Q3 2023 RXO Inc Earnings Call
Welcome to the Rx, So Q3 2023 earnings conference call and webcast.
My name is Cynthia and all of your operator for today's call. Please note that this conference is being recorded during this call. The company will make certain forward looking statements within the meaning of federal Securities laws.
Which by their nature involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those in the forward looking statements a discussion of factors that could cause actual results to differ materially.
And in the company.
You see filings as well as in its earnings release, you should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional important information regarding forward looking statements and disclosures and reconciliations of non-GAAP financial measures.
Company, you've just been discussing its results.
Now I'll turn the call over to drew.
Mr. Wilson you may begin.
Good morning, everyone. Thanks for joining today's earnings call with me today in Charlotte, Our Chief Financial Officer, Jamie Here's <unk>.
Chief strategy Officer, Jared Weisfeld.
I am pleased with <unk> performance in the third quarter, and what was and continues to be a soft freight market.
We've seen this part of the freight cycle before.
Exactly what actions, we need to take to fuel our.
<unk> growth and set us up for long term success.
In the third quarter, we accelerated our brokerage market share gains, while maintaining strong brokerage gross margins.
Brokerage volume grew by 18% year over year.
For the first time, we've broken out brokerage volume performance between truckload and less than truckload.
Both grew significantly.
Full truckload volume grew by 13% year over year.
Less than truckload volume grew about 55% year over year.
We service, our full truckload customers exceptionally well and those customers continue to award us LTE outbreak, which is mostly contractual and highly automated we.
We expect continued growth in our <unk> business with.
With LPL reaches full scale it will add a meaningful source of earnings to our business and will be a platform for continued growth.
In addition, total volume quarterly loads per day and monthly loads per day during the month of September all set new records.
All major brokerage verticals grew on a year over year basis.
And loads per day grew every month as the quarter progressed.
The most important driver of that growth was contractual volume, which grew 30% year over year faster than the 19% year over year growth, we achieved last quarter.
This result speaks to the significant trust our customers habits.
Securing contractual volume positions us to win even more spot volume and project loads when the market and flex.
We expect to grow brokerage volumes again in the fourth quarter on a year over year basis.
Jerry will walk you through our volume trends in more detail shortly.
Our market share gains continue to be profitable.
We leverage our cutting edge AI enabled technology to improve our buy rates and our sell rates.
The year over year decline in revenue per load in the third quarter eased when compared to the revenue per load decline we saw in the second quarter.
Brokerage gross margin was strong at 15, 1% in the quarter.
We also saw momentum in our complementary services.
We achieved another quarter of synergy load growth in managed transportation and secured additional new business wins now onboard in 2024.
Within last mile. We continue to take actions to improve our profitability and still expect last mile to grow EBITDA year over year for 2023.
The strategic pricing actions that we took earlier this year helped contribute to 90 basis points of year over year margin expansion for our complementary services.
The investments we've made in our cutting edge AI enabled technology helped fuel our business results in the third quarter, 97% of our loads were created recovered digitally up from 81% in the third quarter of 2022.
The team is executing very well and is growing our core truckload business, expanding and investing in additional services and capitalizing on powerful trends, including near shoring.
Let me give you some more details about how the quarter played out.
Early in the third quarter, we experienced a squeeze on gross margin.
This is typical for this part of the cycle.
We believe July was the low point for brokerage gross profit per load for 2023.
The third quarter, Mark the low point for adjusted EBITDA This year.
The freight market and <unk> performance improved each month as the third quarter progressed.
Many of the industry metrics, we look at also improved.
The load to truck ratio increase from less than two to one earlier in the year to approximately three to one at the end of the third quarter.
Industry wide tender rejections also moved higher to approximately 4% and carrier exits continued although at a slow pace.
We also continue to hear from our retail and e-commerce customers that inventories are in a much better position heading into this year's holiday season.
While I'm optimistic about the improvements we're seeing the industry still faces some challenges, including uncertainty around consumer demand heading into the holidays and the rise in interest rates and increased fuel prices.
That brings us to the month of October where we did see some softening many bid activity increase in brokerage volume grew year over year, but the volume growth was at a slower rate in the third quarter. However.
However, despite the softening in the market our brokerage gross profit per load remained resilient in October and was roughly flat compared to the month of September with a strong gross margin of 16%.
Even though the pace of the recovery is uncertain, we will continue to run the playbook, we've talked with you about all year.
First and most important we will continue to stay close to our customers to ensure we can react quickly to the ever changing market dynamics.
We will remain focused on the long term and continue to make strategic investments.
In the third quarter.
Added new team members to fuel continued brokerage growth.
Produced new technology to support our customers and our people and expanded the services we provide to customers.
All of these investments increase the stickiness with our customers and there are an important part of our strategy. So youll hear both Jamie and Jarrod talk more about them later on the call.
Many of the largest shippers continue to increase their share of wallet with Rx. So because we have a team that has delivered results for their transportation and logistics departments.
Rod array of services and a strong financial position.
Our strategy is to invest across all parts of the freight cycle and thats uncommon in our industry.
While investing during the down cycle negatively impact short term profitability.
It delivers outsized returns when the market improves.
This is not the first time, we've run this playbook.
This was a winning strategy for us during COVID-19, when we invested aggressively in our sales force.
We see this down cycle as a some more opportunity to position us for robust growth over the long term.
Doing so will provide significant operating leverage for us when the market and flex.
We believe this playbook will enable us to achieve our long term target we laid out for you a year ago at our Investor day.
We anticipate delivering between $475 million and $525 million and EBITDA by the end of 2027.
We have a winning strategy and experienced leadership team.
<unk> technology and close customer relationships.
<unk> was in a great position to exit the salt rate cycle, even stronger than we entered it.
Now I'll turn it over to Jamie who will discuss our financial results in more detail Jamie.
Thank you drew and good morning to everyone in the third quarter, we generated $1 billion in revenue.
Compared to $1 1 billion in the third quarter of 2022.
Gross margin of 17, 7% was down 190 basis points year over year solid performance for this stage of the freight cycle.
Adjusted EBITDA was $26 million in the quarter compared to $66 million in the third quarter 2022.
And our adjusted EBITDA margin was two 7% down 310 basis points.
The declines in these metrics were primarily due to lower freight rates and a moderation in brokerage gross profit per load.
We continued to optimize our cost structure, while investing for growth positioning us well to drive substantial operating margin leverage when cycle in flex.
I'll touch on our year to date annualized cost savings shortly.
Below the line our interest expense for the quarter was $8 million, our adjusted effective tax rate at 13% in the quarter was a function of an updated annual forecast of lower taxable income. In addition to a small amount of discrete tax items.
Our year to date adjusted effective tax rate is approximately 19%.
Adjusted diluted earnings per share for the quarter was five cents.
Which includes approximately one set of discrete tax benefits.
You can find a breeze to adjusted EPS on slide seven of the earnings presentation.
Moving to our lines of business.
We continue to outperform the brokerage industry, we grew brokerage volume by 18% year over year.
Brokerage gross margin remained strong at 15, 1% down 390 basis points year over year, while only down 30 basis points sequentially.
Complementary services gross margin of 20% improved by 90 basis points year over year.
Our last mile pricing initiatives were the biggest driver.
Please turn to slide eight as we discuss cash flow.
Our adjusted free cash flow over the trailing six months was impacted by lower profitability levels increased quick pay adoption by carriers and timing related to $15 million of certain cash tax outflows, including cash taxes related to prior periods.
With respect to quick pay.
This service allows our carrier partners to get faster access to their cash payments increases carrier retention.
Generates a strong return on capital for our XO.
We have an opportunity to drive increased carrier adoption of quick pay across our business and we are investing accordingly.
While increased quick pay adoption will be a net use of working capital is a good strategic initiative with our carrier base with a good return on investment.
Quick pay as a win win for our carriers and our XO.
Normalizing for the increased adoption of quick pay in cash tax items, our adjusted free cash flow conversion over the trailing six month period was approximately 45%, which we are pleased with the discipline in the freight cycle.
We remain comfortable with an annual adjusted cash conversion rate between 40% and 60% of adjusted EBITDA over the long term across market cycles.
As we mentioned last quarter accelerated growth as the cycle turns will result in a use of working capital.
We continue to anticipate to use approximately 7% to 9% of each incremental revenue dollar.
This can impact short term cash conversion, depending on the pace of recovery.
Let's move on to our cash balance.
We've also included a six month cash bridge on slide eight.
We ended the quarter with $104 million of cash on the balance sheet.
The largest headwinds to cash in the six month period were restructuring and spin related cash outflows and the amount of $12 million, we continue to expect restructuring and spin related charges to decline significantly in 2024.
We also continued to set a rsum tax withholding obligations and cash to minimize solution, which was an outflow of $5 million in the period.
Let's now discuss cash on a three month view.
As Youll recall in second quarter, we collected approximately $15 million of receivables earlier than we expected.
When considering these earlier collections the normalized starting cash balance for the third quarter was approximately $109 million.
In addition to the use of working capital for quick pay we used cash of approximately $3 million for restructuring and approximately $3 million for RSV tax withholdings.
We've now achieved year to date annualized run rate savings of approximately $31 million with associated restructuring charges of $12 million.
A strong return.
While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load.
It will create significant operating leverage when the cycle turns.
We now expect lower restructuring and spin related costs relative to our prior estimate.
Specifically, we expect 2023 restructuring and spin related costs of approximately 30% to $32 million compared to $35 million previously.
Additionally, we now anticipate cash outflows associated with these restructuring and spin related actions of approximately $25 million $5 million lower than our prior estimate.
As you can see on slide nine our balance sheet remains healthy with net leverage at quarter end at approximately two one times trailing 12 months adjusted EBITDA.
This is higher than the one six times last quarter due to our cycling a prior year EBITDA.
While our leverage is above our long term target of one to two times.
Our liquidity position remained robust with $604 million of available liquidity at the end of the quarter.
We will again cycled through a tough comparison in the fourth quarter and expect net leverage to move higher at year end.
I'd also like to review our capital structure.
November we exercised the accordion feature under our existing revolving credit agreement that increased total revolver commitments from $500 million to $600 million.
We simultaneously repaid all outstanding obligations under our term loan credit agreement.
Pro forma these actions will yield annual interest savings of more than $1 million gross debt will decrease in our net debt and liquidity positions remain unchanged.
We've maintained the same liquidity with more flexibility at a lower cost.
As you would expect at the end of the fourth quarter, you will initially see a lower cash balance as a result of the prepayments.
Our customers want to work with strong partners that can perform and invest across all market cycles and these actions highlight our financial and balance sheet strength.
You can find our updated 2023 modeling assumptions on slide 15 of the deck.
Capital expenditures are expected to be between 60 and $65 million.
This includes $10 million to $12 million of strategic investments in real estate.
This with us for additional growth in our brokerage business.
This is down slightly from our prior estimate of $50 million due to some changes in project timing.
Stock based compensation expense is expected to be between 20 and $22 million.
Interest expense is expected to be between 32, and $33 million, which is slightly lower than our prior estimate.
This is pro forma for the capital structure optimization and includes the fourth quarter benefit associated with the net interest expense savings I mentioned earlier.
We continue to expect a full year 2023, adjusted effective tax rate of approximately 25%.
You should also model an average diluted share count of approximately 120 million shares.
This does not include any impact associated with potential share repurchases.
Overall, given the current state of the freight cycle, we're pleased with our execution.
We have a strong balance sheet, we're operating well investing strategically while remaining disciplined on cost and positioning <unk> for the cycle and flex.
Now I'd like to turn it over to Chief strategy Officer, Jared Weisfeld, who will talk more about our outlook.
Thanks, Jamie and good morning, everyone.
We continued to outperform the market in the third quarter growing brokerage volume by 18% year over year with continued substantial profitable market share gains enabled by our people and technology.
Loads per day grew every month throughout the quarter.
More specifically, we grew our core truckload volumes by 13% year over year and grew LPL volume by 55% year over year.
Our full truckload customers continue to award us LPL loads because of our strong service and relationships.
<unk> now represents approximately 17% of brokerage volumes.
From a vertical perspective, we saw growth in every major category, specifically retail and e-commerce volumes accelerated significantly with volumes growing by 21% year over year first 3% in the second quarter.
Several existing customers awarded us new business in the quarter, but we also saw growth across the whole category.
The food and beverage vertical also grew strongly.
While industrial and manufacturing grew by low single digits year over year, the vertical decelerated from last quarter's growth rate.
From a profitability perspective, we again delivered strong brokerage gross margin of 15, 1% in the quarter down just 30 basis points sequentially enabled by our technology.
As drew discussed earlier July was a very difficult month for our XO.
However, our performance improved as the quarter progressed.
Our XO brokerage key performance indicators improved every single month throughout the quarter positioning us well into the fourth quarter.
I'll discuss this in more detail shortly.
In the third quarter, 97% of our loads were created or covered digitally versus 81% in the third quarter of 2022.
Seven day carrier retention was a strong 77% in the quarter compared to 75% in the third quarter of 2022.
We launched several new features of our XO connect in the quarter, including enhanced pricing algorithms.
Additionally, we leveraged new natural language processing solutions for automated order creation.
We also made specific generative AI investments in the quarter to improve employee productivity.
In the third quarter contractual volume represented 80% of our business up 100 basis points sequentially and up 700 basis points when compared to the third quarter of 2022.
Contract volume growth was up 30% year over year accelerating from 19% in the prior quarter we.
We have not yet seen the spot market emerge, but because of our contractual business and our deep customer relationships. When the market turns our XO will react quickly and be a prime beneficiary of spot volume.
Before discussing market trends.
To emphasize the strategic investments that drew and Jamie referenced earlier arc.
So continues to invest in the business across our people service offerings and our technology.
We are building for the long term and are laying the foundation for the market inflection.
Taken together, we estimate our 2023 strategic investments will total approximately $20 million to $25 million.
While these investments impact near term profitability. We've run this playbook before and we are investing counter cyclically for the long term.
Last quarter, we communicated that we believed we were approaching the bottom of the cycle.
We now have further conviction in that view.
Specifically, we believe that July brokerage gross profit per load Mark the low point for the year.
I'd like to expand on our current view of the freight cycle and I'll refer you to slides 11 through 13 of the presentation.
Let's start with revenue per load.
To get a better view of our consolidated year over year price declines on a per load basis, it's important to consider the impacts of length of haul mix and changes in fuel prices.
When normalizing for those items revenue per load was down approximately mid teens percentage on a year over year basis in line with market pricing.
As you can see on the chart, we generate strong gross margin across all different parts of the freight cycle by leveraging our proprietary technology and pricing algorithms to procure capacity at better than market rates.
Moving to slide 12, let's continue to walk down the P&L and discuss recent brokerage gross margin trends.
The national load to truck ratio moved higher as the quarter progressed tend to rejection rates increased and carrier exits continued, albeit at a slow pace.
We expect carriers to exit the market at an accelerated pace over the next three to six months.
We also took further by site actions leveraging our technology, resulting in significant improvement in our gross profit per load every month of the quarter, specifically, our gross profit per load in the month of September improved by greater than 20% when compared to July is low.
Let's go to slide 13, and look at Rx those brokerage gross profit per load on a quarterly basis.
<unk> Q3, 2023 gross profit per load declined moderated with continued significant volume growth positioning us well for the inflection.
You're lying intra quarter improvement of the business that we just discussed is invisible in this chart since July as gross profit per load brought down the quarterly average to put in perspective, given the squeeze earlier in the quarter July gross profit per load was our lowest since Q2 of 2017.
I would now like to review the relationship between Q3 volume growth and adjusted EBITDA.
Early in the third quarter, we experienced a squeeze on gross margin.
The headwinds from the freight cycle, where severe in the month of July the most difficult month of the year and that significantly impacted near term profitability. Despite improved volume growth. This is typical at this point in the cycle with gross margins compressing as cost of transportation increase without a corresponding increase in salaries.
When those headwinds reverse like they did as we exited July our model deliver significant operating leverage.
I'd now like to look forward and give you some more color on the puts and takes we're expecting in the fourth quarter.
We typically see a seasonal uptick in all of our lines of business in the fourth quarter, which we expect this year.
Just on what we're hearing from our customers, we're assuming a muted peak seasons.
Our staff for growth and can respond quickly if a stronger peak season develops.
Our brokerage sales pipeline remains robust and is up 115% on a two year stack.
This gives us confidence that we will again grow brokerage volume on a year over year basis in the fourth quarter.
While October brokerage volumes still increased on a year over year basis, we did see year over year volume growth moderate when compared to the third quarter. We are assuming fourth quarter year over year brokerage volumes will grow but at a slower pace than the third quarter.
It's also important to note that we're coming off a very strong September and Q4 had a tougher comp when compared to Q3.
Brokerage revenue per load trends are encouraging and we expect another moderation in year over year revenue per load declines in the fourth quarter.
Moving to brokerage gross profit per load.
While year over year volume growth moderated in October versus September <unk> gross profit per load was resilient roughly flat with September levels with strong gross margin of 16%.
Putting it altogether, we expect our XO companywide adjusted EBITDA to grow sequentially into the fourth quarter.
Over the last three years on average <unk> adjusted EBITDA has grown by approximately 20% from the third quarter to the fourth quarter.
We expect our XO companywide adjusted EBITDA to grow roughly in line with that growth rate with strong company wide contribution margins.
As a reminder, historically, our adjusted EBITDA typically declines from the seasonally strong fourth quarter into the seasonally weak first quarter.
We're continuing to gain market share profitably with another quarter of strong brokerage gross margin, we're optimizing our cost structure, while strategically investing in the business and have a playbook to deliver rapid earnings growth when the market did flex our.
Our gross profit per load bottomed in July for calendar year, 2023, and we're entering the fourth quarter with improved momentum.
Still operating in a soft part of the freight cycle and the pace of the recovery will be subject to the broader macro environment, but we are making the right strategic moves to position us well for the long term.
With that I'll turn it over to the operator for Q&A.
Okay.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on you touched on.
Our first question comes from Ken <unk> from Bank of America. Please go ahead. Your line is open.
Great Good morning.
Sure John and Jamie.
Maybe just talk about the your outlook there right. So you talked about slowing growth in October.
Some increase many bids.
And as confidence that the third quarter is the EBITDA bottom I guess you talked about.
Confidence that inventory well I'll stop there and just what gives you the confidence that we're really seeing the bottom given that backdrop that October seems to be a bit more flattish.
Yes, Ken This is drew good morning, the first thing that I would point out is the improvement that we've seen in gross profit per load. If you look from July gross profit per loan to improve by more than 20% and it continued into October. So the biggest reason for optimism is what we've seen on the gross profit per load the second.
Thing is as you look at what was impacting the second quarter outside of gross profit per load. We have two other partners. One last mile typically takes a step back seasonally from Q2 to Q3, but the cost to run the business doesn't change of time, there and then the third is we are the largest.
Manager of ground expedite shipments in the country.
That was largely built off of automotive customers. So while that was a headwind for us as we came out of Q2 as the plants come back online that will be more of a tailwind for us.
Thanks.
Great and just if I can do a follow up.
You talked about customer inventories being you.
Youre confident that there are lower and kind of set to face that rebound maybe talk about how you look at that given higher rates the impact on consumer.
The economic backdrop I don't know, maybe if loads are up maybe because of the bankruptcy a convoy any thoughts there if youre seeing the benefit there or if this is really some sort of economic backdrop that you are seeing that shifting.
Yes, so two separate points there one on disruption in the market one on peak season.
First point on peak season, as we expect a muted peak season, but we do have some customers that are telling us that they will have a peak season. So we're still staff for growth and prepared to handle that if the inflection curves for for those customers. The second point on the <unk>.
<unk> in the market.
The competitor that went out of business was less than 1% of the overall brokerage market. So it wasn't a huge play on capacity, but it did create some disruption and some noise in the market and Thats a good thing for our business anytime that there is disruption or noise or customers are going to come to us to create solutions and Tom's of chaos for their business.
And we've got a lot of experience doing that and deliver them for them and we expect as the market of what theyre going to come to us on spot loads projects in many of those as well.
Great I appreciate the time and thoughts.
Thank you.
Sure.
Thank you. Our next question comes from Christopher <unk> from Benchmark Company. Please go ahead. Your line is open.
Yes, hi, Thanks for taking my question and good morning, guys.
One of the issues that comes up is.
Spot.
Price kind of stays where it is can you continue to grow your gross margin from here if spot is flat from here or slightly just goes up a little bit.
We do not believe that carriers can continue.
Running below operating cost for much longer we think that over the next three to nine months Youll see carrier rates actually accelerate.
You did not see a demand inflection in that would cause an increase in the overall spot market, but.
Thanks, Dave floating along the bottom our strategy has always been during this part of the cycle that will grow and we'll build our foundation, we will continue to hone in our relationships with our customers, we'll make a fair margin and we will prepare ourself for the inflection and to show the power of the model and the earnings when the market in blocks.
Okay. Thanks, guys I appreciate it.
Thank you. The next question comes from Stephanie <unk> from Jefferies. Please go ahead. Your line is open.
Hi, good morning, Thank you.
Good morning, Stephanie I appreciate it good morning, I appreciate the color you've given so far particularly related to October but realizing this is a tough question to answer but just given maybe what youre hearing from your customers. How early bid cycle are trending so far maybe how this frame kind of your expectations for 2020.
And just where we are in the cycle and the path to our inflection at some point, maybe just your thoughts on when that might occur.
Thank you Stephanie we're just starting a lot of those conversations with customers and we expect those to pick up as they typically do over the next five months and we're hearing different things from different customers. Some of these customers were actually going to and we're seeing slight increases on a year over year basis.
Slightly down it depends on when they were bid and when they were put into place and what was going on with the market at that point in time, the biggest thing for our business, though as we head into 2020 for US we're going to hold the model, we're going to continue to build the foundation grow the base have strong relationships with our customers and as the market starts to inflect.
Spot loads come on when projects start we're going to be the first place that customers go we've got great service, we've created solutions for them and we've got the best technology in the industry.
Great. Thank you so much.
Thank you. The next question comes from Scott Schneeberger from Oppenheimer. Please go ahead. Your line is open.
Thanks, very much good morning.
Drew.
Gave.
Some color on load to truck ratio could you just talk I'll put it in historical perspective.
Where you see it right now what you think it can be over the fourth quarter into next year and what would be more importantly, what would be triggers what would be levels that would make you change behavior.
Versus the mode, you're in right now thanks.
Yes, so right now when you look at where load to truck ratio is sitting roughly around two to one overall and I've been doing this for 17 years Scott.
Anytime that has gone below two to one.
Are you there for a sustained amount of time you saw that whenever it went below two to one earlier. This year. It quickly went to 335 to one so I do not expect to hang down here for long because I do not think the carriers continue to operate below what it cost them to run there.
Especially a small trucking company.
So for US when you were talking about will we continue we've always invested in the business that's not something that we anticipate slowing down we don't look at this business quarter to quarter. We're looking at it over the long term and we've laid out targets and the EBITDA from $4 75 to 520, Bob and the investments that we're making right now.
We're confident are going to help us achieve that.
Thanks, Scott and you did mentioned acceleration of carrier exits in fourth quarter and you are.
Adding adding adding new team members and maybe elaborate on where you are adding new team members and sneaking. Another one into what are some areas of strength and weaknesses across your end market I'm. Just curious where you are where you are winning and losing there. Thanks.
I'll take the first part and then I'll, let Darren take the second part the first part on where we're adding people.
The customers.
We've got a lot of great relationships with existing customers, but we're also bringing on new customers and to have those people come on in.
Trained up and learn the freight industry learned the differentiators for Rx. So take some time. So we continue to invest in the people who are talking to customers and people who were building relationships with the carriers that we're partner.
And Scott Hey, it's Jarrod good morning from a vertical perspective, all of our major verticals grew on a year over year basis in the quarter retail and E. Com, specifically was up 21% year over year, which accelerated pretty substantially from last quarter attributable to not only overall vertical health given the customer inventory levels that we've talked about but also OXXO extending business at existing customers.
Additionally, food and beverage showed nice growth year on year industrial manufacturing did slow down year on year, but it did still grow.
Relative to prior year.
Thanks, guys appreciate it.
Thank you. The next question comes from Jordan <unk> from Goldman Sachs. Please go ahead. Your line is open yes.
Yes, hi, good morning.
I think you mentioned in October some softening in volume trends year over year I'm curious would you use SaaS at that.
More of an underlying demand softening or could it be amped up competitive pressures as folks are other brokers are trying to stick around and go after the business harder.
It was more of a demand softening that we saw and it was broad based it was really across all verticals. Obviously, we did see an impact with the UAW strike, but it wasn't just limited to automotive it was broad based across all verticals, but I do want to be clear, we are still growing volumes on a year over year basis in the fourth quarter.
We continue to take market share in this market.
Okay and then.
Thanks, and then.
I know it's still early on 2024, I think you mentioned in the fourth quarter, though expect sort of maybe usual seasonality on EBITDA growth.
All things equal do you think we could have a normal seasonal sequential EBITDA patterns as we move through 2024 world to be times, where it.
Could it be less earlier more later I mean is there a way to think about that.
Jordan I think there's still too many unknowns for 2024 to call that right now.
As we sit here today, we're not sure where interest rates are going we're not sure what the fed's going to do we're not sure what fuel prices are going to do it and those are three big factors to be able to call out normal seasonality. So we're not at a point, where we can call what's going to happen in 2024.
Great. Thank you.
Thank you. Our next question comes from Brandon <unk> from Barclays. Please go ahead. Your line is open.
Hey, good morning, everyone and thanks for taking my question.
Jared or maybe drew you can go you guys did talk about normal seasonality I think coming off the fourth quarter being down from an EBITDA perspective.
I know thats not necessarily guidance, but can you just help us what is the normal step down in <unk> EBITDA and then I guess, maybe a longer term follow up to that what's going to be really required here to demonstrate the operating leverage in the model.
Especially given that you think the bottom was set in July what incrementally do we need to see from here.
Sure I can start and if if others want to chime in as well so it's Derek good morning, Brendan so.
Right from Q3 to Q4, we talked about three year historical average growth has been about 20% on adjusted EBITDA sequentially, which we expect to achieve roughly that growth rate from Q3 to Q4 heading into Q1, there's been a lot of variance when if you look back over the last three to five years that range has been anywhere from call it down mid single digits too.
To down call it low double digits theres been a lot of variability over the last three to five years, but thats the appropriate range in terms of how to think about sort of historical bridge from Q4 to Q1 in terms of incremental contribution margins. We talked about this a bit in the prepared remarks, we expect strong company wide contribution margins in in Q4 with that sequential.
EBITDA growth from Q3 to Q4 and longer term when you think about what we're doing here in the business not only are we continuing to strategically invest and we size that opportunity at roughly 20% to $25 million of strategic investments in in.
2023, but we're also taking actions in year to date, we've achieved.
We achieved cost savings of approximately $31 million on an annualized basis, that's going to that's going to drive really really strong contribution margins going forward.
Sure.
Sure.
Okay I appreciate that Gerry and then.
I guess you have a net cash position now $4 million I mean is that.
Yes, so Ben.
Anand.
<unk>.
When we did our capital structure update at our capital structure really what we did is we increased our liquidity on our revolver.
We had a somewhat inefficient use of cash. So we took that cash paid off the term debt ticked up let's call. It a 130 150 basis points of negative negative arbitrage on interest will have in excess of $1 million of.
Cash savings a year on interest on a pre tax basis.
So you feel like at the end of the day, we had a big pick up nice pick up in interest savings kept the exact same liquidity our net leverage was the same.
We feel like from a standpoint of running the business with that level of cash.
Into the revolver from time to time is the normal cyclicality of intra quarter cash flow occurs.
But we continue to see a very strong cash flow business, we've talked about 40% to 60%, we still believe thats a good number to use.
In fact, it's been about 43% year to date of conversion so.
So we think we feel very comfortable with the with the optimized capital structure that we put in place in early November.
I appreciate that thank you.
Thank you. The next question comes from Scott Group from Wolfe Research. Please go ahead. Your line is open.
Hey, Thanks, good morning so.
Just from the market overall, I'm curious, where do you what kind of spread are you seeing between contract rate.
Right right now and how does that look versus normal and then I.
I guess, what I'm trying to figure out is you guys are talking about hopefully.
July being the bottom typically with brokers button when spot rates eventually spike we get an incremental squeeze do you think that.
That is.
Do you think we've already seen your squeezed or is there incremental squeezed that cottons whenever.
Eventually spikes.
Yes, good morning, Scott.
We're still at a point where spot rates are below contract rates at this point in the cycle. When you. When you talk about the squeezed we definitely saw squeeze in July I think that the squeeze can come at different points in the cycle and that's a good thing for the business whenever you whenever you get squeezed that can last anywhere from a week to 1%.
Two months so it is not something that is.
A bad thing as you're starting to see a shift in the market I don't think that the squeeze that we experienced in July was the broader turning of the market I think that was more related to produce season, but on the other side of the squeeze is when you're starting to see the spot loads come in and Thats whenever youre going to see contract gross profit per load come down, but the spot gross profit per.
We will go up and more than offset and so the power of the earnings behind the business.
And then I know a lot of talk about the gross.
<unk>.
Wanted to ask on the net operating margins.
Two 6% in the quarter.
Any color on how brokerage net operating margin is doing versus the rest of the business and then ultimately when we get this up cycle at some point.
How should we think about where net operating margins can go.
Hey, Scott, it's Jaret a couple of things on that point. So in terms of the sequential decline in net operating margins.
We look at the business on a on an adjusted EBITDA and adjusted free cash flow basis, but.
You are calling out I think I would highlight a couple of things one would you talked about earlier in terms of the seasonality in last mile from Q2 to Q3.
Typically weaker with generally a fixed cost base that doesn't move that much intra quarter. When you think about the movement from Q2 to Q3 so those.
Those decremental margins impacted the sequential move and then also remember that the low point in.
Gross profit per load was was in July so the starting point for the quarter really felt the full run rate impact of of the squeeze coming out of produce season. So I call. Those two those two factors out.
As well as some of the impact that we talked about earlier with respect to managed transportation associated and the UAW strike. So boiling combining all of those factors I think largely explains the move that you're talking about in terms of the incremental contribution margins from here.
When I talked about earlier in terms of cost optimizations that we're taking and the incremental margins that we're expecting last quarter, we talked about from the low point brokerage gross margin appropriate contribution margins specifically can be it can be pretty strong from the bottom of the cycle certainly in excess of 50%. So that's how we're thinking about the business from a contribution margin standpoint.
Thank you guys.
Thank you operator, good morning, gentlemen.
You called for capacity to come out of the marketplace at a more material level over the next three to six months.
Most people would probably call. It for the same thing in the last couple of quarters to be fair. So what's giving you the confidence that now finally capacity you're going to start coming out of the <unk> market.
Yes, Jason I've said over the next three to nine months.
Biggest thing sorry about that.
Nowhere is the biggest thing on that is carriers right now what it costs to run a small trucking company spot rates are below that right now so we do not think that the.
Balance sheet that they build up during COVID-19 can sustain much longer than where is that right now.
Okay fair enough.
You talked a little bit about some of your customers, saying that sort of youre done with the sort of inventory drawdown what are they saying about the restock going forward.
Hey, Jason it's Sharon good morning.
Standpoint, we saw encouraging trends in Q3, specifically in the retail and e-commerce vertical which was a continuation of the acceleration that we saw in the prior quarter as well some of that was expanding share of wallet and market share gains at <unk>, but also indicative of the broader health of the vertical so like drew said earlier, we are hearing different things from <unk>.
Current customers something that we're going to have a peak some are more mixed on that view I think what's important for us is to ensure that we're prepared for that were staff for growth we have the right investments.
We will see is as the rest of the quarter plays out whether or not we'll have a peak, but we did see encouraging trends with respect to the retail and E com vertical during the quarter.
I appreciate the time gentlemen.
Thank you. The next question comes from Tom <unk> from UBS. Please go ahead. Your line is open.
Sure.
Yes. Good morning wanted to just I guess kind of a fine 0.1st you talked about the slowing in October but didn't really quantify it can you give a little bit of.
Truckload load growth is up I think you said, 13% for <unk> is it up like low single digits in October or.
Is it 10% plus or is there any more kind of.
Fine tuning on that you can give us just to understand how much slowing there is.
Truckload volume was up let's call it mid single digits and overall volume was up double digits.
Okay, great. Thank you for that.
If I look at the.
I think you had some questions on this I think Scott asked about it and it seems to me like a significant kind of overhang on 2024 is just that transition process of eventually spot rates youre going to go up right, which I understand is ultimately good for the business.
<unk> got 80% on contract and so that's maybe.
It's a pretty heavy skew to contract.
I don't know if you do you think you'll be able to adjust the contract rates more quickly than prior cycles or would you say hey, there is a fair bit of risks that if spot rates go up that we will have.
Kind of a normal cycle period, where we do get squeezed on the on the gross margin percent.
Tom The first thing is.
I would remind you and everyone that this business can shift and shift quickly. So like I told Scott the squeeze can be for a matter of weeks and <unk> seen this business shift mix shift from contract to spot by more than a 1000 basis points quarter over quarter. So while there would be a little bit of a squeeze the other side of that is a good thing and the squeeze.
It doesn't have to last that long depending on the capacity this exiting the market as well as depending on demand.
Okay.
If I can just one more quick one on the attrition you were asked about convoy I think thats high profile, but there've been a bunch of other kind of midsized brokers, leaving I think normally we focus on carrier attrition, how do you think about broker attrition and whether thats.
A significant enough factor to help you.
Help the bigger brokers helped the stronger brokers like yourself.
As you go through the cycle or is that just noise.
Tom anytime there is disruption in carriers exiting a routing guide that's a good thing for our business. It doesn't matter if it's an asset based carrier.
Broker that is doing that so with the noise that has been there I would not call that cut up capacity. This exiting the market, but it has created some noise, which has created so many bids and obviously you've followed us for a long time, you'll know that we've got great relationships with our customers our largest customers have been with us for over.
For 15 years on average.
They're going to do whatever they have disruptions theyre going to come to us and thats going to be the same thing for the prior question that we're talking about.
Soon is there a spot loads, they're going to go to the people that have delivered for them, Tom and Tom and Tom again, and Thats all right.
Right, Okay, great. Thanks for the time.
Thank you. Our next question comes from Allison <unk> from Wells Fargo. Please go ahead. Your line is open.
Good morning, guys James on for Allison, just kind of wanted to follow up on this.
Point around exits and the expectations for it to accelerate.
Seems like there has been some level of improvement from a bottom in that market like is there sort of a way where we could see sort of the improvement moving to a place where the carriers might be encouraged to hang tough and we could see an elongation here.
Or do you really need to be in the sort of another leg of spot rate pressure to sort of accelerate those exits.
I think the hanging tough as what you've seen over the last six to nine months when carriers have already been running below the operating cost.
What it takes them so for US we believe that you have seen the hanging tough and now it gets to the tougher time that they can actually go out and do something else.
<unk> potential.
Income from themselves.
Got it and then you mentioned.
The <unk> side of it any sense of like the percentage of revenue and sort of what you could possibly see that growing to over the next 12 months.
Hey, it's Jaret desk. So we mentioned on the prepared remarks that is about 70% of our total volume and it continues to grow it grew 55% year over year.
In the current quarter when that business is at scale, that's going to provide a nice stable, earning stream for the business and really provide a nice opportunity.
For us to grow we continue to get rewarded LPL freight from from our largest TL customers based on the exceptional service and the customer relationships that we have.
And we don't see that stopping.
Any sense of percent of revenue or percentage of profit.
Thank you Dan.
When I talk about that as a percentage of revenue, but from a percentage of volume standpoint, it was 17% in the quarter and we continue to expect that to increase.
Thanks.
Thank you. Our next question comes from Bruce Chan from Stifel. Please go ahead. Your line is open.
Hey, Thanks, operator, and good morning, everybody.
Joe you talked about very nice move up in loads fulfilled digitally versus last year. When you think about cyclical recovery can we maintain those levels of digital assortment or is there more manual touch that's required to onboard the spot business and then maybe just a related question. There. When you think about the head count you have been adding here.
And investing aggressively as you put it do head count additions need to accelerate even more as the cycle comes back.
Yes. Thank you.
So when you look at the digital we're at 97% created or covered we have made significant progress with our customers and we do not expect that the slowdown on the carrier side, we still got a lot of white space to go.
We do expect that to accelerate over the next six to 12 months.
Question on head count, we're investing appropriately in the business in terms of head count we have said before that we like to stay staffed for growth up 15% overnight, if we need it and that's the position. We're in right now when the market turns as you've seen us do before we'll be able to handle the volume we did that during the early parts of Covid when we were growing volume.
20% and 30% on a year over year basis. So we've got the team is prepared to handle it and the customer relationships, where we know that the volume will come our way when that time comes.
Okay I appreciate that and then just going back to the first question. When you think about the differences in the spot business versus the contract business is it.
Materially easier to create those low digitally for contract versus spot or is there not an appreciable difference.
Youre right on that.
Spot loads, rather when the when the market does turn I imagine part of that depends on the strength and timing of the market turn but.
Just wondering how you can get some visibility or confidence if that happens because I think in the past we've seen some of your peers expect something similar but ended up not quite not.
Quite living up to the turn they thought and ended up running lower for longer.
Yes, Brian this isn't our first rodeo we've seen this before.
When you look at what has happened as the market has some flood youre right. We don't know the shape and the timing of the recovery, but what we do know is we're talking to our customers every single day, we know that whenever those opportunities right now in the market that we're in when there is disruption they are coming to us to create solutions. We know that we do business with 58 of the Fortune 100.
Over 200 of the Fortune 500, we've got a lot of white space with customers that we don't do business with our pipeline is in very good position. So we're confident that not only will we get the contract piece of the business, but we'll be rewarded on the spot piece of the business. We've got great service and our customers come back to us because we can.
Understand the blocking and tackling of picking up and delivering on time and showing them complete visibility of the loads.
Okay. So I guess when you think about cadence of renewals for next year.
With many bids and things have changed.
The market is still quite dynamic.
Is that sort of normal most of them done in the fourth and fourth quarter in the first quarter do you expect that to stretch out.
Into into next year, and I know you mentioned it earlier, but just what are the initial indications in terms of.
Where people expect rates to go do you feel like people are going to take some shippers might take one more crack at this to get a lower rate than worry about what happens on the other side.
Yes so.
The bid season is typically in the latter part of Q4, and then through the first quarter of next year.
And what we're seeing right now we're starting those conversations with customers and as I said earlier some of the rates are coming in right in line. Some of them are slightly above some of them are slightly below so I think that when you are talking about shippers, taking another crack at it whats shippers want is people who are dependable who provide good service who had partner.
Our ships for a number of years and who we're giving them a fair market price, which is what we've always done for US. We will go out there we will give them the fair market price, but when the market and flex and you're starting to see tender rejections creep up basketball, we're confident that we'll be the beneficiary of the spot loads that come out.
And just the timing of the.
Be a little bit slower maybe even faster.
I think it will be Q1, and the early parts of Q2.
Okay.
I appreciate it.
Thank you.
Thank you our last question comes from <unk> majors from Susquehanna. Please go ahead. Your line is open.
Jamie with the post quarter end debt pay down it looks like you've gotten yourself a bit of breathing room with the three and a half times leverage ratio covenant can you speak to that a little bit and whether or not you expect just cyclical draws on the credit line to put you back kind of closer to that thank you.
Yes, so the.
The capital work, we did again the big picture is we saved $1 million over million of cash interest kept the same liquidity derivative benefit it did change the calculation of our covenant, but we.
We had we had adequate headroom already gives.
It gives us even more head room, we will have some more a couple of more cycles.
That will have to cycle through but we feel very good about where we are on our on our covenants.
In terms of draws will use that revolver from time to time intra quarter cyclicality note cash flow and cash outflow is not always perfect.
So we do expect to go into the revolver occasionally.
But.
We feel really good about the optimization work, we did and again our liquidity is exactly the same as it would have been.
Yes.
Thank you for that and on the transaction integration restructuring costs, you have seen that come down sequentially like you guys promised it would.
Does that tail off close to zero next year, what are the early thoughts on how much of a long tail we have on that.
Yes. It will go down as you said it has gone down significantly already this year.
Have.
As Jerry had mentioned earlier $31 million of annualized cost savings. We spent for that 31 approximately 11.
So the return on investment of that is significant and again to go back to long term, we're trying to position ourselves on our cost structure when marketing flex that we really can leverage a lot of flow through.
So we do see the restructured go down significantly in 'twenty four but if we have an opportunity to have that type of annualized savings we're going to go for it because it's a good return.
Thank you for that.
And lastly, I'll close Big picture here, you know a few people have asked about this but.
If I if I look at the second half of this.
This year.
If you would come in in the fourth quarter, where you think you are that's maybe $55 to $60 million in EBITDA.
Call It run rate with no seasonal lift of 110 120 million if I look at sell side consensus for next year, It's roughly 200 million, but the range is really wide 140, something to 20 something.
Certainly wouldn't be eager to guide if I were in your seat three months earlier than I had two but is there any sort of book in you can put around you know what a reasonable expectation could be for next year, what are too high expectations could be for next year and just hope of.
Having folks would expect more of the same and be pleasantly surprised by the better rather than expect better and be disappointed by more of the same. Thank you.
Hey, Bascom, it's Jared good morning, you've covered us for a while you know we don't give annual guidance. We wanted to give you some color into Q4 in terms of expecting positive seasonality and roughly 20% sequential adjusted EBITDA growth despite being in a soft market and despite being an expectation for a muted peak season heading into 2024, I think drew summed it up perfectly earlier.
To the extent that a peak season emerges heading into 2020 for how we think about the business over the long term right. So we're making the strategic investments now we are so we are focused on delivering the commitments that we gave at investor day to 475 million to $525 million of adjusted EBITDA No matter, what the market throws at us over a 12 month period, we are confident on <unk>.
<unk> volume growth outperformance with best in class margins.
Thank you.
Okay.
Thank you we have reached the end of our question and answer session I will hand, the floor back to Joe Wilkinson for closing remarks.
Thank you center.
In the third quarter, our XO performed well on a soft freight environment with 18% brokerage volume growth and strong gross margins. We've got experience with this stage of the freight cycle and we've got a winning strategy that positions our XO for future growth, we have a strong balance sheet and a disciplined focus on cost.
At the same time, we continue to invest in our people our service offerings and our technology.
Being close with our customers and providing them with unique solutions that help solve their toughest freight challenges. Thank you all for your time today I look forward to seeing many of you in the coming weeks and I Hope you all have a great holiday season.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating in Aki. Please disconnect your lines.
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