Q4 2022 RXO Inc Earnings Call
Speaker 2: The.
Speaker 3: Welcome to the RXO Q4 2022 earnings conference call and webcast. My name is Michelle 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 the federal security laws, which will be considered by the company's
Speaker 4: section of the company's website for additional important information regarding forward-looking statements and disclosures and reconciliation of the non- GAAP financial measures that the company target.
Speaker 5: day in Charlotte, our Chief Financial Officer, Jamie Harris, and Chief Strategy Officer, Jared Weissau.
Speaker 6: Our first quarterly report as a standalone company was a strong one, despite the challenging macroeconomic environment.
Speaker 7: We reported adjusted EBINAH of $64 million.
Speaker 8: profitable volume growth in brokerage, despite a muted peak season.
Speaker 9: Our complimentary services, including last mile and man-ass transportation, also perform well.
Speaker 10: Overall, our gross margin remains strong at 19.6% up 250 basis points year-to-year.
Speaker 11: Our tech-enabled brokerage business continued to significantly outperform the industry, take share, and grow volume profitably.
Speaker 12: We set a new volume record in the fourth quarter.
Speaker 13: Broker's volume was up 4% year-over-year in the fourth quarter of 2022.
Speaker 14: For the year, we grew brokerage volume about 12%.
Speaker 15: We are proud of our sustained volume growth.
Speaker 16: Since the fourth quarter of 2020, RXO's brokerage volume has increased by 27%. And since 2019, our BOCAs volume has increased by 56%.
Speaker 17: We are focused on continuing this momentum and we are confident that we will deliver.
Speaker 18: This is profitable growth.
Speaker 19: In the fourth quarter, Broker's gross margin was 17.9%.
Speaker 20: an increase of 290 basis points year over year.
Speaker 21: Many of our complimentary services also perform well.
Speaker 22: Our Manus Transportation Pipeline is especially strong right now, and the business won several contracts with large new customers.
Speaker 23: In a volatile market, large shippers are more likely to outsource their transportation departments to RXO. And when they do, they stay with us for years to come.
Speaker 24: Additionally, last mile performance in the quarter was strong despite the difficulties facing the retail and e-commerce sectors.
Speaker 25: December 2022 was our strongest December in terms of stops since 2019.
Speaker 26: In freight forwarding, ocean and air rates have declined, as expected.
Speaker 27: We have done a good job of diversifying this business, and domestic offerings now comprise approximately 50% of freight forwarding's profitability.
Speaker 28: These domestic services provide synergy spent to other parts of our business.
Speaker 29: RXO's business model is capable of generating significant free cash flow.
Speaker 30: Our XO's business model is capable of generating significant free cash flow and our balance sheet remains strong.
Speaker 31: Jamie will talk more about that in a few minutes.
Speaker 32: We have a playbook for every stage of the market.
At this point in the cycle, we're focused on taking market share while maintaining our best in class profitability.
Our contract volume is growing, the rates are declining.
Additionally, there are limited opportunities in the spot market and these dynamics are putting pressure on the gross margin per load in the first half of the year.
But this is my favorite part of the cycle.
RXO is positioned to win as customers consolidate their carriers.
They are choosing RXO because of our track record of delivering results for our customers.
our best-in-class technology, and our massive capacity.
This positions as well for when the market inflects.
Jair will discuss the market cycle in more detail.
Our financial performance was underpinned by our winning sales strategy and best in class technology.
Our sales team continue to expand business with long-standing customers while onboarding new blue chip companies.
New customers are coming to us at an impressive rate, and our sales pipeline is stronger than it has been in several years.
RXO bid on about 70% more broker-driven year over year in the fourth quarter driven by annual bid.
Existing customers continue to grow with us.
For the full year, the number of brokerage customers who generated over $1 million of revenue with us increased by 14% versus prior year.
The number of customers generating more than $1 million of revenue has increased by 66% over the last two years.
Our customers see value in our unique portfolio of services.
In 2022, about 62% of revenue came from customers that utilize more than one of our services. Customers also choose RITO because of our best in class technology.
In the fourth quarter, 87% of our loads were created or covered digitally, the most ever for us.
The ARCHO DRAWBAP has been downloaded more than 120,000 times.
representing 45% growth year of year.
We will continue to invest in our technology.
to push for even more adoption.
Relative to the market conditions, we are performing well as a standalone company and have significant volume and bid momentum heading into 2023.
I'm pleased with how smoothly our new leaders are integrating with those that have been with RX-O for years.
We've assembled some of the best minds in the business.
A strong combination of season leaders, best-wing class operators, and cutting-edge technologists.
We have a great company culture which combines the experience of an industry leader with the energy and entrepreneurial spirit of a startup.
We're proud of what we were able to accomplish in the fourth quarter. And while we're executing well in a volatile macro environment,
We're also planning for a variety of scenarios.
We're also planning for a variety of scenarios. Our business thrives during volatile times.
We have the playbook, the technology, and the people to outperform the industry, and I'm confident that we will grow a brokerage volume again on a year-of-year basis in the first quarter. Our January volume supports our confidence.
Arcos' January brokerage volume grew year-to-year and accelerated when compared to the fourth quarter of 2022 volume growth rate.
RXO remains strongly positioned for long-term growth and we are on track to meet the long-term targets we set at Investor Day last year.
And now Jamie will cover the quarter. Jamie?
Now, Jamie will cover the quarter. Jamie? Thank you, Drew, and good morning to everyone.
In our first quarter as a standalone company, we generated $1.1 billion in revenue compared to $1.3 billion in the fourth quarter of 2021.
Profibility remains strong with a 19.6% gross margin of 250 basis points year-over-year.
Our adjusted EBITDA was $64 million in the quarter compared to $77 million in the fourth quarter of 2021.
Our adjusted EBITDA margin was 5.7%, down 10 basis points from the fourth quarter of 2021.
We are very pleased with these results given the overall economic environment. The estimated earnings for the quarter was 28 cents per share.
Our results were driven by another quarter of profitable market share gains in brokerage.
as well as good results in our last mile and our managed transportation service offerings.
Importantly, we continue to outperform the industry.
Despite a muted peak season, we grew brokerage volume by 4% year over year and 6.5% sequentially.
We are pleased to report that we set a new volume record in the fourth quarter. From a profitability standpoint, brokerage results were again best in class with brokerage gross margins of 290 basis points year over year.
Below the line, our interest expense for the quarter was $5 million. Our adjusted effective tax rate was 21.5% in the quarter.
lower than our expectations, driven by discrete non-recuring tax items.
Regarding cash, we continue to have a strong balance sheet and we had strong cash collections in the quarter.
As I will discuss with Cass today, I would like to refer you to slide 10 of the investor deck for reference.
We ended the quarter with $98 million of cash.
This is consistent with our internal expectations as we had non-recurring cash outflows of $27 million post-spin which was completed on November 1.
$21 million of the cash outflows were related to the spinoff, including items such as rebranding costs, banking and financing costs, and tech-related capex.
The remaining $6 million of cash outflows were to repay the final portion of money received in a prior year related to the CARES Act.
Taking these unusual items into account, our ending cash balance would have been $125 million.
This translates into a free cash flow, post spin of $25 million, which was very strong.
This represents a more than 60% conversion of VIVA DAW to free cash flow.
Prospectively, we expect our EBITDA to free cash flow conversion to continue to be strong and we expect to grow our cash balance sequentially.
We anticipate approximately 10 to $15 million of stand related and restructuring calls in 2023.
weighted more heavily in the first half of the year.
Approximately $10 million of these costs are expected to be cash outflows.
A available capital remains strong with approximately $600 million in liquidity, including our $500 million of revolver, which remains undrawn, and our December 31 cash balance.
Our net leverage at quarter end was 1.2 times adjusted EVA die, which remained at the low end of our stated target range of 1 to 2 times.
Regarding 2023 modeling assumptions.
We expect depreciation and amortization in a range of $70 to $75 million.
interest expense between $33 and $35 million, and an adjusted effective tax rate of approximately 25%.
You should also model an average deluded share count of approximately 120 main shares.
Overall, we are pleased with our financial and operating results as well as our balance sheet position.
Now, I'd like to turn it over to our key strategy officer, Jerry Weissfeld, who taught more about her long-term outlook.
Thanks Jamie and good morning everyone. It's a pleasure to be with you on our first earnings call post bid.
Thanks Jamie, and good morning everyone. It's a pleasure to be with you on our first earnings call post-spit. I'd like to start with the structural profitability of our business.
We have gained market share with best-in-class volume growth enabled by our technology.
Importantly, we have done this profitably, more than doubling our adjusted EBITDA since 2019.
We often get asked about our current gross profit preload relative to historical levels.
Within our brokerage business, our Q4 gross profit per load was roughly in line with our three-year average. The diversity of our business helped us outperform the quarter. While our retail and ecommerce volumes declined as expected, our Q4 gross profit per load was roughly in line with our three-year average.
volumes in automotive, home and building materials.
professional services, and healthcare all grew solidly on a year-on-year basis. Our technology also helped us outperform and optimize our profitability in contracts and spot mix.
This quarter we again had a favorable contract mix.
with contractual volume representing 75% of our business in Q4, up 200 basis points sequentially, and 600 basis points when compared to the fourth quarter of 2021. Our technology is also fueling our continued market share gains.
In Q4, 87% of our loads were created or covered digitally. This was the result of continued adoption of our technology in addition to a platform capability within ORXO Connect that was not previously captured by this measure. We expect the percentage of loads created or covered digitally to grow sequentially into the first quarter.
The AHRICSLAR drive-up has been downloaded more than 920,000 times, up 45% year over year.
Average weekly users increased 30% year over year in Q4. Registered carriers increased 42% year over year. And importantly, 7-day carrier retention was a strong 74%.
Looking into Q1, we are cognizant of the broader macroeconomic environment and where we are in the freight cycle.
Looking into Q1, we are cognizant of the broader macroeconomic environment and where we are in the freight cycle. I wanted to provide some perspective.
Historically, at this stage of the cycle, we've seen quarters represent anywhere between high single digit and low 20% of full year adjusted EBITDA. We still expect our brokerage business to continue with our performance in Q1 and grow volume again on a year-over-year basis. We have a strong sales pipeline and our non-retail verticals are growing year-over-year.
This volume growth will be mitigated by a continued reduction in gross profit per load, but a position that's nicely for when the cycle inflects. I thought it would also be helpful to provide some puts and takes for the year.
Our corporate business exit 22 with significant momentum and we feel confident that 2023 will be another year of volume out performance supported by the strong January volumes that you referred to earlier.
Additionally, some of our customers are telling us that significant retail destocking that occurred in 2022 could lead to restocking in the second half of 2023.
However, similar to Q1 dynamics, gross profit per load in 2023 will moderate when compared to 2022 as the cost of purchased transportation stabilizes and lower contract rates come into effect.
It is important to note that even though our gross profit per load is moderating, we are still operating at best in class profitability levels.
We have a playbook for every cycle, and RxO is in a strong position to gain market share profitably.
That brings me to our five-year outlook, which calls for $500 million of VPETDOT in midpoint in 2027, an approximate 60% increase for the last 12 months.
We remain confident in our five-year outlook. This guidance not only contemplates an uncertain macro environment, but it also embeds a moderation of gross profit per load through 2027.
It assumes modest EBITDA margin expansion with increased employee productivity. And incremental growth embedded in our guidance is 100% organic.
ARXO's Asset Light business model and its highly variable cost structure provide us with significant free cash flow generation capabilities.
Prospectively, we are confident that we will continue to achieve a strong free cash flow conversion relative to EBITDA and adjusted net income. Our priority is to use excess free cash flow to grow our business organically. It's important to note that within brokerage, 100% of our growth over the last six years has been organic. For more information, visit EBITDA.org
We intend to stay within our one to two times net leverage target, and we are currently operating at the low end of that range, providing us with flexibility to deploy our balance sheet effectively.
To summarize, we have taken share profitably. We operate in a $750 billion market with plenty of room to grow.
We plan to generate meaningful free cash flow and our strong balance sheet provides us with flexibility to deploy our capital effectively.
We have a small share of an enormous market, a proven team, and a winning strategy, and a long runway for profitable growth. With that, I'll turn it over to the operator for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch tone phone.
You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the ProLink process, please press the star followed by the two.
If you are on a speaker phone, please flip the hands up before pressing any keys. We ask that you please limit yourself to one question and one follow-up.
Our first question comes from Stephanie Moore of Jeffries. Please go ahead.
Thank you. I did morning. Thank you. Congrats on a nice quarter.
Thank you, Stephanie.
I wanted to touch on just the volume out performance clearly quite strong in the fourth quarter, just continuing into the first quarter. Also, I think what stood out to me was just the increase in bid opportunities despite the softer market in the fourth quarter. So maybe you could talk a little bit about...
You know, some of the volume wins that you're seeing, you know, really, you know, what you've seen in terms of some large contract wins that might be driving this outperformance or if you could kind of pinpoint any other major drivers for the strong results. Thank you.
Yeah, absolutely. Thank you for the question, Stephanie. This is Drew. When you look at our volume outperformance in the market, we've got great relationships with our customers.
Our top customers have been with us for 16 years on average. They come back to us year after year and they continue to grow with us because we provide great service. We create solutions for them that contribute to their supply chain efficiency and their transportation budget. And we've got the best technology in the market that helps them decide things like
What day of the week they ship something, what mode of transportation they should use. We've even helped customers to start where they should place warehouses as far as to efficiently route their transportation. So when you look at why customers are choosing us, it's because of the service that we offer, it's because of the capacity that we bring, it's because of the technology.
When you look at in the fourth quarter, our bid revenue was up 70% on a year-over-year basis. And that's even with revenue per load coming down, and we did that with 30% more customer count. So we've got great momentum on the sales side, and we're positioning ourselves well when the market influx.
Thank you. And then just a second question for me. On share repurchases, just looking at the slide and the repayment of the CARES Act, which I didn't realize was something that our general account for, would that preclude you from being able to do share repurchases until that's fully paid? THE AN Options Agreement is now death in the end.
commentary there would be helpful. Thank you. No, that would not prevent us from doing that. And this is the final piece of the CARES Act. It was the payroll deferment that happened a couple years ago, so we're totally done with that. But it should not require—prevent us from doing anything there.
Got it. Thanks so much. Thank you. The next question comes from Ken Hoekster of BMA. Please go ahead.
He good morning and I Congrats on the first public quarter.
Drew, I guess maybe you could talk a little bit more on Stephanie's question on the bid season. How do you, maybe, can you quantify or talk about how we should think about volume gains into the year is it's still too early to talk about that you obviously are confident on volumes being positive for the first quarter. Is there any insight there after? And when you say 87% creator covered digitally, can you pinpoint what is fully digital start to finish so we can understand?
how much of it is just fully on the system. Yeah, so, Ken, when you just look at the overall macro environment that we're in, it's still a top macro economic environment, so we're proud of the fact that we're going to be able to grow volumes again in the first quarter, as you look towards the back half of the year. Some of what we're hearing from
What is idiosyncratic to our business is the pipeline and the sales momentum that we have in the quarter. So for that, that's why I'm positive on when the market and flex. We positioned ourselves very, very well. This market that we're in right now really separates the haves from the have-nots. And what I mean by that is customers are consolidating the number of cares that they're working with.
for our customers, so we're excited on that. The second part of your question is, we are at 87% created or covered digitally. That's what we feel is the most important metric. The created and covered is something that we continue to gain adoption of, and it's a significant portion and continuing to grow, but not a number that we're disclosing at this point. We thank you so much.
per load. Should we read that as using pricing to win those volumes to outpace the market? Or I just want to understand the message we should read through that in terms of winning that picture.
Absolutely not. We priced in line with the market and we filled because of our technology, because of our pricing algorithms, we are able to operate at best in class gross profit percentages, what you saw in the fourth quarter. We operated at 18% gross profit percentage in broker futures actually up.
290 basis points on a year-over-year basis. So for us, we've priced business to be able to go and take market share, but to do it I appreciate the time and insight. Thank you, Kim.
Thank you. The next question comes from Scott Group of Wolf Research. Please go ahead.
Thank you. The next question comes from Scott Group of Wolf Research. Please go ahead. Okay, thanks. Good morning.
Chad any any color on you talked about gross profit per load sort of near historical averages how much would it have to decline to get to historical froth once you know I assume you get there sort of around the bottom of the cycle when spot rates
start moving up. And then you made some comments about one queue, EBITDA, can be high single to 20% of a full year EBITDA. And should we think about that as a comment relative to sort of the 300 or so million EBITDA you did last year or?
How should we, what's the percentage of what I guess we're not really sure how you're thinking about fully read that down? Sure. Good morning Scott. Thanks for the question. So with respect to your second question, I'll take that first. It's the first quarter as a public company and we wanted to give you some additional color of current cycle dynamics. We thought it would be helpful and instructive to give you context based on historical results. Just active.
with respect to my comment that we're currently operating in Q4 at a gross profit preload in line with our three-year historical average. I just wanted to give you that, as a sense, as it relates to the fact that ultimately, we have seen our gross profit preload moderate, wanted to give you context of where we're punching at relative to our three years. On a go-forward basis, as Drew mentioned in the prior question,
from our customers that there's the potential for restocking in the second half, and we'll see how that plays out.
Okay, and then just on your commentary on January volumes, you know, it strikes me that most companies have had probably better than expected or maybe better than feared January commentary. What just, your perspective is this?
Are we seeing the signs of the market thought? Is this just we had some favorable weather? Any thoughts on this better trend in January ? Yeah, January was a strong month for us. Whenever we look at it on a year-to-year basis, and like Jared said in his comments, or we actually grew that.
faster on a year of year basis than what we grew volume and the fourth quarter on a year of year basis. And for us, you know, it's more of any of us in credit to us and where we're at in the relationships that we've got with our customers. We expect our Q1 volume to be an outperformance in the industry again, and we expect to be able to go out and take market share. Right now, we're at the point in cycle where we are positioning ourselves for the point of inflation. And then this is what separates carriers.
center of much good morning. I just want to circle back to orders covered digitally. Could you give any of the covered or created digitally? Could you give us a feel for maybe mix of how much is is is is is shipper side and how much is driver side. Covered just within that. I know you're on the close it fully, but any any sense.
Give us a sense of how that metric works now as opposed to maybe a few years ago and what type of trajectory you expect there. Alright thanks.
Yeah, I'll start off and I'll let Jared take the second portion of your question. When you look at the created ore covered, we have made a lot of inroads on the customer side. It is a greater percentage on the customer side for where we're at in the cycle. We still have a little bit of room to go on the customer side. And on the carrier side, as you're working with these smaller owner operators or small trucking companies.
We've got a lot of dreams face to be able to continue to go out there and drop adoption in the business. And on, hey, it's got the morning on your second question. With respect to brokerage productivity, it did improve in Q4 relative to Q3 from a brokerage standpoint. So we're very, very proud of that. What we're anchored to and what we're focused on is as we look at our long-term guide of 2027 to $500 million of EBITDA at the midpoint, about 60% higher from current levels.
That's going to continue to yield increased productivity going forward. So we're certainly looking forward to executing on that. I think it's also important to realize that within our brokerage business, we're staff for capacity. When we look at the ability for our ability to respond to a dynamic environment, we can respond to 10 to 15 percent upside in volumes if we need to.
Thanks guys, appreciate that. For my follow up, I'm going to switch it over to last mile. Obviously with peak season, that was a meaningful part of the mix. Just curious, you know, how you're seeing pricing trending there. I would imagine you have an opportunity. Let's fight out.
Just that and takeaways from this peak season and how that's going to carry through to how you approach the business in 23, thanks. Yeah, first, Scott, there really wasn't much of a peak season. And so that's why we're so proud of the performance of what we had in last mile, and having our best December since pre-COVID times. And so that's why we're so proud of that.
When you look at who we are in Last Mile, we're the leader in the space. We have been for a very long time. When customers are doing business with a national footprint, they want to talk to us because we've got facilities that put us within 125 miles of 90% of the U.S. population.
So for us and last fall we got a lot of opportunity to continue to be able to grow and grow with large customers.
Your second part of your question on the pricing, that's an opportunity for us as we head into 2023. We're in some of those bid negotiations right now, and we think that that should be a tailwind. As we're the leader in the space, we've got great service. We want to be compensated fairly according to the services that we provide.
The second part of your question on the pricing, that's an opportunity for us as we head into 2023. We're in some of those bid negotiations right now, and we think that that should be a tailwind. As we're the leader in the space, we've got great service. We wanna be compensated fairly according to the services that we provide. Great, thanks guys, I'll turn it over. We'll be back in just a few more paragraphs in the first quarter.
Thank you. Thank you. The next question comes from Tom Wojtowicz of UBS. Please go ahead.
Yeah, good morning. I wanted to ask you a bit about revenue per load. I'm thinking about the comment that you were 75% contractual loads in 4Q, but you still saw a pretty big decline in revenue per load, something on the order of 25%.
So how do I think about revenue per load as you look at 2023? Do you think that as the bid season goes through and you have contracts reprised that there's further step down that's meaningful in 2Q3Q or would we think about your revenue per load more being driven by spot rates that maybe as you see spot market kind of bottom out say in 1Q.
that your revenue per load might stabilize more quickly. Yeah, thanks for the question Tom. When you look at our performance in the fourth order, we're proud of our performance in the fourth order and especially if having a gross profit percentage of 18% in brokers. In regards to the revenue per load declining, when you look at that, there was three reasons for it.
And the first is spot volume and spot rates are down. They're at a low. You look at contract pricing, we talked about this in the last quarter. And I told you last quarter that we expected contract pricing on a full year 2023 basis to be at the midpoint somewhere down around 10%. We're still holding to that number.
And then the third thing is length of haul. We have to be able to shift with our customers. We've done a great job of answering our customers' demand, and we saw our length of haul reduced on a year-over-year basis in the fourth quarter. So, but I guess in terms of the forward look, how would be, do you have any thoughts on when revenue per load might bottom for you? Is it?
QQ, you think you stabilized or should we think about contracts shifting down that maybe you fall further in as you look in second half?
Yeah Tom, you know we didn't call the top or the bottom in the previous market. We're not going to call it in this one. We're confident that we'll be able to go out and take share and outperform the industry overall and you know the point to anchor to is for a full year we expect contract pricing to be down roughly 10% on a year-over-year basis.
Okay yeah fair enough. Second question would just be on headcount. Obviously you guys have nice momentum on volume growth and 4Q continuing in January . Are you adding headcount this year just to support that growth? You know kind of how are you thinking about the resource you know versus volume in 23? Thank you.
The biggest thing that we look at for headcount, as Jared said, is being able to be staffed for growth. And we continue to be staffed to where we feel like we could grow volume 15 to 20 percent overnight if we have to. And those are good conversations to be able to have with your customers to talk about having the capacity to grow with them as they grow their business. So, that's what we're going to do.
For us, we're looking out to be able to continue to staff up and gain efficiencies within our employee based through technology, but we want to say staff for group.
Okay, great. Thank you. Thank you. Thank you. The next question comes from Allison Poliniak of Wells Fargo. Please go ahead.
Hi, good morning. I'm going to ask about the carrier retention. You talked about the seven-day being in sort of that mid-70s range. Is there any color you can give us as we expand out, maybe that timeframe, three to six months, what that trend's been? Has it been above or below that? Just try and understand if there's been any shift there. Thanks.
It's roughly in line with that with that Allison and you know for us that's an important base because whenever you're talking about smaller carriers coming back to do business with you.
They're coming back to do business with you within a week. That tells you that a lot of times their next load is coming from RXO Connect. And RXO Connect is an easy system for them to be able to use. It's something where as an owner-operator you can pick up your cell phone, you can book a load, you can negotiate. You can do all that with little to no human interaction.
While getting access to our RXO Extra program, which gives carriers discounts on things like fuel, tires, roadside maintenance, the things that matter most in a trucker's life, we built the system around that. So that's why you see such a high retention rate, and it pays dividends for us. Great. And I want to go back to sort of that cash, the capital deployment question earlier.
You know, leverage is at that lower end. I know there's some cash outflows in the first half, but as you think about maybe revisiting, can you maybe talk about how you're thinking through sort of those capital deployment objectives as we sort of get towards the end of 23 here? Thanks. Yeah, Alice, this is Jamie. Thanks for that question. We had a really good strong cash quarter. We entered the year with a really good balance sheet, as you know.
Capital deployment, organic growth is our top priority. As Jared mentioned, last six years, 100% of our growth is organic. So we're going to be focused on that. We still have a lot of good opportunities there. If you think about our overall framework, M&A is not a top priority. We will look at it. If things came along that made a strategic sense, we would take a look.
If you look at capital returns in the form of a buyback or dividend, something that's also in our framework that we're going to look at as the market dictates, but organic is our number one priority right now. We're going to have a really good strong quarter with cash, and so we're going to look at all of those things. But I think the key word I'd leave you with is we've got a lot of options.
capital returns in form of a buyback or dividend, something that's also in our framework, but we're going to look at as the market dictates, but organic is our number one priority right now. We're going to have a really good strong quarter with cash, and so we're going to look at all of those things. But I think the key word I'll leave you with is we've got a lot of options. Perfect. Thank you.
Thank you. The next question comes from Brian Osenbeck of JP Morgan. Please go ahead. Hey, good morning. Thanks for taking the question. Drew, I know you don't want to talk about going to the bottom of the market or the top of the matter, but can you just give us some context in terms of your carrier base, and
is a pretty choppy December , January , strong December , weaker January . What are you seeing in terms of people turning in their fees? What's the retention look like? Are you still adding more to that base? How do you feel about the support you got there on the supply side as you go into the 23? Yeah, carriers, we actually added carriers again in the fourth quarter to our.
Okay. Good to know. So I think the other comment that you mentioned on integrating some, I guess, people who are maybe from the outside may have been reading to mention to that, but can just talk about hiring from
The technology side, there's been some account reductions across the space. Are you picking up any talent that you find interesting and attractive on that front? Are you able to kind of do what you have internally and not looking to add more talent above the arm of your considered normal? We're always looking to add great talent to the organization.
where we sit and what technology is able to provide into our business and look forward to continue the growth. We can pick up talent off the street to after that we'll absolutely do it. I guess do you think with some of the cool backs and more digital natives out there do you find this time?
better than usual to pick up some of that talent. We have it seeing a huge number come over to us from the digital folks. And again, we'll talk to folks who are out there in the industry. And if it's something that we feel like the act is added to our organization, we'll do it.
but I'm very confident in the technology team that we've got. They've delivered amazing results over the last decade, and if I'm putting money behind somebody, I'm putting money behind them.
Thank you. Thank you.
Okay, thank you, Drew. Appreciate it.
Appreciate it. Thank you.
Thank you. The next question comes from Jack Atkins of Stevens. Please go ahead.
Okay, great. Good morning and thank you for taking my questions. So I guess I'd like to maybe dig into the volume growth a bit, just kind of circling back to that. So when you think about the components describing that 4% volume growth, obviously significant outperformance versus the rest of the market. But are you seeing any changes to mode mix there? For example, is that all full truckload driving that or...
Are you seeing increased drayage volume, increased LTL volume? Just trying to square the lower revenue per load with strong revenue margins and higher volume. Those things typically don't all move in that same direction.
Yeah, we're looking at all modes of transportation to be able to continue to grow out. We built the business off of truckload, drive, and freight. That's something that continued to grow for us in the fourth quarter. And LTL and other modes also grew as well. Okay, okay. So it's a combination of not just full truckload there.
I just want to kind of clear that up and then I guess you know I guess Jamie if you could maybe kind of talk a little bit about Some of the expense buckets in 2023. You know, I appreciate the interest Guidance and the depreciation guidance, but you know as we sort of you know think about OPEX
you know, below net revenue. You know, any sort of commentary there around, you know, inflationary costs, pressures, or just any sort of kind of commentary there to kind of help us square up, you know, the OPEX side as we sort of think about 2023. That'd be helpful. Yes, if you look below the line there on OPEX specifically, you know, we've got a half a million
views in the company of how we can make decisions quicker, how we can make easier decisions, which ultimately will translate into cost efficiencies and cost savings. In terms of directly guidance on an OPEX, we can't really provide that. What we can say is the market...
from an inflationary standpoint, we're seeing good, able to negotiate with vendors well. We're seeing our overall cost structure stay in line with where we want it to be for the year.
The, you know, back to the interest, you know, one thing I do want to point out is it is coming in lower than what we provided as modeling tools back in at investor day. So we're down. I think we modeled about $37 million back in investor day. We came in in 32 to 34 range and as you mentioned depreciation something we also see down year-to-year.
Okay maybe just real quick follow up on that if we think about like the the SG and A-line item you know what portion of that would you say is variable or would flow with the revenue?
Yes, we hadn't given that specifics before. I mean, if you think about the cost of transportation is almost all variable. So if you take that, we've mentioned 87 percent of our total cost structure was variable. So if you go down to the SDNA line, by definition, it's going to be less variable than the 87. You know, I think...
depending on what the top line looks like, you could see that the end and the 50 to 65% range at times.
Okay, now that's super helpful. Thank you very much for the time. Thank you. Our next question comes from Jordan Alliger of Goldman Sachs. Please go ahead.
Yeah, hi morning just curious. Can you talk a little bit about contract negotiation timing like where are you in the process as it just started you 30% through you know and then following on that I think you mentioned 10% contract rate. You're kind of what you're looking at. I think that was for the full year. I'm just curious have you hit that point yet? Where is that something you still think is yet to come as you?
discuss the contracts. Thanks. Yeah, as far as where we're at in the bid cycle, the heaviest part of the bid cycle for us is starting at the midpoint in Q4 and going through Q1. So we're wrapping that up, coming out of it. When you look at the 10% comment on contract, that was looking at
full year, looking at the full year. And so for that, we're implementing those rates right now coming out of bid season. Okay, so that's sort of about the ballpark that you're seeing during this heavy period that you just talked about, just to make sure I understand.
That's correct.
All right, and then just a quick follow-up. The transaction and integration costs, you know, the 40 million in the fourth quarter and I think you said 10 to 15 million of restructuring in 2023. Like what is, can you give some sense for what the components are of these costs? Thanks.
Yeah, so the things like rebranding, and I'm going to focus on what happened post-span that impacted the $21 million record out in our cash walk. You know rebranding calls where we want to move things from the logo of XBO to the new RXO logo.
We had some cash costs of banking and financing fees that fell into that. We had some CapEx that we had to spend to start up a standalone business. You think about mainly in tech type areas. We had some other general restructuring. If you go prior to the spend, there's a lot of duplicate costs that we were running while we were pulling the spend together.
If we look forward into 23, as you would expect, those numbers come down quite substantially. We mentioned in the comments 10 to 15 million dollars of restructure and our stand related calls into 23. I would think about 10 million plus from minus to that being cash expenditure.
versus just the P&L expenditure. And I think those will be predominantly in the first half of the year, more so than the second. But you will see those come down materially throughout the year. Thank you.
Thank you. Our last question comes from Bosco Majors of SuscoHenna. Please go ahead.
Thanks for taking my questions. Just to follow up with one more on the op-x side. Are there any?
Duplicate or excess calls from transition agreements where you're really kind of running DUP systems and that sort of thing. Just any calls that come out naturally as those agreements age over the next year or two that we can think about on the call side.
Yeah, thanks for the question. This is Jamie. As we transitioned through the SPIN, we had a number of transition service agreements. Most of those agreements had very short lives attached to them. In fact, we have ended a number of those agreements already. We actually had some agreements that were what we call reverse transition service agreements where we were providing services.
I think if you look into 23, a number of those have already been completed. We have a large amount that will be rolling off in the first quarter as we complete this first year of this first quarter of being separate. As we look forward to the balance of 23, that's not a material impact on our call structure really one way or the other.
I think the good news about it is this business as a standalone was already very self-contained and so setting it up as a new publicly traded standalone company is going very well. And we're very pleased with both the call side as well as the performance side.
That's great news and thank you for the color there and.
You know, maybe to cap it off here, you understand the desire not to give a full year outlook, given the uncertainty around here as far as EBITDA goes. But, you know, can you just, if we were to anchor to call it the streets, 235 million of annual EBITDA, can you walk us through the components of how you would get to free cash, from there and what that could look like if EBITDA were to come in roughly in that range and...
Maybe even higher level. I mean I understand you're kind of getting your sea legs as a public company here But when we get to a more stable environment any thoughts on how you want to guide whether it will be annually Go forward a quarter not really at all. We've just seen a lot of different approaches from different brokerage related companies. I'd love to hear
how you'd like to come at it once the market stabilizes and you've got more experience as a public company. Thank you. Yes, so this is Jamie. I'll take the first part of that and let Jared take the second. If you think about free cash flow conversion, use EBITDA as a reference point or a starting point.
We will have an annual debt service. We've modeled that out in the range of $32 to $34 million for the year. We will have CAPEX. We've talked about that over the long term, about 1% of our revenues. There will be years where that exceeds that. But on average, I think you can see about 1% over the long term.
You'll see a cash tax payment obviously, but also you'll see a working capital. What we've talked about is the way we think about working capital is we grow a dollar revenue about 8% of that dollar growth is a use of working capital. So it's an investment in growth.
Conversely, if revenues were to decline, it's about a $8% decline. If you go back to 4th quarter, we converted an excess of 60% of our EBITDA into free cash which we were very pleased with. And we look forward...
You can use the 50-60% conversion rate in a time of stable revenue. In yesterday we talked about a 40-plus times of growth and so we see those to hold and true in the future.
Hey, I'm Baskin, Ben Stratt. Good morning. With respect to your second question on guidance, we're not going to be providing formal guidance when we think about the company going forward, but we will certainly give you more of a color when appropriate like we did today.
All right, thank you both.
Thank you both. Thank you.
Thank you. We have reached the end of our question and answer session. I'll hand the floor back to Drew Wilkerson for closing remarks. Thank you, Michelle. I'm pleased with RXO's performance and our first quarterly report as a standalone company. We continue to gain share and grow brokerage volumes year over year and quarter over quarter.
We also drove increased adoption of our technology with customers and carriers and are effectively navigating through a very challenging macro environment.
We have the right team, the technology, and the playbook in place to outperform the market.
The playbook, which at this point in the cycle is focused on growing volume, will put us in a position of strength as the freight cycle turns. Our management team remains focused on continuing to deliver results for our share owners, customers, carriers, and employees. Thank you all for your time today. Have a great rest of the week and I look forward to...
The that.