Q2 2023 RXO Inc Earnings Call

Welcome to our Q2 2023 earnings conference call and webcast. My name is Sylvia 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.

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 web site 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. Wilson you may begin.

Good morning, everyone. Thanks for joining today's earnings call.

Joining me today in Charlotte, our Chief Financial Officer, Jamie Harris, and Chief Strategy Officer, Jared Weisfeld.

I'm pleased with Orix those performance in the second quarter of 2023, despite the soft freight market.

Importantly, we accelerated our market share gains and achieve the goals, we laid out for you last quarter.

We continued to grow brokerage volume year over year, and we grew adjusted EBITDA sequentially.

In addition last mile is on track to grow EBITDA year over year for 2023.

Overall, our company wide gross margin remained strong 18.6%.

And our adjusted EBITDA margin was up sequentially.

Even though revenue declined quarter over quarter.

We continued to optimize our cost structure and invested to support our growth Jamie will discuss our efforts in more detail in a few minutes.

Our Q2 results were driven by another quarter of impressive year over year brokerage volume growth.

Strong brokerage profitability and improved results from last mile.

In brokerage, we continue to grow profitably significantly outperforming the industry.

Volume grew by 10% year over year, and we achieved gross margin of 15, 4%.

We set multiple brokerage volume records in the quarter, including New records for total volume quarterly loads per day and monthly loads per day during the month of June .

Year over year volume growth accelerated every month as the quarter progressed.

For the last few quarters, we've highlighted the strength of our sales pipeline with successfully converted to contract volume in the second quarter.

Contractual volume remained the most important driver of our brokerage growth.

Similar to last quarter managed transportation and L. P. L synergy loads also contributed to our growth.

Overall, Rx oats contractual volume grew 19% year over year.

Our contract business now represents 79% of our brokerage volume.

Bid momentum continued in the quarter with the number of bids up 23% year over year.

Now let me give you some color on what we're seeing within our brokerage customer verticals.

Our retail e-commerce volumes flip positive in the second quarter growing low single digits year over year.

You'll recall that our retail and e-commerce volumes declined by low single digits year over year in the first quarter.

This was the first quarter that retail and E. Commerce volumes grew year over year since Q3 of 'twenty to 'twenty two.

Our retail and e-commerce customers inventories are in a much better position than they have been in a long time.

Similar to last quarter, we also saw strength in the home furnishings building and technology verticals.

When the market is this saw many companies found it difficult to grow volume.

However, our XO continues to win.

Our customer relationships service technology and scale enable us to take share profitably.

Our customers are telling us that they continue to reduce the number of carriers, they're working with and our long history of creating value within their supply chain has them awarding more freight to our XO.

We're in an excellent position to receive spot loads and project freight when the market turns.

As an example of how we're performing for our customers.

In the second quarter, Alright, So one dels 2022 North America full truckload carrier of the year award for the second straight year.

Dell told us that our focus on partnership performance and flexibility enabled them to meet the challenges of peak demand in last year's disrupted supply chain.

We pride ourselves on the close relationships, we have with our customers and we strive to provide this level of performance for every customer.

And now I want to spend some time discussing the dynamics that impacted brokerage gross profit per load in the quarter.

We saw a significant tightening of capacity and a portion of the country as the quarter progressed.

Put it in perspective, the national load to truck ratio increased when compared to the first quarter of 2023.

There was an acute tightness in the space impacted by produce season.

The tightening of capacity increase our cost of purchase transportation in those states. However, there was no corresponding increase in our sell rate due to the lack of spot market.

Despite these dynamics, we still posted solid brokerage gross margin up 15.4% in the quarter driven by the efforts of our team and our technology.

<unk> will talk more about this in a few minutes.

Turning to the results within our complementary services gross margin expanded by 50 basis points sequentially a strong result.

Both year over year and quarter over quarter made us transportation significantly increase the number of synergy loads it provided to our truck brokerage business.

Our managed transportation pipeline continues to convert nicely as large shippers strategically choose rx owed to manage their transportation spend.

In the second quarter made us transportation on boarded a large new customer and secured several key wins that will be all boarded in early 2024.

And last mile EBITDA improved on a year over year basis as a result of the strategic pricing actions, we discussed last quarter.

Last mile second quarter EBITDA was the highest it's been since the second quarter of 2021.

We continue to expect to grow EBITDA within our last mile business year over year for full year 2023.

We're winning because of our scale our ability to design unique solutions for our customers and our superior customer service.

Our cutting edge technology continues to support our business results.

In the second quarter, 96% of our loads were created or cover digitally.

Looking ahead to the third quarter, we expect another quarter of year over year brokerage volume growth.

Our playbook remains the same.

ROE profitably provide best in class customer service supported by industry, leading technology and control costs, while making investments for the future.

During the quarter, we announced the expansion of three brokerage offices, Ann Arbor, Michigan, Columbia, South Carolina, and Kansas City, Missouri.

Now shifting to what we're seeing in the market.

Both our internal and market data suggests that we're approaching the bottom of this rate cycle.

The exact timing of the bottom and the pace of the recovery are subject to the broader macroeconomic environment.

We're closely watching industry specific leading indicators, including tender Jackson's load to truck ratios and carrier exits.

We're always getting feedback from our customers and we are monitoring broader economic data, including industrial production and consumer demand.

Jeremy will cover what we are seeing later in the call.

This isn't the first time, we've been through a market like this our leadership team has decades of experience operating in every kind of freight cycle.

We're optimizing our cost structure, leveraging technology and closely monitoring all the data to make the right decisions for the long term.

We're exactly where we need to be in this part of the freight cycle.

<unk> volume growth combined with our optimized cost structure will lead to significant earnings growth when the cycle in flex.

We expect the moves that we're making now will pay off for years to come.

With that I'll turn it over to Jamie.

Thank you drew and good morning to everyone.

Drew mentioned, we're executing well in what is a tough environment.

In the second quarter, we generated $1 billion in revenue.

<unk> $1.2 billion in the second quarter of 2022.

Profitability remains solid with gross margin of 18, 6% down.

Down 300 basis points year over year.

Our adjusted EBITDA was $38 million in the quarter compared to $101 million in the second quarter 2022.

And our adjusted EBITDA margin, 3.9% down 430 basis points in the prior year.

The declines in these metrics were primarily due to lower year over year freight rates.

The moderation in Brook could your gross margins and the incremental corporate costs of being a standalone public company.

It's important to note that Q2 2022 was the peak of the prior freight cycle and the highest EBITDA in our company's history, a tough comparison, we are cycling.

Combined operating expenses and SG&A were down 5% on a sequential basis.

This was a direct result of the cost actions, we took in the quarter and the variable component of our cost structure.

Despite the 5% sequential reduction in revenue.

Our margins improved by 20 basis points from the first quarter of 2023, driven by our strong execution and process engineering initiatives.

We continued to optimize our cost structure, which helped us hold the pricing pressure.

This positions us well to Josh Stanchion operating margin leverage when the cycle and flex our expand on this in more detail later.

Below the line our interest expense for the quarter was $8 million.

Adjusted diluted earnings per share for the quarter was eight.

You can find a bridge to adjusted EPS on slide eight of the earnings presentation.

Moving to our labs business.

We continued to outperform the brokerage industry.

We grew brokerage volume by 10% year over year.

Profitability in brokerage remained strong with gross margin of 15, 4%.

Complementary services gross margin was flat year over year and expanded by 50 basis points sequentially.

Our last mile pricing initiatives were the biggest driver.

Please turn to slide nine as we discuss cash flow.

Going forward, we will communicate our cash conversion on a six month view.

Which will normalize quarterly volatility.

We had a very very strong trailing six month cash flow conversion at 68%.

This exceeded the estimate that 50% that we shared with you last quarter due to earlier than expected collection of some accounts receivable.

We ended the quarter with $124 million of cash on the balance sheet.

Prospectively there are some second half cash considerations to highlight.

The earlier than expected collections in the second quarter were an approximate $15 million benefit.

Which will likely reverse in the third quarter.

In addition, there will be approximately $10 million of cash outflows associated with fully agreed legacy claims.

Regarding working capital we remain comfortable with an annual adjusted cash conversion rate between 40, and 60% of adjusted EBITDA over the long term across market cycles.

However, accelerated growth as the cycle turns will result in a usage of working capital in any given period.

We anticipate a use of working capital at a rate of approximately 7% to 9% of each incremental revenue dollar.

This can impact short term cash conversion dependent on the pace of recovery.

Moving to restructuring and spin related costs.

Last quarter, we estimated restructuring and spin related costs of approximately $35 million for the full year 2023.

$30 million breaks.

Cash outflows.

These estimates remain unchanged.

We took out additional costs in the quarter and achieved annualized run rate savings of approximately $7 million. These savings help us sort of some of the reduction in brokerage gross profit per load in the quarter.

We incurred approximately $1 million of restructuring charges to achieve the $7 million of savings and even better return relative to the first quarter's restructuring actions.

As we previously discussed we continue to anticipate restructuring and spin related charges to decrease in 2024.

We've now achieved year to date annualized run rate savings of approximately $27 million.

While the savings have been masked attract freight cycle dynamics and the reduction in brokerage gross profit per load.

We are preparing the company for significant operating leverage when the cycle turns.

Jeremy will expand on our growth algorithm in a few minutes.

As you can see on slide 10, our balance sheet remains strong with net leverage at quarter end at approximately one six times trailing 12 months adjusted EBITDA.

This is at the midpoint of our stated target range and slightly higher when compared to the first quarter as we lap last year's second quarter EBITDA.

We executed $2 million of share repurchases in the quarter.

As we discussed last quarter at a minimum we plan to repurchase enough shares to cover dilution from restricted stock grants on an annual basis.

Additionally, we'll continue to settle tax withholding obligations for the vesting of pre span our S E grants and cash.

This was a $2 million cash outflow in the second quarter, and a $9 million cash outflow for the six month period.

We estimate a cash outflow of approximately $15 million or RSC tax fatality in obligations in 2023.

You can find our 2023 modeling assumptions on slide 14 of the deck.

They remain unchanged and we continue to expect the following.

Capital expenditures between 60 and $65 million.

This includes $15 million of strategic investments in real estate to position us for additional growth in our brokerage business.

Capital expenditures tell an approximately 1% of revenue over the long term in line with our guidance at Investor Day.

Stock based compensation expense between 20 and $22 million.

Depreciation and amortization between 70 and $75 million.

Interest expense between 32, and $34 million and a net Justin effective tax rate of approximately 25%.

You should also model than average diluted share count of approximately 120 million shares.

Please note that this does not include any impact associated with potential share repurchases.

Overall, given the current state of the macro economy, and specifically the freight cycle, we're pleased with our execution.

Operating well has solid cash flow generation and a strong balance sheet.

Now I'd like to turn it over to our Chief strategy Officer, Jared Weisfeld, who will talk more about our outlook.

Thanks, Jamie and good morning, everyone.

We continue to outperform the market growing brokerage volume by 10% year over year with substantial market share gains enabled by our people and technology.

We've been investing in artificial intelligence for the last decade, our industry, leading pricing algorithms helped fueled brokerage gross margin of 15, 4% in the quarter despite softness in the freight cycle.

Our excess pricing suite of products is pink hundreds of thousands of times daily which allows us to benefit from best in class dynamic pricing.

I recently hosted an AI webcast with a few of our technology leaders to highlight this differentiated homegrown technology.

In the second quarter, 96% of our loads were created or cover digitally versus 80% in the second quarter of 2022.

Seven day carrier retention was a strong 78% in the quarter compared to 73% in the second quarter of 2022.

While carriers exited the market during the quarter, albeit at a slow rate our access platform continues to benefit from carrier adoption.

Q2 active network carriers increased by 2% sequentially and we grew weekly active users by 3% on a year on year basis.

This quarter, we were again in an enviable position with contractual volume representing 79% of our business up 200 basis points sequentially and up 600 basis points when compared to the second quarter of 2022.

On a two year stack contract volume growth was up 49% accelerating from 42% in the prior quarter.

As we approach the bottom of this rate cycle I wanted to review, how our contract and spot mix can shift during an upturn.

While we'll still haul the same contractual freight our best in class service to our contract customers will yield spot volume mini bids and special projects our.

Our spot mix can increase quickly on a sequential basis.

Revenue per load continues to be impacted by declining fuel prices increased El T. L synergy loads and length of haul which was down year over year as last year's port diversion volume did not reoccur.

When compared to the second quarter of 2022 revenue on a per mile basis declined at a rate less than revenue per load.

Given recent market developments I thought it would be helpful to give a bit more color on our monthly trends in the quarter and expand on our current view of the freight cycle.

Refer you to slides 11 through 13 of the presentation.

The national load to truck ratio moved higher as the quarter progressed capacity tightened significantly in certain states during the quarter and was particularly acute in states impacted by produce season.

As you can see on slide 11, this had a direct impact on our cost of purchase transportation with by rates moving up every month throughout the quarter. This is a long term positive development, but it does have the near term impact of moderating gross margin and our brokerage gross margin exited the quarter at approximately 14%.

Despite tightening market conditions Rx is still delivered strong brokerage gross margin of 15, 4% for the quarter.

We are very pleased with this margin performance at this point in the freight cycle.

Moving to slide 12, we're improving our cross cycle profitability, delivering higher highs and higher lows.

During the prior freight recession in 2019 Rx is adjusted EBITDA declined for four quarters by approximately 70% from peak to trough.

We're now four quarters past, our most recent peak, but <unk> adjusted EBITDA is approximately 3.5 times higher when compared to the second quarter of 2020, our volume in that same period is up by 77%.

Not only is our EBITDA significantly higher but our cost structure is more efficient and we're still making improvements while simultaneously investing in the business.

You can see the impact of that effort in our second quarter results EBITDA margin was up 20 basis points sequentially. Despite a 5% sequential reduction in revenue.

Putting this altogether, we are priming our model for significant operating leverage when the market and flex.

And I know all of you have questions about when we think that will be.

Our perspective is informed by internal and market data and we believe that we're approaching the bottom of this rate cycle.

National load to truck ratio has moved higher since our last earnings call and carrier exits are continuing albeit at a slow pace. Additionally.

Additionally, consumer data has been encouraging and both retail inventory positions and volumes have improved.

But while these are encouraging trends, we are still operating in a soft rate market and as drew mentioned the exact timing of the bottom and pace of the recovery are subject to the broader macroeconomic environment.

Let's now move to slide 13.

Our Q2 gross profit per load was roughly in line with Q1 2020, the lowest level in the last five years.

Note that this was partly impacted by the growth in L. T L synergy loads within our brokerage business.

Importantly, since Q1, 'twenty 'twenty, our brokerage volume has grown by approximately 70%.

Led by our core full truckload.

Expanding on this a bit more our exit rate gross profit per load was roughly in line with Q2 2017 levels by.

By Q4, 2017 gross profit per load had recovered by approximately 70%.

While we are not calling for this type of recovery I thought it was important to provide some historical context about how quickly the market can turn.

I talked earlier about making higher lows, while we're currently operating at a similar gross profit per load when compared to the Q2 2017.

Perfect gross margin during the month of June was 300 basis points higher.

This is a business that moves quickly and we believe that also has a best in class growth algorithm when the environment improves we expect a greater than 50% EBITDA contribution margin, providing a path to rapid earnings growth.

I'd now like to look forward and give you some more color on what we're expecting in the third quarter.

While we don't provide quarterly guidance I wanted to provide some puts and takes for our brokerage business given recent market developments.

We exited the quarter with incredible brokerage volume momentum our brokerage sales pipeline remains robust and is at its highest level since pre COVID-19.

The pipeline is up 118% and 132% on a two and three year stack, respectively. Despite a lower rate environment. This gives us confidence that we will again grow brokerage volume on a year over year basis in the third quarter.

However, the third quarter will be negatively impacted by the full run rate impact of the tighter market conditions that developed in the second quarter.

Turning to monthly trends July trends were similar to the month of June .

While gross profit per load has not yet recovered it did stabilize and was roughly flat in July when compared to June .

Additionally, there were two fewer business days in the month.

Encouragingly brokerage volumes grew again on a year over year basis in July and truckload revenue per load trends held flat versus June .

This is the first time truckload revenue per load has stabilized month over month since the first quarter of 2022.

There are a few ways the remainder of the quarter can play out for our brokerage gross margin and I'll summarize them for you.

Let's start with typical seasonality.

While we have not yet seen gross profit per load recover we typically see a seasonal gross profit per load improvement starting in August .

To the extent this occurs gross margin percentage for the quarter could be flat sequentially.

Secondly, let's discuss if theres no change in the current environment.

If the current environment continues with no gross profit per load recovery and only moderate capacity exits gross margin percentage will be down slightly when compared to the second quarter of 2023.

The last scenario is that there is a change in either supply or demand if capacity exit start to accelerate in a more meaningful manner or demand increases heading into back to school and peak season, Spotless would emerge an increase as a percentage of the mix. While this is a long term positive our near term gross margin percentage would moderate further in the scenario.

To summarize we're continuing to gain market share profitably with brokerage gross margins that are higher than previous cycles, we're optimizing our cost structure, while strategically investing in the business and have an algorithm to deliver rapid earnings growth.

We're improving cross cycle profitability, our asset light business model generates significant free cash flow and we're returning capital to shareholders.

We continue to believe that growth in free cash flow on a per share basis is a primary driver of long term value creation.

Put simply we just grew volumes by 10% with strong gross margins as we approach the bottom of the cycle imagine the possibilities when the freight cycle in flex with that I'll turn it over to the operator for Q&A.

Thank you Sir.

Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will then hear a three pronged acknowledging your request and if you would like to withdraw. Your question. Please press star followed by two and if Youre using a speakerphone you will need to lift the handset before pressing any keys. Please go ahead and press star one now.

If you have any questions.

And your first question will be from Stephanie Moore at Jefferies. Please go ahead.

Hi, good morning, Thank you.

Good morning, Stephanie.

So my first question.

People to contribute success to their supply chain and it allows them to make informed decisions on how they are going to move their transportation and then the last thing that I would highlight is Jared mentioned in in the in the opening comments is that we've got a team that has been here done this before knows and understands how to operate every part of the cycle.

Oh, great. Yeah, that's really helpful. And then just for a follow up I. Appreciate the color that you provided unplug your thing that's for that's far N.

[noise] July but was wondering if you could talk a little bit about you know maybe.

What do you know this high level, just remind us like normal seasonality is for revenue growth as well as scrubbed shop at for load and then the comment to the point, where you do see similar Chris pop up her load as June and July maybe just talk a little bit about why you think that's the cases the macro starting to turn or are you seeing some incremental volume because of disruption.

The space you know any additional color would be helpful. Thank you.

Yeah, absolutely. So when you look from June to July It was the first time in awhile, but we saw revenue per <unk> load stabilization. We also saw stabilization within our gross profit per load, it's still assault trucking environment out there, but some of the things that have us cautiously optimistic as we <unk>.

Forward or you're still seeing capacity exit the market.

You're starting to see tender rejections pick up for the first time in awhile and if you look at waterfall routing guards, you know three or four or five weeks ago. It wasn't getting past. The first carrier now you're seeing waterfall routing God's get past the first carrier for the first time in a wellness sit landing somewhere between two and five or where it is so that tells you that there's been a <unk>.

<unk> and capacity, it's not a big enough shipped to where it is created spot loads, which is ultimately when I believe the inflection will be so we've seen a chef, but not enough to take us out of a soft market. Overall your second part of your question as far as disruption in the industry.

Disruption in volatility typically is a good thing if you're a good strong broker and so obviously and the L. T. L. We've seen some orders pick up over the last couple of weeks and one thing that we're watching closely is if you're starting to see long awkward freight bleed over into the truckload network, we haven't seen that yet, but it's something that we do think is a.

Possibility over the coming weeks.

Great. Thank you so much.

Thank you.

Next question will be from Brandon Glinski at the Barclays. Please go ahead.

Yeah, Good morning, and thanks for taking my question do I guess this is more strategic in nature, but you know gross profit per load, obviously spike during the pandemic and we know all the disruption looking backwards, but I guess looking forward with more competition in the space and you guys are obviously done a good job going you know more and more digital.

<unk> <unk> is the value proposition structurally changed where like prior G. P per load is just not the right benchmark anymore.

That's not how we think about at random when you look at the industry. There there's been over 10000 brokers in the space for as long as I've been doing this so competition has always been there to me. This is a cyclical business and when you look at coming out of a low cycle when you're starting to see load the truck ratios shift and <unk>.

Typically a somewhere around six to one you'll see more spot loads and what you'll see happen. Then is our gross profit per load on our contractual business that will still serve will come down but the gross profit per load on the spot loads will go up.

Okay and can you extend on the sales is this expanding business with your current customers. Because I think you also had a set and the slides take me like average users on your platform only up maybe three per cent. So is this going deeper and bigger with the customers that you do have already.

Absolutely so whenever our customers are coming to us they they don't just come back and renew the business that we've got with them because we've got great service because we've got technology. This integrated within their platforms, they come back to us and they're giving us more afraid than what we were hauling for them before they trust us.

But we're also bringing on new customers make no mistake about it I mean this year, we brought on some new fortune 100 companies and we're excited about the pipeline up bringing on new customers. We've got a strong brand in the marketplace.

Alright, thank you.

Thank you Brian .

Next question will be from Kent at the Bank of America. Please go ahead.

Hey, great. Good morning, just wanted to kind of focus on that profitable growth commentary, which you highlight a couple of times.

I just wanted to understand the contrast, with EBITDA falling from 8% margins to 4% margins. It may be taken how we should think about that move in and then the inflection.

That you see coming and then a couple of comments on cash calls that you made there there was a 10 million dollar legacy claim it. It seemed like there are a couple of things going on like cash cash flow, maybe you can either your Jamie dig into that as well. Thanks.

Hey can good morning, it's Jarrett I'll start and then I'll hand, it over to Jamie in terms of EBITDA margin comparison, I think it's Jamie noted this and make sure that it gets really important to note that last year's Q2 EBITDA was the peak of the prior fried cycle and importantly was also the peak in the highest company EBITDA that are delivered in terms of where we are in the cycle. So it's really tough comparison.

In terms of strong profitability, 15.4% gross margins at this point in the Fray cycle, given where we are we're really proud of you know you've covered as for awhile. It's part of our DNA in terms of profitable growth, where we operated a 400 billion dollar market and we we gain share we're doing it profitably handed over to Jamie in terms of the cash considerations yeah. Thanks.

Good morning, Ken.

Cast.

Comment we had actually a really good chord Reagan's first half of the year with conversion you worry about 68%.

One of our call out as we had about $15 million roughly of collections of accounts receivable that came out earlier than anticipated and so that'll be you know apples to apples basis that'll reverse in the third quarter, so it'll be a little bit of Ah something to consider when you're building a model and then the second call out once we had about it we have about a 10 million dollar.

Outflow of cash for some legacy claim.

Claims that we've been we've settled everything ordinary course of business fully accrued that we mainly call. It out just because it is a an item that we want you to be able to modeling you cash flow.

Alright, so just that you're calling out just the 10 million on the the odd outside there were a couple of things you had mentioned there in terms of things that could affect cash coming up in the third quarter.

Yeah that does rattler, one and then just early.

Early collections of some receivables in late.

Reverse itself yeah, Okay, and then just.

Minor things you some new terms I haven't heard before cinergy loads and some things what is what what are those.

Yeah. So when you look at the the LPL loads that we talked about the the reason that we have seen growth and LPL over the last couple of quarters is because of our service and truckload. So these are customers who are doing business with us on the truckloads out and they're coming to us and say we want to continue to expand we want to look at other modes of transportation with Ya. So.

Synergy that we're getting off of our truckload is leading to growth within.

Other verticals for us when you look at LPL. Overall, you know these are highly automated loads on both covered and created and it's low low touch and this incremental margin for us as far as what we've done there on the L. T L side, but make no mistake about it our business is led by the truckload growth and.

Truckload growth led the quarter for us as well.

So then I guess on that are there any immediate reads given all the volunteer you mentioned kinda, you're starting to see that I mean, I would imagine just over the last three weeks, we would have seen such a massive shift on the L. T. Outside anything you can kind of highlight on the on the business shift in that part of the business.

Yeah, we've seen a slight picked up in our LPL loads again, we're close to all of our customers that are gonna call us as they are experiencing any kind of disruption in the market there'll be able to create a solution for for them. The biggest thing that I'm watching fork in is do you starting to see bleed over into the truckload market does that.

Create spot load just not something we've seen at this point, but if something were monitoring.

Great. Thanks for that time it that's appreciate it thank.

Thank you Kim.

Next question will be from Scott Schneberger Oppenheimer. Please go ahead.

Thank you very much good morning, I I guess I'll start off could you guys speak a little bit I understand you're not getting full guidance, but I. You know you gave some scenario analysis due to have third quarter may play just curious your visibility into back to school and and a holiday season and what.

You're seeing out there and and then just kind of as a fall one as your as your gaining share here, where where what are the end markets you'd say, where you're gaining share and is it is it small peers at large peers, just a sense of that thank you.

Yeah. So we haven't seen a notable change from June to July from what we're tracking as you start to look out farther than Q3, and you look into Q4.

Inventory levels are in a much better position than what they were at this point last year. The consumer health has been Brazilian as we've gone through the cycle. The biggest thing that we've got to be able to see what happens from a consumer demand perspective, and we don't have a forecast or read on how that's going to play out for Q4, yet at this point.

But one of the positive trends force in the third quarter as you did the second quarter as you did see retail on the commerce volumes picked up for the first time since the middle of last year. Your second question I think it was about like whereas the share gains coming from and it is coming from everywhere, it's not one specific <unk>.

Editor or what shape and size of a competitor is really about going to our customers, creating solutions looking at what fits in well with in our network that is going to create value within their supply chain and again one of our customers that we've got a long history with that we do business with they come back to us time and time again and they don't just come back and say, we want to renew what where do.

<unk> with you we want to grow so we're able to take share and we were able to do it at best in class margins.

Okay. Thanks to Jamie if I could just over you ask on a status report on your your cost savings initiatives, where are you waiting what's to come what type of of unique savings and spend we should we should anticipate.

<unk>.

Yeah. So we've had we've had a really good year in terms of being able to take cost out of the business today.

To date, we spent about $9 million <unk>.

Restructuring charges, we had one in this quarter eight in the first quarter, but that's yielded annualized about $27 million worth of run rate savings and we're really pleased with the kind of a three to one investment ratio and will you know we're going to continue to do if we can find those opportunities.

If you look at kind of wood anywhere in <unk>.

What we did we after span we really took up can I call. It a white sheet of paper and we looked at org structure, we look vendor.

We had since applicative roles, we had some to play vendors that we were able to consolidate we're able to cut some costs. There we looked at facilities to make sure that we can steal service the customer with excellent been maybe put two facilities together sub lettuce in space.

Terms of the anywhere from.

From Ah overall process engineering, yeah, we want to become known internally and externally as a as a continuous improvement company, that's always looking to optimize cost and.

And you know what we're gonna do is you're really began to drive how can we get quicker better make quicker decisions.

The other day and I think it's evident in sequentially. If you look at our margins up about 20 basis points sequentially. Despite having revenue down I think you're seeing those cost savings begin to play out in the P&L and so we got a lot to do there, but the big thing to take away as we wanted to be a continuous improvement.

And we're constantly finding ways to improve our cost structure. So when this marketing flags, we have opportunity to bring in some really.

Good saving I'm really good earnings to the bottom line.

Excellent. Thank you very much.

Thank you next question will be from Ravi Shankar Morgan Stanley . Please go ahead.

Thanks morning, everyone drew and team I think you were the first management team to call. The end of the Downcycled on your previous conference call and hopefully the first management team to call at the beginning of the Upcycling at this conference call. So <unk>. Thank you for your service and be I think <unk> walk through of the different scenarios.

For the back off of the are really helpful. But just trying to get a sense of are you guys looking for a <unk>.

You shape or a V shaped recovery here, because I think it looks like there's a little bit of a delay in the handoff between the downside when the upcycle do you think this kind of limbo period last for awhile or do you think you can imagine be getting <unk> back to school and holiday season, and we should see a pretty nice recovery among those scenarios.

Yeah, absolutely. Thank you Robert.

I do want to clarify we didn't call for the influx and you've got it at this point, we said we're approaching the bottom in the shape of the recovering and the timing of the recovery is still to be determined and I think some of that is going to be terminal by overall consumer demand. We're seeing some positive trends whenever you think about carriers exiting whenever you start thinking about tender rejections.

Growing up load the truck ratio, increasing your going farther down the rounding up those are positive signs and you have to have those before inflection, but the shape and timing of the recovery I think is still too early to call.

And Robbie it's it's Jared and I think you know and your last note you made a really good point in terms of as the back half of the year plays out what we're looking to us to help with the consumer right. So as we noted in the script that helped US consumer we're seeing some encouraging signs in terms of the resiliency, we want to see how that plays out but as drew also noted inventories are in a much better position for a retail any commerce customer.

So to the extent that we looked at.

We'll look into the back half of the year to the extent that continues it can be really interesting situation. As you think about as you think about the back half.

Garner that's really helpful and maybe it's a follow up and I'm just looking at the the tightening of the routing guide do you have a sense of how much of that is the mind improvement versus going to supply eggs, even the market and kind of made me talking about supply I'll just need to think about asset based trucking supply, but are you also seeing something similar on the brokerage side, where mom-and-pop brokers simply.

And compete in an AI arms race or a machine learning arms race, and so that that part of the the date of the brokerage business also mean consolidate.

The biggest thing that we've seen as if people who have led with right on a waterfall routing job. They may not be taking as much of the tenders is what they were taking and you know.

A few months earlier, so that that hasn't held up whether it's been broker or asset base base carriers. So so for US you know if you see the market tightened up more you're going to see more pressure that Robyn.

Very good thanks.

Thank you Robin.

Thank you next question will be from Scott's group had the Wolf research. Please go ahead.

Hey, Thanks, good morning, So Jared I understand some of the scenarios you laid out for some I'm. Just curious your take is it you think it's more likely that EBITDA is higher or lower.

Third quarter of her second quarter or <unk> second half first first half wherever you think you've got better visibility.

Hey, Scott appreciate the question so as as you know we don't we don't issue formal where donation quarterly guidance I wanted to lay out some scenarios in terms of how we think about Q3 is gonna play out I think the first thing to consider is certainly as we talked about the market tightening that progressed as of Q2 in terms of month on month changes and buy rates that of course, you have the full run rate impact for marks.

Nations that developed into Q2 into Q3. So then as you think about how the quarter progresses from a July standpoint, as we mentioned, we're seeing some encouraging try and trends in terms of gross profit per load stabilization, we're seeing revenue per load on truckload flat relative to the month of June that's the first time that has occurred since Q1.

Of last year. So is certainly an encouraging development and then to your point as you think about the remainder of the quarter I think it's still too early to call. We're seeing some encouraging signs as drew mentioned with respect to tend to projections and talking about the the waterfall underground and guide so I think thats, we'll see how the Porter plays out but I think those three scenarios are how we're looking at the rest of the.

Quarter in terms of whether or not we received the typical seasonality uplift that we see in August in terms of gross profit flowed whether or not the environment remains the same or whether or not carrier.

Carriers continue to accelerate in terms of the exit the market and then whether or not we got the staging for peak season.

Okay, and then when I think about net operating margins.

Last year, they were about 20% this year.

Idling closer to 10 as you.

You think about the next up cycle.

What.

Is there something that that we can do to get higher ultimate net operating margins.

The next up cycle to just get better underlying profitability.

Now from from our standpoint, we continue to look at free cash flow on a per share basis as our primary as our primary Northstar from from our perspective, I think Jamie hit on this a little bit right. We are we're priming the cost structure for significant operating leverage when the cycle and flex we expand EBITDA margins by by 20 basis points sequential.

Despite a 500 basis point decline in.

Sequential revenue and when you think about what we're doing I gave some color on the commentary in terms of how to think about contribution margin right. So when we think at this point in the cycle when the cycle and flex we're gonna have greater than 50 per cent EBITDA contribution margin, which gives us confidence for rapid earnings growth when the cycle influx.

Okay. Thank you guys.

Thanks Scott.

Next question will be from Allison.

Wells Fargo. Please go ahead.

Hi, good morning.

Oh.

Volume growth.

<unk> commentary is there.

And all that in terms of what's coming from new customers person is increasing your share of violent with existing customers than any differential and margin contribution you know if it's coming from one way or the other things.

Yeah, no absolutely the majority of us coming from existing customers, because typically whenever you're bringing on a new customer you're not starting out with huge chunks of business, you're showing your capabilities, you're showing the much our technology can do and you continue to move the ball forward over time. So the majority of it is coming from existing customers and if it's lanes that.

We have strong capacity and their power lines for us across the country as easy to integrate.

The margins run similar to how the overall businesses performing a.

A newer lane in somewhere somewhere that we're building out of power line than the margins improve over time.

Got it and then you have business meetings and manage transportation understanding that those winnings of having to wait in one ear ear lines of business day.

Is there a way to understand sorry about that contribution can be in 24 hours. So we have an algorithm there. Thanks.

If you look right now 62% of our revenue comes from customers, who do business with more than one line of business and we think that that can continue to improve we're just scratching the surface surface with what we're able to do from the integrations that we've got across our customers.

Okay.

It's Derrick Brooks, we secured several key wins in the quarter to your appointment just to emphasize that that we feel comfortable are going to be on board in early 2024 and growth of frayed under management within our managed transportation business is a real strategic priority for the organization. So when we think about the ability we talked about in the quarter.

Sequential and year on year cinergy loads from our manage transportation business. They were up significantly so as we think about the confidence level, we have with the business momentum and managed transportation on those new wins, we think that's going to be a really exciting opportunity for us next year.

Perfect. That's helpful. Thank you.

Thank you next question will be from.

At U B S. Please go ahead.

[noise] Yeah. Good morning, I wanted to see if I could ask a clarification.

<unk> on the low growth comment so when you talk about 10% low growth is that truckload growth or is that including L. T. L growth. If it does include L. T L. What did the truckload volume growth look like.

That is our overall load count growth, Tom was 10% and the majority of that was R. Okay came from the truckloads are we haven't broken it out but the more that we grow LPL or something that we should consider.

So you were pretty close to 10% on truckload volume grows to where I I guess the reason I ask is just obviously L till loads revenue per loads a lot lower and so you can kind of skews a low gross number if you if you see a meaningful change in the L. T L loads.

Hey, Thomas Jared Yeah, now so to juries point, a majority of that growth that we talked about in the quarter is coming from our core full truckload and I think it's important to emphasize also when we think about the LPL loads that we're winning why we're winning them right where winning them because we're servicing that contractual freight on full truckload. So well so we talked about <unk> syndrome.

Loads in the quarter.

Contributing as a percentage.

Contributing to growth.

To give you comfort or to give you some more perspective LTM mixing the quarter was relatively unchanged relative to the prior quarter and to juries point, a majority of our volume growth in the quarter was certainly attributable to our core photo upload.

Okay Alright, great.

When I look at one of the big challenges, obviously revenue per load down pretty significantly year over year and down sequentially quite a bit as well.

How do we used to you know I mean, the market's gonna do what it's gonna do right. How do we think about responsiveness of revenue per load for <unk>. So when spot rates move up because you're you know you're at a very high contractual level, but you know I think broker contracts can be pretty flexible. So how do you think about your Rev.

New per load responsiveness, one spot rates move up is that you know a couple of quarter lag do we have to wait for the next season to really see the kind of responsiveness and improvement in your your revenue per load just trying to understand that you know that time lag between the two.

The market can turn quick Tom So I don't think that you know what I mean.

I don't I don't think anybody's got a crystal ball on when it's gonna turn it but it it.

Flatbed, a very fast rate and whenever you're starting to see spot loads those will be at a higher revenue furloughed now how much higher there will be other revenue per load will depend on how tight capacity comes during that time.

But if you're running 79 per cent of loads or contract.

Like maybe I should ask it a little bit more fine fine point on it how quickly would your contract revenue per load respond to changing spot as you know our contracts. All one year are there is there a mixed where you can get to some a lot quicker than that.

It varies Tommy.

A lot of our contracts are one one year, but you'll also whenever a market turns like that you're starting to see more many beds and you're starting to see more project for a come out. So you can see your contract you can see your contract revenue per load go up during that same time and some of US just a function of carrier.

Give back within the customer and encouragingly in the month of July we talked about full truckload revenue per load flat sequentially relative to June . So we are starting to see some encouraging trends and that was the first time that remain flat since since.

Q1 of last year.

Okay.

Sounds good thanks for the time.

Thank you.

Next question will be from Jack Atkins at Stevens. Please go ahead.

Great. Thanks, and good morning, I guess just may be following up on Tom's question. If I go back to last quarter's call I I think the comedy you guys made with <unk> excuse will change that mix of contract versus spot by a thousand basis points relatively quickly when the market began to turn I guess, how do ya.

And he is that still do you feel still feel like that's the case and be you know if that is how do you square the.

Maybe taking market share and keeping market share with the reputation will kind of challenges of going back to customers and and you know walking back your rate commitments.

Yeah. So I'll start with the latter part of your question. The reputation of thing is something that we've got a strong reputation that's why you've seen us outperform over the last decade, Jack if you remember from 2013 through 2021, we grew three times faster than what the brokerage industry grew and over the last year, you've seen our shared aims accelerate that.

Because we have strong service, we've got great relationships with our customers. We've committed we've given them solutions that have had huge impacts on their business. So the reputation of peace is not one that we place.

Place to our advantage, yeah, and Jack I think you are.

Exactly right I mean, we touched on this a little bit in the prepared remarks, and we talked about this last quarter as well.

Our ability to mix shift aggressively to the contract for the contract versus spot. We think is best in class, we're flexible and agile organization, we're still going to haul the same contractual freight to Jewish point reputation and ability to service our customers is paramount to the organization, but then because of how well we service that contractual freight we're gonna get reward.

Did the many bids the special projects the spot right. So we're going to move fast we have in cycles to your path to your point move the spot contract mix by as much as 1000 basis points in a given quarter, obviously, that's going to be a function of how quick the recovery is but I think the important takeaway is that we're gonna get rewarded that spot volume because of how well we surfaced contractual for it.

Okay got it and then I guess thinking about the longer term outlook. It you know.

[noise] ago, when you all spun out from from X P. O I I, you know I think that if we kind of.

Fast forward to where we are now it's been up more challenging downcycled and I think really anybody would have anticipated instead of the trough as maybe deeper and it's Ah. It's Ah you know blogger kind of hall back to that 475 to 525 kind of longer term target that you guys laid out for adjusted EBITDA in 2027.

You guys still comfortable with that longer term target.

Sort of the the the key building blocks of that changed just based on on the last year's progress any sort of you know kind of comments on that.

We're still we're still comfortable with the 475 to 525 EBITDA arrange for 2027, but we provided you with we're making the right moves in investing in the business. We're building the foundation and preparing for the inflection and Jack when you look at what we're doing within the business, we're creating higher higher and higher lows. So we're setting ourselves very.

Very well for when the market turns.

So we are in a good position right now.

Okay. Thank you for the time.

Thank you next question will be from Jordan at Goldman Sachs. Please go ahead.

Yeah, Hi morning, just at quick question.

Around the SG&A as you noted in your presentation. It's.

Pretty good <unk>.

Sequentials nausea root beer.

Decline and you mentioned cost initiatives and stuff in the coffee.

And I guess, there's a variable cost aspect you can maybe talk a little bit more specifically about some of the actions taken and how do we think about that going forward X.

Yeah. So this Jamie yes.

So we were able to take out you know run rate of $27 million, which we talked about the overwhelming majority of that is what we would call structural costs removal, where you will not be added back is volume increases. Thank.

You'll see as you already mentioned.

This isn't the company from a call structure to have a very good.

Contribution margin is the market and flag.

You've heard us talk.

Before about productivity you know loads per head per day that is set up to.

Continued to grow continued to become a more productive.

So the cost structure. Some came out of SG&A. Some came out of direct top back the way I would think about it.

Is predominantly.

Predominantly it as a structural removal of cost that won't be added back with growth.

Great. Thanks, and then just a quick follow up just on contracts again, [laughter], obviously, 79% a pretty high level.

Maybe if you could just comment on sort of.

Do you think about contracts over the cycle, how you feel.

That could flex over time up or down and.

This level.

And I assume at the level that you feel comfortable with because you're there but sort of strategically.

Why is sort of boost it up so high right now.

And a software market, there's not a lot of spot loads. So the way to grow your business is to grow it through contractual business.

For our customers, who trust you. The first step that you get is through contractual business. So you'll contractual businesses are base and spot loads come as the market in flex as you're starting to see changes in capacity in the first place that customers lean on for whenever they see a tightness in capacity is for the people that have the strongest relationship.

With so when the market doesn't flirt we are in a very good position because of the relationships that we've got with our customers and the service that we provide to them.

Is there one particular quarter or two that where we could look towards the bulk of the renewals like is it gonna start in the fourth quarter of this year or is it more second quarter next year. Thanks.

Typically you starting to see it in Q4 and Q1.

Alright, thanks, so much thank.

Thank you.

Thank you at this time I would like to turn to call back over to Mr. Wilkinson for closing remarks.

Thank you Sylvie in the second quarter, RSO delivered significant brokerage volume growth and solid margin performance.

This is an important part of the freight cycle the decisions that we're making right now will position us for significant earnings growth when the cycle and flex.

We've got a season leadership team this focused on continuing to take share while optimizing our cost structure and making the investments for future growth with our cutting edge technology massive capacity and the best people and strong customer relationships alright, so as well positioned over the long term we remain confident in our.

80 to deliver our 2027 adjusted EBITDA targets.

Thank you for your time today, and I look forward to seeing many of you in the coming weeks.

Thank you, Sir ladies and gentlemen, this doesn't need complete your conference call for today. Once again, thank you for attending and at this time, we do ask that you. Please disconnect your lines.

[music] [music].