Participants

Drew Wilkerson; Chief Executive Officer, Director; RXO Inc

James Harris; Chief Financial Officer; RXO Inc

Jared Weisfeld; Chief Strategy Officer; RXO Inc

Jenny Mack; Logistics Lead; RXO Inc

Ken Hoexter; Analyst; Bank of America

Scott Schneeberger; Analyst; Oppenheimer

Stephanie Moore; Analyst; Jefferies

Chris Wetherbee; Analyst; Wells Fargo

Ravi Shanker; Analyst; Morgan Stanley

Jordan Alliger; Analyst; Goldman Sachs

Jason Seidl; Analyst; TD Cowen

Caroline Scott; Analyst; Wall Street

Daniel Imbro; Analyst; Stephens

Presentation

Operator

Welcome to the RXO fourth quarter 2024 quarter earnings conference call and webcast. My name is Jenny and I will be your operator for today's call. Please note that this conference call 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 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 of 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 RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld.
There are four main points I want to convey this morning. First, the integration of Coyote Logistics remains ahead of schedule, and we continue to see the benefits of our increased scale and our larger portfolio of service offerings. As a result, we're again raising our estimate for cost synergies, which we now expect to be at least $50 million. As a reminder, this number does not include the significant cost of purchase transportation and cross-selling benefits we expect to see.
Second, while the market remains soft, RXO continued to deliver on our financial commitments. Importantly, we achieved these solid results while making significant progress on the Coyote integration.
Third, momentum continued within complementary services. Our sales pipeline in Managed Transportation is now nearly $2 billion, and we achieved another acceleration in last mile stops, which grew by 15% year-over-year.
And fourth, the structural improvements we're making to our business will increase our earnings power and free cash flow over the long term and across market cycles.
I'll start by giving you an update about the integration of Coyote. Last quarter, I mentioned that we're ahead of schedule, and that's still the case. We're focused on our people, our customers, our carrier partners, our technology and synergies. When it comes to people, we're continuing to retain our top talent. Since the acquisition closed, voluntary turnover of director level and above employees was only about 2% across the company.
I've been impressed with the engagement I've seen within the workforce. We're operating as one cohesive team and employees have been reaching out to me regularly to share the wins they've had with customers and carriers. Our larger size and scale are resonating with our employees, and with our key external stakeholders.
Thanks to the dedication of our people, we were able to deliver on both our financial commitments and the integration. Our people remain focused on taking care of our customers including executing our bid season strategy and reliably servicing the freight we've been awarded.
We had one unified strategy for the vast majority of the bids we participated in. This was made possible by the effective collaboration we have across the team. I mentioned that the integration is ahead of schedule. And one of the key areas that is showing up is in cross-selling. Cross-selling opportunities have exceeded the lofty internal goals we set for ourselves. Customers have been eager to leverage RXO's broad portfolio of services beyond truck brokerage, and we've had several wins with large shippers who are now using more services from RXO including managed transportation and last mile.
We made significant progress on integrating our technology in the fourth quarter. We migrated critical components of our tech platform to the cloud to achieve greater scalability and flexibility. We launched a unified tracking experience for shippers as well as a new website that provides customers with instant quotes. We continue to anticipate that the bulk of our tech integration will be complete by the end of the third quarter.
The smooth integration so far has enabled us to identify additional synergy opportunities. We now expect to achieve at least $50 million of annualized cost synergies, double our initial estimate. These numbers exclude the significant opportunities for improving our cost of purchase transportation and the impact of our cross-selling efforts. Jamie will talk in more detail about synergies later in the call. The Coyote acquisition positions us well for future organic growth.
Now I'd like to talk about our fourth quarter results, which were in line with our expectations. RXO delivered adjusted EBITDA of $42 million, within the guidance range we provided to you last quarter. Brokerage volume for our combined business declined by 6% year-over-year within the expected range. Less than truckload volume increased by 1%, but was offset by 8% decline in full truckload volume. Importantly, brokerage volume increased by 10% sequentially from the third quarter as a result of our continued focus on providing the best service, solutions, innovation and relationships in the industry. Brokerage gross margin was 13.2% in the quarter.
Momentum continued within complementary services. Our Managed Transportation sales pipeline continues to grow and is now nearly $2 billion, up almost 50% from last quarter. Converting that pipeline will provide significant cross-selling opportunities with enterprise customers across RXO.
In Last Mile, stops grew by 15% year-over-year. another acceleration from the third quarter growth rate of 11%. The most well-known retailers of big and bulky goods continue to turn to RXO for last-mile delivery services because of our scale, technology, financial stability and exceptional service.
Complementary Services gross margin was 21.1%, and RXO's company-wide gross margin was 15.5% in the quarter. Turning to the overall freight market. We continue to operate in a soft freight environment, and it was a muted peak season as we had anticipated. However, during the fourth quarter, conditions tightened significantly impacting by rates and gross profit per load. The national load-to-truck ratio and industry tender rejections reached their highest levels in more than 2 years. While there's still too much capacity in the market compared to the demand we're seeing from shippers, the industry is making progress towards reaching a more balanced state. In the first quarter so far, we've seen a continuation of these dynamics. While we typically see softer market conditions this time of year, in January, we also saw impacts from severe weather sustaining the market tightness. We have seen some project opportunities, but not enough to offset the increase in carrier rates.
Clearly, the freight environment is still [ solid ]. However, for the first time in 2.5 years, contract rates are increasing year-over-year, and spot rates are also starting to catch up. The market still isn't at an equilibrium, but we are moving into an inflationary rate environment. The data is telling us that we're coming off the bottom of the cycle, but we don't know what the shape or pace of the recovery will be. We remain focused on executing our bid season strategy and reliably serving our customers' freight. Jamie and Jared will discuss our outlook in more detail, but we expect the first quarter combined brokerage volume to decline by mid- to high single-digit percentage year-over-year, with tightening market conditions continuing to impact our buy rates. Importantly, given the strong execution by the team and feedback from our customers, we expect our combined brokerage volume to grow on a year-over-year basis for the full year.
I'm confident that RXO is well positioned for the future. We've made significant structural changes to our business over the last few quarters. We increased our truckload volume by 125% as a result of the Coyote acquisition, which has provided us with better lane density and more freight to award our carrier network. Ultimately, our additional volume, combined with our cutting-edge technology will enable us to achieve significant benefits when it comes to the cost of purchase transportation.
We've improved our go-to-market strategy to focus on cross-selling our wide array of services to customers, which is fueling new wins across the company. We enhanced our already best-in-class technology platform, which includes pricing algorithms that leverage AI and machine learning. Our employee-facing software is continuously improving productivity and is a significant competitive advantage. The synergy actions we're taking today will improve the efficiency and operating leverage of our business.
And lastly, we improved our already strong balance sheet, which provides a solid foundation for future organic and inorganic growth. You're not currently seeing the benefits of these structural changes due to the persistent soft market conditions that have decreased gross profit per load. However, the steps we've taken have significantly increased the long-term earnings power of RXO. We're building this business for the long term, and I'm more confident than ever in our future. Now Jamie will discuss our financial results in more detail. Jamie?

James Harris

Thank you, Drew and Good morning. Let's review our fourth quarter performance in more detail. We're presenting our financials on an as reported basis which includes the acquisition of Codi as of September 16, 2024. Unless otherwise noted my comments referring to peer prior to the closing of the acquisition, exclude the impact of the acquisition. Our brokers business is now a significantly larger portion of our overall company. You can see that our revenue and gross profit was significantly higher year-over-year in the fourth quarter because of the acquisition.
Additionally, Codi's historical gross margin and EBIT margin were lower than RXO which also impacted comparisons to prior periods during the fourth quarter. We generated $1.7 billion in total revenue. Gross margin was 15.5%. Our adjusted EBITDA was $42 million in line with our guidance range. Our adjusted EBITDA margin was 2.5% below the line. Our interest expense was $8 million for the quarter. Our adjusted earnings per share was $0.06. You can find a breeze to adjust the EPS on slide. Seven of the earnings presentation.
Now, I'd like to give an overview of the performance within our lines of business brokerage revenue was $1.3 billion and represented 75% of total revenue in the quarter. From a possibility perspective, brokerage gross margin was 13.2% slightly above the midpoint of our outlook and consistent with our expectations given this is the first full quarter of combined results. And because the legacy businesses have different gross margin profiles, we wanted to note that legacy RXO brokerage gross margin was approximately 14.5% in the quarter.
This was a strong result given tightening market conditions, complementary services revenue in a quarter of $431 million increased by 5% year-over-year. It was 25% of our total revenue. Complementary services gross margin of 21.1% remains strong and increased by 20 basis points year-over-year. Our last mile business generated $290 million in the quarter and performed better than our expectations. We are gaining share within the big and bulky category tops. Grew about 15% year-over-year accelerating from last quarter's growth rate.
Managed transportation generates $141 million of revenue in the quarter. Down 8% year-over-year, the decline was primarily attributable to lower automotive volume in our managed expedite business which was softer than we expected. Let's now discuss cache. Please refer to slide, eight adjusted free cash flow in the fourth quarter was $6 million.
This represents a 14% conversion from adjusted EBITDA. The conversion rate was impacted by a semi annual interest payment, lower profitability at the bottom of the freight cycle and timing of certain working capital cash flows. Longer term. We remain confident in a 40% to 60% conversion through market cycles. Given the strong free cash flow characteristics of the business, we ended the quarter with $35 million of cash on the balance sheet higher than the range of $5 million to $10 million that we shared with you last quarter.
This higher cash balance was solely due to the timing of transaction payments and other costs related to the QTI acquisition. These payments will be made at the end of the first quarter. So you'll see a lower cash balance in our first quarter earnings report. As you can see on slide nine, our liquidity position continues to be the strongest. It's been in our company's history.
Our $600 million revolver was undrawn at the end of the fourth quarter, end gross leverage was 1.7 times trailing 12 months pro forma adjusted. We have significant capacity to deploy our balance sheet in line with our balanced capital allocation philosophy across organic investments, share repurchases and opportunistic. M&A.
Let's move to the coding integration. As Drew mentioned, the integration is progressing well and we are again increasing our cost synergy estimate. We now expect at least $50 million of annualized cost synergies $10 million higher than last quarter's estimate. We've moved quickly and by the end of the fourth quarter, we completed approximately $25 million of annualized cost synergies. We expect to complete the remaining $25 million this year.
As a reminder included in that number is $15 million related to the integration of our technology platforms. The cost synergies tied to the technology integration will be realized in 2026 putting it all together based on actions taken. We expect incremental realized operating expense savings of $25 million to $30 million in 2025.
Importantly, these synergies exclude opportunities for calls to purchase transportation and the benefits we'll receive from the cross selling that drew mentioned which we believe will be significant. Now, let's discuss our expectations for the first quarter. The first quarter is typically our softest quarter of the year within brokerage. We're expecting seasonally lower volume. In addition, tightened market conditions impacted our buy rates to start the quarter.
Moving into complementary services, we expect continued weak automotive volumes and managed expedite and last mile given the better than expected fourth quarter performance. We're anticipating a larger than normal seasonal decline into the first quarter. For the combined company we expect to generate between $20 million, $30 million of adjusted IDA in the first quarter.
Jared will provide more details on our outlook shortly. Slide 14 includes our 2025 modeling assumptions which fully reflect the acquisition of Cody. We expect the following capital expenditures between $75 million and $85 million. This includes approximately $15 million of strategic real estate spend associated with the expansion of our brokerage operations and headquarters in Charlotte for 2026. The real estate costs will not recur.
In addition, we expect a reduction in CapEx of approximately $10 million following the integration of our tech platforms. This implies a 2026 CapEx spend of approximately $50 million to $60 million materially lower than 2025. We expect depreciation expense between $70 million $80 million amortization between $45 million and $50 million stock based compensation expense between $30 million $35 million restructuring transaction and integration expenses between $40 million $50 million cash outflow associated with restructuring transaction and integration activities of approximately $50 million to $60 million which includes actions from prior periods, net interest expense between $32 million and $36 million and an adjusted effective tax rate between 27% and 29%. You should also model an average fully diluted share count of approximately $170 million shares.
As we look at the upcoming year, the macro economy remains reasonably healthy, unemployment remains low core inflation has moderated and many key indicators including the ISM manufacturing index are moving higher. We continue to monitor any changes to trade policy including tariffs. While recent freight market developments have been encouraging, we're still operating in a prolonged soft freight environment. Gross profit per load has moved lower which is impacting our near term results that said we're making structural improvements which will increase the earnings power of the business. The team is executing well, the integration of Cody is ahead of schedule and we're positioning RXO for the long term.
Now, I'd like to turn it over to Chief Strategy Officer, Jared Weisfeld who will talk in more detail about our results and our outlook.

Jared Weisfeld

Thanks Jame and good morning, everyone. As I typically do, I'll start with an overview of our brokerage performance in the quarter to make the comparisons more useful for you. I'll give you pro forma numbers for our combined brokerage business which include Coyote's results in prior periods. Brokerage volume in the quarter was at the high end of our expectations. Up 10% sequentially and down 6% year-over-year LTL volume increased by 1% year-over-year, contractual LTL volume was up double digit percentage year-over-year.
While transactional LTL volume declined by a high single digit percentage. LTL represented 18% of our brokerage volume in the fourth quarter, down 300 basis points sequentially and up 100 basis points a year-over-year, full truckload volume was down 8% year-over-year and represented 82% of our brokerage volume. We also maintained a favorable mix of contract and spot business in the quarter. Contract business represented 76% of our full truckload volume. An increase of 300 basis points sequentially and 100 basis points year-over-year.
Our customer mix typically drives stronger contract volume in the fourth quarter. Spot business was 24% of our full truckload volume in the quarter and decreased by 300 basis points. Sequentially, it was another muted peak season and spot and special project opportunities decreased after the disruptions from hurricane Helene and Milton eased. This was in line with the expectations we communicated last quarter before reviewing our financial performance and market conditions. In more detail, I'd like to talk more about our technology integration.
Last quarter, we confirmed that Orico Connect will be our primary operational system. As drew mentioned, we've made great progress with our best of both worlds strategy that is integrating Coyote's unique capabilities into Oric's best in class tech platform. RXO connect was built with microservices architecture allowing for efficient updates and enhancements. We've already scaled critical capabilities and components and migrated them to the cloud. That's part of our consolidation efforts.
Strategically, we're planning to integrate our coverage technology first and bring all our carrier reps onto one unified system. This will enable us to leverage our proprietary pricing algorithms more effectively and achieve benefits within cost of purchase transportation. As we said before, we believe that cost of purchase transportation, synergies will be among our largest opportunities.
Importantly, while we're making excellent progress with our XOC connect, we're also moving quickly to integrate our core corporate systems including our CRM and ERP we continue to anticipate that our technology integration will be substantially complete by the end of the third quarter. Our technology also enables our people to become even more productive on a rolling 12 month basis. Productivity as measured by loads per person per day improved by over 16%.
I'd now like to review our brokerage financial performance and market conditions in more detail. You can find this information slides 10 through 13 of the presentation starting with revenue prelude on slide 10. Please note that starting this quarter and going forward, we'll discuss full truckload revenue per load trends. LTL revenue per load trends are more stable when compared to full truckload. So we thought this would be helpful. We've also excluded the impacts of changes in fuel prices and length of haul on the chart to give you a better view of underlying year-over-year price changes.
This has been recast for all historical periods. And prior to the third quarter of 2024 refers to Legacy RXO and starting with the fourth quarter of 2024 includes Coyote in the fourth quarter, full truckload revenue per load was flat year-over-year. January trends were encouraging and full truckload revenue per load further improved up by a low single digit percentage year-over-year.
As drew mentioned, we are transitioning from the bottom of the freight cycle to an inflationary rate environment. We expect 2025 contract rates to be up low to mid single digits year-over-year. Let's move to slide 11 and discuss brokerage monthly gross margin performance and industry trends. Market conditions tightened significantly as the fourth quarter progressed.
Specifically, the load to truck ratio increased by a full point to approximately 4.5 to 1 for the quarter. An inter quarter hit a high of seven to one. Industry tender rejections also increased to above 6% and briefly hit 10%. These metrics are the highest since the beginning of 2022. The move higher in industry KPIS was capacity driven as opposed to an improvement in demand. The impacts from hurricanes, Helene and Milton repositioning of supply typical seasonality and continued carrier exits all contributed to the tightening while there is still too much capacity in the truckload. Market carrier exits in the fourth quarter increased significantly when compared to the third quarter. Some weeks in the fourth quarter exhibited the highest number of carrier exits throughout all of 2024 which speaks to the unsustainable unit economics for most carriers.
While the market is still soft, we believe it's more balanced than it has been relative to the last few years. We continue to believe that for a robust recovery capacity will need to continue to exit and demand will need to improve from current levels. Tightening market conditions resulted in higher buy rates as the fourth quarter progressed. Additionally, as Jamie talked about earlier and consistent with our expectations, Coyote has a lower gross margin profile. Brokerage gross margin was 13.2%. In the quarter of note, legacy RXO's brokerage gross margin was approximately 14.5%.
The tightness I just described continued in early January exacerbated by severe weather across the country resulting in higher buy rates. Encouragingly, those rates have eased in recent weeks and we expect gross profit per load to improve throughout the rest of the first quarter. Let's go to slide 12 and look at the quarterly full truckload to gross profit per load trends.
As you can see on the chart with the acquisition of Coyote, our full truckload volume increased by more than 125% significantly increasing our scale. Our truckload gross profit per load moved lower sequentially due to the tightening market conditions that we just discussed combined with customer mix, moving to slide 13 RXO's LTL brokerage volume continues to outperform the broader LTL market with stable gross profit per load. We've more than doubled the size of our LTL business with the acquisition of Coyote and have significant opportunities with our customers to continue to grow Coyote's LTL gross profit per load is a creative to our LTL business.
I'd now like to look forward and give you some more color on our first quarter outlook starting with brokerage. We expect year-over-year volume to decline by mid to high single digits. As a reminder with Coyote, the broker's business has additional volume seasonality leading to a greater volume decrease from the fourth quarter to the first quarter. We expect brokerage gross margin to be between 12% and 14% in the first quarter due to the sustained tightening of the freight market.
Let's now talk about complementary services in managed transportation. The business continues to have tremendous momentum with a sales pipeline that is now approaching $2 billion in the near term managed expedite automotive headwinds continue to impact us and last mile, we're expecting another quarter of year-over-year growth although at a slower rate when compared to the fourth quarter, given last mile's better than expected fourth quarter results, we are anticipating a more than seasonal decline in the first quarter.
More than half of the sequential decline we expected in just in the first quarter is attributable to last mile putting it all together. We expect a RXO's first quarter adjusted to be in the range of $20 million to $30 million. This outlook assumes similar freight market conditions and limited spot opportunities.
Historically, our adjusted increases from the seasonally slow first quarter into the second quarter, looking to the full year given strong execution by the team and feedback from our customers. We expect combined brokerage volume to grow on a year-over-year basis to close while we're still operating in a prolonged soft freight environment. Our integration of Coyote is progressing well and remains ahead of schedule while we don't know the shape of the recovery. We're transitioning from the bottom of the cycle to an inflationary rate environment and are confident in structurally higher cross cycle earnings power.
Our balance sheet remains strong with a robust liquidity profile and we have the capacity for future M&A which can contribute to additional earnings growth. We are focused on delivering returns for our key stakeholders over the long term with that. I'll turn it over to the operator for Q&A.

Question and Answer Session

Jenny Mack

Thank you, ladies and gentlemen. (Operator instructions)
Your first question is from Ken Hoexter, Bank of America.

Ken Hoexter

Hey, good morning. Maybe to Drew, Jamie and Jared if you want to jump in, maybe define the core RXO EBITAs shifts over the past year. So we can understand how much has gone on seasonally and what's going on with the market backdrop. And then secondly, with Coyote contribution, maybe talk about the shift from your original expectations to today and then just real quick on the current market you've noted kind of we started off with higher PT costs, but it looks like spot rates have really pulled back. Have you noticed any inflection or anything changed? Really? I guess more recently in terms of maybe shifting that outlook?

Jared Weisfeld

It's Jared, so I can give you some seasonality comments as it relates to the combined business. So we talked about from Q1 to Q2. We typically see a seasonality uplift and that really is across all lines of business from a brokerage standpoint, we typically see seasonally better volumes. We'll have the benefit on the newer contracts that we're talking about. We talked about moving to an inflationary rate environment with contract rates probably uploaded mid single digits year-on-year for 2025 when compared to 2024 the new books of business that we're winning will also ramp across complementary services. You'll see managed transportation. We expect better automotive volumes. Q2 versus Q1.
And in last mile Q2 is one of the seasonally strong quarters as weather warms up. So on a combined basis, Q2 and Q4 are typically the seasonally strongest quarters. When you think about what the combined business looks like on your second question, in terms of the higher buy rate environment, you're exactly right. And over the last few weeks, we have seen an improvement in buy rates and that has been a tailwind for gross profit per load. And we expect gross profit per load for the brokerage business to increase throughout the first quarter.

Ken Hoexter

If I can squeeze a follow up, then what do you see the broker market growing? If you're seeing kind of down mid single digits in the fourth quarter and maybe accelerating to mid to high single digits, how do you think the markets compared to that?

Drew Wilkerson

Good morning, Ken. This is true when you look at the brokerage market, brokerage has been taking share in the for hire, trucking for a long time. If you go back to 2010, it was less than 10% of the overall market. Now it's in the low 20s and we look at the business on through a cycle when you look at what strong brokers who have financial stability who bring solutions to customers who are able to operate like an asset like carrier and pull trailers together and bring flexible capacity to customers. I think we're just getting started on brokers taking share. I think, as you look out over the next five years, brokers will have, roughly 30% of the overall four hire trucking market and it will continue to move higher from there.

Ken Hoexter

Thank you. Appreciate the time.

Jenny Mack

Your next question is from Scott Schneeberger, Oppenheimer.

Scott Schneeberger

Just curious what you, as you look out over 2025 and you anticipate that that volume does grow. Just want to get a sense of your confidence level in that and a degree of magnitude potentially there. And then I'll follow up.

Drew Wilkerson

Good morning Scott. We're confident, the reason that we were putting it out this quarter is because we're right now in the middle of bid season. And we can say with a degree of confidence based off of the early returns and early results that we're getting from customers. And when you look at the feedback that we're getting from customers that we're still in bid with that, we're confident that we're going to be able to grow volume on a year-over-year basis.

Scott Schneeberger

All right. Thanks. Just to follow up on that. And then I'll have another obviously tariffs a big issue, you guys do a bit of business cross border with our neighbour. Just curious on your initial thoughts on what you're seeing there, how that may affect automotive and other?

Drew Wilkerson

Something that we're watching closely. I think if you see tariffs implemented on the short term, you will see inventory pull forward and pulled across the border and that will be a short term tailwind to the business. If you look at it and tariffs are something that extend out for the intermediate term, it would be a headwind as you would see volumes starting to slow down. And if tariffs are something that are implemented and held for the long term, thus, we're extremely bullish on the tailwind that that would create for our business because you would see more business that would be north shore near shored into the US, which is the vast majority of our business.

Scott Schneeberger

Thanks and just somewhat of a housekeeping for Jame. I'm a CapEx, spend $75 million, $85 million, $15 million related to expanding headquarters. Could you elaborate on the Charlotte and then just kind of discuss what's maintenance, what's growth CapEx for this year of that number? The big number.

James Harris

So the guy we gave$75 million, $85 million you're right, 15 is a strategic real estate. Charlotte has really three big operations that we have a nice size brokerage operations here. A lot of back office services are located here and it does house our corporate headquarters as well. But, we're extending the lease, it's been home for, for these operations for over a decade. Kind of, it's a one time, 2025 spend. If you look beyond, there's about we believe another $10 million included in 25 that will come out as CaPex energies.
Now, that's in addition to the $50 million of OpEx synergies, we called it out, but we think we will drop, $10 million approximately in going into $26 million. So the way we think about more of a long term CapEx is kind of a 50 to $60 million type number heading into '26 and beyond which, keeps in line with that 1% of revenue that we talked about, back at it spend.

Scott Schneeberger

Great. Thanks all.

Jenny Mack

Your next question is from Stephanie Moore, Jefferies.

Stephanie Moore

This is [Joe Haling] on for Stephanie Moore, Jeffrey's. I wanted to ask a little bit about the incremental synergies as well as you know, what's kind of going on the integration front. Could you maybe provide us you know, kind of a historical walk over the last couple of months of, what has changed from the $25 million to the $40 million to the $50 million. What have you found in terms of incremental cost saves and maybe on the integration front sometimes integrating brokerages, there can often be kind of a head count or attrition. Issue you guys called out, really strong on that front. Can you talk about maybe what's different with the RFO Coyote combination and how you've been able to kind of maybe keep you know, the key talent together.

James Harris

So start with the synergies. First of all, the integration we believe is going very well. It's been a great cultural fit. People are working very well together. We have upped our synergy target, from regional $25 million to now $50 million. So we've been able to double that last quarter. We raised it to $40 million. We had seen a lot more opportunity in the technology synergy space. Now, most of that as we called out last quarter will be back half actually late in the year 2025. So you'll see that benefit really begin to flow through the P&L more in '26.
Last range from $40 million to $50 million really came from two primary areas, real estate consolidation. And we took a hard look at our footprint and able to, put some real estate together. And then secondly, our sourcing or our procurement activities. And if you look at these two companies, historically, a lot of the same type services, often the same type vendors are getting some scale out of our contract span. We've been able to work through that and we believe there's more synergies there because of that. So, you think about we're actually very happy with the synergy, outlook right now. And that does not include any synergies from the cost of improved transportation spend. Nor does it include any synergies that, that we believe can come from cross sell.

Drew Wilkerson

On the integration piece. Joe, I think it starts with building trust with the employees and building relationships. You hear us talk about relationships all the time and being able to build relationships with them and build trust and show the vision for where we're going. There's a lot of excitement now working for what's the third largest broker in North America and one that will gain share over the long term through a cycle. There's excitement about being able to serve our customers and offer them more services than what we were able to offer them before you heard us highlight and prepare commentary that we've got customers that were doing business with Legacy Coyote that are now in Manus Trans that are now talking to Last mile and doing business there. So I think the being able to sell a wider array of services and the excitement of going to work for somebody who values the work that you're doing that has built strong relationships and trust and has a vision for continuing to grow the business. There's a lot of excitement and morale across the company is extremely high right now.

Stephanie Moore

Got it. Thank you so much. And Jared if I could squeeze one in, was 2024 kind of wrapped up. Something you kind of have given in the past is kind of ROX volumes on a, two and three year stack. I was just kind of curious where 2024 landed.

Jared Weisfeld

Yeah, we're moving really quickly integration as Drew just talked about. So we're really viewing this as one Combined Business right now, Joe and I think when we look at 2025 we're pretty happy to be able to go ahead and endorse full year volume growth relative to 2024 given the strong execution of the team throughout the season with one unified strategy. So I'd anchor to that metrics because at this point, we're viewing this as one combined business.

Stephanie Moore

Got it. Thanks so much guys.

Jenny Mack

Your next question is from Brandon Lansky from Barclays.

Hey, good morning, everyone and thanks for taking the question. Drew maybe if I can just come back to Ken's question because I think it's pretty important here and there's so many numbers being tossed around this call. So it's a little hard to keep up. But I think at the end of the day, what a lot of investors are trying to figure out here, is that your ear or your operating earnings, look pretty low here on the consumer database, especially going into the first quarter. And I guess it's just maybe a lot longer than we thought at integration of Coyote. So there's a fear that there's been a deterioration in the core business and I want to anchor off something, you just said that you'll get back to taking share in the marketplace. So, has there been an issue in the last, six to nine months at either RXO or Coyote? And is this something that you think you can rectify and, get back on a much better earnings pace looking forward?

Drew Wilkerson

Well, I would start by reminding your brain and if you go back to what we told you our bid season strategy for 2024 was at Legacy RXO, we told you that we were pricing in some sort of recovery and if that did not happen, that we would sacrifice a little bit of volume and, potentially a little bit of EBITDA as well. And that, that is what played out the position that we're in with our customers is extremely strong. I said earlier, the feedback that we're getting on the early returns of the bids that we've got is positive and there's a lot of momentum there. We don't look at this business on a six to nine month basis. We never have. We view this business for the long term and what it looks like through a cycle. And if you go back and you look at the history of what we've got of being able to take share through a market cycle. I don't think there's many others that have done it like it so very proud of what the team has done and confident in what the team is going to be able to continue to do when you look at the overall earnings, which was the first piece of your question, as I said in my prepared commentary, the biggest thing is a deterioration in gross profit per load. That is what that is what has happened with cost of purchase transportation going up and the sell rates have come down over the last year and a half. We've now told you that we're entering into a period where rates are going up for the first time in two and half years on a year-over-year basis. So we're hitting an inflationary rate environment confident with what what's happening there.
And when the market turns, I think that you've seen that we are going to be the provider that people turn to for spots projects and many bids. The last piece of your question was the overall health of the Coyote business. When you look at what we acquired last year, very happy with how they performed versus the market. And I think that brokerages in general, there's been a compression gross profit per load. Coyote is no different than that, but the opportunity is far bigger than I think what we even realized at the time of acquisition, which is why we've again raised our synergy estimates. We've talked about the cost of purchase transportation, we've talked about cross selling. So as the market turns, we're better positioned than what we have ever been since we didn't spend.

Appreciate that. Drew. And I guess, can you put in the context moving to? I think a higher contractual mix in the fourth quarter, maybe this is one for Jared. But if you see rates moving up, don't you want to be moving less contract at the moment? Or maybe I have that confused? And thank you.

Drew Wilkerson

Yes, Brandon, I think that the part that you're forgetting is if you remember that whenever we announced the Coyote acquisition, we said that there was a large customer that had a heavy contractual mix that was seasonally weighted to the fourth quarter. So I think that's the biggest piece. And the large driver for the contractual piece we talked about in the month of October that we did see some spot loads, some projects and some mini bids. As you saw some market tightening?

Okay, thank you, Drew.

Jenny Mack

Your next question is from Tom Weitz. From, you'll be your line.

Wanted to see, I think Jared you, maybe I'm trying to recall. I think you might have in the past talked about like first quarter as a percent of full year or something like that. I wanted to get a sense if there's any perspective you can offer on that, just to help us think about what does the fer end up looking like off the base of what you're talking about for one QI guess another way you could look at it would just be like. Is there a point where you'd see a bigger than normal seasonal step up? if you look at two key or three Q. So I guess just to start with any thoughts on that for, one key versus full year.

James Harris

Tom. Good morning. So when you think about Q1, it's typically our softest quarter. So lowest as a percentage of full year contribution to EBITA, I'll go back to Ken's question from earlier. If you think about that ramp from Q1 to Q2, we have positive seasonality across all lines of business. What we do know is that we're bouncing off the bottom and we're now in an environment where we're talking about rates moving higher on the contractual side, our confidence is high in terms of being able to grow year-on-year volumes for the combined business year-over-year. But when you think about what that shape of the year look like, it really depends on what the recovery is going to look like.
At this point. I think there are just too many variables to start hypothesizing on how second half looks versus first half. When you think about just the nature of the recovery. If it's a sharp recovery, you'll see us pivot pretty quickly to the spot board and get, be able to go ahead and benefit from all of the strong relationships that we have with our customers that trust us with their spot freight and special projects. And in that case, you'll see a nice sharp move higher in gross profit per load. If it's more of a stair step, you'll see a little bit of a squeeze on the contractual book of business until we get to healthier market conditions.

Okay. So it sounds like maybe from where we are today, you would think that if we just, one team might be kind of a lower than normal percent of the full year, do you think that's right if we're assuming, that makes sense if we're assuming some improvement in cycle through the year.

Drew Wilkerson

It's also important to realize that this is a new combined business, right? So when you look at the RXO plus Coyote, this is the first year that we're obviously operating as a complied entity, right? So I don't want to start getting into how to think about Q1 as a percentage of the full year in that basis, especially as we're coming off the bottom, right? So to the extent that you have a different shape of recovery, whether it's AV or AW or ANL, it all is going to go into that notion of how to think that spot versus contract mix behaves. What we do feel comfortable about saying is that Q1 should be the low point in terms of percent contribution and the business should move higher as we get to Q2 across all lines of business.

A second question, I think looking at, you mentioned and it's, I straightforward, so Coyote's gross margin percent is lower than legacy. So you're talking about the technology implementation, maybe two Q3 key that the, carrier focused brokers would would get the new technology. Do you think that that technology of RXO will allow a fairly quick step up in Coyote gross margin percent? And that's kind of the key lever assuming that the Coyote gross margin percent could move towards legacy RXO or do you think there's like a difference in business mix that spread might be more kind of structural or more, take longer to change.

Drew Wilkerson

Tom. When you look at the Coyote business there is a structural difference in the gross margin percent. There's really three pieces to the Coyote business. One is large enterprise customer who there's deep relationships with and long term contracts with that runs at a lower gross margin percentage. It is a good chunk of the business. It's a good piece. It is profitable business, a steady volume. We're able to keep our carrier network moving through it. It's business that we like and appreciate and want to continue to be able to grow, but it's lower gross margin percentage. The second piece of the business is their S&B business and on the S&B business that runs at a strong gross profit per load.
But you will see us be able to improve that with the power of purchase transportation. We told you very early on when we did the diligence. One of the things that got us excited was we knew there were lanes that Coyote bought better and we knew that there were lanes that were legacy RXO bought better. So we would be able to improve margins and the last piece is the middle market and enterprise business and similar to the S&BI think that there is the opportunity to improve those margins as well over time. The last caveat that I would add in is we can improve legacy RXO's gross profit per load versus market cycle. Because again, there are lanes that Coyote was buying better that we'll be able to tap into that capacity as we come on to one platform.

That helpful. What just you mentioned the mix. Can you give a sense of the pro forma mix between enterprise and SMB and brokerage volume in a rough sense on that?

Drew Wilkerson

At the time of spin, we talked about S&B being roughly 40% of the overall business and we talked about one large customer being around 10% of the overall gross margin.

Okay. So combine 40% of S&D with Coyote.

Drew Wilkerson

A little bit higher than that. Now, Tom Ro was not heavy in the S&B but the 40% S&B was Legacy Coyote.

Oh, Legacy Coyote. Okay. So not performing.

Jenny Mack

And your next question is from Chris Wetherbee, Wells Fargo.

Chris Wetherbee

Good morning guys. Maybe you want to pick up on gross profit per load trends and, and thinking about some of the moving pieces there. So I know there's some differences between the two businesses. But I guess as you think about balancing volume growth and it was up sequentially, gross profit per load was down sequentially, as you think about the market and maybe a return to growth on a year-over-year basis. How should we think about that sequential progress in gross profit per load as we move through the rest of 2025? Do you see a step up in the first quarter or is that maybe the low water mark? And then we start to see some improvement beyond that.

James Harris

Hey, Chris Whetherbee. So if you look at the progression from Q3 to Q4, gross profit per load moved a bit lower. Sequentially, I'd say part of that was attributable to the inclusion of coyote which runs at lower gross profit per load. And part of that also is some of the seasonality within that Coyote business driven by customer mix in particular for Q4. And then the market tightened. We had some benefits on the legacy RXO side to start the quarter with some special project and spot opportunities. But as expected that moved lower. So that really drove the move lower throughout Q4 on gross profit per load relative to Q3. When you think about that bridge from Q4 to Q1, we are expecting a little bit move lower from Q4 to Q1, I'd say a modest decrease on gross profit per load because the market really did start pretty tight here to start the year given the inclement weather across the country, but we do expect gross profit per load to improve as Q1 progresses with January marking the low point. So that's sort of the progression through Q1.
And then from Q1, I would think about two factors from Q1 to Q2 seasonally, Q2 is a, is a tighter market with produce season and road check. So I think when you have to combine that with where we are from a recovery standpoint to get the shape of that gross profit per load, to go back to the prior question where when you think about that shape of the recovery, if it's a V shaped recovery, I think you'll see a strong recovery in gross profit per load, you'll see the spot opportunities and if it's a more modest recovery, it will be a little bit of a squeeze.

Chris Wetherbee

That's helpful call. I appreciate it. And then I guess when you think about the cost synergies as you play that out through the rest of the year, way to think about the cadence of that contribution kind of by quarter or maybe by half as you think about, the sort of progress towards that 50 plus.

James Harris

This is Jame. $25 million had been completed. By the end of the year of that amount, think about over the course in the $25 million to $30 million range can be realized as we head into this year. Incrementally, that would include some impact from the $25 million synergies, but most of the of the rays, especially around technology is going to be implemented in the fourth quarter. And so you really see that progression more in the Q beginning in Q126. And so, the dollars that we have completed thus far, you'll begin to see that roll into $25 million. But the predominance of the of the majority additional $25 million will be in the '26 time frame.

Chris Wetherbee

That's helpful. Thank you very much.

Jenny Mack

Your next question is from Ravi Shanker, Morgan Stanley.

Ravi Shanker

Great. Thanks morning guys, Jared. I just want to follow up on your commentary on the shape of the recovery. I think you said you prepared remarks looking for a low to mid single digit contract rates in '25. I think some of the asset based carriers I hinted that maybe they are already getting and looking for more than that. Do you think that's just ambitious on their part? Do you think that you know that opportunity to get maybe high single legit push in double digits is available for you as well? If the cycle is sharper or do you think there's a little bit of a GAAP between asset based and asset like pricing the cycle?

Jared Weisfeld

I can only speak to what we're seeing so far. Ravi and what we're seeing and what we're hearing from customers gives us confidence that we're talking about low to mid single digit increases for 2025. But to your point, to the extent that the cycle develops here and we start seeing stronger recovery and it is that type of V shape, we will absolutely be able to go ahead and see those kind of price increases that you're talking about. And you know how our model works.
And I would just reemphasize that the deep relationships that we have with our customers is what's that strong spot volumes over the last 10 plus years? So when you think about the cycle getting to an inflationary type rate environment and starting to really recover with tender rejections approaching 10% plus, in sharp recoveries, our spot volume has increased by almost 1,000 basis points in 90 days because our customers come to us as the first call.

Ravi Shanker

Understood and maybe as a follow up. But can you unpack a little bit as to why Coyote seasonality is so skewed relative to base RXO? Is it a mix of customers? Do they kind of have more kind of project business or kind of what's the reason for that 444?

James Harris

The big factor. We have one large customer that provide some seasonal uptick in the fourth quarter. A good piece of business, a strong partnership, but it's really driven by one particular customers. Got a lot of contract business in the fourth quarter.

Jenny Mack

And your next question is from Jordan Alliger, Goldman Sachs.

Jordan Alliger

I wonder if you could talk about Coyote's operating performance since you bought it. Not talking about integration. I'm talking about the operating performance better or worse than you thought. And I don't know if you could frame it in terms of standalone EBITA profitability, from a trajectory standpoint, has it come in under generally under expectations? And then the second question is the transaction integration restructuring charges $40 million to $50 million for the year. Can you talk to what's in those buckets? And does that diminish through the year or does it stay evenly paced? Thanks.

Drew Wilkerson

Thanks, Jordan. I'll start and Jamie and Jared will take the second person. So when you look at how it's performed versus expectations, I don't think when we bought Coyote, we knew exactly what the market was going to do over the next six months. I would say when you look at how Coyote has performed versus what's going on in the market. We're, we're pleased and we're excited when you look at the opportunity to take our overall volume and grow it by 125% and spread that cost across, spread our overall fixed cost across more loads. We're excited about what that looks like. When you look about getting on one platform and being able to reduce purchase transportation. We're excited about being able to do that. So if you look at cross selling there, there is a lot going on within the business that you know, you may not see right now with the gross profit per load being compressed at the bottom of the cycle. But the actions that we're taking right now, we're confident in what they're going to do for the long term piece of the business.

James Harris

So this is Jamie on the second part of your question around transacting calls, restructuring calls, the majority of the calls, both for 2024 and going into '25 are going to be related obviously to Cody. The big items are going to be, we got technology span that we can that will be, eliminating as we put the systems together. So we'll have some transaction costs that you give us some contracts. There'll be like in the fourth quarter, we the biggest spend charge we had was related to some real estate consolidation where we impaired the leases because we were moving out of some space and then just general, just general restructure sign out a contract of a vendor as an example would be spend.

Jenny Mack

And your next question would be Jason Seidl, TD Cowen.

Jason Seidl

Can you talk a little bit about the tender rejection rates? I think you said it was about 6% in the quarter hitting a high, I think with the hurricanes of about 10% where are we currently in the market? And where do you think one Q is going to shape out? And then I guess something that really hasn't been discussed, you guys have a bit of a freight forwarding business maybe. How should we think about the trends in that business as we progress around 25?

James Harris

I'll start with the first as it relates to tender rejections. So you're right, tender rejections in the fourth quarter moved up to about 6.3%. And for a couple of weeks got as high as high as 10% heading into Q1. What we see now over the last four weeks, despite typical seasonal softness, we're still at over 6%. We're between six and 6.5%. So we're sustaining given tightening market conditions. And even though it's come down from that 10, if you look at it on a year-over-year basis to normalize seasonality it's still up 100 basis points to 150 basis points. So I think this dovetails with our commentary that we're coming off the bottom. We're moving to an inflationary rate environment. The question now is the rate of recovery.
And Jason the freight forwarding piece, the business has performed well. We have seen some inventory get pulled forward from Asia in that business and it's a smaller piece of the business. But for what it's done is punched above its weight class for the last couple of quarters in contribution. The one thing that they have done as a business and they really did this, in 2019 and 2020 is they started diversifying a lot of what they did and there was more domestic pieces, which is why we combined that business with man as trans. And if you look at what we've been able to do and what's going through our facility in Laredo that has picked up if you look at what we've been able to do from a customs brokerage that has picked up. So overall in forwarding, we're very happy with what the team has done and continue to see nice growth out of the business.

Jason Seidl

Appreciate the time.

Jenny Mack

Your next question is from Caroline Scott from Wall Street.

Caroline Scott

You talk about the managed trans pipeline, keep growing. We think managed trans revenue starts to grow again. And then Drew. Can you just remind us on Coyote? How big is Ups and does the big drop in Amazon volume? Does that have any impact? Do you think on Coyote and some of the seasonality around Q4 in any way?

Drew Wilkerson

The way that we've described the UPS business was that it was around 10% of the overall margin with Coyote business. Just like with any customer, Scott, we're not going to break down the ins and outs of the puts and takes of what could drive volume going forward and what could cause declines. We'll continue to do with UPS like we do with all of our other customers to show them great service. We're going to build solutions for them, look for other ways that we can grow with help them with our technology and build strong relationships.
If you look at the managed trends and the decline in revenue, a lot of that is driven by the automotive volume, automotive expedite volume has been down dramatically because the supply chains and automotive have been running fairly smooth. So that's the biggest driver, but the pipeline is robust. If you remember last quarter, we highlighted of how much freight we were onboarding in the managed transportation. And the reason that that's so important Scott is because that allows us to drop synergy to the rest of the overall business. Jame and I were on with a potential managed transportation customer yesterday. We're talking to big customers with a lot of thumb that we're looking at onboarding over the next several quarters.

Caroline Scott

So when do you think that the overall manage trends, revenue starts to grow again?

Drew Wilkerson

I think as we onboard these customers, we've got a lot of on boarding that we did late last year in the Q1 of this year. And it takes time to get the full kind of power of that transportation model, built in. But we think, late first half going into second half, we'll see the impact of that begin to flow through the managed trans model and then the opportunity to get those energy IOS over into the brokerage side of the business.

Caroline Scott

Thank you guys.

Jenny Mack

And your last question would be from Daniel Imbro, Stephens.

Daniel Imbro

Thanks for taking our questions, squeezing us in here. I'll be brief maybe starting on the near term. Can you help put some guardrails around the one key guidance Jared? I think when we think about the $20 million to $30 million goal post, what are the variables to get to that high or low end? I'm guessing January was tight. And so is it if the truck market loosens. We come in at the high end and gross margins, the swing factor or what are the puts and takes. We should be watching as we move to one Q.

James Harris

I'd say the biggest variable for Q1 in terms of that $20 million to $30 million guidance range that we put out is really gross profit per load and more specifically cost of purchase transportation. So we've seen over the last couple of weeks, buy rates come down a little bit and we'll have some of the newer contracts implemented as the quarter progresses. But if you think about, what will delineate between the bottom half and the upper half? it's really going to depend on cost of purchase transportation and our ability to continue to bring down the buy. We do think that gross profit per load will improve as the first quarter progresses.

Daniel Imbro

Helpful and then Jame maybe a follow up on cash flow. I think working capital is a drag here in the fourth quarter. As the market tightened, it probably was a further drag here in January to get the move in truckload rates. With the higher CapEx guide, we think about cash flow maybe stepping up in the near term and then related to that. They're adjusted out but of the transaction cost this year, they're coming in higher than expected those cash costs. Like how should we think about that? Investing cash flow this year, maybe 22 questions about cash flow there.

James Harris

So it's called operating cash flow first hit. And we did have some timing. It's late in the year as we look into next year. We are at the bottom of the cycle. And so, if you think about the structure of our company, we've got about $30 million interest spend annually in cash as we've committed to $75 million to $85 million of CapEx. You kind of think about $105 million to $110 million kind of breakeven operating cap you to break even. But once you get above that 1, 10, you've got an opportunity for about 75% flow through contribution flow through from EBITDA to free cash flow.
And so if you think about that and then go to your question about restructuring, we'll use some of that free cash flow to do to do restructuring charges coming in at about $50 million to $60 million for the year. Keep in mind a portion of that is the cash portion of some of the restructuring charges we took in '24 for P&L purposes is deferred payments. But if you think about the money we spent, whether legacy RXO and now Cody integration, the return on investment is is very nice and so it's a good use of cash. But long term, we remain confident in the 40% to 60% through the market cycles in the last point of cash.
If you think about it to get back to spend, we've been in a down cycle for most of that period of time, we've actually generated about 43% free cash flow conversion from EBA to free cash flow, which is a great number at the bottom of the cycle. So if you take that and think about the power of cash flow generation in the up cycle, it can be very significant for the business. And we think that's a value creator for us.

Daniel Imbro

Thanks so much.

Scott Schneeberger

The question and answer session is now closed. I will now hand the call back Drew Wilkerson for the closing remarks.

Drew Wilkerson

Thank you, Jenny. Our integration of Coyote is ahead of schedule and we have increased our estimate for annualized cost synergies to at least $50 million. We're delivering on our commitments in the fourth quarter. In brokerage, we achieved 10% sequential volume growth.
Our complementary services momentum continued and managed transportation. The sales pipeline is now nearly $2 billion in freight under management. And in last mile, the stops grew by 15% in the quarter. We remain focused on providing the best service, the most comprehensive set of solutions, continuous innovation and close customer relationships.
We continue to be in a soft rate market but our disciplined execution and the structural changes we've made in our business are positioning RXO well, to deliver significant earnings growth and free cash flow across market cycles and over the long term. Thank you all for your time this morning.

Jenny Mack

Thank you, ladies and gentlemen, the conference has now ended. Thank you all for joining newly August. You may now disconnect your lines.