Jason Seidl: Okay, that’s great color. And lastly, on the last mile business, some of your competitors have reported actually pretty decent results. And I understand everybody saw little bit different in the last mile game. But could you talk to demand and what you’re seeing out there and what we should expect going forward?
Drew Wilkerson: Yes, very happy with the last mile team and their performance. We talked in 2022 about the opportunity to improve last mile’s overall profitability and growing EBITDA last year in 2023. They started off this year strong. Part of the reason why we have the strongest pipeline that we’ve had in four years is because the last mile team has such strong relationships with their overall customers Right now, they’re in a seasonal uptick. So, part of the reason for the guide being raised for Q2 versus what it was in Q1 is because of the performance that last mile is having. They’ve got a number of operational initiatives underway. One, just continuing to utilize all of the space that we’ve got in our last mile hubs. Number two, pulling down purchased transportation from where it started to rise in 2022 and early 2023.
I mentioned earlier that we’ve got opportunities with some of our large customers that trust us and want to give us the opportunity to win more of their business. We’re in the middle of some of that right now and it’s going — the early returns are extremely positive. And then the last thing is, we still got some opportunity to take price from some of our customers in last mile and get paid a fair value for the service that we provide for them.
Jason Seidl: That’s good. Can we dig in a little bit more into what you were talking about? You said, hey, a record pipeline of last mile is responsible for a bunch of that. What percentage of the pipeline is last mile now versus maybe, say, last year?
Drew Wilkerson: Yes. So, I don’t think that I said that they were responsible for a bunch of it. I said that they were one of the reasons that we were able to have the strongest pipeline of what we had in four years. Not going to break that down by our overall lines of business because that’s not how we manage the business. We told you all along, as you look out over the long term, there are a number of ways for us to hit our longer term targets and improving in last mile is one, growing brokerage, taking market share, improving the volumes on the LTL business, adding Managed Transportation firm. There’s a lot of opportunities and we’re excited about where the overall pipeline is right now.
Jason Seidl: Understand. Gentlemen, I appreciate the time, as always.
James Harris: Thank you.
Drew Wilkerson: Thank you.
Operator: Your next question comes from Ravi Shanker from Morgan Stanley. Please go ahead.
Ravi Shanker: Thanks. Morning gents. The commentary on your existing TL customers given your incremental LTL volumes is really interesting. Are you — are they explaining the rationale for that? Kind of, is that a function of what’s going on in the LTL marketplace on the asset base side in terms of capacity? And are you seeing any shift in the other direction, which is LTL customers trying to move into the TL market just given what’s going on there as well?
Drew Wilkerson: Yes. So, the first thing that we hear from our customers, Ravi, is that when they’re looking at their overall spend, LTL is a small piece of it. Truckload, for the most part, dominates their spend. But they’ve spend a lot of time on LTL, cleaning up things like claims, late deliveries, lost shipments. And so what they’ve seen on the truckload side is, they love the platform of RXO Connect. It’s easy to do business with. It’s something that gives them a lot of data to help them make decisions, gives them great visibility, so they’re coming back to it, and they love the fact that it lets them work with multiple LTL carriers. So, for them, we’re taking away a headache and they trust us because of the service that we’ve provided on the truckload side.
As far as mode shifting over from LTL to truckload, we haven’t seen a ton of that at this point, but we always monitor where mode conversions are going, whether it’s from LTL to truckload, truckload to LTL or intermodal to truckload or vice versa. But we’re doing — the last point that I want to make is, right now, Ravi, we’re doing RFPs for our largest customers on the truckload side. We’re doing LTL RFPs every single day right now.
Ravi Shanker: Got it. And maybe as a follow-up, can you talk about the decision to get yourself more headroom on the covenants a few weeks ago? Was that opportunistic? Was that necessary? And kind of what’s the messaging on the balance sheet over the next six, 12, 18 months as we potentially kind of go through a prolonged down cycle than maybe in secular upcycle?
Drew Wilkerson: Yes, I’d say the messaging on the balance sheet, first of all, it’s very strong. Our customers want to do business with people with strong balance sheets, and we clearly have a strong balance sheet. The decision to upsize or mend the revolver, purely opportunistic, proactive in nature. We don’t know exactly what the freight market looks like for the next six, 12, 18 months, so we want to be proactive to give ourselves plenty of headroom. As we said last quarter, we didn’t anticipate an issue. We still do not anticipate an issue, but we’re doing what we should be doing as a management team, is proactively planning. And so, we took the opportunity to go out and raise the amendments. And look, we had good banking partners who understand this freight cycle, and — so that’s why we did that action, Ravi.
Ravi Shanker: Very good. Thank you.
Operator: Your next question comes from Scott Group from Wolfe Research. Please go ahead.
Unidentified Analyst: Hey, this is Jake on for Scott. Thanks for the time. Can you give us a sense about how you’re thinking about the shape or seasonality of EBITDA in the second half of the year? And do you expect to return to EBITDA growth?
Jared Weisfeld: Hey Jake, it’s Jared. So, as you know, we give an outlook one quarter at a time. We’re very pleased that we’re able to almost double our EBITDA sequentially at midpoint of our guide, Q1 versus Q2. And I’ll hit on what Drew said earlier, right? We look at this business over a multi-year view. Our volume growth is holding very, very strong in Q1 and Q2, with truckload contract up in the second half of the year. I think we’re very excited about converting some of the pipeline that we have, which is the largest in four years for the company. And we also have obviously significant cost initiatives underway with respect to at least $35 million of cost outs for 2024. So, I’m not going to specifically comment on the second half.
But I think that, obviously, it’s going to depend on the shape of the recovery and what the market looks like. But I think we need to make sure that we are — we’ve got a playbook for different parts of the cycle, and we’ll go ahead and we’re positioned really, really well in terms of whatever the market gives us.
Unidentified Analyst: Understood. And you’re taking out a fair amount of costs between last year and this year. How should we think about operating leverage in the off-cycle? And did these costs return? It’d be great to get your perspective there.
James Harris: Yes, this is Jamie. The overwhelming majority of these costs are structural in nature and permanent in nature. So how I think about it is if you take $1 gross margin that hits our P&L, you used to think about in excess of about 60% of that flowing through to the EBITDA line. And so as the market inflects, we’re working hard with our customers to make sure we’re there providing good contract, great customer service. So, we’re positioned to get incremental volume. We’re doing — working hard on our cost structure. So, when the market does inflect, we’re positioned to have significant flow-through.
Unidentified Analyst: Great. Thanks for the time.
Operator: Your next question comes from Jordan Alliger from Goldman Sachs. Please go ahead.
Jordan Alliger: Yes, hi good morning. I know there’s a lot of uncertainty injected into the freight recovery, but are you hearing anything from your customers, I guess, particularly in brokerage that maybe give some optimism in a recovery over the next six months? And then, second question, I’m assuming on the restructuring charges, those are in some way directly tied to the $35 million in annualized structural cost savings. Is the restructuring mostly headcount or facilities reductions? Just some help there. Thanks.
Drew Wilkerson: I’ll start off with the first question, and Jamie will take the second one on the restructuring. So, we’re always talking to our customers, and I spend a lot of time with customers. I think it depends on the vertical that you’re looking at. But if you look at inventory positions right now, they’re in a much healthier position than what they were this time last year. We’re happy with where our overall pipeline is. So I think that customers are similar to what you’ve heard this morning. Do they expect a recovery at some point over the next six to 12 months? Yes, they do. Do they know the exact timing of it? I don’t think anybody does.
James Harris: And Jordan, this is Jamie. On your second question, the answer is yes, all the restructuring charges relate to the cost outs, first of all. If you think about where the cost outs came from, there was some reduction in some employment with consolidation of vendors, consolidation of roles. We took the opportunity as folks have retired or just through attrition to not replace roles and find a more efficient way to maybe put two or three roles together. Your question about facilities, there has been some consolidation of facilities where it made sense, always with a mindset towards making sure that we can service the business well. And so, we’re actually very pleased with the cost outs. And again, I think it positions us well for when the market does inflect, we’ll have significant flow-through.
Jordan Alliger: And just as a follow-up, I mean, I’m assuming then those restructuring numbers will diminish quarterly, but checking.
James Harris: Yes, that is correct. They should diminish quarterly. One thing to throw out, and we’ve said it all along, we want to be known as a continuous improvement company, and we’re constantly going to be looking at ways to become more efficient. But specifically to the restructuring charges, yes they should go down.
Jordan Alliger: Thank you.
Operator: Your next question comes from Daniel Imbro from Stephens Inc. Please go ahead.
Daniel Imbro: Yes, thanks. Good morning guys. Thanks for taking the questions. Maybe one nearer-term and one longer term one. On the near-term, just looking back at the first quarter, so last call, you talked about coming in towards the high end of the EBITDA range if buy rates fell from January, they did. And it sounds like you’re running in line to ahead on the cost takeouts, but results were kind of at the midpoint. So, was there anything on the cost side or anything else in the first quarter that developed maybe worse than you anticipated that kind of kept us from getting to that high end of the range?
Jared Weisfeld: Hey Daniel, it’s Jared. I’d say a couple of things. With respect to the outlook that we provided 90 days ago, you’re right, we did say that easing of buy rates would be one factor to get us to the high end. We also said that seasonal improvement in volumes and demand would also be the other factor. And as we talked about in our prepared commentary, I mean, ultimately, seasonality is not right there — not there right now as we think about the sustained, prolonged freight market. We also did talk about, in some of the opening remarks with respect to some of the managed expedite weakness with respect to automotive. So, I think those were the two main reasons that caused us coming at the midpoint versus high end.
