RXO - Earnings Call - Q1 2025

Executive Summary

• RXO delivered Q1 2025 revenue of $1.43B and adjusted EBITDA of $22M, with gross margin at 16.0%; adjusted diluted EPS was $(0.03) while GAAP diluted EPS was $(0.18) as integration and restructuring costs weighed on GAAP results.
• Versus S&P Global consensus, revenue missed by ~$60M and adjusted EPS missed by ~$0.01, while adjusted EBITDA was essentially in line; Q2 guidance calls for adjusted EBITDA of $30–$40M and Brokerage gross margin of 13–15%. Values retrieved from S&P Global.
• Management raised the Coyote synergy target again to “> $70M” cash synergies, excluding sizable cost-of-purchased-transportation (COPT) opportunities; carrier and coverage operations migrated to a single RXO Connect platform enabling future buy-side savings.
• Key operating positives: 26% LTL brokerage volume growth and 24% Last Mile stop growth; key headwind: automotive, which was a ~$10M gross profit drag year-over-year in Q1.
• Near-term stock reaction catalysts: raised synergy target and tech integration milestone (buy-side opportunity), alongside conservative Q2 outlook framed by shipper uncertainty and tariff impacts.

What Went Well and What Went Wrong

What Went Well

• “Carrier and coverage operations are now happening in one system,” unlocking future COPT synergies; synergy target raised to >$70M cash synergies. CEO: “We now expect cash synergies to be more than $70 million... This estimate does not include cost-of-purchased-transportation opportunities, which we expect will be significant.”
• Strong growth in complementary services: Last Mile stops +24% YoY; complementary services gross margin 21.0% (+40 bps YoY).
• LTL brokerage volume +26% YoY; RXO emphasized AI/ML-driven productivity gains (+17% loads per person per day over the last 12 months).

What Went Wrong

• Automotive weakness: CFO quantified a ~$10M company-wide gross profit headwind year-over-year; managed expedite automotive volumes pressured Managed Transportation.
• Company gross margin compressed to 16.0% (from 17.4% YoY) and Brokerage gross margin to 13.3%, reflecting buy-rate dynamics and mix, including net revenue accounting for some legacy Coyote fee-based business (reduced reported revenue by ~$35M with no GP/EBITDA impact).
• Free cash flow conversion was negative on an unadjusted basis (FCF $(17)M) given lower profitability at cycle trough; adjusted FCF $6M (27% conversion), below long-term target 40–60%.

Transcript

Operator (participant)

Welcome to the RXO Q1 2025 Earnings Conference Call and webcast. My name is Joelle, and I will be your conference 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 (CEO)

Good morning, everyone. Thank you for joining today. There are four main points I want to convey this morning. First, we completed the most significant technology milestone of the Coyote integration, and our carrier network, along with RXO carrier representatives, are now covering freight out of one transportation management system. Second, we're again raising our estimate for acquisition synergies. We now expect more than $70 million of cash synergies, which includes both operating expense and capital expenditures. As a reminder, this does not include the significant cost of purchased transportation and cross-selling benefits we expect to see. Third, in brokerage, we achieved 26% less-than-truckload volume growth. We also continue to see productivity increases through our investments in technology, including AI and machine learning. Fourth, we maintain the momentum that we achieved over the last several quarters in complementary services.

Managed transportation increased the synergy loads it provides to brokerage, and we grew last-mile stops by an impressive 24% year-over-year. Putting it all together, our strong and growing business has significantly more scale and is powered by cutting-edge technology that is driving continuous productivity improvements. This uniquely positions RXO for increased earnings power and free cash flow conversion over the long term and across market cycles. I'll start by giving you an update about the integration of Coyote. I mentioned earlier that our carrier and coverage operations are now working out of one platform, Freight Optimizer. Our carrier network now has access to significantly more freight, and our reps now have access to an even larger network of carriers to cover that freight. The increased capacity is helping us to find the best truck for each load, enabling us to better serve our customers.

The early results from the migration have been encouraging. First, we've proved the scalability of our tech, which remained stable during the migration process. Second, our carrier operations team is working together as one network much faster than expected. As an example, about 20% of Legacy Coyote's freight was covered by Legacy RXO reps, and about 20% of Legacy RXO's freight was covered by Legacy Coyote reps. This exceeded our expectations, and we're already seeing signs of buying better when it comes to purchased transportation. We're now turning our attention to migrating Legacy Coyote customers. In fact, we've already migrated all the master customer data, and we're already managing several Legacy Coyote customers within our platform. We continue to expect the bulk of our tech integration will be complete by the end of the third quarter.

Our technology and coverage teams have been working around the clock since the acquisition to ensure a smooth and successful transition. I'm extremely proud of what they've been able to accomplish in such a short amount of time. As the integration has progressed, we found additional opportunities for synergies and now expect to achieve more than $70 million of total cash synergies, including more than $60 million of annualized operating expense synergies. This excludes the significant opportunities for improving our cost of purchased transportation and the impact of our cross-selling efforts. Jamie will talk in more detail about the synergies later in the call. Now I'd like to discuss our first quarter results, which were in line with our expectations. RXO delivered adjusted EBITDA of $22 million within the guidance range we provided to you last quarter. RXO's company-wide gross margin was 16% in the quarter.

Brokerage volume for our combined business declined by 1% year-over-year. We outgrew the market as measured by the Cass Freight Index, despite a significant automotive headwind. Our volume performance was better than anticipated due to a substantial 26% year-over-year increase in LTL volume. Full truckload volume decreased by 8% year-over-year. Brokerage gross margin was 13.3% in the quarter. We continue to achieve robust productivity gains in brokerage, driven by enhancements to our tech platform. Productivity over the last 12 months increased by about 17%, and over the last two years by almost 40%. Our significant investments in technology, including AI and machine learning, have a strong return on investment. While we've made substantial productivity gains, we're still in the early innings and have lots of runway for further improvement. Momentum continued within complementary services.

Managed transportation increased the number of synergy loads it provided to brokerage in the quarter. In last mile, stocks grew by 24% year-over-year, accelerating from the fourth quarter growth rate of 15%. We are also seeing the benefits from the productivity initiatives we have completed over the last few years. The best-known brands in the big and bulky space are increasingly turning to RXO for last mile delivery because of our exceptional service, scale, technology, and financial stability. Complementary services gross margin was 21%. I would now like to talk about the overall market conditions. The weather-related tightness we saw in January and discussed on last quarter's call eased as the quarter progressed. We quickly reduced our cost of purchased transportation, resulting in an improved gross profit per load throughout the quarter. We also made significant progress improving Legacy Coyote's profitability.

Legacy Coyote gross profit per load improved by approximately 20% from January to March. We made further progress in April and will continue to drive improvements. The current environment remains highly fluid. In response to changing trade policy, our customers are employing a variety of different strategies. Some have staged inventory in advance of increased tariffs, and others are taking more of a wait-and-see approach. This uncertainty is impacting near-term truckload demand. Specifically, in April, RXO's truckload volume was down by a mid-single-digit percentage when compared to March. RXO has several company-specific drivers that we anticipate will yield a sequential improvement in gross profit per load in the second quarter. We also expect to grow EBITDA significantly when compared to the first quarter. The flexibility of RXO's asset-light model will continue to drive our performance in all market conditions.

Jamie and Jared will discuss our outlook in more detail later in the call. RXO remains well-positioned to drive increased earnings over the long term. Our technology migration will enable us to realize the benefits of our increased scale, including cost of purchased transportation opportunities. As a reminder, we more than doubled our truckload volume as a result of the Coyote acquisition, which has provided us with better lane density. We're continually improving our tech platform even as we complete the integration. Our powerful pricing algorithms leverage AI and machine learning, and our employee-facing software continues to help improve productivity. When those algorithms are unleashed on our much larger set of carrier and customer data, we expect massive benefits. Our cross-selling initiatives are fueling new wins across the company. We're growing stable sources of EBITDA, including in LTL and managed transportation, and our last-mile business has tremendous momentum.

We have even more tenured talent within the organization, and our people are energized and dedicated to the success of our customers and our carrier network. We've been proactive when it comes to reducing costs, which has helped us mitigate the effects of a difficult freight market and will provide us with significant operating leverage once the market improves. We have a strong balance sheet and a unique platform that provides us with opportunities to drive both organic and inorganic growth. Now, Jamie will discuss our financial results in more detail. Jamie?

Jamie Harris (CFO)

Thank you, Drew, and good morning. Let's review our first quarter performance in more detail. Our results were in line with our expectations in the first quarter. We generated $1.4 billion in total revenue. Gross margin was 16%. We delivered adjusted EBITDA of $22 million. Our adjusted EBITDA margin was 1.5%. One item to note regarding our EBITDA results was the impact of our automotive business. The slowdown in automotive volume represented a company-wide gross profit headwind of approximately $10 million year-over-year. This volume, because of its time-critical nature and higher service requirements, typically carries a higher gross margin with strong flow-through to EBITDA. Below the line our interest expense was $9 million. For the quarter, our adjusted earnings per share was negative 3 cents. You can find a bridge to adjusted EPS on slide nine of the earnings presentation.

Now I'd like to give an overview of our performance within our lines of business. Brokerage revenue was $1.1 billion and represented 72% of our total revenue. Please note we have a small piece of business within Legacy Coyote brokerage that is fee-based in nature, similar to our managed transportation business. We made a decision to account for this on a net revenue basis, which reduced reported revenue by approximately $35 million. This change had no impact to gross profit or adjusted EBITDA. Turning to volume, we had strong LTL growth driven by new customer wins, offset by a decline in truckload volume given continued soft freight market conditions. Brokerage gross margin was 13.3%. Complimentary services revenue in the quarter of $415 million increased by 8% year-over-year and was 28% of our total revenue. Complimentary services gross margin of 21% remained strong and increased by 40 basis points year-over-year.

Now let's move to each line of business within complementary services. Managed transportation generated $137 million of revenue in the quarter, down 10% year-over-year. Managed transportation continues to be impacted by lower automobile volumes in our managed expedite business. Our last-mile business generated $278 million in revenue in the quarter, about 20% year-over-year, better than our expectations. Last-mile stops grew by 24%, accelerating from last quarter's growth rate. We continue to gain share within the big and bulky category and are winning profitable business from both existing and new customers. We also continue to see the benefits from the productivity initiatives we launched last year. Let's now discuss cash, and please refer to slide 10. Adjusted free cash flow in the first quarter was $6 million, a 27% conversion from adjusted EBITDA. The conversion rate was impacted by lower profitability at the bottom of the freight cycle.

Longer term, given our asset-light business model, we remain confident in the 40%-60% conversion through market cycles. We ended the quarter with $16 million of cash on the balance sheet, consistent with our expectations. As we discussed in February, our fourth quarter cash balance was higher than anticipated due to the timing of transaction payments related to the Coyote acquisition, which was paid in the first quarter. We also had a cash usage of $17 million for tax withholdings, which was the final tax payment related to pre-spend RSUs. As you can see on slide 11, our liquidity position continues to be strong with more than $575 million of total committed liquidity at the end of the first quarter. Quarter-end net leverage was 1.9 times trailing 12 months bank-adjusted EBITDA, up slightly when compared to the prior quarter.

We continue to have significant capacity to deploy our balance sheet in line with our balance capital allocation philosophy. Let's move to the Coyote integration. We're again increasing our synergy estimate. We now expect more than $70 million of cash synergies. We expect more than $60 million of annualized operating synergies, $10 million higher than last quarter's estimate. We also expect at least $10 million in capital synergies, which will benefit 2026. It's important to note that the cash outlay required to generate these savings is approximately $50 million, which will generate a strong return of almost 150%. These synergies exclude opportunities for optimizing our cost of purchased transportation spend. With carrier and coverage migration complete, there is a significant opportunity to purchase transportation more effectively. As a reminder, we had a combined brokerage transportation spend of about $4 billion in 2024.

A 1% improvement in buy rates would represent a $40 million opportunity. These synergies also exclude revenue and cross-selling opportunities across the company, which have already begun to materialize. Now let's discuss our expectations for the second quarter. The current macroeconomic environment is creating significant shipper uncertainty, which we've incorporated into our outlook. For the combined company in the second quarter, we expect to generate between $30 million and $40 million of adjusted EBITDA. For the second quarter, you should model depreciation expense of approximately $17 million to $19 million, amortization expense of approximately $9 million to $11 million, and an adjusted effective tax rate of approximately 30%. Jared will provide more details on our second quarter outlook shortly. Slide 16 includes our 2025 modeling assumptions. There are a few things I'd like to highlight. We're reducing our 2025 capital expenditure estimate by $10 million to approximately $65 million-$75 million.

We're also lowering our depreciation expense estimate accordingly and now expect depreciation to be in the range of $65 million -$75 million. We're also lowering our 2026 capital expenditure estimate, which will benefit from the previously discussed Coyote synergies. We anticipate 2026 CapEx to be between $45-$55 million, down materially from 2025. You'll also notice this year's estimated adjusted effective tax rate moved higher and is expected to be between 30%-33%. This is solely a function of lower pre-tax income given the current state of the freight market. Our long-term target of 25% remains unchanged. Before handing it over to Jared, I want to highlight the benefits of our asset-light operating model, which is a key strategic benefit, especially in periods of volatility. We have minimal maintenance CapEx requirements and can move quickly on cost.

While we continue to operate in a soft environment, we're investing for the long term, making significant progress with the integration of Coyote and scaling the business to position us for when the market recovers. We've taken out significant cost, executed aggressively on our synergy targets, and successfully migrated carrier and coverage operations, enabling opportunities for cost of purchased transportation synergies. These actions position us well to produce strong results over 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 (Chief Strategy Officer)

Thanks, Jamie, 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 combined numbers for our brokerage business, which include Coyote's results in prior periods. Brokerage volume in the quarter was down 1% year-over-year, ahead of our expectations. The better-than-expected performance was driven entirely by LTL strength. LTL volume increased by a strong 26% year-over-year, the result of successfully onboarding new customers. LTL represented 25% of brokerage volume in the first quarter, up 500 basis points year-over-year. Full truckload volume was down 8% year-over-year, impacted by continued soft freight market conditions. Automotive weakness was the biggest driver, and automotive volume was down more than 25% year-over-year. Truckload represented 75% of our brokerage volume. We also maintained a favorable mix of contract and spot business in the quarter.

Contract represented 73% of our full truckload volume, down 100 basis points sequentially and up 100 basis points year-over-year. Spot was 27% of full truckload volume in the quarter. We continue to operate in a prolonged soft environment with minimal spot opportunities. Before reviewing our financial performance and market conditions in more detail, I'd like to talk more about the progress we've made to integrate Coyote's technology into RXO's platform. As you can see by the milestones noted on slide six, we've taken a phased approach and we've moved quickly. We launched a unified company website that enables instant quoting. We've successfully integrated our payments networks. We've migrated to one CRM platform, which is helping our sales teams see opportunities across RXO. We completed the most significant technology milestone of the Coyote integration, and our carriers and operations teams are now covering freight on one common platform.

We're now leveraging a unified data set for pricing and network decision-making. This last point is an important one. RXO led the industry in adopting AI and machine learning. Pre-acquisition, we had 10 years of data on which our algorithms could learn and optimize. Following the successful data migration, our next-generation models are already running on our larger combined data set, including Legacy Coyote's pricing models. Let's now review our brokerage financial performance and market conditions in more detail. You can find this information on slides 12-15 of the presentation. Starting with revenue per load on slide 12. In the first quarter, full truckload revenue per load trends continued to improve. Revenue per load, excluding the impact of changes in fuel prices and length of haul, was up 4% year-over-year.

After a successful bid season, we continue to expect 2025 contract rates to be up low to mid-single digits year-over-year. Let's move to slide 13 and discuss brokerage performance and current market conditions. Following difficult weather conditions in the month of January, the market loosened in line with our expectations. Specifically, the load-to-truck ratio decreased from 7-1 to less than 5-1, and tender rejections decreased from 7.5% to 5%. Importantly, while the market softened, industry KPIs were higher year-over-year, consistent with our view that capacity had exited the market, which brought the industry to a more balanced state in the quarter. Supporting this view, class eight net orders have declined materially to start the year, and the April decline was one of the largest sequential declines on record. Amidst looser market conditions, we quickly brought down our cost of purchased transportation in the quarter.

This resulted in lower buy rates and higher gross profit per load as the first quarter progressed. Turning to the second quarter, shippers are highly uncertain given the current environment, and we saw that in our April results. Within our brokerage business, the second quarter started off with continued soft volume trends led by automotive weakness. April truckload volume was down a mid-single digit percentage when compared to March and was down a high single digit % year-over-year. However, LTL continued to grow strongly, and total volume was up slightly year-over-year. Despite the fluid environment, RXO has multiple levers for margin improvement, and we anticipate gross profit per load to improve in the second quarter. Our contract rate increases are continuing to phase in, and we remain laser-focused on purchased transportation costs. With last week's successful carrier and coverage migration, there are additional opportunities to procure capacity even more effectively.

Let's go to slide 14 and look at quarterly full truckload gross profit per load trends. We were able to improve gross profit per load significantly throughout the quarter, resulting in a relatively stable gross profit per load when compared to the fourth quarter. Specifically, truckload gross profit per load improved by approximately 20% from January to March. Moving to slide 15, RXO's LTL brokerage volumes continue to outperform the LTL market with stable gross profit per load. We have significant opportunities to continue to grow our LTL business. I'd now like to look forward and give you some more color on our second quarter outlook that Jamie provided. Starting with brokerage, we expect overall volume to decline a low single digit percentage year-over-year with continued soft truckload volume trends, mostly offset by strong LTL growth.

We expect brokerage gross profit per load to move higher into the second quarter, resulting in a brokerage gross margin of between 13% and 15%. Let's now talk about complementary services. In managed transportation, while the business has significant sales momentum, managed expedite automotive headwinds continue to impact us in the near term. In last mile, we expect another quarter of year-over-year stock growth, although at a slower rate when compared to the first quarter. As a reminder, the third quarter is seasonally weaker for last mile when compared to the second quarter. Putting it all together, we expect RXO's second quarter adjusted EBITDA to be in the range of $30 mill9on -$40 million. We thought it would also be helpful to give you some more color on the assumptions underlying our outlook. Typically, truckload volume ramps throughout the second quarter.

We have not incorporated that assumption into our guidance range. The high end of our outlook assumes truckload volume and gross profit per load remain consistent with April levels. The low end of our outlook assumes that truckload volume declines materially from April with lower gross profit per load. Additionally, our outlook does not assume any material purchased transportation benefits associated with the carrier and coverage migration that was completed on May 1. To close, while we're operating in a more uncertain environment, RXO has multiple idiosyncratic levers that position us well for long-term earnings and free cash flow growth. Coyote carrier and coverage migration is now complete, which will enable significant cost of purchased transportation savings opportunities. We again raise our cost synergy estimate. We are staying close to our customers and will capture spot opportunities when the market recovers.

Our LTL volume is growing quickly and knows a long runway for sustainable and profitable growth. Last mile continues to gain significant share, and we have a strong balance sheet and are positioned well to capitalize on additional organic and inorganic growth opportunities. With that, I'll turn it over to the operator for Q&A.

Operator (participant)

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star, followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star, followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Stephanie Moore with Jefferies. Your line is now open.

Stephanie Moore (SVP of Equity Research)

Hi, good morning. Thank you.

Drew Wilkerson (CEO)

Morning, Stephanie.

Stephanie Moore (SVP of Equity Research)

Is it? Morning. Is it? You know, I think it would be helpful if, you know, maybe Drew or Jamie, whoever wants to handle this, if you could speak to your mid-cycle earnings power now with Coyote under your umbrella. Obviously, there's been a faster-than-expected tech integration that you've called out and some pretty clear line of sight on PT synergy. So how could this compare to your prior mid-cycle earnings? Thanks.

Drew Wilkerson (CEO)

Yeah, I think, Stephanie, when you look at the business, we took what was a really strong business in Legacy RXO, and we've dramatically improved the long-term earnings power of the business. You focus on purchased transportation, and Jamie framed it up that if we're only able to improve that by 1%, it'll be around $40 million of how well we buy versus what's going on in the market. You look at doubling our volume in brokers and being able to spread our cost out across more loads, which essentially lowers our cost to serve for our customers and makes us more profitable.

When you look at the productivity improvements that we're really just getting started on right now at 17% on a year-over-year basis, for us, there is so much runway in continuing to improve the long-term profitability of the business and being able to have higher lows, higher midpoints, and higher highs.

Stephanie Moore (SVP of Equity Research)

Great. Appreciate the color. Maybe just taking a more near-term view, you know, appreciate the color. You know, Jared, you just highlighted on terms the 2Q guidance. Given how uncertain the macro backdrop is, if you could touch a little bit about what your underlying freight market assumptions are for 2Q, and then is April kind of the right run rate just based on the conversations that you're hearing? Meaning, do you feel like in April your customers were a little bit more negative and then improved as the year—I'm sorry—as the month progressed, or do you feel like April is a good starting point? Thanks.

Jared Weisfeld (Chief Strategy Officer)

Sure. Hey, Stephanie, it's Jared. When you look at the month of April, we talked about full truckload volume being down roughly mid-single digits when compared to the month of March. If you actually look historically for Legacy RXO, that number is actually usually up slightly. We saw that softness materialize into April. As Q2 seasonally progresses, we usually see volume ramp from April into May into June. Given the uncertain environment that we're in, none of those assumptions are incorporated into our outlook. Off of that lower base into April, we are not assuming any improvement in freight market conditions across that outlook range, even at the high end. That does not assume that market conditions continue to improve.

At the very low end, what we did was we assumed that we take another step lower in volume relative to that April base, which is already below seasonal, and lower gross profit per load. We tried to go ahead and give a framework that goes ahead and encompasses a lot of different scenarios that could occur within Q2. I think, importantly, two things to add on that. None of the scenarios include any significant benefit associated with purchased transportation, where we're seeing some early wins, and gross profit per load will improve for the business sequentially across those scenarios from Q1 to Q2.

Stephanie Moore (SVP of Equity Research)

Thank you. Appreciate the time.

Operator (participant)

Your next question comes from Chris Wetherbee with Wells Fargo. Your line is now open.

Chris Wetherbee (Senior Analyst)

Great. Thanks for warning. Maybe to follow up on that question, as you think about the gross margin percentage range for the second quarter, I guess maybe can you talk a little bit about the sort of the potential dynamics that can influence you one way or another? Presumably, if you're seeing the TL market continue to soften, that might help that number. I just want to get a little bit of sense of how you think about sort of the high end and the low end there. What are the dynamics you'd expect to see?

Jared Weisfeld (Chief Strategy Officer)

Hey, Chris. That's exactly right. I mean, to the extent that the market does soften, you'll see the ability of continued improvement in gross profit per load. I mean, if you look at Q1 as a proxy, I think that's a really good example in terms of how quickly we brought down purchased transportation. If you look at between January and March, we increased gross profit per load by approximately 20% across our truckload business, mostly attributable to the buy side. If the market does go ahead and get a bit looser, and then you think about on the sell side in terms of some of the contract rates that we talked about, where low to mid-single digits, we still feel very good about for the full year, and that was up about 4% year-over-year in Q1, those should all be tailwinds.

I think most importantly, now that we are buying capacity, procuring capacity as one organization with all carrier reps procuring and covering freight in one system, Freight Optimizer, we have, you know, our customers have better access to more trucks with the right loads, and that has the ability to go ahead and contribute as well.

Chris Wetherbee (Senior Analyst)

That is great. Maybe one follow-up here, maybe zooming out a little bit, thinking bigger picture about EBITDA progression as you move through the rest of the year. I guess what we are trying to kind of figure out is, I guess you have seasonality, which I think in some cases might be a little bit softer in 3Q versus 2Q for the overall business, but you obviously have synergies, the potential for PT optimization. Any help that you can give us in terms of thinking about how this might build over time? I understand also, obviously, that the macro is quite challenging and difficult to predict, but anything you can kind of help us with, how do you think about the shape of the rest of the year from a profitability perspective?

Jared Weisfeld (Chief Strategy Officer)

Sure. I'll start, and then I'll let Jamie come in and give you some more color as it relates to synergies. You know, when you think about, you know, Q2 to Q3, as you know, we give guidance one quarter at a time, but can certainly give you some frameworks in terms of how we're thinking about the back half of the year. Q3 will get to benefit from the new implementation of all the contract increases that we talked about. As you know, you know, we will go ahead and it's a staggered approach, right, where as the new contracts start to roll in, Q3 will reflect the full run rate benefit of that. We're working really hard to benefit from purchased transportation synergies quickly with the successful integration complete on carrier migration last week. Last mile business, to your point, is seasonally lower relative to Q2.

We are continuing to gain significant share there. You saw stops up 24% year-over-year last quarter. That will moderate a bit into Q2. You know, from a sequential standpoint, that is seasonally weaker into Q3. The biggest variables are going to be volume and gross profit per load. I think at this point, you know, we are in such an uncertain environment. We certainly incorporated that as it relates to our Q2 outlook. Beyond that, I think it is too early to call. I will hand it over to Jamie on the synergy front.

Jamie Harris (CFO)

Yeah. Thanks. On synergies, you know, we've taken out a lot of costs, $70 million annualized. You know, we realized for the year about $45 million of that into 2025. You saw sequential Q1 to Q2, there should be a bump of about another $4 million. There'll be a slight increase going into the back half of the year. As we take out that last $10 million of OpEx, primarily in the back half of the year, we really will get a little bit of that in the fourth quarter, but we should see most of that realized in 2026. The other thing that Jared touched on, I'll reemphasize, you know, we've just cut over the procurement side of our carrier transportation costs. There's a big opportunity there. Drew gave the framework, $4 billion spend, we can get 1%. We should be able to buy better than the market rates.

We see that ramping up as we head into the back half of the year as well in terms of the execution of the opportunity.

Chris Wetherbee (Senior Analyst)

Perfect. Thanks very much for the color. Appreciate it.

Operator (participant)

Your next question comes from Brandon Oleksy with Barclays. Your line is now open.

David Zazula (Equity Research Analyst)

Hey. Hey, this is David Zazula for Brandon. I know you'd previously talked about the RXO business being primarily a domestic business. I'm wondering if you could help us a little bit on what you're thinking for the potential tariff impacts in second quarter and third quarter. I think we're seeing, you know, pretty sharply down imports coming in from Asia. How that might impact your business and where that's incorporated into your guide?

Drew Wilkerson (CEO)

Yeah. We're seeing different things from different customers, David. There's not a uniform approach to what customers are doing. We've got some customers that have pulled inventory ahead. We've got some that have pulled completely, and we've got some that have continued shipping as normal. Obviously, we're watching it closely and well aware that imports coming into the U.S. are dramatically down over the last 30-45 days. With that said, you know, it could have an impact on the overall truckload market and the truckload demand. Our playbook there is we're going to focus largely on purchased transportation to be able to improve profitability if that's what occurs.

David Zazula (Equity Research Analyst)

Thanks. And then, you know, specific to volume trends, you touched on a little bit on it earlier. I guess our perception is the comps on the Coyote side are getting a little easier. Are you expecting to have maybe a little bit of tailwind there? And are there, you know, some offsets that would, you know, potentially, like you mentioned, you maybe have some headwinds in April and moving forward into Q2?

Drew Wilkerson (CEO)

I think the biggest headwind is automotive. When you look at it, we are the leader in the U.S. on ground expedite shipments, and that's largely driven by automotive. And we have been forever. So that's, you know, as that comes back, that'll be a tailwind to the business. For right now, you know, you certainly see the impacts of less automotive expedite shipments out there within our network. For the legacy Coyote and legacy RXO, yes, comps get easier, but I'd say the most important thing is the feedback that we're getting from our customers. When you look at what we've heard from our customers, you know, we're hearing good feedback on the awards that we're actually receiving, the awards that are still coming in, and where they expect us to finish from a rate perspective.

We still expect to see that increase on contractual business of low to mid-single digits.

David Zazula (Equity Research Analyst)

Thanks, Jared. Thanks, Drew.

Operator (participant)

Your next question comes from Jeff Kauffman with Vertical Research Partners. Your line is now open.

Jeffrey Kauffman (Equity Research Analyst)

Thank you very much, and thanks for the context and your outlook. I guess I'd like to ask a question a little bit differently. I hear the conservative forecast and how this second quarter is a little different from previous second quarters, but in any forecast, there's the parts of the forecast you feel you got your arms around, and then there's the parts of the forecast that are a bit of a leap of faith. I'm just curious what the leaps of faith are in your outlook, whether it's second quarter or full year 2025.

Drew Wilkerson (CEO)

We're confident in the forecast that we put out, Jeff. You know, I think that, you know, the way that Jared framed it up, we looked at a number of different scenarios. You know, we've got a playbook. If volume goes down, to be able to focus even more on purchased transportation, we have the tailwind of coming on to one platform that is idiosyncratic to us. I'm sure everybody's focused on purchased transportation, but we've got the benefit of having capacity that didn't cross over to be able to find the right truck for the right load to be able to improve it there. When you look at gross profit per load, you know, for us to be able to say that we expect that to improve sequentially, there's confidence in the numbers there.

Jeffrey Kauffman (Equity Research Analyst)

All right. And just to follow up, you know, nobody really knows what's coming with this freight air pocket that's going to hit us in 2Q and 3Q. If the environment is somehow worse yet than even you're looking for, how much flexibility do you have at this point with the technology part of the integration more behind you to respond to a positive or negative market environment?

Drew Wilkerson (CEO)

We're very agile. We've shown the ability to move quick and, you know, realize the synergies faster than what we originally communicated out. You know, we've talked about in the past being staffed for growth and being staffed at around 15% overnight growth that we could realize. We're above that right now from where we sit. You know, we've got a lot of different things that we can run from the playbook with the market right now.

Jeffrey Kauffman (Equity Research Analyst)

Okay. Thank you very much.

Operator (participant)

Your next question comes from Lucas Servera with Truist Securities. Your line is now open.

Lucas Servera (VP of Equity Research)

Hey, guys. Good morning. Just wanted to touch on productivity improvement. Where could you see some of those further improvements longer term? And then I'll have another one after that.

Jared Weisfeld (Chief Strategy Officer)

Hey, Lucas. It's Jared. I think, you know, one of the key strategic benefits associated with the acquisition of Coyote was, you know, we had the ability to go ahead and actually accelerate our technology roadmaps. You know, after we closed the acquisition and we compared the technology roadmaps, it was really interesting to sort of do side by side because a lot of things that we had on our roadmap, Legacy Coyote in some cases, actually had implemented. I think part of that also we saw last week with the successful migration of the carrier coverage where, you know, if you think about the makeup as it relates to the carrier bases across the organization, RXO historically more owner-operators. Legacy Coyote leveraged larger fleets, private fleets.

Their digital capabilities, their ability to cover freight with those larger freights, with those larger fleet sizes, I think we took the best of both worlds. We have integrated that, and I think we are going to, I think that is one area to continue to focus on in terms of how to go ahead and continue to be efficient from a cost-to-serve standpoint and increase our productivity by leveraging the technology suite of the combined company.

Lucas Servera (VP of Equity Research)

Okay. Last mile came in ahead of overall expectations. Do you think there was a level of pull forward there from end consumers maybe trying to get ahead of tariffs?

Drew Wilkerson (CEO)

Absolutely not. Last mile had a whopping 24% year-over-year increase in their stops. That was driven by growth from current customers as well as new customers. When you look at current customers, we were getting business in new markets that we were not operating for them today where we've got really good service. We've got strong relationships. They've seen the results that we've been able to deliver for them. New customers were taking markets from other competitors and giving them to us because of how much they trust us. Because we've been the leader in the space, we've got a great reputation. We've also seen new customers come on at a really good rate, and the onboardings have been great. It is a growth from new customers as well as existing customers, but it's new markets importantly.

Lucas Servera (VP of Equity Research)

Okay. Thank you.

Operator (participant)

Your next question comes from Ken Hoexter with Bank of America. Your line is now open.

Ken Hoexter (Managing Director)

Hey, Greg. Good morning. Less-than-truckload volumes were up 26% in a market that's seeing kind of upper single-digit declines. What's driving the share gains? Is there something where you're using price to take share? Is there different capacity offers from the carrier partners that are working with you to enable the share gains? Just wondering what's driving such a different factor versus the market.

Drew Wilkerson (CEO)

Ken, let's start with the price piece. When you look at our revenue per load in LTL on a year-over-year basis and you back out fuel and you back out length of haul, it's flat. I think the answer is if you're looking for price as a lever, it's not how we do, it's not how we do business. That's something that's not in our playbook. We want to price in line with what's going on in the overall market. The first part of your question about how are we taking share, the biggest thing that we're seeing right now is a lot of times LTL can be a pain point for customers. It's a small piece of their revenue spend, and it's a small piece of their overall volume.

When you talk about tracking, when you talk about claims that come in, you talk about lost shipments, you talk about working with multiple different carriers for something that's a small piece of their business, we bring an easy solution to use from the technology side for them. They're familiar with us from the service that we've provided from the truckload side. We're winning with large enterprise customers that are coming to us and giving us the opportunity to service LTL in addition to truckload. I would close with we're just getting started in LTL. It went from 20% of our volume to 25% of our volume. You know, if you look at some other large brokers in the industry, 50-60% of their overall volume comes from the LTL side.

We think we've got a lot of share to take in the market in the coming years.

Ken Hoexter (Managing Director)

Thanks for that. That's great. I just want to clarify. Did you say pricing was flat or did I revenue per load? I missed what the original comment was there.

Drew Wilkerson (CEO)

Revenue per load, excluding fuel and length of haul, was flat. When you look at lowering price to get business, not in our playbook.

Ken Hoexter (Managing Director)

Yeah. Okay. Great. You mentioned the cutover on May 1 of the systems. Any early signs of the PT cost savings that you've enacted? Does it happen? Can you get it in that quick, or is that something you need practice and it takes time to start to blend those in?

Drew Wilkerson (CEO)

Our expectations coming in were zero. I mean, like all we wanted to be able to do was have a system that could handle the scale that we were putting on, making sure that it was a stable system and that people were learning how to operate in the system and we were servicing our customers. Knock that out of the park. We did not expect to see a lot of cross-pollination from capacity in the early innings of this. On day one, we started seeing it. You know, Legacy Coyote, when you look at whether carrier reps are covering, it is around 20% of what is coming on Legacy RXO freight. It is the same for Legacy RXO carrier reps. About 20% of what they are covering is coming from Legacy Coyote freight. Our customers are getting the right truck for the right load. Service is there.

When you look at purchased transportation, we are seeing some early signs. Now we're four days in. We're not running around high-fiving and celebrating. We're laser-focused on continuing to improve purchased transportation, but there are early wins that we're seeing in the first four days.

Ken Hoexter (Managing Director)

Great. All right. Thanks. Good luck. Thank you. Appreciate the time.

Operator (participant)

Your next question comes from Ravi Shankar with Morgan Stanley. Your line is now open.

Ravi Shankar (Head of India Equity Sales)

Great. Thanks. Morning, everyone. Just a follow-up on the LTL share commentary. What is the, when you look at the LTL market, kind of what is the target share of the overall industry do you think the asset-light players can get versus asset-heavy relative to the TL market? Also, in the past, TL side, asset-based carriers have sort of almost blamed brokers for putting pressure on the industry as a whole. Do you think the same thing will happen on the LTL side as well? This is not an RXO question as much as an overall industry question.

Drew Wilkerson (CEO)

I think that we look at the carriers, Ravi, as our partners of who we're doing business with. We're a sales channel for these LTL carriers to be able to grow over the years. We've got great relationships with them. For us, it's all about finding the lanes that work within their network and where they're going to provide the best service at a reasonable price to the customers. It's about giving the customers, you know, the right truck for the right load. A lot of it comes down to the technology and the ease of use within the system that we're able to provide for the customers. You know, I look at it not necessarily on where the market can go from asset versus non-asset because eventually it's ending up on the LTL carriers' trucks.

I more look at it as where can we take our volume to. Again, this is something we're just getting started in. It's only 25% of our overall volume, and we feel like we've got a lot of runway. The LTL, remember, it's got a fairly stable gross profit per load. If you look at the slide in the chart, it's relatively flat over the years that we've had. As you start talking about, to Stephanie's question earlier, higher highs, higher lows, higher midpoints, LTL provides that stability through a cycle as we grow that out.

Ravi Shankar (Head of India Equity Sales)

Understood. Maybe just a follow-up on the synergy topic as well. How are you able to, I mean, obviously very good that you're able to raise the synergy target so often, but where is that coming from? Is this like, you know, peeling layers of the onion where every layer takes off and kind of you find more? In which case, kind of how much more of the onion do you have to cut? I think this analogy works better than the baseball innings one, so I'm going to stick with it.

Jamie Harris (CFO)

Yeah. Hey, Ravi. This is Jamie. Yeah, we've had good success in our synergies, and we have raised it now three times in the last three quarters. Think about the typical places in business like this, you know, bringing this technology integration first phase to be complete. That's a big win. Not only operationally, but it gives us the opportunity to take out duplicative costs. We've had good wins in real estate consolidation, you know, just, you know, taking a building and closing a floor and putting folks on two floors instead of three as an example, subletting the space. And then third, probably one of the bigger ones, it really doesn't begin to hit until next year from a realization standpoint is the procurement side.

You know, taking two businesses that really do virtually the same thing, having contracts with the same vendor or having contracts with two different vendors, putting them together and getting the power of scale. We've been able to do all of those things. As you'll note, $10 million of that $70 million is CapEx savings. That will be eliminated going into next year because, you know, now we have one platform instead of two to spend money on. Ravi, one other thing to add. If you look at that $70 million, the return on investment that we've gotten has been very powerful. I mean, we're going to spend, let's call it $50 million in total to generate $70 million of savings that's annualized on a go-forward basis. We're very pleased with that return.

Ravi Shankar (Head of India Equity Sales)

Understood. Thank you.

Operator (participant)

Your next question comes from Brian Ossenbeck with J.P. Morgan. Your line is now open.

Brian Ossenbeck (Managing Director)

Hey, good morning. Thanks for taking the question. Maybe just wanted to ask a little bit more about the competitive dynamic. Obviously, the market is quite soft and a lot of uncertainty, as you highlighted. We've seen one major retailer at least maybe get into the brokerage side a little bit more, but maybe you can broaden out just to the competitive dynamic, specifically in full truckload as we go through an extended weak period of the cycle here.

Drew Wilkerson (CEO)

Yeah. Good morning, Brian. You know, I've been doing this almost 20 years. Brokerage has always been a very competitive business. We have seen retailers come into the space before. This is not something that is new. For us, you have to look at how are we building the business. We built the business on having fantastic service for our customers. We've got solutions that we put together for them that allow them to optimize their freight more efficiently and gives them great visibility of what they're doing. We've got technology that helps them drive decision-making, telling them what days of the week they should ship something, what mode of transportation they should use. We've got long-tenured relationships and a history of creating these solutions for them. When you look at our top customers, they've been with us for over 15 years on average.

For us, you know, we look to be able to build off of that, and it's more about how are we building in what has always been a competitive landscape in the brokerage industry.

Brian Ossenbeck (Managing Director)

Maybe if you can give a little more color on sort of the pricing dynamics you're expecting, contract renewals specifically phasing in throughout the rest of the year. You mentioned the low single to mid-single digit improvements. Obviously, the market needs to cooperate for those to become effective. Maybe a little bit more on the confidence and visibility to those rates actually coming through. Again, I guess it's more of a competitive question, but confidence in those holding and being able to recognize that. I guess more specifically, you know, what are you reflecting in that sequential improvement in Q2?

Jared Weisfeld (Chief Strategy Officer)

Hey, Brian. It's Jared. Our confidence is high as it relates to the contract rate increases that we talked about. We're reiterating our view in terms of low to mid-single digit contract rate increases year-over-year. You're starting to see the implementation of that throughout Q1, throughout Q2, with the full run rate impact of that into Q3. We feel really good about that. I think that comes back to exactly what Drew was talking about earlier. You know, the service that we provide to our customers, right, we have to win the right to serve every load. We see that in our service results. That's part of it. The other thing to think about certainly is mix, right?

You can, you know, I think Q1 was a great example of that where revenue per load in our full truckload business, excluding length of haul, excluding fuel, was up 4% year-over-year, right? That was also in the context of automotive being an approximate $10 million headwind to gross profit year-over-year, given the time-critical nature of those shipments. We feel really good about our contract rate increases, but it needs to also be viewed in the context of mix where automotive has been a headwind for the business, and that's also incorporated into our Q2 outlook as well.

Brian Ossenbeck (Managing Director)

Understood. Thanks very much.

Jared Weisfeld (Chief Strategy Officer)

Thanks, Brian.

Operator (participant)

Your next question comes from Bruce Chan with Stifel. Your line is now open.

Bruce Chan (Analyst)

Yeah. Thanks, operator. And good morning, guys. Still a little bit confused on the brokerage GP per load trends. Hopefully, you can sort me out here. But you mentioned that Coyote GP per load improved 20% from January to March. And, you know, when I think of that against the overall trends for the overall business still being kind of stagnant while, you know, some of your peers have maybe seen a pretty steady improvement in AGP, is that all due to automotive? And then, you know, Jared, you talked about the big opportunity in GP per load now that you're on the unified platform, but you also said that the high end of the guidance range assumes a flat AGP per load from Q4.

Maybe you can just help me to synthesize all that commentary and, you know, kind of figure out why you're seeing flatter trends versus some of the competition.

Jared Weisfeld (Chief Strategy Officer)

Sure. I'll have to take that first. When you think about the baseline, just to frame it up, right, January was a very difficult month for us in the industry, and we moved quickly from January to reduce cost of purchased transportation very quickly. That improvement that we saw from January to March was, you know, almost entirely buy-side driven. We were able to go ahead and improve gross profit per load by about 20% from January to March. That improvement sustained as it related to the month of April as well. We saw stable gross profit per load off of that improvement. When you look at Q2 as a whole, you know, all of the guidance scenarios that we provided assumes that gross profit per load will be up sequentially from Q1 levels at the high end and at the low end.

To your point, you know, if you look at the high ends where, you know, off of that April baseline, we are assuming gross profit per load is stable. At the low end of our guide, we are assuming a move lower in gross profit per load per move lower. You know, and we're also expecting a gross margin % improvement as well from Q1 to Q2. If you look at the midpoint of our outlook, it's about 14%, which I think is pretty strong relative to the industry. And remember, mix is also a percentage of that. I think Drew touched on this earlier. When you think about mix on gross margin %, recall a higher LTL mix will generally yield a higher gross margin %.

We think we've got a long runway to go as it relates to LTL growth, which would be a tailwind to gross margin percentage longer term.

Brian Ossenbeck (Managing Director)

Okay. Great. Thank you.

Operator (participant)

Your next question comes from Jordan Alliger with Goldman Sachs. Your line is now open.

Jordan Alliger (VP and Equity Research Analyst of Transportation and Logistics)

Yeah. Hi. Just a couple of quick questions. One, on the volume, you gave sequential thoughts as to how March to April is doing, but can you maybe translate that to sort of year-over-year for the second quarter? And then just to follow up, Jared, on what you just talked about on LTL and the gross margin percentage, can you also talk about LTL versus TL gross profit per load and how they compare? Thank you. Yeah, if there's some order of magnitude differential since LTL seems to be a bigger piece of your pie.

Jared Weisfeld (Chief Strategy Officer)

Yep. Happy to take that, Jordan. When you look at Q2 volume or outlook calls for a low to mid-single digit decline year-over-year, I think when you look at April trends, that is a pretty good way to think about how we are thinking about the quarter. That would equate to, you know, truckload down, right? High single digit year-over-year, LTL up strongly. I think importantly, in the month of April, volume was actually up year-over-year, right? I think we are seeing that play out as it relates to that is sort of the dynamics that are underlying our Q2 assumption. As part of your second question in terms of the different dynamics across TL and LTL, generally speaking, LTL, building off of Bruce's question, carries a higher gross margin percentage, and a lower gross profit per load.

It could be significant, right, in terms of lower gross profit per load, which is why when you saw Q1, you know, our volume outlook was ahead of our expectations, entirely driven by LTL. Because TL came at the lower end of our expectations for the quarter, you had that result in terms of Q1 results. I think that, you know, lower gross profit per load on LTL, but higher gross margin percentage. In some cases, it could be significantly higher.

Jordan Alliger (VP and Equity Research Analyst of Transportation and Logistics)

Thanks.

Operator (participant)

Your next question comes from Scott Schneeberger with Oppenheimer. Your line is now open.

Scott Schneeberger (Managing Director)

Thanks. Good morning. Could you speak to the cross-selling question? Just you mentioned managed transportation increase synergy loads provide to brokerage. Just talk about the opportunities there over the course of this year. Thanks.

Drew Wilkerson (CEO)

Yeah. Scott, every time managed transportation onboards a new customer, it's an opportunity for brokerage. If they've got great service and the rates are in line with what's going on from the market, it's an opportunity for brokerage to be able to win business. Because our brokerage has good service, a lot of customers are coming into that sell cycle asking managed transportation to use our brokerage or where can we use our brokerage. Anytime something goes wrong for a customer, which happens in transportation on the managed trans side, the customer has more comfort knowing that we've got a backstop from a capacity standpoint with our brokerage. You know, brokerage has always been a part of the sell cycle for us with managed transportation. The synergies between those two teams are extremely high, and they've done a good job at building it over the years.

I think we've got a lot of opportunity to be able to continue to do that.

Scott Schneeberger (Managing Director)

Great. Thanks. Jamie, on the CapEx, you're taking it down $10 million this year, and it looks like you gave some guidance for 2026, $45-$55 million, a good bit lower than 2025. Can you speak to what areas are the focus of the pullback and what you view as far as how that, you know, what areas you're cutting in specifically?

Jamie Harris (CFO)

Yeah. For 2025 specifically, I mean, it was nothing specific other than we are constantly doing an evaluation of what's a good return on an investment. We found the opportunity to just take $10 million out of our CapEx plan. We're not, you know, pulling back on any strategic or, you know, high ROIC investments. I'd say bringing the $10 million down is just normal course of business that we're constantly looking at. If you move into 2026, specifically two items, one is we have about $10 million in there related to the integration spend that, you know, we'll be done with that latter half of 2025 into Q4. That goes away. Then we have one investment that we're spending some money on this year, some strategic real estate investment, call it $10 million-$15 million. That goes away in 2026. It's not a repeatable spend.

That's the 25-26. But, you know, still all high ROIC organic type investments that we think are good positions, and that's good for the long term.

Scott Schneeberger (Managing Director)

Got it. Thanks.

Operator (participant)

There are no further questions at this time. I will now turn the call over to Drew for closing remarks.

Drew Wilkerson (CEO)

Thank you, Joel. In closing, I want to outline how we're more confident than ever in RXO's ability to drive increased earnings and free cash flow that's going to go across market cycles. Our successful migration of legacy Coyote's carrier and coverage operations over to RXO's platform is game-changing. Our early results provide us with confidence that we'll be able to realize significant cost of purchased transportation synergies. Our investments in technology, including AI and machine learning, are driving significant productivity improvements across our business. We remain disciplined when it comes to cost, and we have a strong balance sheet and a unique platform that provides us with opportunities to drive both organic and inorganic growth. Our people remain focused on providing exceptional service, a comprehensive set of solutions, continuous innovation, and close customer relationships.

We're making the right strategic investments to drive long-term success and outperform across all parts of the freight cycle. Thank you and look forward to seeing many of you soon.

Operator (participant)

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and ask that you please disconnect your lines.