RXO, Inc. (NYSE:RXO) Q4 2023 Earnings Call Transcript

RXO, Inc. (NYSE:RXO) Q4 2023 Earnings Call Transcript February 8, 2024

RXO, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.03. RXO, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to RXO Q4 2023 Earnings Conference Call and Webcast. My name is Lara 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 and 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 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 website 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. Wilkerson, you may begin.

Drew Wilkerson: Good morning, everyone, and thank you for joining today. With me here in Charlotte are Chief Financial Officer Jamie Harris and Chief Strategy Officer Jared Weisfeld. Before I get into our fourth quarter results, I want to recap 2023, a historic year for RXO. When we spun from XPO in November of 2022, we created a new public company that is more fit for purpose with the ability to allocate capital even more effectively. While market conditions were difficult when we spun, we viewed this as an opportunity to demonstrate the power of our model. In 2023, we doubled down on our strengths, exceptional customer service, solutions that help our customers solve their toughest transportation challenges, innovation, and deep customer relationships.

We also successfully integrated new leaders into our existing long-tenured team. Our model delivered outperformance for 2023 despite the extended soft freight market conditions. Brokerage volume grew by 12% year-over-year, with gross margin of more than 15%. Brokerage cross-border loads grew by 37% year-over-year. Brokerage productivity, as measured by loads per head per day, increased by over 15%. In maintenance transportation, we significantly grew the synergy loads provided to our other lines of business, largely truck brokerage. We also on-boarded several large new customers. We grew last mile adjusted EBITDA year-over-year. We also generated strong adjusted free cash flow of $49 million, which Jamie will expand on later. We achieved all of this, while making investments for our future, including our people, offices, technology, and services.

I couldn’t be prouder of what the RXO team delivered in 2023, and I’m looking forward to continuing to outperform this year. Now let’s discuss our fourth quarter results. RXO continued to perform well in the quarter despite soft freight market conditions that have persisted. For the third consecutive quarter, we achieved double-digit brokerage volume growth. Total brokerage volume grew by 15%. Full truckload brokerage volume grew by 11%, and less than truckload volume grew by 45% year-over-year. We again broke records in our brokerage business this quarter. Quarterly loads per day and total volume hit new highs. Full truckload has always been the core of our brokerage business and it represented 84% of volume in the quarter. Later Jared will talk in more detail about our volume growth by vertical, but all of our major truckload verticals grew year-over-year.

Our cross-border loads also grew by an impressive 28% year-over-year. Contract volume was again the most important driver of our growth and represented 80% of our mix in the quarter. Securing contractual volume puts us in prime position to win spot volume and project loads when the market inflects. RXO continues to take profitable market share. Brokerage gross margin was 14.8% in the quarter. In complementary services, Managed Transportation again grew the synergy loads it provided to our other lines of business, mainly truck brokerage. Managed Transportation also secured several key wins including new managed expedite customers solidifying our position as a leading provider of this service. In Last Mile, the focus we placed on improving profitability was successful and we grew adjusted EBITDA both sequentially and year-over-year for the fourth quarter and for full year 2023.

We’re pleased with the progress we’ve made in our Last Mile business and we have many opportunities ahead. Complementary Services gross margin was 20.9% in the quarter, up 90 basis points sequentially and up 40 basis points year-over-year. Our proprietary technology continues to drive many of these results. In the fourth quarter, 97% of the loads were created or covered digitally, up from 87% a year ago. Our seven-day carrier retention was 76%, up 200 basis points year-over-year. I’d now like to spend some time giving you an overview of what we’re seeing in the market and how that impacted our business in the fourth quarter. The freight market continued to soften during the fourth quarter, primarily due to supply side challenges. The load to truck ratio declined to about 2 to 1 in the fourth quarter, down from nearly 3 to 1 in the third quarter.

Industry tender rejections remained steady at just about 4%. The logistics manager’s index dropped sharply in November after three consecutive monthly increases. It rebounded only modestly in December. Carrier exits accelerated, but there’s still too much capacity relative to demand. We also experienced a muted peak season. We saw a typical seasonal capacity reduction at the end of Q4 and when combined with inclement weather hitting certain parts of the country, there were limited opportunities to improve our buy rates. This negatively impacted both our brokerage gross margin percentage and gross profit per load throughout the quarter. However, our focus on profitable growth while controlling costs enabled us to increase adjusted EBITDA by approximately 20% sequentially, in line with the expectations that we communicated to you last quarter.

I’d like now to discuss our expectations for the first quarter. We expect that our strong brokerage sales pipeline will enable us to deliver year-over-year brokerage volume growth in the first quarter, albeit at a slower pace than in the fourth quarter. Brokerage gross margin compression continued into January and we anticipate that will impact the first quarter. Jamie and Jared will discuss this in more detail later in the call. As we look forward to the rest of the year, we’re preparing for multiple scenarios. At this time, our base case is the recovery will begin in the second half of the year. That assumes that the macro economy remains stable and carrier exits continue to accelerate. In market conditions like these, large companies like RXO, who have financial strength, strong relationships with customers and carriers, and cutting-edge technology will excel and widen the gap with the competition?

We have our sights set on the future and are investing for long-term growth and profitability. We also continue to react quickly to changing market dynamics, including by reducing our costs. The actions we’re taking now will help drive outsized growth when the market turns. Now, Jamie will discuss our financial results in more detail. Jamie?

James Harris: Thank you, Drew, and good morning, everyone. I’ll review our fourth quarter performance in addition to some highlights for the full year. In the fourth quarter, we generated $1 billion in revenue compared to $1.1 billion in the fourth quarter of 2022. Gross margin in the quarter was 18%. While gross margin declined 150 basis points year-over-year, we are pleased with this performance given the current freight environment. Our adjusted EBITDA was $31 million in the quarter, in line with our expectations of 20% sequential growth. This compares to $64 million in the fourth quarter of 2022. Our adjusted EBITDA margin was 3.2%, down 250 basis points year-over-year. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin.

Below the line, our interest expense for the quarter was $8 million. Our adjusted effective tax rate of 29% in the quarter was lower than our previous expectations due to discrete tax items. Adjusted diluted earnings per share for the quarter was $0.06, which includes approximately $0.02 of discrete tax benefits. You can find a bridge to adjusted EPS on slide 7 of the earnings presentation. Moving to our lines of business. In the fourth quarter, our brokerage business generated $610 million of revenue, down 8% year-over-year, primarily due to lower freight rates. Brokerage volume for the quarter increased by 15% year-over-year. Brokerage gross margin remained strong in the quarter at 14.8%. While gross margin declined 300 basis points year-over-year against a very tough comp, it only declined by 30 basis points sequentially.

Complementary services revenue in the quarter of $411 million was down 16% year-over-year. Revenue was impacted by lower automotive volumes in our managed transportation business and continued weakness in the big and bulky category impacting Last Mile. While Last Mile stops were down 9% year-over-year in the quarter, Last Mile adjusted EBITDA was up year-over-year, primarily as a result of strategic pricing actions we took earlier in the year combined with continued operational improvements. Our customers recognize the value that our Last Mile business provides and we’re excited about the opportunities in this part of our business. Complementary services gross margin of 20.9% improved by 40 basis points year-over-year and by 90 basis points sequentially.

Fourth quarter seasonality and our Last Mile pricing initiatives were the biggest drivers of our improved gross margin on a sequential and year-over-year basis, respectively. Turning to the full year. In 2023, we generated $3.9 billion in revenue compared to $4.8 billion in 2022. 2023 gross margin of 18.3% was down 130 basis points year-over-year. Our full year adjusted EBITDA was $132 million compared to $306 million in 2022. Our adjusted EBITDA margin for the year was 3.4% down 300 basis points. The declines in these metrics were primarily due to lower freight rates and the moderation in brokerage gross margin. Now I’d like to discuss the full year results for our lines of business. Brokerage revenue for the year was $2.4 billion down 19% year-over-year, primarily due to lower freight rates.

Brokerage volume for the year increased by 12% year-over-year. Broker’s gross margin remained strong at 15.4%, but declined by 300 basis points year-over-year. Complementary services revenue was $1.7 billion for the full year, down 15%. Gross margin of 20.8% improved by 80 basis points year-over-year. For the full year, Last Miles stops were down 9%, but adjusted EBITDA was up year-over-year, as we mentioned earlier. Please turn to slide eight as we discuss cash flow. Our adjusted pre-cash flow of negative $2 million over the trailing six months was impacted by lower profitability levels at the bottom of the freight cycle. As we mentioned during last quarter’s call, Q3 adjusted pre-cash flow was also negatively impacted by the earlier than expected collections in the second quarter.

For the full year, RXO generates strong adjusted free cash flow of $49 million, or approximately 37% of adjusted EBITDA. As we discussed last quarter, our 2023 adjusted free cash flow was impacted by out-of-period cash tax payments in the amount of $15 million. When adjusting for those payments, our 2023 adjusted free cash flow conversion was approximately 48%. This speaks to the power of the RXO model and our ability to generate meaningful cash flow during a down 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. At the bottom of the cycle, adjusted cash conversion will be negatively impacted by fixed charges such as interest expense in addition to the capital expenditures that we intend to make for long-term growth.

As Drew mentioned, at this time our base case is that the freight market recovery will begin in the second half of the year. As a reminder, accelerated growth as the cycle turns will result in the use of working capital. We continue to anticipate using approximately 7% to 9% of each incremental revenue dollar. This could impact short-term cash conversion depending on the pace of the recovery. Now let’s move to slide eight where we’ve included a 6-month cash bridge. We ended the quarter with $5 million of cash on the balance sheet, slightly above our expectations due to strong receipts in the quarter. The reduction of our cash balance from the third quarter was principally a function of our $100 million term loan prepayment. Turning to cost, in 2023 we achieved annualized run rate savings of approximately $32 million with associated restructuring charges of $16 million, a very strong return.

While the savings have been masked by the current freight cycle dynamics and the reduction in brokerage gross profit per load, this will create significant operating leverage when the cycle turns. Our full year 2023 restructuring and spend related costs were $28 million, better than last quarter’s estimate of $30 to $32 million and our initial expectation of approximately $35 million at the beginning of 2023. Additionally, the cash outflows associated with these restructuring and spend related actions were $23 million, also better than the $25 million expectation that we shared with you last quarter and our initial expectation of $30 million at the beginning of 2023. I want to spend some time discussing our cost optimization efforts for 2024.

While we continue to strategically invest in the business, we will always leverage our technology and operate with a continuous improvement mindset. That said, given the current market conditions, we are acting expeditiously to take additional costs out of the business. We currently plan to take out at least $25 million of additional annualized operating expenses. From a capital expenditure perspective, our current projection for 2024 is for capital expenditures in the amount of $40 to $50 million. This compares to $64 million in 2023 and is more in line with our long-term, cross-cycle target of 1% of revenues. Also remember, 2023 capital expenditures included approximately $12 million of strategic real estate spend. As I mentioned earlier, we are continuing to invest for growth but are mindful of the current operating environment.

As you can see on slide nine, our liquidity position remains healthy with $600 million of committed liquidity at the end of the quarter. Growth and net leverage at quarter end were both approximately 2.5 times trailing 12-month adjusted EBITDA, moving higher from the prior quarter as we cycle through last year’s EBITDA. We remain comfortable with our current leverage ratio and given the strong free cash flow characteristics of our business, we will de-lever as the cycle inflects. Our customers want to work with strong partners like RXO that can perform and invest across all market cycles. Regarding the first quarter, as Drew mentioned earlier, our brokerage business is currently being impacted by market conditions and limited spot opportunities pressuring our gross margin.

We therefore are anticipating an above seasonal sequential decline in adjusted EBITDA. Specifically, we expect Q1 adjusted EBITDA in the range of $12 to $18 million. You can find our 2024 modeling assumptions on Slide 13 of the deck. We expect the following: capital expenditures between $40 million and $50 million, depreciation expense between $56 million and $58 million, amortization of intangibles of approximately $12 million, stock-based compensation expense between $24 million and $26 million; restructuring, transaction and integration expenses between $20 million and $25 million; net interest expense between $31 million and $33 million, and we expect our full year 2024 adjusted effective tax rate to be approximately 30%. This assumes no change in the current tax law.

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’re operating well, investing strategically while remaining disciplined on cost and positioning RXO for the cycle inflection. Now I’d like to turn it over to Chief Strategy Officer, Jared Weisfeld, who will talk more in detail about our results and our outlook.

Jared Weisfeld: Thanks, Jamie, and good morning, everyone. We continued to outperform the market in the fourth quarter, growing brokerage volume by 15% year-over-year with continued substantial profitable market share gains enabled by our people and our technology. More specifically, we grew our core truckload volumes by 11% year-over-year and grew LTL volume by 45% year-over-year. Our full truckload customers continue to award us LTL loads because of our strong service and relationships. LTL represented approximately 16% of brokerage volumes in the fourth quarter. In our full truckload business, all of our major verticals grew year-over-year in the fourth quarter. We believe this speaks to our idiosyncratic profitable market share gains as our results continue to outpace the macroeconomic indicators most closely aligned with these verticals.

Retail and e-commerce volumes grew by 12% year-over-year. Volume from our industrial and manufacturing customers increased by high single digits year-on-year. This is particularly noteworthy as the ISM manufacturing PMI was in contractionary territory for all of 2023. From a profitability perspective, we again delivered strong brokerage gross margin of 14.8% in the quarter, down just 30 basis points sequentially, enabled by our technology. The quarter started off strong from a gross margin standpoint. But as Drew discussed earlier, the freight market weakened throughout the entire quarter, we had a muted holiday peak season, and we experienced the capacity squeeze at the end of the quarter. I’ll discuss this in more detail shortly. In the fourth quarter, 97% of our loads were created or covered digitally versus 87% in the fourth quarter of 2022.

Seven-day carrier retention was a strong 76% in the quarter compared to 74% in the fourth quarter of 2022. We launched several new technology features in the quarter, including enhanced generative AI capabilities that are helping our sales enablement teams get closer to our customers. We also increased automation within our LTL business and implemented new auto tracking capabilities for cross-border freight. Our technology continues to enable our people to become even more productive. In 2023, productivity in our brokerage business as measured by loads per head per day improved by over 15% year-over-year. In the fourth quarter, contractual volume represented 80% of our business flat sequentially and up 500 basis points when compared to the fourth quarter of 2022.

Contract volume grew 23% year-over-year. Because our LTL business is largely contractual, we thought it would also be helpful to share our contract mix for our truckload business, which was approximately 75% in the quarter. While we have not yet seen meaningful spot opportunities, it’s worth noting that line haul spot rates moved higher as the fourth quarter progressed. I’ll discuss this in more detail shortly, but if spot rates in industry-wide tender rejections continue to move higher because of our contractual business and our deep customer relationships, RXO will be a prime beneficiary of spot volume. I’d like to expand on our current view of the freight cycle, and I’ll refer you to Slides 10 through 12 of the presentation. Let’s start with revenue per load.

Revenue per load declines eased again in the fourth quarter and declined by 20% year-over-year. The year-over-year decline improved by 600 basis points when compared to the third quarter. As we discussed last quarter, 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 at approximately low teen’s percentage on a year-over-year basis, in line with the broader market. This decline also improved versus last quarter’s mid-teens year-over-year decline. We generated a strong gross margin percentage across all different parts of the freight cycle by leveraging our proprietary technology and pricing algorithms to procure capacity at better than market rates.

Let’s move to Slide 11 and discuss brokerage monthly gross margin trends. There are points in the cycle, including the current environment where market conditions limit our ability to bring down transportation costs. While we leverage our proprietary best-in-class technology and our people to generate a strong gross margin, our actions cannot fully offset changing market conditions. In fact, transportation costs have recently moved higher given that, in many cases, carrier operating costs are at or above current spot rates. This is best demonstrated through the continuation of carrier exits in the industry, which have occurred every month since October of 2022. The carrier exit rate accelerated at the end of December, and we anticipate the acceleration to continue throughout 2024.

In fact, in the month of January, the average weekly carrier exit rate was approximately 30% above full year 2023 levels. To give you some additional color, RXO active network carriers declined approximately 5% sequentially. While these carriers hauled less than 1% of our volume over the last 90 days, it serves as a good proxy for broader market conditions. Moving to brokerage gross margin trends in the quarter. As we discussed last quarter, we saw some softening during the month of October, but our gross profit per load remained resilient. However, margin decreased as the quarter progressed as weakness in the freight market persisted. The national load-to-truck ratio averaged 2:1 during the quarter and for many weeks, it was below 2:1, levels not seen since earlier in 2023.

For context, the load-to-truck ratio has averaged approximately 4:1 for the last 5 years, and spot volumes typically emerge around 6:1 to 7:1. Tensor rejection rates were relatively unchanged at about 4% in the quarter, special projects wound down into November and December, and it was a muted peak season. Market conditions also limited our ability to bring down the buy side, and we saw the typical seasonal capacity squeeze at the end of Q4. This margin pressure worsened in January when compared to December and was further amplified by inclement weather in certain regions. The load-to-truck ratio sharply increased above 3:1 at the end of December and sustain the move higher into January. To help put that in perspective, when comparing January to December, our gross profit per load percentage decline in weather impacted states was 2 to 3 times the amount when compared to volumes in states not impacted by weather, entirely driven by an increase in cost of purchase transportation.

The declines in the Midwest and Southeast regions of the country were the most acute. While our book of business is by design largely contractual, we can pivot quickly to changing market conditions. This model has worked well for us for more than a decade, delivering above industry growth and profitability. During the previous freight market recovery, RXO was able to quickly respond to service our customers’ needs and our spot mix increased significantly in just one quarter. Let’s go to Slide 12 and briefly look at RXO’s brokerage gross profit per load on a quarterly basis. Given the strong month of October, RXO’s Q4 2023 gross profit per load increased sequentially despite the gross margin squeeze in the quarter. I’d now like to look forward and give you some more color on the first quarter outlook that Jamie provided.

Given recent volatile market conditions, I’ll be giving a more granular view of our Q1 expectations, which is typically our seasonally weakest quarter. Let’s start with volume. Our brokerage sales pipeline remains robust. More specifically, our late-stage pipeline is up 24% year-over-year and up 90% on a 2-year stack. This gives us confidence that we will again grow brokerage volume on a year-over-year basis in the first quarter. While January brokerage volumes still increased on a year-over-year basis, we did see year-over-year volume growth moderate when compared to the fourth quarter. More specifically, we grew January brokerage volumes by approximately 8% year-over-year. We’re assuming first quarter year-over-year brokerage volumes will grow, but at a slower pace than the fourth quarter.

Brokerage revenue per load trends are encouraging, and we expect the moderation in year-over-year revenue per load declines in the first quarter. The first quarter will be the third consecutive quarter where revenue per load declines have improved on a year-over-year basis. Moving to brokerage gross margin, which I mentioned moved lower throughout the fourth quarter. We expect Q1 brokerage gross margin to be approximately 12% to 14%, solid performance given the difficult market dynamics at this part of the freight cycle. While gross profit per load declines have eased over the last few weeks, we’re continuing to monitor market conditions. From a complementary services perspective, we expect typical negative Q1 seasonality, including an absorption of fixed costs on a lower revenue base in Last Mile.

Putting it all together, we expect RXO’s first quarter adjusted EBITDA to be between $12 million and $18 million in the first quarter. If buy rates cool as weather patterns normalize, and the business seasonally improves into February and March, we are likely to come in at the midpoint or high end of our adjusted EBITDA range. If the recent margin squeeze within brokerage persists, we are likely to come in at the lower end of the range. Based on our current view of the broader macroeconomic data, industry-wide carrier exit rates and what we are hearing from our customers, our current base case is a market recovery in the second half of the year. It’s important to differentiate between the macro economy, which remains reasonably healthy in the freight cycle.

Consumer confidence is increasing, inflation is moderating and goods demand relative to services has stabilized. However, there is still too much trucking capacity relative to demand negatively impacting the freight market. We believe the rate of carrier exits is the largest variable affecting the timing of the freight recovery. In summary, we’re continuing to gain market share profitably with another quarter of strong brokerage volume growth and 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 inflects. We’re operating in a prolonged soft rate market, but we’re 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.

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Q&A Session

Operator: [Operator Instructions] We have our first question coming from the line of Ken Hoexter from Bank of America. Please go ahead.

Ken Hoexter: Great, good morning. Jamie, I think you said you ended the year with $5 million cash on hand, and that was slightly above target. Just wondering why you’re running on such thin cash? And then just thinking about what Jared just talked about and Drew mentioned for the first quarter, $12 million to $18 million of adjusted EBITDA implies maybe another $8 million of operating cash flow and your CapEx seems to be on $10 million to $15 million. So it looks like you might be negative on cash again. Can you maybe walk us through the rollout there and then the thoughts on cash?

James Harris: Yes. Ken, this is Jamie. Yes, so cash, remember in the quarter, in November, we paid down our term loan. So we used $100 million of our cash is on the balance sheet of Q4 to pay down term loans. So that was the big use of cash. From an operational standpoint, we finished the 6-month trailing at about a negative $2 million adjusted free cash flow. If you remember, in second quarter, we had a large approximately $15 million early receipt that really bumped up our conversion rate in the first half of the year that really calls the third quarter and therefore, the 6-month period to be a little bit lower. If you take that into account, we’re at about a 22% conversion. We actually — the cash balance of $5 million, we had a $5 million cash balance, $5 million usage of the revolver, that was actually slightly better than we had anticipated being based on our outlook 90 days ago.

So we were actually pleased with where we landed for the quarter. If you look at lifetime to date, Ken, going back to the spin, we’re over 50% conversion rate of EBITDA to adjusted free cash flow. For year-to-date, we’re about 48%. So both of those metrics fall right in line with our 40% to 60% target that we believe is our long-term cross-cycle conversion. If you kind of go over to the first quarter, to your question about where we think we’ll land a $12 million to $18 million range should put us somewhere in the neighborhood of a usage of cash of about $2 million to $3 million on an adjusted free cash flow basis, taking into account all other cash items, primarily, which will be some restructuring costs there. We should be in the $10 million to maybe $15 million usage in the first quarter.

To your point about CapEx, we are spending — we guided to about $40 million to $50 million of CapEx. That’s more in line with our long-term target of just over — just at or over 1% of our revenues. So overall, we actually felt really good about our cash flow for the quarter. As we outlook, the first quarter based on that range, we see cash being in that ballpark.

Ken Hoexter: If I could — a follow-up. I guess just talking about your gross margin, Drew, looking at the steep drop-off of margins, I guess, is there something that is accelerating downward in the business in the first quarter from where you ended. I know you talked about a lot of things, weather and everything in the fourth quarter, lack of peak, but it seems like the step down is beyond economic and seasonal press, is there increased competition that you’re seeing that’s accelerating that? Maybe just talk about that outlook a little bit. Thanks.

Drew Wilkerson: Yes. No, absolutely. Thank you, Ken. This is Drew. So if you look at what we saw in the first quarter, typically, the first two weeks of January, you see pressure on your gross profit per load and your gross profit percentage. We saw that, but it actually was worse than what we anticipated due to whether Jared hit on in his prepared commentary, that the Midwest and the Southeast, specifically those gross profit percentages were down 2 to 3 times more than what the rest of the country was. So this was largely driven by weather. There is also the cost of purchase trends. We had hit the bottom of where the carriers were operating at, so there was no room to pull down carrier costs, and we’re operating in what is largely a contractual volume.

There’s not a lot of spot loads out there in the market today to where spot gross profit per load can help offset that. But again, if you look at where we finished for the quarter, I think our gross margin percentage stacks up well for where we finished in the industry. And I think that we’ll continue to see best-in-class gross margins because of the investments that we’ve made in our technology.

Ken Hoexter: Great. Appreciate the thoughts. Thank you.

Operator: Our next question comes from the line of Jordan Alliger from Goldman Sachs. Please go ahead.

Jordan Alliger: Yes, hi. I was wondering you sort of talked about expectation for a second half recovery. Can you maybe give us some thoughts on the cycle recovery? How is it going to look? What still has to happen? Will — does that include net revenue or gross margins starting to expand again? Just some color on that and sort of the comfort level in the second half. Thanks.

Drew Wilkerson: Yes. So Jordan, two big things have to happen for the back half recovery. The first is the overall macro. If you look at what’s happened in the macro, GDP sitting around 3.3%. Inflation continues to ease. The job market reports have been good. So we need the market to continue to be in a stable environment. The second thing and the biggest thing that we’re watching right now is capacity exits. And as Jared said, we’ve seen capacities exit the market every month since October of 2022. And in the month of January, we saw them run at 30% higher than what all of 2023 came out at. So we need to continue to see capacity exits across. There’s still a good bit more capacity in the market than what there was even at pre-COVID.

So those two big things have to happen for the back half of the recovery. That is our base case. That’s what we’re anticipating happening. And when you look at that, what the base case implies is that you start to see revenue, gross profit per load EBITDA turning positive during that time frame.

Jordan Alliger: Okay, thanks so much.

Operator: Our next question comes from the line of Stephanie Moore from Jefferies. Please go ahead. Miss Moore, your line is now live. Please go ahead.

Stephanie Moore: Maybe following up on Ken’s question to start. Could you talk a little bit about even seasonality in the first quarter? Maybe what you see from January to March, I know March can be a pretty big inflection? So maybe just talk about kind of thoughts on normal seasonality and what the quarter and how that relates to your guidance?

Drew Wilkerson: Yes. So typically, you do see Q1 get better throughout the month — I mean, throughout the quarter. And that’s what we’re anticipating in the guide that we gave you from $12 million to $18 million in EBITDA for Q1. January, there was pressure on gross profit per load. As we’ve gotten into February, we’ve seen in this first little bit of February, we’ve started to see gross profit per load trend better than what it was in the month of January. It’s not back to where it was in October and November, but it has started the path to recovery, which is why we were able to give you the range that we did of $12 million to $18 million.

Stephanie Moore: That’s helpful. Appreciate it. And then I think you noted and have shown that in the past, you are able to adapt very quickly on the cycle turns and move your mix between contracts and spot. Given the cycle has really been probably not like any cycle we’ve seen before. Can you talk about your ability either to not be able to move from contract to spot as quickly as you have in the past? Or what might limit your ability to move as quickly, potentially if this is a slower recovery or faster recovery? Just how should we think about how the environment could possibly inflect?

Drew Wilkerson: Yes. So the recovery will largely depend on the spot market, it will largely depend on what’s happening in the overall market. That’s not something you can — as a business, it’s harder to shift from spot to contract, is more of looking at what’s going on in the market and making sure that you’re in the pole position as spot loads as project as many bids start to happen, you’re in the pole position for customers to reach out to you, and we’re confident that we’re in the pole position. If you look at the market, I mean, in Q4 load-to-truck ratio went down to around 2:1. Tender rejections were around 4%. That’s not a market that’s conducive to being a heavy spot market. Now did we see spot loads go up sequentially?

Yes, but it was minimal. Our spot gross profit per load was trending ahead of our contractual gross profit per load. But it’s not a robust spot market and the measures that we watch are load-to-truck ratio, tender rejections, carrier exits and what we’re hearing from our customers. And our customers are still telling us that they will lean on us for projects. They’ll lean on us for spot loads as the market does start to tighten.

Stephanie Moore: Great. Thank you so much.

Drew Wilkerson: Thank you.

Operator: Our next question comes from the line of Brandon Oglenski from Barclays. Please go ahead.

Brandon Oglenski: Hey good morning guys. And thanks for taking my question. And I hope this doesn’t come off the wrong way, but you referenced numerous times in the presentation this quarter and I think in past quarters, too, about continued profitable growth in the brokerage business. But obviously, like the bottom line is adjusted EBITDA keep coming in lower. I mean, I think we’re back to maybe the lowest even approach where we were in early 2020. So help put in context that comment about growing profitable loads relative to consolidated results. I appreciate that.

Drew Wilkerson: Yes. Absolutely, Bran. The biggest thing that we’re looking at is how we’re operating versus the industry versus in the environment that we’re in. And so when you look at what we’re seeing right now, we’re putting up best-in-class volume growth, and we’re doing that with best-in-class margins. Now in the bottom part of the cycle, you do feel pressure on your gross profit per load. Gross profit per load is one of the biggest levers that we watch for where we’re going to go long-term. So the pressure that you see on the downward — you see the good side of that on the upswing that gross profit per load can bring to you. So for us, we’re confident that we’re making the right investments that allow us to operate at the best gross margin percentage with strong volume growth.

Brandon Oglenski: Okay. Appreciate that, Drew. And then, Jamie, on the cost side, I think you talked about continuing to optimize the cost structure, maybe Jared made that comment, but what’s your objective for cost in 2024? And if you could provide any directional guidance, that would be helpful.

James Harris: Yes. So we expect to take out at least $25 million in 2024. Last year, we were able to take out about $32 million of annualized savings on OpEx, not all of that has found its way into the P&L because some of that was the latter part of the year. So you’ll see some pickup from the animalization of that this year. But $25 million — at least $25 million for this year. Since then, we’ve been working very aggressively to optimize our cost structure throughout. We’ve looked at all processes. We’ve looked at all the roles of vendor relationships to make sure that we’re running as effectively and efficiently as possible. From a cost standpoint, we really want to set ourselves up so that we are optimally structured cost-wise. So when we see a market inflection, it just gives us significant operating leverage and flow through to the bottom line when gross profit per load recovers.