Street Calls of the Week
On Wednesday, 10 September 2025, RXO Inc (NYSE:RXO) presented at Morgan Stanley’s 13th Annual Laguna Conference, offering a mixed strategic outlook amid a soft freight market. While RXO’s integration of Coyote has shown promising results, market conditions have pressured profitability. The company remains optimistic about leveraging technology to drive future growth and improve margins.
Key Takeaways
- RXO’s LTL business has grown to 32% of overall volume, with a target of exceeding 50%.
- The Coyote acquisition integration is nearly complete, with strong customer retention.
- The company is investing over $100 million annually in technology to enhance operations.
- RXO aims for mid-single-digit EBITDA margins in the long term.
- The automotive sector poses challenges, with significant volume declines.
Financial Results
- Market Conditions:
- The freight market remains soft, with some tightness around holidays.
- Produce season in Southern and West Coast states had notable effects.
- Revenue Breakdown:
- Industrial manufacturing, retail e-commerce, and food and beverage each contribute 20-25%.
- Automotive accounts for a high single-digit percentage of truckload brokerage volume.
- LTL Growth:
- LTL volume has increased to 32%, up from 10% at the time of spin-off.
- The company aims to increase this to 50% or higher.
- Synergies from Coyote Acquisition:
- $70 million in cash synergies anticipated.
- $60 million in operating expenses and $10 million in capital expenditures.
Operational Updates
- Coyote Integration:
- 99 of the top 100 pre-acquisition customers remain with RXO.
- Technology integration is ahead of schedule, with carrier bookings consolidated on one platform.
- Technology Investments:
- Over $100 million spent annually on technology.
- 97% of loads are created or covered digitally on the legacy RXO side.
- Productivity Improvements:
- Loads per employee per day have increased by over 45% over two years.
- Automotive Sector Challenges:
- Managed Transportation business volume is down 40%.
- Expedite gross margin dollars have decreased significantly.
Future Outlook
- Peak Season Expectations:
- A muted peak season is anticipated.
- LTL Growth:
- Continued growth in LTL volume is expected.
- Cost Reductions:
- $10 million in incremental savings expected from decommissioning Bazooka.
- EBITDA Margins:
- Targeting mid-single-digit margins of 5-6% in the long term.
- Plans to achieve EBITDA growth regardless of market conditions by 2026.
- Technology Enhancements:
- Productivity gains expected from AI and Agencik AI.
Q&A Highlights
- Normalized Earnings:
- Long-term EBITDA margins are expected to normalize at 5-6%.
- Comparison to Competitors:
- RXO’s business mix and modality mix influence net operating margin.
- Automotive challenges present a $40 million annual headwind.
- LTL Business Growth:
- Plans to expand the LTL business with minimal headcount increases.
For those interested in deeper insights, the full transcript of the conference call is available.
Full transcript - Morgan Stanley’s 13th Annual Laguna Conference:
Unidentified speaker, Interviewer: Great. So let’s resume with transportation content. And next up, we have RXO and very happy to welcome back to Laguna, CEO Drew Volkerson and Chief Strategy Officer, Jared Weiswold. Gentlemen, thanks so much for coming back to Laguna. Thanks Thanks for
Drew Volkerson, CEO, RXO: having us. Always great to be here.
Unidentified speaker, Interviewer: Absolutely. So maybe you can start out by just running through what you’re seeing out there. Obviously, lot of focus on the 2Q to 3Q transition, whether we saw any pull forward into whether there’s been a normal seasonality into 3Q or not? Data is a little bit all over the place. So kind
Jared Weiswold, Chief Strategy Officer, RXO: of what do you see from your perspective? Yes.
Drew Volkerson, CEO, RXO: I mean, I think it starts with the as we all know, we’re still in a soft freight market. And 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, right? But there’s also been times in the market when it has 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.
Unidentified speaker, Interviewer: 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 than the consumer side of the business. So what’s it like for you guys? And kind of what is that difference you’re seeing out there?
Jared Weiswold, Chief Strategy Officer, RXO: 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 three 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 twelve, twenty four months, where it’s been different trends across each vertical, right, where industrial manufacturing, I think all eyes are on the industrial PMI. And yes,
Drew Volkerson, CEO, RXO: we saw a little bit of
Jared Weiswold, Chief Strategy Officer, RXO: 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 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
Unidentified speaker, Interviewer: the freight market. Got it. Understood. So from that perspective, do you think like what happens next week in a sort of 25, 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 bit too little?
Jared Weiswold, Chief Strategy Officer, RXO: First, I mean, if there’s a not to hypothesize on what the Fed or will or will not do next week, right? But if there’s a jumbo size cut next week and it’s 50 basis points, could that help stimulate demand? Let’s see what happens for the long end of the curve. And does that continue to help mortgage rates, which have been falling? Mean, as you think about 2026, to the extent that you see that continued trend in mortgage rates, which are on ten-, eleven 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.
Unidentified speaker, Interviewer: Drew, I think you said on the 2Q call that you’re seeing or 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? Is that optimism continuing or are they like we don’t know yet?
Drew Volkerson, CEO, RXO: Clearly, they 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, 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 furiously 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
Jared Weiswold, Chief Strategy Officer, RXO: a strong word, but I
Drew Volkerson, CEO, RXO: 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.
Unidentified speaker, Interviewer: 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 mixed messages in the parcel guys sound a little bit bearish. The PL guys are saying we are seeing some project business. So from your vantage point, what are you seeing?
Drew Volkerson, CEO, RXO: I think it’s still too soon to call right now. And 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 that they’re going to have a strong peak season.
Jared Weiswold, Chief Strategy Officer, RXO: I have
Drew Volkerson, CEO, RXO: 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 that, I say I would expect another muted peak season going into this year. But also, there is still a lot to be done and a lot of conversations we have with customers on it.
Unidentified speaker, Interviewer: Got it. Are you able to sense see any patterns between the guys that sound good and the guys that sound
Drew Volkerson, CEO, RXO: Are you saying the ones who are more positive? More positive on Yes. Think if you go down a level to some of your not your highest event on cost retailers, some of them are more positive going forward. Okay. Got it.
Unidentified speaker, Interviewer: 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? Do you maintain that going forward? And kind of what are the catalysts we can look forward to?
Drew Volkerson, CEO, RXO: Well, if you go back to 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 three or four 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 platform, It is a big time suck compared to truckload, which is your bigger size. All but 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.
Unidentified speaker, Interviewer: Got it. Just to follow-up there, you mentioned RX is connecting a bit line. You said kind of quasi Managed Trans. Is this a tech
Drew Volkerson, CEO, RXO: Managed Trans Lite. Managed Trans Managed Trans Lite.
Unidentified speaker, Interviewer: So is this a quasi tech solution that is driving the share towards you and that you maybe have a better connectivity than the the LTL carriers themselves do that bring the business to you? Or is it just the fact where you are in their supply chain?
Drew Volkerson, CEO, RXO: 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 three LTL loads. I could have done that in a truckload. 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.
Unidentified speaker, Interviewer: And just kind of on that point, just maybe an unfair question, just heads up, but lot of the
Drew Volkerson, CEO, RXO: Thank you. Appreciate the heads up. A lot of
Unidentified speaker, Interviewer: the TLs have historically kind of almost blame brokers for putting pressure on pricing And is there a risk that LTL pricing might also and honestly, you guys bring transparency to pricing, right? So it’s a good thing for everybody. But do you think there’s a
Jared Weiswold, Chief Strategy Officer, RXO: risk that LTL pricing is going pressure?
Drew Volkerson, CEO, RXO: 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, of getting people home off of a backlog, 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 two years coming out of the pandemic in 2023 and 2024, 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. So I think whenever you look at it, like to me, that was the driver of a lot of this.
Jared Weiswold, Chief Strategy Officer, RXO: Got it. Sorry to hear sir.
Unidentified speaker, Interviewer: 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, 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?
Drew Volkerson, CEO, RXO: I’m almost at twenty years of doing this. I’m coming up on that this year. And like 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 eleven here, but on the East Coast time, it’s two right now. If you call a load where I’m from picking up in Charlotte, North Carolina at two an asset based carrier capacity is largely spoken for. 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 brokers get up into the 30s. And I think longer term, you’ll see it get up into the 40s.
Unidentified speaker, Interviewer: So Drew, just to kind of wrap up 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? And 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 looked like it actually beat seasonality, right?
So how do we think about that sequential walk on the gross margin?
Jared Weiswold, Chief Strategy Officer, RXO: Sure. So we gave a wide range for that very reason in terms of when you think about the bridge from Q2 to Q3, 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 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, etcetera, 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 three point five 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 lows, 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.
Drew Volkerson, CEO, RXO: Got it.
Unidentified speaker, Interviewer: 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
Drew Volkerson, CEO, RXO: 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 term 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’ve 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 eight months, we were able to have all of carriers being able to book out of one platform. As we wrap up Q3 and 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’d 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’s 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 are 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 two 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.
That’s next week, by the way.
Unidentified speaker, Interviewer: That’s true. But so so how much of that gap is, to your point, idiosyncratic to CryoDi given how that business was run versus the cycle?
Drew Volkerson, CEO, RXO: Well, I think there’s definitely a cycle component. We knew we were buying at or near the bottom of the cycle. 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 five, six weeks, like we were able to improve how well we were 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.
Unidentified speaker, Interviewer: Understood. And just to follow-up on your point that you said the customer migration will be complete by end of 3Q, early 4Q. Got you. 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 after that? Or is it what does that look like?
Drew Volkerson, CEO, RXO: 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 a carrier up for booking their first load. Legacy, RxO reps who have been on the platform for ten years, we’re sitting beside Legacy Coyote reps, showing them the shortcuts and how to use the system 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 on boarder, 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.
Unidentified speaker, Interviewer: 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 think
Jared Weiswold, Chief Strategy Officer, RXO: there’s more opportunity there? Well, I
Drew Volkerson, CEO, RXO: think I saw Jared, he was foaming at the mouth to speak right there, but I’m going jump in real quick. I think, no, it’s not we’re not stopping at 70,000,000 right? $70,000,000 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%. And I think it’s one of our levers as you start looking into what’s going to happen in 2026, this idiosyncratic best, that’s one of the levers that we’ll talk about.
Jared Weiswold, Chief Strategy Officer, RXO: Got it. I think you nailed it in terms of me thumbing its amount, 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 $70,000,000 more than $70,000,000 in terms of cash synergies, 60,000,000 of operating expenses, 10,000,000 of CapEx. You break that down, CapEx comes down materially 2026 versus 2025, about $20,000,000 in aggregate from a company standpoint and going to about $50,000,000 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 $50,000,000 of operating expenses or $12,500,000 per quarter another $10,000,000 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 $10,000,000 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 brokered 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 $100,000,000 per year in technology.
How do we think about we’re not going to be the company that talks about what that AI roadmap looks like externally because ultimately a lot of it is proprietary, but how do we think about leveraging Agencik AI? How do we think about leveraging automation? How do we leverage that incremental, 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 two year stack.
So I said a lot there, but I think that 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.
Unidentified speaker, Interviewer: I want get a tech in a sec, 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?
Jared Weiswold, Chief Strategy Officer, RXO: So when you think about the $60,000,000 of operating expense synergies that we talked about, dollars 50,000,000 is embedded within the Q2 results that we delivered with another $10,000,000 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, think we are that’s one of the levers that we have that’s idiosyncratic to RCO heading into 2026. I think 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
Unidentified speaker, Interviewer: the market environment next year? Understood. So let’s talk about tech, right, because that’s always been very close to you guys who are going to back from 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?
How do you think about how you put that out there?
Jared Weiswold, Chief Strategy Officer, RXO: I mean we’ve taken tech seriously since day one, right? I mean that’s part of, to your point, the DNA of this company is built on technology. So we spend north of $100,000,000 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 three 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 our 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 type 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 our RxoConnect, which is or RxoDrive, 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 algorithms on the other side. So leveraging machine learning techniques from a pricing algorithm standpoint has been at the heart of 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 AgenTek 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 sixteen 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 Agencik AI to think about can this business run at structurally higher operating margins long term, I think that’s definitely the case.
Unidentified speaker, Interviewer: 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 could that spread looks like by leveraging AI?
Drew Volkerson, CEO, RXO: 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 two years, our loads per employee per day are up over 45%. That’s attributed to what’s going on, on the technology side. That’s not 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 five years.
Unidentified speaker, Interviewer: Got it. When you see the tools that many of your peers are using, 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 is that something that you guys have had with you already? Do you see out there?
You have always been the leader, if not one of the leaders on the tech side. Do you think out there has cool tools that you’d like to use? Look,
Drew Volkerson, CEO, RXO: I don’t know that we have seen them. Right? Like, I I I don’t think that they’re lining up to give us tech demos of their their their system for competitors. We’re not lining lining up to give them. But, mean, I think, you know, if you look at a company like Echo that was public at one point, Doug is a technologist himself without saying, and 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 one hundred 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 two years our productivity by 100%?
Jared Weiswold, Chief Strategy Officer, RXO: And
Drew Volkerson, CEO, RXO: 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 necessarily looking for what’s the flashiest thing or for the next thing. We’re looking at how do we 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 seven or eight minutes to build an order.
Unidentified speaker, Interviewer: Understood. Any questions from the audience?
Jared Weiswold, Chief Strategy Officer, RXO: Considering
Unidentified speaker, Audience Member: 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?
Jared Weiswold, Chief Strategy Officer, RXO: So when you think from a normalized earnings standpoint, right, this business at our scale is the number three provider in broker transportation holistically across the company between Managed Transportation, Last Mile and brokerage. We should be doing mid single digit type EBITDA margins, 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 upside? And that potentially. But I think that’s how we’re framing it.
And I think I would also think about 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 five 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 turned, 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 five year average, excluding the peaks of COVID. And when you get torque from gross profit per load, the incrementals can be as high 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 two things I would mention. One, purchase transportation benefits.
We feel very good in terms of 100 basis points of improvement on our PT spend as a combined organization and then the cost opportunities that we obviously just talked about.
Unidentified speaker, Interviewer: Got it. The risk of Jared, at the risk of potentially making you repeat the answer you just gave me, if I were to ask that same question 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 are other factors involved? Scale is part
Jared Weiswold, Chief Strategy Officer, RXO: of it, but I would also highlight two 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 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, four, five 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 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 the vertical mix, especially automotive. Got it.
Unidentified speaker, Interviewer: 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?
Drew Volkerson, CEO, RXO: Yes. So I think when you look at automotive, you have to remember that there’s four 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 is when there’s disruption in the market. So disruption in the market comes from first tender rejections off of one of the through the first three 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 the company rolling out a new product?
Or is the company behind on a product? Because they’re not going to chance that to one of the first three. 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 two years. We haven’t lost any, our and 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 brokers 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%. So like the impact on the P and 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 seven?
Or what if we don’t even get to that, we get to four? Like, the meaningfulness that that has to the P and L is very, very large.
Unidentified speaker, Interviewer: Got it. We shall remain on cycle watch and hopefully We are too. We will see them fork sometime soon. Drew, Jared, thanks so much for joining us. Thank you.
Jared Weiswold, Chief Strategy Officer, RXO: Thanks, Robert.
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