RXO, Inc. (RXO) Q4 2025 Earnings Call Transcript
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Overview
The earnings call summary presents a mixed outlook. Financial performance and market strategy are challenged by weak demand and cost pressures, though cost structure improvements and AI investments are positive. Q&A insights reveal weather impacts and restructuring costs, but also spot volume growth and potential synergies. The neutral sentiment reflects these balanced factors, with no strong catalysts for significant price movement. The mid-sized market cap suggests moderate stock reaction.
Key Financial Performance
Brokerage overall volume Declined by 4% year-over-year. Less than truckload volume grew by 31%, offset by a 12% decline in truckload volume. The decline was attributed to the prolonged soft freight market and significant capacity reductions.
Brokerage gross margin 11.9%. Declined 130 basis points year-over-year and 160 basis points sequentially. The decline was due to increased cost of transportation and soft demand.
Managed Transportation revenue $133 million in the quarter, down 6% year-over-year. The decline was attributed to easing automotive headwinds and soft demand.
Last Mile revenue $298 million in the quarter, up 3% year-over-year. Last Mile stops also grew by 3%. However, demand for big and bulky items weakened.
RXO's EBITDA $17 million in the quarter, below expectations. The decline was due to a pronounced brokerage margin squeeze caused by capacity exits and increased buy rates.
Total revenue $1.5 billion in the quarter, down 14% year-over-year. The decline was due to soft freight market conditions and increased transportation costs.
Gross margin 14.8%. Negatively impacted by increased transportation costs and soft demand in Last Mile.
Adjusted free cash flow $47 million for the year, with a 43% conversion from adjusted EBITDA. This was driven by disciplined capital deployment and favorable working capital.
Net CapEx $57 million for the year, below the outlook of $65 million to $75 million. This was due to strategic capital deployment.
Truckload revenue per load Increased by 1% year-over-year, excluding fuel prices and length of haul. However, cost of purchased transportation increased at a faster rate, leading to margin compression.
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Operating Highlights
AI Spot Quote Agent: Introduced a new proprietary AI spot quote agent to unlock incremental margin opportunities.
AI Enhancements: Improved pricing engine, extended pricing tooling with increased automation, and launched a contract pricing model view for enhanced decision-making.
Agentic AI Capacity Sourcing: Rolled out agentic AI capacity sourcing to attract qualified carriers to the RXO platform.
AI Tracking Updates: Automated thousands of tracking updates via agentic AI tooling and delivered a generative AI assistant to support customer sales and operations.
Brokerage Late-Stage Sales Pipeline: Grew by more than 50% year-over-year, driven by full truckload.
Managed Transportation: Awarded more than $200 million of freight under management in Q4.
LTL Volume Growth: Achieved 31% year-over-year growth in less-than-truckload (LTL) volume in Q4.
Cost Optimization: Reduced costs by over $155 million since becoming a stand-alone company, including AI investments, real estate optimization, and productivity improvements.
Productivity Increase: Achieved a 19% increase in productivity over the last 12 months.
New Asset-Based Lending Facility: Finalized a $450 million facility to replace the $600 million revolver, providing better pricing and financial flexibility.
AI Investment: Investing over $100 million annually in AI to transform operations and improve efficiency.
Focus on Profitable Growth: Expanding stable sources of EBITDA like Managed Transportation, SMB, and LTL.
Integration Completion: Completed integration efforts, enabling a unified tech platform and return to growth mode.
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Risk or Challenges
Prolonged soft freight market and capacity reductions: The company is facing challenges due to a prolonged soft freight market and significant capacity reductions, which are squeezing brokerage gross margins.
Brokerage gross margin squeeze: Brokerage gross margin was negatively impacted by increased transportation costs and soft demand, particularly in the truckload segment. This was exacerbated by capacity exits and regulatory changes.
Regulatory changes and enforcement: Regulatory actions, including enforcement of non-domiciled CDL restrictions and English language proficiency requirements, have led to capacity exits, increasing transportation costs and impacting near-term results.
Soft demand and limited spot opportunities: Demand remains soft, with insufficient spot opportunities to offset rising transportation costs, leading to margin compression in the contractual book of business.
Last Mile demand weakness: The Last Mile segment experienced weakening demand, particularly in big and bulky items, which impacted revenue and gross margins.
Seasonal and structural challenges in Managed Transportation: Managed Transportation faced seasonal softness and a $12 million goodwill impairment due to restructuring of the Express service offering.
Increased purchase transportation costs: Purchase transportation costs increased significantly, particularly in the truckload market, without a corresponding increase in sales rates, leading to financial strain.
Economic uncertainties and market conditions: The company is navigating weak freight demand across all lines of business, with uncertainties around the timing of demand recovery.
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Guidance & Outlook
Brokerage Sales Pipeline: The late-stage brokerage sales pipeline has grown by more than 50% year-over-year, driven primarily by full truckload. The company expects to resume year-over-year truckload volume outperformance as early as mid-2026.
Managed Transportation: The business has a strong pipeline and was awarded more than $200 million in freight under management in Q4 2025. This is expected to result in increased synergy loads to RXO's other lines of business.
Market Conditions and Demand Recovery: The company anticipates a sharp market inflection when demand recovers, driven by structural changes in truckload supply due to regulatory actions. However, near-term results are under pressure due to soft demand and increased purchase transportation costs.
Technology Investments: RXO is investing over $100 million annually in AI and technology to enhance operational efficiency, improve pricing algorithms, and provide better customer solutions. These investments are expected to fundamentally change operations and improve long-term margins.
Capital Structure: A new $450 million asset-based lending facility has been finalized, replacing the previous $600 million revolver. This facility is expected to provide better pricing and greater financial flexibility across market cycles.
2026 Financial Outlook: For Q1 2026, adjusted EBITDA is expected to range between $5 million and $12 million. Full-year CapEx is projected to be between $50 million and $55 million, with other financial metrics provided for modeling assumptions.
LTL and Last Mile Business: LTL volume is expected to grow by mid-single-digit percentages year-over-year in 2026, while Last Mile stops are projected to decline by mid-single-digit percentages due to weak demand for big and bulky items.
AI and Operational Improvements: The company is leveraging AI to improve volume, margin, productivity, and service. Recent advancements include AI spot quote agents and enhanced pricing tools, which are expected to unlock incremental margin opportunities.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:What drove the 50% increase in the late-stage brokerage pipeline, and what is the expected timing and pricing?
A:The 50% increase in the late-stage brokerage pipeline is attributed to the team's focus and the integration of Coyote into the organization. The pipeline includes both existing customers (average relationship of over 15 years) and new, attractive customers. Bids are typically implemented throughout the second quarter, with optimism about outperforming the truckload market by mid-year. Contractual pricing is expected to be in the low to mid-single digits, while spot pricing is expected to be significantly higher.
Q:What progress has been made on AI initiatives, and how is it impacting productivity and margins?
A:Significant progress has been made in AI initiatives, focusing on volume, margin, productivity, and service. Productivity is expected to increase by 19% year-over-year in 2025 and nearly 40% on a two-year stack. AI is helping decouple volume growth from headcount growth, driving strong incremental contribution margins. AI capabilities are also expected to drive incremental margin opportunities across the business.
Q:How do company actions and market dynamics interact, and when will they start working together?
A:The company is not waiting for the macro environment to improve and is focusing on company-specific initiatives, such as the late-stage pipeline, which is up more than 50% year-over-year. These initiatives are expected to drive growth and outperform the truckload market. The team is confident in executing the pipeline and resuming historical outperformance.
Q:What was the impact of winter weather on the first quarter?
A:Winter weather in the Southeast and Southwest caused two major snow and ice storms, leading to a $2 million negative EBITDA impact in January. The weather also affected the Last Mile business due to iced-over driveways.
Q:Why has spot volume not increased significantly despite tender rejections being above 10%?
A:Spot volumes have increased from Q3 to Q4 and into January, driven by tender rejections climbing above 10%. However, the increase has not been enough to offset the compression in gross profit per load on the contractual side. The company expects tender rejections to continue climbing, leading to more robust spot opportunities.
Q:What are spot volumes tracking year-over-year in Q1, and what is the outlook for free cash flow?
A:Spot volumes are up year-over-year in January. The company ended the quarter with $17 million in cash and expects low single-digit cash usage in Q1. On an annualized basis, free cash flow conversion is expected to be in the 40-60% range, with positive free cash flow anticipated for the year.
Q:What is the earnings contribution from Managed Transportation after recent changes?
A:Managed Transportation contributes higher EBITDA margins and is measured on a net revenue basis. It provides synergies to the rest of the organization, impacting multiple lines of business. The company continues to grow its FUM year-over-year.
Q:How does RXO define truckload market outperformance, and what are the expectations for volume, pricing, and EBITDA?
A:Truckload market outperformance is defined by external metrics and historical share-taking. Volume is expected to grow, supported by the pipeline and customer feedback. Contractual pricing is expected to be in the low to mid-single digits, with spot rates significantly higher. Every dollar of gross profit per load improvement translates to over $1 million in annualized EBITDA.
Q:What are the dynamics in LTL versus truckload, and why is LTL stronger?
A:RXO's LTL business focuses on enterprise customers and pain points like claims and lost shipments, leading to more outsourcing. LTL performance depends on onboarding timing, while truckload bids are typically implemented in Q2. The pipeline for LTL is robust, but truckload outperformance is expected by mid-year.
Q:Why is RXO's truckload volume down compared to peers, and what is the Q1 EBITDA outlook?
A:RXO focused on integrating Coyote in 2025, which delayed volume stabilization. Sequential outperformance in Q3 and Q4 indicates stabilization and a return to growth. Q1 EBITDA is impacted by brokerage margin compression and seasonal declines in Last Mile, magnified by winter weather.
Q:What are the restructuring costs and their impact on cash flow?
A:Restructuring costs are down 60% year-over-year, with $25-30 million expected in 2026. About one-third of this relates to prior actions. Initiatives include process improvements, technology integration, and real estate consolidation. Cash outflows for restructuring are estimated at $30 million, with half related to prior years.
Q:What is the visibility for Q2 gross margin and volume improvement?
A:Q2 gross margin depends on market conditions and tender rejections. Volume improvement from Q1 to Q2 is expected with high confidence. The late-stage pipeline provides a strong indicator of future performance, with targeted discussions and high conversion rates.
Q:What are the cost reduction impacts of technology initiatives?
A:Technology initiatives focus on automation, integration, and productivity improvements. Over $155 million in costs have been removed post-spin. Incremental margins in brokerage can reach 80% for every dollar in gross profit. Cost benefits are expected in 2026, with ongoing productivity gains.
Q:What is the impact of demand recovery versus supply tightening on spot opportunities?
A:Demand recovery would help drive spot opportunities, but recent tender rejections above 10% indicate supply-side pressure is already creating spot loads. Regulatory changes and supply tightening are contributing to the current market dynamics.
Q:What are the realized synergies from the Coyote integration?
A:Approximately $70 million in synergies were expected, with $60 million in OpEx and $10 million in CapEx. Most synergies have been realized, with an additional $10 million expected in 2026. These synergies position the company for strong P&L flow-through during demand recovery.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the specific reasons for RXO's truckload volume decline compared to peers, providing general statements about integration and customer feedback instead. Additionally, while discussing Q1 EBITDA outlook and restructuring costs, the responses lacked detailed breakdowns or clarity on the timeline for realizing benefits from these actions.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
ABL
Brokerage
Managed Transportation
Mile
Slide
action
asset lending
basis point
brokerage margin
capacity
capital
conversion
covenant
credit
customer relationship
decade
demand
detail
development
expense
flexibility
hub
increase
industry
interest
lending facility
line
load
margin squeeze
market cycle
mode
month
need
outlook
revolver
sale rate
structure
truckload
volume
RXO Transcript
RXO, Inc. (RXO) Q4 2025 Earnings Call Transcript
Unknown2-6
The earnings call summary presents a mixed outlook. Financial performance and market strategy are challenged by weak demand and cost pressures, though cost structure improvements and AI investments are positive. Q&A insights reveal weather impacts and restructuring costs, but also spot volume growth and potential synergies. The neutral sentiment reflects these balanced factors, with no strong catalysts for significant price movement. The mid-sized market cap suggests moderate stock reaction.
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The earnings call reveals a mix of challenges and opportunities. Despite a soft freight market and higher leverage, RXO shows strong financial health, strategic investments in technology, and a focus on cost reduction. The cautious optimism from customers and structural capacity changes present potential growth. The strategic plan highlights improvements in truckload profitability and lower CapEx, while AI investments enhance operational efficiency. The Q&A section shows management's confidence in navigating market conditions, supporting a positive sentiment.
RXO Slides
RXO Report
Frequently Asked Questions
Where does this earnings call transcript come from?
All transcripts are sourced directly from the official live webcast or the company’s official investor relations website. We use the exact words spoken during the call with no paraphrasing of the core discussion.
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Why do some answers appear as “Unclear” or “Inaudible”?
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They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
