at what we're already doing on the technology side. Over the last 2 years, our loads per employee per day are up over 45%. That's attributed to what's going on, on the technology side. And that's not new. That's something that's ongoing.

When you walk through our offices and you see some of our top reps, they're doing hundreds of loads per day. They're leveraging AI. They're leveraging assistants that used to be people that are helping them do their jobs. And so what I would say is we are very, very early in our journey of being able to increase productivity over time. And as you look out, this is still a people business. It is still a relationship business. But over time, we will not hire anywhere near at the same rate for growth of what we've hired over the last 5 years.

Got it. And when you see the tools that many of your peers are using kind of is there anything that you're like, hey, that's really cool. We don't have that, either we need to go acquire that or build that? Or kind of is that something that you guys have had with you already? Or kind of who do you see out there -- I mean you have always been the leader, if not one of the leaders on the tech side, kind of who do you think out there has cool tools that you'd like to use?

Look, I don't know that we have seen them, right? Like I don't think that they're lining up to give us tech demos of their system for competitors...

Surely [indiscernible]...

We're not line enough to give them. But I mean, I think, obviously, if you look at a company like Echo that was public at one point, Doug is a technologist himself without seeing it, I'm sure they have great technology. I think that Doug is a very smart guy. You look at Robinson, they've been around for 100 years. I'm sure that they're getting smarter in what they're using in technology and how they're building it out. There's a lot of great competitors at the top of the brokerage industry. For us, as Jared said, it is very, very simple on whenever we think about building technology.

What is this going to do for customers, carriers and employees. But more importantly, what is this going to allow us to do in terms of how well we're buying versus market in terms of a capacity standpoint? What is this going to allow us to do from a productivity side of what we just talked about? Can we increase over the next 2 years our productivity by 100%.

And the last thing is, what does this -- what does our technology allow us to do from a volume perspective versus what's going on in market. And for us, we're not necessarily looking for what's the flashiest thing or for the next thing, we're looking at how do we -- you focus on the business and how do you make those components of the business better. And so like everything within it is reducing keystrokes, reducing clicks of the mouse. Can you talk to the computer to be able to start creating orders, whereas whenever I started, it took me 7 or 8 minutes to build an order.

Understood. Any questions from the audience? Yes.

Considering many of the initiatives you talked about with Coyote and sort of some TLs beginning to see maybe normal seasonality in the back half of the year, how should we think about normalized earnings for the business? And when can we expect to see that?

So when you think from a normalized earnings standpoint, right, this business at our scale is the #3 provider in brokerage transportation holistically across the company between managed transportation, last mile and brokerage. We should be doing mid-single-digit type EBITDA so call it, 5% to 6% range. As we think about leveraging some of the technology investments that we talked about longer term, could there be some most, but not potentially. But I think that's how we're framing it.

And I think I would also think about it in the context of your question in terms of timing. I don't know when that's going to be, right? Do we get that 50 basis point jumbo size rate cut next week? Could that help? Sure. But ultimately, as we think about priming the operating model for incremental leverage and the ability to go ahead and deliver that, call it, mid-single-digit EBITDA margin, like what are we focused on? We're focusing on delivering the higher lows and the higher highs for better cross-cycle profitability when we think about the business.

And I would also encourage you when you think about normalized earnings, it's not just about slapping a 5% to 6% EBITDA margin on sort of the current revenue of the company, right? Think about how far behind we are from normalized volumes in terms of overall freight demand. Think about to Drew's point earlier, some of the legacy Coyote customers that we're active at where volume is not where it was from a few years ago. When the market turns, the ability to have that incremental torque and capture share on the spot side is significant.

And then on gross profit per load, we're still mid-teens percentage behind our 5-year average, excluding the peaks of COVID. And when you get torque from gross profit per load, the incrementals can be as high -- and attributable to price, it could be as high as 75% to 80%. So there are a lot of initiatives we have. And then you think about the other 2 things I would mention, one, purchase transportation benefits, we feel very good in terms of the 100 basis points of improvement on our PT spend as a combined organization and then the cost opportunities that we obviously just talked about.

Got it. Drew, at the risk of -- sorry Jared, at the risk of potentially making me repeat the answer you just gave me. If I were to ask that same question in a different way, your large peer obviously is getting a lot of attention rightfully for having -- for improving their net operating margin quite significantly, right? And there is a fairly significant gap between where you guys are and where they are. What would be the drivers of that gap? And how do you close that over time? Is it largely scale and kind of things you mentioned or other factors as well?

Scale is part of it, but I would also highlight 2 other things. One, business mix is an important factor. When you think about automotive for us, in particular, has been a very big headwind, right? Where last quarter, automotive was a $10-plus million EBITDA headwind year-over-year, so $40-plus million on an annualized basis relative to where we are from a company standpoint, that's a very significant headwind because we are the leader in ground expedite in North America. And given the time-critical nature of that kind of volume, very high incrementals and decrementals.

The other I would focus also is just from a modality standpoint, right? I think that particular competitor that you're mentioning, I think it's 50% to 60% of their volume is LTL, right? So for us, it's -- call it, last quarter, it was about 32%. So -- and I think this ties back into what you were saying earlier with Drew on growing that LTL business longer term and the technology that's embedded in our platform. That is such a -- we think a pretty big investment, call it, 4, 5 years ago in that LTL platform.

And that business, not only does it provide the stability in EBITDA that we talked about, but the contribution margins there are significant. So we have the ability to scale that LTL volume over time with pretty de minimis headcount additions. So the contribution margins there could be very -- are will be very, very strong. So when you think about it relative to the largest player in the space, I would certainly caution as it relates to modality mix, LTL versus TL and then vertical mix, especially automotive.

Got it. Just to the point on auto, we had a couple of the rails here earlier actually sounding reasonably constructive on autos. But we had a trucking company that was not sounding as good in autos, and it sounds like you guys are fairly muted as well. Is there some kind of share shift occurring here in the auto space between truck and rail?

Yes. So I think when you look at automotive, you have to remember that there's 4 things that happen in automotive. It starts on the rail. The next piece is it goes to truckload. The third piece is it goes to deviated truckload. So it's not quite an expedite shipment. And then the last one is it's an expedite shipment. And that's the world that we play in.

Like if you look at SARS, SARS is fine, right? So like I think that that's probably what the rails are seeing. And so when you think of when we do well, it's when there's disruption in the market. So disruption in the market comes from first tender rejections off of -- through the first 3 rounds. Is there something that happens in the market that causes disruption? Is there something regardless of what's going on in the market, is a company rolling out a new product? Or is a company behind on a product because they're not going to chance that to one of the first 3. They're going to go straight to expedite on those type moves. And the answer to all of those has been no recently.

Like automotive, just to put more context around what Jared said, if you think about the peak for our managed transportation business, it's about half of our freight under management is automotive. When you think about that volume, we've added new customers over the last 2 years. We haven't lost any and our volume is down 40%. So that's not a market share question because we own the market.

And so like confidence in that whenever that starts to come back. What that means for our brokerage business because at this point, managed transportation is a customer to brokerage off of that. If you think of expedite gross margin dollars in total, what it meant for brokerage, I think it was like 12% to 14% of our overall gross margin dollars were coming from expedite. I think today it's 1% to 2%.

Yes.

So like the impact on the P&L is real off of that. And I'm not calling that we get back to 12%. But what if we get back to the midpoint at 7% or what if we don't even get to that, we get to 4%, like the meaningfulness that, that has to the P&L is very, very large.

Got it. We shall remain on cycle watch and hopefully...

We are too.

We will see them talk sometime soon. Drew, Jared, thanks so much for joining us.

Thank you.

Thanks, [indiscernible].

Welcome to the RXO Q2 2025 Earnings Conference Call and Webcast. My name is Ludy, and I will be your operator for today's call. Please note that this conference is being recorded. During this call, the company will make certain forward-looking statements within the meaning of federal securities laws which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in the forward-looking statements.

A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release. You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional important information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures that the company uses when discussing its results.

I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may begin.

Good morning, everyone. Thank you for joining today. I'm here in Charlotte with RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. There are 5 main points I want to convey this morning. First, we again delivered on our commitments in the quarter and achieved adjusted EBITDA of $38 million, at the high end of the guidance range we provided to you last quarter. Second, our brokerage business outperformed the market and grew volume by 1% year-over-year, driven by 45% growth in less than truckload volume. Importantly, truckload gross profit per load improved by 7% sequentially despite tighter market conditions. Third, we're beginning to realize the benefits of having our team on a combined tech platform. We're purchasing transportation more effectively than we did before the integration, but still have a lot of opportunity ahead.

Fourth, last mile continued its impressive run of year-over-year growth, achieving 17% stock growth, the fourth consecutive quarter of double-digit growth. And lastly, we accomplished all of this while achieving an exceptional adjusted free cash flow conversion of 58% and adding cash to our balance sheet. I'd now like to give you an overview of our results within brokers. Which outperformed despite the prolonged soft freight market.

Overall, brokerage volume grew by 1% year-over-year, outpacing the cash freight index, which contracted by more than 3% in the quarter. Our growth was led by a 45% increase in less than truckload volume. That's an acceleration from last quarter's 26% growth. We continue to win in this area because we make LTL shipping easy for our customers. Over the past few years, we've invested in cutting-edge technology that improves productivity and reduces cost for our team while giving LTL customers complete visibility. We maintain relationships with nearly all the LTL providers in North America which enables our customers to realize the benefits of scale.

Growing our LTL business is a key part of our company strategy because it provides a stable source of EBITDA with strong margins across market cycles. We still have many opportunities to continue growing our LTL business, and that growth will come from both existing truckload customers and new customers. On the truckload side, volume declined by 12%. The decline was primarily due to automotive weakness and efforts we undertook with customers to optimize price, volume and service.

Brokerage gross margin was 14.4% in the second quarter, above the midpoint of our outlook. And truckload gross profit per load increased by 7% sequentially despite tighter market conditions. This was the strongest sequential increase in 3 years, and we expect to improve truckload gross profit per load again in the third quarter. We continue to achieve robust productivity gains in brokerage driven by enhancements to our tech platform. Productivity over the last 12 months increased by about 18% and over the last 2 years by 45%.

There's still significant room for improvement. We continue to invest in AI tools that help our people be more productive and enhance the experience for our customers and network of carrier partners. Let's talk about our efforts to procure brokerage capacity more efficiently, leveraging our larger scale. As a reminder, on May 1, our coverage operations were combined providing our carrier network with access to significantly more freight and our reps with access to an even larger network of carriers to cover that freight.

Our common platform is enabling us to realize the benefits of our increased scale helping provide the best truck for each load and realize the benefits of our additional power leads. We're already seeing the results, and over the last few months, we've improved our buy rate favorability by approximately 30 to 50 basis points. We remain confident in our ability to drive further improvements, and Jared will walk you through more details later in the call. Earlier this quarter, we successfully completed the migration of legacy Coyote's ERP system, which was a huge accomplishment.

The last 2 items remaining in the integration are the completion of the customer migration to RxO's technology platform and the decommissioning of certain back-office systems. The customer migration is underway and we continue to expect that the bulk of our tech integration will be complete by the end of the third quarter. Importantly, our team is already operating as 1 RXO working together to ensure the success of our customers and our network of carrier partners. As I travel to the branches around the country, I'm proud of the energy and the dedication that I'm seeing.

We set forth an aggressive timeline to complete the integration, and we're ahead, thanks to the hard work of our team. In complementary services, our momentum continued in the second quarter. Last mile stops grew by 17% year-over-year the fourth consecutive quarter of double-digit stock growth. The exceptional service we provide, combined with our massive scale, cutting-edge technology and financial stability is enabling us to gain profitable market share. The best-known brands in the big and bulky space continue to rely on RXO for home delivery services.

Managed Transportation again increased the number of synergy loads it provided to brokers and grew its late-stage sales pipeline sequentially. For the quarter, RXO delivered adjusted EBITDA of $38 million RXO's company-wide gross margin was 17.8%. Cash performance was a highlight for us in the second quarter. Despite the prolonged soft freight market, we delivered a 58% adjusted free cash flow conversion. We also added cash to our balance sheet. All of this speaks to the long-term free cash flow generation capabilities of the RXO business model.

Jamie will discuss cash in more detail later in the call. Overall, the freight market continues to be soft. We did see some tightening throughout the second quarter, but this was driven by capacity and not improved freight demand. As we previously stated, carriers have exited, resulting in a more balanced market overall. On the demand side, though, our customers are still managing through macroeconomic uncertainty. Our effort to procure transportation more effectively, along with our focus on cost discipline will enable us to outperform typical seasonality in the third quarter. Jared will discuss this in more detail later in the call.

Our strategy remains the same. We're focused on driving profitable growth across market cycles, while continuing to advance our cutting-edge technology platform. When it comes to growth, we're focused on increasing our scale and expanding the solutions we offer to our customers. We have a great track record when it comes to driving growth. Our total volume in the second quarter when including the inorganic impact of the Coyote acquisition is up 275% versus the comparable quarter 5 years ago.

Our long-term organic growth results are likewise impressive. Over the 5 years prior to the Coyote acquisition, RXO grew total volume by 72% organically and 11% CAGR. In that time period, Truckload was up 43% and LTL was up a whopping 851. More importantly, when you focus on the 3 years pre-acquisition, which narrows in on the current down cycle, our team was able to grow volume by 21%. And Future growth will not only come from our core truckload business but will also come from premium services that expand our deep customer relationships.

We'll continue to advance the businesses that provide us with stable sources of EBITDA during all market conditions, including LTL and managed transportation. We are focused on taking profitable market share over the long term through market cycles. We continue to hear from customers and carriers that our technology is the most advanced and easiest to use in the industry. Each year, we spend more than $100 million on technology. Our tech continues to improve the productivity of our people, enabling them to spend more time with our customers and network of carriers.

Our AI and machine learning algorithms are also constantly working to optimize our pricing. You can see the impact of these investments in our margins and our productivity, which has increased by 45% over the last 2 years. We're doing all of this while remaining disciplined when it comes to cost. The focus is helping us navigate the difficult freight market conditions and will enable us to achieve significant operating leverage once the market improves. RXO is well positioned to deliver increased earnings power and free cash flow over the long term and across market cycles.

Now Jamie will discuss our financial results in more detail. Jamie?

Thank you, Drew, and good morning. Let's review our second quarter performance in more detail. Our results were at the high end of the ranges we provided. For the quarter, we delivered $1.4 billion in total revenue, gross margin of 17.8% adjusted EBITDA of $38 million and adjusted EBITDA margin of 2.7%. Sequential adjusted EBITDA growth was driven by improved truckload profitability within brokerage strong execution and seasonality from last mile and disciplined cost management. We delivered these improved results despite continued headwinds within the automotive industry.

Automotive headwinds increased on both the sequential and year-over-year basis. Specifically, the slowdown in automotive volume represented a company-wide gross profit headwind of more than $10 million year-over-year. Automotive freight, because of its time-critical nature and higher service requirements typically carries a higher-than-average gross margin with strong flow-through to EBITDA. Below the line, our interest expense was $8 million. For the quarter, our adjusted earnings per share was $0.04. You can find a bridge to adjusted EPS on Slide 7 of the earnings presentation.

Now I'd like to give an overview of our performance within our line of the business. Brokerage revenue was $1.025 billion and represented 69% of total revenue. We had strong LTL growth driven by continued customer wins that growth was offset by a decline in full truckload volume. The decline was primarily due to automotive weakness and efforts we undertook with customers to optimize price, volume and service. Brokerage gross margin was 14.4%, up 110 basis points sequentially.

Gross profit per load for truckload improved by 7% sequentially, which was the largest increase in 3 years. We achieved this result despite the tighter market conditions in the quarter. We continue to bring down our cost of purchase transportation, and we're also beginning to see early benefits associated with the carrier and coverage migration which was completed on May 1. Complementary services revenue in the quarter of $457 million increased by 9% year-over-year and was 31% of our total revenue.

Gross margin within complementary services remained strong at 22.8%, a sequential increase of 180 basis points. Now let's move to each line of business within complementary services. Managed Transportation generated $142 million of revenue in the quarter, down 9% year-over-year. Managed Transportation continues to be impacted by lower automotive volume in our managed expedite business. Our last mile business generated $315 million in revenue in the quarter, up 19% year-over-year. Last mile stocks grew about 17% as we continue to gain profitable market share within the big and bulky category.

This was the fourth consecutive quarter we've grown last mile volume by double digits. Let's now discuss cash, please refer to Slide 8. Adjusted free cash flow in the second quarter was $22 million, building a strong 58% conversion from adjusted EBITDA. This puts our year-to-date conversion at 47%. We're especially pleased with our conversion during the quarter as it included our semiannual bond interest payment of $13 million.

Our results were primarily driven by working capital management. Most impactful, we've harmonized working capital processes across the combined organization, and we believe the majority of these improvements to be permanent. We anticipate strong cash performance again in the third quarter. Longer term, given our asset-light business model, we remain confident in the 40% to 60% conversion across market cycles. We ended the quarter with $18 million of cash on the balance sheet which increased by $2 million sequentially, with no change to the revolver balance.

We grew a cash balance despite our $13 million semiannual bond interest payment and $12 million of restructuring, transaction and integration cash outflows. Looking forward, we expect to grow our cash balance again in the third quarter. As you can see on Slide 9, our liquidity position continues to be strong with more than $575 million of total committed liquidity at the end of the second quarter. Quarter end net leverage was 2.1x trailing 12 months bank-adjusted EBITDA up slightly when compared to the prior quarter.

We continue to have significant capacity to deploy our balance sheet in line with our balanced capital allocation philosophy. Now let's discuss our expectations for the third quarter. We continue to operate in a fluid macroeconomic environment with significant shipper uncertainty, which is reflected in our outlook. For the combined company in the third quarter, we expect to generate between $33 million and $43 million of adjusted EBITDA. Sequentially improved truckload brokerage profitability and disciplined cost management are helping to offset a seasonal decline in last mile.

For the third quarter, you should model SG&A down slightly when compared to the second quarter depreciation expense of approximately $17 million to $19 million; amortization expense of approximately $9 million to $11 million and an adjusted effective tax rate of approximately 30%. Jared will provide more details on our third quarter outlook shortly. Slide 14 includes our 2025 modeling assumptions. There are a few things I want to highlight. While we're always operating with a continuous improvement mindset, we have completed most of the cost actions associated with the Cody acquisition.

We, therefore, expect a significant reduction in second half restructuring, transaction and integration expenses when compared to the first half of 2025. In 2026, we continue to anticipate a material reduction in capital expenditures and expect next year's CapEx to be between $45 million and $55 million. Our business model, combined with our cost discipline, will yield significant operating leverage as the market improves. While the timing of an improvement in the freight market demand remains uncertain, we are hearing some cautious optimism from our customers that clarity on trade policy is to bring in incremental business confidence.

The integration of [ CODI ] is nearly complete and we are seeing early wins when it comes to procuring transportation more effectively. RXO is well positioned to deliver strong results or crawl market cycles. Now I'd like to turn it over to our Chief Strategy Officer, Jerry Weisfeld, who will talk in more detail about our results and our outlook.

Thanks, Jamie, and good morning, everyone. As I typically do, I'll start with an overview of our brokerage performance in the quarter to make the comparisons more useful for you, I'll give you combined numbers for our brokerage business, which include Coyote's results in prior periods. Brokerage volume in the quarter was up 1% year-over-year, ahead of our expectations. The better-than-expected performance was driven entirely by LTL strength. LTL volume increased by a strong 45% year-over-year and included the full quarterly contribution from the customer onboarding we shared with you last quarter.

LTL represented 32% of brokerage volume in the second quarter, up 1,000 basis points year-over-year and the highest contribution in the company's history. Truckload volume was down 12% year-over-year primarily driven by automotive weakness and efforts we undertook with customers to optimize price, volume and service. Combined, those 2 drivers represented a majority of the year-over-year volume decline. To give you more color, automotive volume was down 28% year-over-year and headwinds increased on both a sequential and year-over-year basis.

This accounted for about 1/4 of our overall truckload volume declined in the quarter. As a reminder, we service our automotive customers across brokerage and managed transportation. As the largest provider of managed ground expedite services to the automotive industry in North America, RXO is uniquely exposed to the current automotive headwinds. However, we are well positioned for growth when the market recovers. Truckload represented 68% of our brokerage volume.

Contract was 73% of our truckload volume flat sequentially and up 100 basis points year-over-year. Spot represented 27% of our truckload volume in the quarter. We continue to operate in a prolonged soft rate environment with minimal spot opportunities. Before reviewing our financial performance and market conditions in more detail, I'd like to talk more about the initial success we've achieved as a result of the combination of Arcos and Coyote's carrier and coverage operations, which was completed on May 1.

We've historically purchased transportation better than the market. We believe that combining RXO's and Coyote's carrier networks would allow us to purchase transportation even more effectively by increasing our network density and reducing deadhead miles. We previously communicated a framework to think about the long-term COPT opportunity, a 100 basis point improvement would translate into an approximately $40 million of cost avoidance or savings depending on market conditions. The initial results are encouraging. Over the last few months, we have seen buy rate favorability improve incrementally by approximately 30 to 50 basis points.

This improvement also occurred during tighter freight market conditions, yielding cost avoidance. As a reminder, by rate favorability needs to be measured against constantly changing market conditions. We still have a significant opportunity to improve our buy rates as a combined organization. Let's now review our brokerage financial performance and market conditions in more detail. You can find this information on Slides 10 through 13 of the presentation.

Starting with revenue per load on Slide 10. In the second quarter, truckload revenue per load trends remained inflationary. Revenue per load, excluding the impact of changes in fuel prices and length of haul, was up 3% year-over-year, but the lack of meaningful spot opportunities continue to be a headwind to revenue per load. Truckload revenue per load also increased year-over-year during the month of July. We continue to expect 2025 contract rates to be up low to mid-single digits year-over-year.

Let's move to Slide 11 and discuss current market conditions and brokerage margin performance. The market tightened throughout the second quarter with both industry-wide tender rejections and load-to-truck ratio moving higher. We believe this was driven by continued supply rationalization, not improved demand for freight. Also supporting this view, Class 8 net orders have continued to decline and remain below replacement levels. Carrier unit economics continue to remain challenged in the current environment.

Additionally, we saw even more market tightness driven by produce season this year when compared to the last few years, an encouraging sign that the market is responding to seasonality and is more balanced when compared to the last few years. While industry KPIs moved lower into July as they typically do, we are seeing them increase year-over-year. Despite tightening market conditions as the second quarter progressed, we were able to procure transportation effectively. This resulted in truckload gross profit per load improving by 7% sequentially. We also saw early benefits of the previously discussed carrier and coverage migration.

This will help drive another sequential improvement in truckload profitability in the third quarter. Let's go to Slide 12 and look at quarterly truckload gross profit per load trends. As I just mentioned, we improved truckload gross profit per load significantly, resulting in a 7% improvement when compared to the first quarter. This is the largest increase in truckload gross profit per load for the combined company since Q2 of 2022. An improvement in truckload gross profit per load yields very strong contribution margins and flow through to EBITDA, typically greater than 60%.

Moving to Slide 13. Arco's LTL brokerage volume continues to outperform the broader LTL market, contributing stable gross profit per load and strong contribution margins to the business. We have significant opportunities to continue to grow LTL volume with existing and new customers. I'd now like to look forward and give you some more details on our third quarter outlook that Jamie provided. Starting with brokerage. We expect overall volume to remain approximately flat year-over-year with continued soft truckload volume trends, offset by strong LTL growth.

We expect truckload gross profit per load to be up slightly in the third quarter significantly outpacing recent seasonality. We anticipate that brokerage gross margin will be between 13.5% and 15%. Let's now talk about complementary services. In managed transportation, while the business has significant sales momentum and an expanded pipeline, managed expedite automotive headwinds continue to impact us in the near term.

In last mile, we expect another quarter of year-over-year stock growth although at a slower rate when compared to the second quarter. As a reminder, the third quarter is seasonally weaker for last mile when compared to the second quarter, and we also expect last mile stock growth to decelerate into the back half of the year due to tougher comparisons as we lap last year's new business wins. Putting it all together, we expect RXO's third quarter adjusted EBITDA to be in the range of $33 million and $43 million. We thought it would be helpful to give you some historical trends for the combined company.

Over the last few years, on average, third quarter adjusted EBITDA is typically down anywhere between 15% and 30% sequentially, primarily driven by last-mile seasonality. We expect to perform better than this with improvement in truckload brokerage profitability and lower expenses, offsetting a sequential decline in last mile. Similar to last quarter, we thought it would also be helpful to share the brokerage volume assumptions underlying our third quarter outlook.

Truckload volume is typically higher in September when compared to the seasonally slow month of July. The midpoint of our outlook does not embed any above seasonal volume growth from July. The high end of our adjusted EBITDA outlook assumes volume growth from July to September, modestly above our 3-year average while the low end assumes volume growth modestly below our 3-year average.

To close, while we continue to operate in a fluid environment, we've entered the third quarter and upcoming bid season with momentum. Truckload brokerage profitability has significantly improved. We are gaining profitable market share within LTL with carrier and coverage migration complete, we're seeing early wins on procuring transportation more effectively. Productivity gains fueled by our investments in technology are accelerating.

Our technology integration will be substantially complete this quarter. Managed Transportation continues to increase synergy loads to brokerage with an expanded sales pipeline, and we continue to gain market share within last mile. We remain focused on driving profitable growth and leveraging our cutting-edge technology, both of which position the company for significant long-term earnings and free cash flow growth.

With that, I'll turn it over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Tom Wadewitz with UBS.

Yes. Great. wanted to ask Drew on the -- one of the comments you made in kind of talking about the truckload volumes and the weakness. So the auto makes sense, you have more leverage to that, you mentioned the optimizing price volume and service, I think, is kind of the language you used. So to me, that sounds like kind of quality of the book that you're working on improving that. I don't know if that's the right way to view it. And how much of this is kind of related to Coyote that you'd say maybe, well, the mix of what we had needed some of this improvement?

I guess I'm just a little more color behind that and how long does this process last in terms of working on the price volume service component, just so we can think about kind of the forward impact on volume.

Yes. Thanks, [indiscernible] First, when you look at the volume, you highlighted the first piece on automotive. Automotive was roughly 1/4 of 12% of why volume was down on a year-over-year basis. And a bigger piece of it was exactly what we talked about. We worked with the customers, and it wasn't an overarching strategy of, hey, we're just going out there and taking price from customers. We're working with the customers 1 by 1 on what's the right strategy for them, looking at the power lanes that we've got across the country where we have the strongest amount of capacity where we provide the best value to their overall transportation network. So we were able to improve gross profit per load 7% sequentially. It's the biggest increase that we've had in 3 years. And price was obviously a piece of that.

Customers even come to us and they want to make sure that we can service their business profitably. So there was some business that we did lose and walk away from. Some of that, we think we've got good opportunity to move back. You know well, Tom, that bid season typically happens in Q4 and Q1, it is implemented throughout Q2. So that's largely behind us, and that's what gives us confidence when you start to look at sequentially on Q3 it's going to be roughly flat. It could be up a little bit, it could be down a little bit.

One last point I want to make is just on the customer base and the retention of the customer, Tom's. And when you look at our top customers, take our top 100, for example, from pre-acquisition, we're still with 99 of them and we're still at 99 of them at size. So what we want to make sure that we're doing is that we know that we're in a soft freight market. We want to make sure that we're relevant and that we're providing enough value that we are on the call whenever the market starts to turn, that we receive those spots projects in many bids.

Right. Okay. That makes sense and focusing on quality of the book or improvement, a 7% improvement in gross profit per load is obviously a constructive move. How do long do you think this kind of focus on quality would affect the volume though, you think like 3Q, 4Q, will you be still talking about this in 1Q next year? Just trying to think about the duration of that impact to the truckload volume year-over-year.

Yes. I think when you look at year-over-year for Q3, you're probably talking about similar numbers for what we put up for Q2. But I think the important piece is where you look at where you're going sequentially. And like I said, that's going to be roughly flat. So bid season is behind us. Bid season is implemented, and we're already working on next I spent time over the last couple of weeks with some of our top customers working on what the strategy is for 2026.

Okay. And is it related to Coyote or this is just kind of a broader look across the combined book?

We stay in a continual set of improvement as a company. That's something that we've done from day 1 as a company. We did talk about at the time of acquisition that we felt like we had the opportunity to improve gross profit per load profitability for the overall Coyote book, but that's not exclusive to them. We're operating as 1 company and it's all [indiscernible]

And your next question comes from the line of Ken Hoexter with Bank of America.

Drew, can you talk about the margin characteristics or maybe the operating differences in getting such strong LTL growth compared to truckload? How should we think about the impact on the business there?

Yes. So when you look at the LTL piece, it starts with the relationships that we have on the truckload side, again, these are customers who have been with us for a really long time, and they're large customers. And they come to us and they say LTL is a small piece of our overall transportation spend. And I'm working with a few of the national players. But I'm having to go into different platforms, and I'm having to look for claims, lost shipments, damages, all of those things. And they're familiar with our technology, RXO Connect.

And so they come in and they say, if we can put everything on RXO Connect and now we can start capitalizing on some of the capacity from the regional players as well. This can be something that gives us better visibility and for us, LTL is going to be a part of our growth story for a long time. We're just getting started. I'm sure you remember at the time of spin, LTL made up only 10% of our overall volume. It's now over I want that volume to get up over 50%. We know the stability that, that adds to margins.

If you look at what comes out in the deck, gross profit per load in that is relatively stable. It doesn't move a whole lot. It doesn't have the volatility that truckload does. So it's a good, stable EBITDA for us as a book of business.

And then just a follow-up, right? So given the integration of the merger, can you talk about the synergy details? Where are we now, Jared, you kind of threw in the potential cost savings, I guess, 30 to 50 basis points on your you're buying. Can you talk about what -- what's left -- how should we see that scale going forward?

Ken, it's Jamie. On the synergies, we're still on track with the $70 million we talked about last quarter. In terms of realization, let's call it, annualized $50 million of the $60 million of OpEx as flowing through the P&L from a realization standpoint in Q2. Small amount moving into Q3. But as you head into Q1 of next year, that last $10 million of annualized synergy because of the completed the tech integration will be complete we should see $2.5 million per quarter flow through the P&L beginning in Q1.

And then that last $10 million of synergies that we talked about, which is CapEx spend this year, you should see that be removed from CapEx spend going into '26.

Ken, it's Jared. On purchase transportation, that was part of the original investment thesis as it relates to the Coyote acquisition. Combining these 2 organizations approximately the last year $4billion of cost of purchase transportation, how do we, as an organization, procure capacity more effectively. Carrier migration was completed on May 1. And in just a few months, we've seen significant improvement in our ability to buy relative to the market. We've increased already by rate favorability incrementally by about 30 to 50 basis points in a period where rates were inflationary, so that yielded significant cost avoidance when we think about that historical framework that we provided of approximately 100 basis points of incremental improvement relative to buy rate favorability, we feel very confident in that.

And your next question comes from the line of Stephanie Moore with Jefferies.

Hoping you could touch a little bit about what your underlying freight market assumptions are for the third quarter. In particular, maybe your outlook for the automotive sector, just given the impact you've seen so far in the first half of the year. And then as well, any benefits from PT savings and the integrated platform and that contribution to third quarter expectations.

Stephanie, it's Jared. When you think about the underlying assumptions from Q2 to Q3, that's embedded in our outlook, we are continuing to assume that we're operating within a soft freight market. So limited spot opportunities July, as you know, is the seasonally, one of the seasonally slowest months of the year. And when you think about automotive as it relates to our business, as Drew mentioned earlier, it was down 28% year-over-year with headwinds sequentially increasing both sequentially and year-over-year into the second quarter embedded within our third quarter outlook assumes continued automotive headwinds.

We're the largest provider of ground expedite services in North America. So when the market does recover, we will have strong incremental contribution margins in excess of 70% to 80% when the market does recover. So we're positioned very well. As it relates to PT synergies, absolutely, we have embedded continued improvement as it relates to our ability to buy. And just to give you a little bit more flavor in terms of from Q2 to Q3 typically, brokerage gross margin is down sequentially. And typically, gross profit per load is down significantly sequentially. So

we're outpacing historical seasonality over the last few years by a pretty wide margin embedded within our Q3 outlook in part due to how well we are procuring transportation.

That's helpful. And then I guess as I think about normal seasonality, 3Q to 4Q and if we kind of layer in what you just outlined synergies, PT optimization and the like, maybe you could talk a little bit about your confidence in the ability to continue to outperform seasonality if this environment -- overall freight environment continues to be weak.

From Q3 to Q4, historically, the combined business is up sequentially, but I would caution you that the variability is pretty significant. If you look at over the last few years, there's been a quarter where we've been down sequentially, and there's been a quarter where we've been up 100% sequentially. So it really does depend on how peak season shapes up. whether or not the consumer shows up and what consumer demand looks like. But we do expect Q4 to be up sequentially relative to Q3 in the context of continued improvements we're making in the business with truckload profitability, combined with how well we are procuring transportation. That should remain to be a tailwind into Q4.

And your next question comes from the line of Chris Wetherbee with Wells Fargo.

Drew, you are talking about the work you're doing with the customer base on the truckload side, and that's certainly a piece of the year-over-year declines in volume that we saw in the second quarter. I think a quarter came from the auto business. How much of the -- of the 3 quarters that was left, I guess, came from sort of this customer exercise? And where are you with that process? I guess, in other words, should we expect to see a multi-quarter effort to kind of get the book of business, the portfolio in the right place from a profitability perspective? How much more kind of runway do you have on that?

Yes. Thanks for the question, Chris. It's largely done because bid season was Q4, Q1, and it was implemented in Q2. So we've said before, we stay in a continuous state of improvement. So it's something that we're always working on, and it's something that we're always having conversations with our customers. I don't know of an organization that could be in front of customers more than what we are.

And so it's making sure that we're working through it thoughtfully, strategically and we're adding value for the customers. And what we're doing. But when you look at bid season, it's largely done, and we're off and running. And that's why when you look at Q3, volumes will be roughly flat. It could be up a little bit, it could be down a little bit, but roughly flat from Q2 to Q3 overall.

Okay. That's helpful. And then when you think about peak season, maybe if we could zoom out a little bit and get a sense, I guess there's been some discussion of a pull forward in maybe what we're seeing in July and August is potentially the peak and fourth quarter could be a little bit weaker as a result. You can sort of offer some thoughts on what you're hearing from your customer base about how busy or not you're going to be as we move through the rest of the year?

Yes. We're hearing different things from different customers. And I don't know that there's a consistent message. It's still too early to call what will happen for peak season. We saw some customers pull volume forward. We saw some customers hold volume and that's hitting now. as there starts to be a little bit more clarity on tariffs and where that's going to ending. So I think that it's still too early to call what happens on peak season.

Right now off of what we see, we're confident in our ability to be able to grow EBITDA from Q3 to Q4, but it's too early to call what happens on peak season at this point.

And just if I could sneak in just sort of a follow-up on that. UPS has got some volume dynamics that they're working through as you go through the rest of the year. How does that influence that sort of outlook for the fourth quarter, if it does at all?

UPS is obviously a peak season customer. We talked about at the time of the acquisition of Coyote. We've gone through a great peak season of giving them phenomenal service. last year. We've got a very strong relationship there, 1 that we look to continue to build on -- our job is to be able to go in there and service them as they experience peak season.

I think it's still too early to call what happens with peak season for them or for anyone else, but happy with where the partnership is and Chris, if you'll remember, there was volume commitments that came in with the time of acquisition. And right now, we're hitting those volume commitments.

And your next question comes from the line of Daniel Imbro with Stephens Inc.

I'll start on the final mile piece, and it continues to grow to I think, high teens. Is any of that due to inorganic growth? Or is that all organic? And I guess if it is organic, why do you think you're gaining share in that market? How should we think about that growth into the back half of the year just from an absolute growth point?

It's all organic, 100% organic. We haven't done a last mile acquisition in many, many years. And so when you think about it, it is all organic, and it starts with our relationships with our existing customers.

So when you think about customers who are working with multiple last-mile providers, what we've seen over the last couple of years is they've started to reduce the number of carriers that they're working with. So this isn't necessarily a market share pickup in the certain markets, what we're operating in. What it means is if we're operating in the Southeast market for a customer today, and they look to go with 1 of their current providers that they have strong strategic relationships within another market.

We're winning a lot of those markets with multiple existing customers right now. The other piece is off of the Citi acquisition, there were some large customers that came over from Coyote that was -- were not doing last mile business with us that started doing last mile business with us very early on after acquisition. So the cross-sell from the acquisition is paying off. And then we've got an outside sales team that is always work in the pipeline. And so we brought on some new customers in last mile as well.

Great. And then, Jared, maybe focusing a little more on the third quarter. You gave some helpful sequential seasonality comments to define. But maybe stepping back, would just walk through the $5 million year-over-year increase in EBITDA for the third quarter? Because I mean you bought Coyote brokerage volume led. I think Jamie mentioned $50 million of synergies are in the P&L now. So logos. I'm trying to think what are the offsets as to why maybe on a year-over-year basis, that EBITDA increase isn't maybe larger in the third quarter.

Yes. The biggest delta there, Daniel is going to be automotive. When you think about the headwinds that we had in the automotive business in the second quarter, they were down -- automotive volumes were down 28% in our brokerage business. Overall, company-wide gross profit dollars we're actually down more year-over-year in the second quarter relative to the first quarter. And I think Jamie said in his prepared remarks more than $10 million, we expect those headwinds to persist again into the third quarter. So that's definitely part of the bridge. The other thing to consider also is that we still have continued synergies that will get rolled out that are not yet fully reflected in the P&L as you think about 2026 with the decommissioning of Bazooka as we finish the tech integration.

So that will be another $10 million year-over-year, which will come in the P&L in 2026. And those are -- those are going to be the 2 biggest drivers when you think about the year-over-year.

And your next question comes from the line of Ravi Shanker with Morgan Stanley.

So as the price security guy, can you say that your customers are cautiously optimistically environment of the [indiscernible] you saying that a settled tariff is what your customers need to unlock the demand saturating here rather than the level? Or just kind of what we may expect into the broad?

Ravi, we got about 1/4 of what you said. So I'm not sure if it's our line of yours, but I'm going to take a stab at what I think you said, if I didn't answer your question, then we can take it in a follow-up. What we're talking about with our customers right now is having clarity on what's going on. When you look at what happened on liberation day, you had customers who had already pulled things forward you had customers who had not -- you have customers that slowed down on some of what they're shipping, some who stopped completely during that time.

And when you start to look at more clarity that has come on some of the tariffs, people have better visibility of how to do planning. There was a lot of chaos early on right around liberation Day of what should we do and plans we're changing every single day as we work with our customers on how they were going to pull inventory into the U.S. And now there's more clarity on that. So I think that that's the optimism that Jamie was referencing. So if that did not answer your question, we'll give you a chance to ask it again.

I apologize, so we can give me better now. Maybe as a follow-up. How much of a magic wand is AI for what you guys are doing and is there a natural saving of productivity in terms of employees transactions per employee and also are on the part getting there and how can get there?

Ravi, it's Jared. When you think about how we're leveraging artificial intelligence in the business, this is something we've been doing for a long time, 10 years plus. I'd say specifically, we use AI and machine learning on our pricing algorithms pretty significantly and as the algorithms continue to learn from each other. And when you think about the combination of RXO plus Coyote, having that larger data set combined with the operating history of Coyote, we think increases the power of our pricing algorithms.

I would say, secondly, to your point, when you think about productivity and our ability to go ahead and think about margin expansion from the operating margin line driven by artificial intelligence and what that means to productivity. Over the last 2 years, productivity is up 45% in terms of loads per person per day. Think about everyone in the organization that's involved with touching a load and what that looks like relative to 2 years ago, that growth rate actually accelerated versus prior quarter. It was about 40%. So having the ability to go ahead and drive incremental volume in the network with a growth rate that is nonlinear, right, relative to the headcount growth, driving the significant operating margin.

We think that we are still in the very early innings with significant expansion opportunities ahead.

Ravi, one thing that I would add, I agree with everything that Jared said on being on the early innings of AI, and it will continue to help us with employees, with customers and with the network of peers we partner with. The other thing is we're a company that wants to stay staffed for the long term through a market cycle. And so we probably do carry some headcount right now, knowing of what we can do in the outside of a market.

And so that's something that we still operate in a people business that is built off of relationships. That's how we were able to go in and have so many of these conversations, deep conversations, strategic conversations about adding value to our customers, but we're set for growth right now, make no mistake about it.

And your next question comes from the line of Scott Group with Wolfe Research.

A couple of things. As the LTL volume growth is really accelerating, the gross profit per load has moderated a little bit the last couple of quarters. Just wondering if you had any color there. And then why do you think you're having such outsized declines in auto volume?

Yes, Scott, this is Jared. I'll take that. I don't think you can walk outside of your office in New York and buy a Snickers bar for how little gross profit per load is down whenever you look at it sequentially. That's the beauty of the LTL business. When you look at that chart, is very, very stable on what it does. Now when you look at length of haul on some of the business that we have onboarded, it is a lower length of haul. So that means your revenue per load comes down.

And therefore, the gross profit per load is a little bit lower on those but it's still a good margin percentage. It's highly automated and is accretive. And on the automotive, I would disagree with the premise of your question. When you look at automotive, we're the largest manager of ground expedite shipments -- so when you're managing these ground expedite shipments, it's not a market share question. You own the market.

You're doing this for the largest OEMs, the largest auto parts providers out there. So when you're managing it, it's the portion that comes over that. And typically, the part that we're managing is to expedite. So it's not the normal truckload. It's not the deviations that happen. It's that last part when things fall apart, that's when these companies depend on us.

Okay. And then you made a comment that you're starting to prepare for next year's bid season. I know it's early, but what are you thinking about is should we be thinking about another year of low to mid-single-digit pricing increases. Do you think it could be better than that? Just any initial thoughts?

It's still very, very early, Scott, and like these are preliminary conversations with customers on planning. So I don't want to pin ourselves down on what we're expecting on the truckload market to do on a year-over-year basis. Right now, we understand that we're still in a soft rate environment.

And your next question comes from the line of David Zazula with Barclays.

You'd mentioned during the prepared remarks you're bringing on profitable last mile growth. Is there any way to talk about the profitability of kind of the existing book-to-business normal trends and then the incremental profitability of the new business you brought on and how we should expect to compare and monitor going forward?

Yes. David, this is Jamie. Yes, so the business we brought on, as Drew said, we're winning new customer relationships. We're also winning some white space and new markets from existing customers. The business that we won year-over-year, fourth quarter in a row with double-digit growth really came more in the area where we're running business out of a customer facility that's typically going to have a smaller contribution margin flow-through than when we win business in our hubs.

If you think about win in business in one of our hubs, you can think about a 30% to 40% flow-through from revenue down to EBITDA. When we run that business out of the customer hub That's going to be in the mid-teens. The profitability, the incremental profitability was in line with what we were expecting. The business is doing well. Customers like our service and we're really -- we actually went on a lot of good new markets.

Okay. Roger, -- so just -- so I understand the business of the customer facility is a lower capital type spend that is when you have over market profile.

Yes, yes, I'd probably frame it up more in a lower fixed cost type spend because we're operating out of their facilities. Therefore, we don't have our warehousing calls as part of the equation. But that's the primary difference between the flow-through.

Got it. And then, Jamie, you mentioned earlier the $100 million in tech spend. How are you measuring the results of that tech spend and kind of evaluating the flow-through of what's appropriate to spend going forward?

Yes. So we've got a very robust process internally. We have an internal investment committee, if you will. It's made up of our tech leadership, Drew, myself every project that comes through, we're looking at what's the ROIC, what's the strategic value to the customer service as it give us new capabilities, et cetera, et cetera. If you take an example, Drew mentioned the 30 to 50 basis points that we've gotten from the integration of the carrier procurement.

That's the beginning of what we think is a lot of upside in terms of our purchase trends. They took investment dollars to achieve that. But every project that we have in tech regardless of the line of business to apply to we're going through this model, strategic value, customer service value, return financial value. And we think we've got a lot of upside in organic investments around our tech spend, it's still ahead of us.

And your next question comes from the line of Ari Rosa with Citigroup.

I wanted to talk about the LTL versus TL market dynamics. I was surprised, Drew to hear you say that you expect LTL eventually to reach 50% of your load volume or correct me if I got that wrong, but just talk about what the value add is that you're bringing in the LTL market versus the TL market? And given that the TL market is so much bigger than the LTL market, like why would that not continue to just outpace, I guess? The LTL share?

Yes. So it's not an either/or for us. A, we want to be able to do both. And thus, again, if you go back and you look at the organic growth, just of truckload per Coyote acquisition for the last 5 years that included the downturn, that's still up more than 40%. So drilling truckload organically is still a part of our story and who we are. but LTL has a lot of room to grow. We love the stability that, that brings from a profitability perspective to us. And we also -- the ease of managing it on our RXO Connect platform for our customers -- it's highly automated.

There's not a lot of touch. But I want to be very clear, it is not an either/or, and we expect to grow both through a cycle.

Let me add one thing to that, on the shipper side, having been on the shipper side, a lot of my career -- this is an area that's hard to manage. It's often the smallest part of the transportation spend of a shipper. It's an easy piece of business to outsource. It's also been very beneficial to outsource. And one of the things we provide a shipper is we have the scale on a regional level to pick different LTL providers to provide that shipper that can create even a bigger scale than an individual shipper can get on their own.

So there's a lot of kind of operational and financial advantages to move into us, which is one of the reasons why we're winning big books of business at a time. I guess just a point of clarification. Do you think that you're adding more value for shippers in the LTL market than you are in terms of the service that you're offering in the truckload market? And I don't mean that specific as like a knock on RX. It's just is there more opportunity to add value to shippers and LTL brokerage than there is in TL brokerage?

No. Because remember, Ari, these are coming to us because of our truckload relationships and the value that we were adding on the truckload side. If we were not adding value on the truckload side, we would not be getting these opportunities within LTL. That's how they started. So I mean, again, through a cycle, we will organically grow both truckload and LTL above the market.

Okay. Understood. And then just for my second question, I wanted to ask about expectations for I noticed in the slides, you mentioned the buyback authorization. I know it hasn't really been tapped, but just wanted to get your thoughts on, is that a good use of cash right now given the cash conversion that you're seeing and kind of the expectations to continue to generate cash and the level of interest internally on deploying that.

Yes. So the buyback we've had it in place a couple of years it has been since day 1 kind of 1 of our key pillars of capital allocation. First and foremost, organic growth. strategic M&A as it becomes available, and we think it's a good strategic move and then, of course, the buyback capital allocation to kind of the return to shareholder. As we think about the buyback, we certainly think there's good value in our stock. We're always looking at that relative to the market conditions overall.

And our balance sheet is something that we pay a lot of attention to, to your point, I had a really strong cash flow quarter. We expect another strong cash flow quarter in Q3. As we think about that balance sheet, though, if you go all the way back to our time and spin, we talked about a leverage ratio of 1x to 2x. We're at that 2.1x. We feel good about that right now in the market cycle. So that buyback decision is always going to be taken in context of how -- where are we with our balance sheet. And so it's something we're watching very closely, but those 3 pillars are our key allocation priorities, and they continue to be where we're focused.

And your next question comes from the line of Jason Seidl with TD Cowen.

Drew, Jamie, Jared. I wanted to flip back a little bit to sort of your gross profit per load commentary. How much of the improvement that you saw on the truckload side in 2Q and then your forecasting improvement is due to sort of your carrier migration and your unified pricing data set that we saw move over earlier in

Yes. I'd say it's a combination of 2 things, Jason. You've got the pricing strategy that we've talked about. You've seen that begin to kick in. You're also seeing the cost of purchase trends, we'll quantify each of those individuals. But think Jared made this point earlier. If you look back to history, Q2 to Q3 as an example, we typically would see gross profit per load being down materially, we could see gross margin percentage being down. as we go from Q2 to Q3, we see both of those up, gross profit plowed up slightly. We see kind of a stable gross margin percentage -- both of those are different than we've seen in the last 2 or 3 years.

So we believe that you're seeing both the pricing strategy and our procuring transportation better begin to kick into the P&L.

That makes sense. For my follow-up, I wanted to hop over to managed trans since we haven't talked much about it. You guys mentioned that the pipeline continues to expand a bit. Maybe you can dive a little bit deeper in there and talk about that pipeline and where you see the opportunities coming from?

For maintenance Trans, the pipeline is up sequentially. Right now, we've got a bunch of deals that we think are making decisions over the next 6 months with managed trans typically, they are longer sales cycles. So sometimes those do get pushed out a little bit. For us right now, when you look at how we built managed trans, a lot of it was built off of automotive oil and gas and industrial manufacturing.

One of the things that we've done a really good job at over the last couple of years is building a pipeline that is stronger on the food and beverage side, stronger on the CPG side, stronger on the technology and electronics side. So building diversification in the verticals that we're serving in the managed trans is something that we're focused on as we go forward.

And your last question comes from the line of Jordan Alliger with Goldman Sachs.

I know you generally, freight conditions remain soft. But I'm just sort of curious, are there pockets that have developed in the spot market at all where there's signs of life? And then sort of following on that, to get the true inflection in gross profit per load, let's say, do you need that spot market to be favorable?

We do not need the spot market to be favorable in terms of how well we buy transportation versus market. That's what you saw as one organization now buying 30 to 50 basis points better than what we were doing previous acquisition. So we do not need it for that to see the true inflection of course, you need spot loads. When you look at what spots do, typically, those are higher gross profit per load. And you see that around whenever tender rejections get up and stay over that 10% mark.

So for us, we've got some things that are idiosyncratic in our favor as far as how well we can perform in terms of gross profit per load. But the market -- if the market inflects it impacts the whole industry, and you've seen what we can do there before whenever we posted double-digit EBITDA margins during that time period.

And just in the spot market, in general, you would say it's fairly nonexistent?

I think when you look at large enterprise customers, routing that compliance is holding up very well. If you think about the SMB market, that is largely spot. Those aren't typically contract moves. They're spots on a one-off basis. But rounding odds for large enterprise customers is holding up right now. And so for us, our job is to go in there and make sure that we are leveraging where we have the strongest capacity where we can provide the best service and where we can make a fair margin at.

Thank you and that is all the time we have for questions. I would like to turn it back to Mr. Wilkerson for closing remarks.

Thank you, Ludy. RXO delivered strong results in the second quarter. We're starting to see the benefits from our unified carrier operations, and we're purchasing transportation more effectively than we did before the integration with a lot of runway for future improvements. Despite tighter market conditions, we increased truckload gross profit per load by 7% sequentially, an impressive result.

Brokerage volume grew by 1% year-over-year and then last mile, [indiscernible] stopped by double digits for the fourth consecutive quarter. Our cash performance was strong with 58% adjusted free cash flow conversion. We also added cash to our balance sheet. We remain focused on taking profitable market share, and we're well positioned to deliver increased earnings power and free cash flow over the long term and across market cycles. Thank you all for joining today.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.