RXO, Inc. (RXO) Earnings Call Transcript & Summary

All right. We're going to go ahead and get started with the next, I guess, fireside chat here. And we have Jared Weisfeld, who's the Chief Strategy Officer for RXO. Jared, thank you for joining us. Always good to have RXO at our conference. We appreciate your time. And a lot of interesting topics in brokerage and truck at RXO as well to talk about. So maybe just to kick things off, if you want to offer some thoughts about kind of what you're seeing in the freight markets and how you're looking at activity in 4Q.

Sure. And Tom, thanks for having us at your conference. Really appreciate it. So when we reported a few weeks ago when we talked about still being in a prolonged soft freight market and you look at some of the indicators that we were referring to, the month of October, if you look at cash freight shipments, cash freight shipments were down 7% year-over-year. And -- so it took another step back relative to September. And what's interesting is if you go back and you look at year-to-date 2025 cash freight shipments, you're approaching great financial crisis lows going back to 2008. So you think about over the last almost 15-plus years, overall shipments are really weak when you think about just the freight economy and the divergence that's occurred relative to the broader macro economy, which is reasonably healthy, right, positive GDP growth, slowing inflation, services economy is strong. And I think that speaks to the fact that goods relative to services are sitting at 15-year lows relative to consumption. So still in a prolonged soft freight market. But the one thing that we talked about on the call was that we believe the changes that are happening on the supply side are structural in nature and are something certainly to be paying attention to when you think about the FMCSA sizing about 200,000 nondomiciled CDLs, potentially coming out of the market over the next few years. That's a big deal, and enforcement actions have sustained state by state. And I think the DOT is taking corrective actions to ensure safety across the board for our roads. And I think that has the near-term implication of what's transpired into our business because we procure capacity on the spot market as a truckload brokerage and we've got a heavy contractual book of business. So what we saw embedded in our Q4 outlook, which I'm sure we'll get to, is that when you think about Q4, we've got this contractual book of business and the cost of purchase transportation moved higher in the month of October as it relates to a lot of the supply tightening that I just referred to occurring. So sort of I said a lot there, overall state of the industry, and we can certainly dive into it.

So how do you think about, from an activity perspective, I guess if you look at some of the other industry kind of characterizations, metrics, whatever we want to look at, does it seem like it's kind of shaping up as you would have had anticipated? Or do you think it's kind of -- do you see indications it's much different.

So if you look at the industry-wide metrics over the last, call it, 4 weeks load-to-truck ratio, [ tender ] rejections have all moved generally higher, tender rejections sitting around 7%, line haul spot rates have moved higher as well. They took a little bit of a dip here in November and then over the last few weeks, have seasonally moved higher. So you're seeing the spot rates move higher ex fuel. So all the freight KPIs are certainly moving, have been moving higher, which is good in terms of when you think about what must be true for a better environment related to spot opportunities for someone like RXO, we typically talk about tender rejections hitting that 10% plus level and load-to-truck ratio hitting 8:1. So -- and then getting contract versus spot spread closer to parity. So all of those are moving in the right direction. I think the question is how sustainable is that as you think about that into 2026. And I think certainly a part of what's been going on in terms of these key metrics moving higher has been the supply side. When you think about all of the supply that's come out, both cyclically and structurally over the last few months, so I think that's sort of how we see it right now in terms of tighter market and all of that was contemplated in our Q4 outlook. When you think about the range that we gave for Q4, we talked about sustained tightening market conditions embedded within our outlook.

What about from an activity perspective? Is it -- do you think it's kind of a normal peak season developing? I mean, are normal maybe -- that's the right word, again, given the kind of broader weakness we've seen, but do you see that kind of seasonal uplift it would be characteristic of the peak season.

We talked about a muted peak season. And I think if you look at just overall industry-wide volumes, this is not an RXO comment. You've seen overall tender volumes move higher over the last few weeks. Tough to tell if that's really attributable to peak season or more of a normalization of demand post government reopening with respect to the shutdown ending. So you've seen the normalization on outbound tender volumes from an industry-wide standpoint, and that goes back into what I was saying earlier in terms of some of the key metrics in terms of load-to-truck ratio and tender rejections moving seasonally higher, but I still think it's -- we call it for a muted peak season with respect to our Q4 outlook. And I think the -- heading into 2026, it all depends on, as we think about the intersection of supply and demand does the enforcement actions -- do the enforcement actions sustain into next year? What happens by vertical, which certainly we can explore.

Right? Okay. But in terms of that expectation of a muted peak, it sounds like broadly, that's the way it seems to be playing out from a industry perspective?

Yes. I mean what I would say is the outlook that we gave for Q4 was $20 million to $30 million of adjusted EBITDA, and we talked about how in our brokerage business, we typically see an increase, and we are going to see truckload volumes grow sequentially from Q3 to Q4. That's contemplated within our outlook. But what you're seeing is the typical seasonal uplift that we generally see from an adjusted EBITDA standpoint, embedded within the outlook is that is muted because of the rising cost of purchased transportation. We talked about that squeeze that really was severe in the month of October, and that is embedded within our Q4 outlook that, that sustains throughout the rest of the quarter. So that offsets some of the positive momentum from truckload volume moving higher. And then in our last mile business, we talked about how typically we see an increase from Q3 to Q4 from an adjusted EBITDA perspective. But embedded within our outlook is a decrease based on some of the slowing demand activity that we really saw after Labor Day.

Right. Okay. So $20 million to $30 million sounds like kind of broadly tracking against that, that does embed some tightening. How do you think about government shutdown? And was that actually a big impact, is kind of a depressing impact in October that you would make sense of what you see in November that there'd be some lift as you gotten beyond that? Or do you think it seems hard to gauge whether that was really meaningful impact of freight or not?

Yes, from a direct exposure standpoint, it wasn't that much for RXO. But on the margin, as you think about just consumers' willingness to spend and what that means for overall consumer confidence and overall freight volume activity, I certainly think that marginally freight demand was impacted by the government shutdown. I think certainly a positive that the government reopened and you think about one of the more obvious use cases with respect to government funding in terms of SNAP benefits, right? You've got 40-plus million Americans that are dependent on SNAP benefits. So when you think about food and beverage type exposure that was definitely impacted by government shutdown. With the reopening of the government and those funds continuing to flow, I think that was certainly a positive in terms of just overall industry volumes.

Right. Okay. I think we look at the pattern in the last couple of years for spot rates and truckload market tightness. It is difficult to see some tightening in December. I think part of that seasonal activity, part of that's probably drivers late December, kind of go to the sidelines and during the holidays that seems to carry into January. So if you just look at the chart of dry van spot rates ex fuel, it seems pretty regular in the last couple of years as you see that pick up now. Maybe this is a touch earlier than that, but how do you kind of distinguish between, hey, this is normal seasonal pattern versus the regulatory actions are really starting to bite and affect capacity?

What's interesting is that what's been occurring over the last 2 to 3 months is effectively unprecedented. When you think about overall industry volumes being so weak all year, and you have tightening KPIs such as load-to-truck ratio and tender rejections moving higher, that's not intuitive, right? So when you think about in the month of October as a great example, with cash freight shipments down 7% year-over-year, taking another step back relative to September. And despite that, you saw load-to-truck ratio and tender rejections move higher. That gives, I think, certainly us confidence that you're seeing supply come out with respect to some of the structural and cyclical dynamics that are playing out. When you think about from this baseline here throughout Q4 into Q1, it's a great question, and I think it's going to be a function of a couple of things. Over the last few years, you've definitely seen line haul ex fuel rates move higher from Q4 to Q1. Weather has been a big factor for the last couple of years. So I think we'll -- I mean without getting into [ La Niña ] predictions for the first quarter and the Southern stratospheric warming that may or may not occur over the next 30 days and what that means for for winter storms. I think you got to just put that in context where I'm not really sure what normal is anymore as it relates to the cadence from Q4 to Q1 on spot, but weather has definitely been an impact. We talked about that earlier this year in terms of impacting the month of January. And I think most of the truckload space talked about that as well. What's interesting, though, is that you're still having carriers operating below where they need to with respect to breakeven, right? So all of the -- we put out the RXO curve, which came over from legacy coyote, it used to be the coyote curve. And one of the stats that we put in the release a couple of weeks ago is that you look at carrier rates in terms of spot rates over the last 10 years, basically flat in terms of overall freight rates. But the cost to the carrier is up 34%. Insurance, tires, maintenance, overall inflation. So you're at an environment that is not sustainable for many reasons, just based on how economics work. So you think about some of the ORs that are out there for some of the trucking companies operating anywhere between probably [ 95 and 115 ]. So it just, I think, speaks to the fact that we're operating in an environment right now that is very painful for many carriers, given where unit economics are and ultimately speaks to the need for rates to move higher longer term to achieve acceptable margins longer term.

So what do you see in your own carrier base in terms of attrition that would result from this pressure? Is that something where there's been a change in the pace of attrition that's been meaningful. I think just kind of like headline type things. It does seem like you've seen more bankruptcies of kind of midsize trucking companies, I don't know, over the last 6 months, I would say.

It was a large 1 last night, yes.

Yes. So the new slow does seem to reflect that. It's kind of qualitative, but you guys have a lot of data and metrics. Are you seeing in your carrier base that there's like a higher pace of attrition.

Our carrier base has generally been pretty stable. The overall RXO network has about 120,000 carriers and 1.6 million power units. And we take so much pride on the restrictions that we have in terms of what must be true to drive on behalf of RXO in terms of compliance and screening and onboarding processes really thorough. And ultimately, you as a shipper you want that thoroughness. You want to be comforted by the fact that you have a betting mechanism that is in place to go ahead and ensure that it is the highest quality drivers. We can go ahead and start a trucking authority and get our CDLs. But you're not -- we're not going to be able to drive for RXO on Day 1 after receiving your CDL. We have very strict requirements. It's going to be at least 3 months before you're even driving on behalf of RXO. And then as you assume, you have to go ahead and work your way up to earn the right to drive highly lucrative and profitable freight. So we've actually seen some -- it's been pretty stable in terms of the RXO core. And I think that's one of the advantages of being the third largest provider of broker transportation in North America having access to massive amounts of capacity. And ultimately, the shippers longer term, when you think about all of the structural changes that are ongoing right now, what does the steady state look like when we get to the other side of this you as a shipper, and we hear this from our shippers. They want to do business with large-scale carriers, large-scale brokers that have balance sheets and the ability to invest throughout cycle and have access to massive amounts of high-qualified capacity.

So I mean it's favorable, you have broad access to capacity. Obviously, that's to your advantage. I guess what makes a lot of sense to me or less intuitive to me is that with that larger capacity base, why would you not see attrition? When it seems like there's so much pressure on the carriers.

Well, I think when you -- you have to look into who is exiting the market right now. A lot of the exits have been nondomiciled CDLs, capacity that may or may not -- should potentially not even be in the industry, right? There are -- there's a ton and this has been widely reported in terms of individuals that have -- first name is no last name and name given, right? You think about who is getting some of these CDLs. This speaks to the pretty strict processes that we have internally in terms of who is driving on behalf of RXO. So no doubt, over the last few years, you've seen overall carrier attrition a little bit based on the cyclical pressures that we've talked about. But in general, it's a pretty stable base. And I think this also speaks to one of the advantages that we saw with respect to the purchase of Coyote last year, the carrier base for Coyote is very different from that of RXO. So legacy RXO more owner operators, legacy Coyote more medium-sized to larger carriers access to a lot of these private fleets. And as you know, to drive on behalf of private fleet, you're really going to be an employee and not have a nondomiciled CDL. So it speaks to the fact that we've got access to not only a massive amount of capacity, but very high-quality capacity.

What's the advantage of using more owner-operator versus kind of midsize and private fleet? Or is it just kind of like you get some advantage using everything?

I think it's the latter. It's just the -- the way the businesses were built -- RXO was built on getting access to power lanes across owner operators throughout the country, and legacy Coyote was more of centralized capacity as it relates to medium to larger-sized private fleets. RXO, we tried to crack into the private fleet market, and we weren't as successful as legacy Coyote was. So when we saw that difference in terms of the carrier networks and how complementary they actually were sort of just different ways of building up the density that both networks had and I think pretty complementary to each other.

Okay. How do you think about coyote, RXO cayote synergies and opportunities, how much impact is there when you look in 2026.

About cost synergies?

Cost synergies, cost of purchase transportation, just overall impact EBITDA in '26 versus '25?

Sure. So let's set the stage in terms of the cost efficiencies throughout the organization. So since we spun from RXO we've taken out over $125 million of annualized operating expenses, that includes about $60 million of operating expenses from Coyote. We announced a couple of weeks ago in earnings that we are instituting a new $30 million cost takeout on an annualized basis. So that brings the grand total from $125 million up to $155 million. when you think about the flow-through into 2026, sort of 2 components to think about. There is the actions that were taken in 2025 from a synergy standpoint that will be fully realized into 2026. And then you think about the cost actions that we took in -- that we announced a few weeks ago that are being taken in the fourth quarter with the full annualized impact in 2026. Taken together, those combined numbers should be around $30 million, $35 million of annualized costs coming out of the model. And I think that really does speak to us operating at a very efficient cost structure highly. And when we think about sort of incremental leverage associated with that, we're talking about from gross profit down to EBITDA with respect to volume, it could be $0.60-plus on dollar with respect to price, it could be $0.85 plus on dollar with respect to -- on the brokerage business. One other thing to keep in mind in terms of the $35 million year-on-year tailwind that we'll have 2026 versus 2025, holistically across both operating expenses takeout and synergies there is certainly inflationary pressure in the business. When you think about just overall cost inflation, that stat that I gave you earlier in terms of you think about insurance and tires and maintenance for a lot of the carriers, some of those certainly are true for us when you think about insurance and merit, et cetera. So you won't see all full $35 million year-on-year, '26 versus '25. But certainly, we continue to take out aggressive -- take out costs aggressively. And even when you look at the last quarter, you look at last quarter versus the full quarter when we closed Coyote in Q4 of last year, SG&A is down about $15 million or $60 million on an annualized basis, pretty big number.

So you mentioned $30 million to $35 million. How do we think about cost to purchase transportation and synergies from that? Is that -- when it gets that gets tricky when you say, well, spot rates are going up, and we're going to get squeezed. But we're getting a benefit from combined. So it's probably harder to decouple. But is that a factor we ought to consider for '26? Or should we just say, hey, let's not focus on that because we know cost of purchased transportation overall is going up.

You should absolutely consider it for 2026 and beyond because it was part of the strategic rationale associated with the acquisition of Coyote. You think about the combined pool of purchase transportation dollars across legacy RXO and legacy Coyote, almost $4 billion of [ PT ]. The ability for us to improve spend can drop from gross profit down to EBITDA. So that is a huge focus of the organization. We talked about last quarter how year-to-date, we're seeing since the carrier cutover, which occurred on the technology side, the first, over the last, call it, 5 months, we've seen about 30 to 50 basis points of incremental buy rate favorability. We've given some framework where by May of next year, which is the 1-year anniversary of that carrier cutover and just to help frame things and put things in perspective for everyone, we did the technology transition in multiple phases. One of the first phases was making sure that all carrier reps across legacy RXO and legacy Coyote, we're covering freight in one system, which is the RXO system, RXO Connect and our proprietary TMS freight optimizer that occurred in -- on May 1. And it's also a pretty iterative process where over time, you'll have the ability for the carrier reps to improve productivity think about some of these carrier reps out legacy Coyote, almost tenured in the industry doing this for 8 to 10 years operating off of Bazooka. So it takes some time to go ahead and learn the inner workings of the newer system and learn the freight that they have access to. By that 1-year anniversary of May, we feel comfortable that we'll get to about 100 basis points of incremental buy rate favorability. But you also bring up a very important point that you need to distinguish the cost synergies and the cost takeouts from that of purchase transportation synergies because purchase transportation synergies will move with how the market is performing. So ultimately, if you are in an inflationary rate environment, it will serve as incremental cost avoidance. If you are in an environment that is status quo or perhaps loosening, you have the ability to benefit from incremental PT savings.

Great. Okay. How do you think about the kind of algorithm for 2026 overall? Is it base case -- you get a little bit of growth in freight, you get some tightening in the market, you get some rate increases. I don't know, what are some of the pieces that could come together in addition to what you've talked about on the cost side?

This is the longest freight recession on record. So I think we're not going to get into predictions for 2026 and what is already a very unprecedented environment. But what I can talk to, and I think this is really important, is our ability to outperform the market. And if you think back 12 months ago, we just completed the acquisition of Coyote. But underneath the hood, it was still clearly 2 separate companies with us first beginning the tech integration journey, the operation integration journey. If you think about where we are right now, the integration is effectively complete. We are integrated from a sales standpoint, integrated from an ops standpoint, carrier integration complete, shipper integration on the customer side, materially complete. One CRM and one ERP, one pricing tool, combined data set of both legacy RXO and legacy Coyote in 12 months. This is the largest integration that's ever occurred in the asset-light space. And we hit operationally our time line in terms of tech integration, which was a very robust and aggressive time line to begin with. So heading into next year as 1 RXO with the integration behind us, if you think about RXO over the last 10, 15 years, profitable growth has been our algorithm. Outperformance in the brokerage market has been our algorithm. If you look back over the last 10 years, we have significantly outperformed the truckload market heading into 2026. The business has very good momentum as it relates to conversations with shippers and an integrated company across the board to go ahead and resume that outperformance that we've been accustomed to for the last decade.

How much visibility do you have to that? I think when Drew talked -- has talked about this year, he said, okay, we thought rates would go up. They didn't go up as much as we thought or they didn't really go up the market stayed soft. And so we probably underperformed a bit on maybe market share or volume relative to the stance we took on rates. You have done some heavy lifting and putting the pieces together, but it's also now a new entity versus what it was when you had the strong track record of growth. So kind of what gives you confidence that you can go back to being growth above the market as you go '26, '27.

So you think about, as 2025 progress, to your point, we took a stance on rates earlier in this year and the market took another leg lower. So we think about where we are now versus 12 months ago at the time of the Coyote acquisition, we thought we were at or near the bottom of the freight cycle, and we thought that the market would move higher. It's taken a little bit longer. And there have been consequences as it relates to our truckload volume growth year, which first quarter was down 8%; second quarter, down 11%; second quarter down -- third quarter down 12%. And at the midpoint of our outlook, we talked about down double digits again. So we've underperformed this year on the truckload side, to your point, no doubt, based on some of the pricing strategies that we engage. And if we knew if it was going to be a softer market, we certainly did not have to be as aggressive as we were on some of the price increases earlier this year. But you sort of fast forward to where we are right now. And you think about the automotive headwinds that have impacted -- I want to be clear, it wasn't just legacy Coyote, right? Legacy RXO, we are the largest provider of managed expedite in North America for automotive. So legacy RXO, you look at our automotive volumes for the combined basis in 2025, they're down 20% to 30% year-over-year. So fast forward to 2026, automotive stops being a headwind materially starting in Q1. Our truckload comps eased materially starting in Q2 of next year. And then in terms of your question on visibility, I think the conversations we're having with our customers have been very constructive. We've stabilized the volume. We talked about Q3, our truckload volume was up 1% sequentially. Q4 will be up again embedded within our outlook. And then when you think about off of that base, then being able to outperform the market irrespective of market conditions, we feel very good about that. What we don't know is the demand environment where ultimately, if the demand environment still remains soft, we could have a very good bid season. But ultimately, what we call fill rates, right, would be challenged, whereby customers have a view of demand and ultimately, if the shippers forecast is off because the consumer deteriorates as an example, their demand goes lower and therefore, our demand would go lower, even if you had that award. But in terms of the ability to continue to stay close to customers, servicing that freight exceptionally well now as one RXO we feel very good about.

Let's spend a little bit of time on the regulatory side. I know you look at a lot of the details of what's happening in the specific regulatory actions, you're thoughtful about how that manifest and how big the impact can be. What's your latest thought on what are some of the key regulatory actions that are taking place and how you think that is base case, how it tracks market in 2026?

I think the biggest regulatory action that has been taken over the last, call it, 6 months, I'd say, have been twofold. One was the executive order, the Rules of the Road executive order in May of this year, which required English language proficiency on behalf of truck drivers and the ability to interpret road signs. And the second was the interim final rule from the DOT in September, which effectively paused the issuance of nondomiciled CDLs. Those are very significant in terms of the potential implications to the truckload industry, and we saw a preview of that in October in terms of the capacity that's come out. So sizing that up I think the FMCSA has sized up 200,000 nondomiciled CDLs being impacted by the interim final rule on a base of 3.9 million, that's about 5% of overall capacity. But then you sort of break down that denominator, which is about 3.9 million CDLs that are out there, what is the true denominator of the [indiscernible] higher truckload market, excluding private fleets, probably somewhere close to anywhere between 1 million and 2 million. So it's a significant amount of capacity that could permanently leave the market, and that has long-term implications, which are positive for many constituents. One, it's positive for the road and positive for driver safety. It's positive for large-scale carriers and large-scale brokers like RXO when you think about the ability for -- like we were talking about earlier, shippers wanting to do business with carriers and brokers that have very rigorous training processes and qualification processes in order to go ahead and drive on behalf of RXO. And you think about what that could mean longer term. There's also brokers that are out there that leverage this nondomiciled capacity, and those business models might now go away. So you think about what that means in terms of market structure, I think it's a really good thing for the industry. And I think it's a really good thing for a large-scale broker like RXO, the top 9 brokers post the acquisition of Coyote represented about 45% -- 50% of the overall industry structure. Longer term, we think the top 5 probably represents 50% to 70%. So I think winners take most type market structure with respect to having the ability to invest throughout cycle, having the balance sheet, having the ability to stay close to customers and are having access to that massive capacity to weather a lot of the structural changes. But those are the 2 biggest changes that have occurred in 2025.

It seems like DOT and FMCSA keep discovering kind of -- or maybe identifying kind of, if you want to say, fraudulent or questionable, approaches, whether it's self-certification of ELDs. So perhaps you and I [indiscernible] the use, right? driver schools that are inadequate. So it's kind of the nondomiciled CDL issuance that states weren't following rules or some states weren't. So it's kind of this and that. And the other thing. Do you think those other elements are pretty significant too? And do you think that there's just like so much momentum that has got to have a big impact? Or is it still unclear what this does?

No, no, I very much agree with the former in terms of all of the actions in totality have the potential to be very significant in terms of what happens to the overall supply balance for this industry longer term because you're right, it's not just about the executive order on the rules of the road and English language proficiency. It's not just about nondomiciled CDLs. I mean even in the last 24 hours, you've had the DOT identify almost half of the schools that are teaching these drivers to get the qualifications potentially be ineligible going forward. It's about 15,000 driving schools in the U.S. and almost 7,000 or 7,500 have been identified that hit last night. I think yesterday also, the DOT identified Minnesota issuing 1/3 of their nondomiciled CDLs as potentially being problematic. So it's not just 1 issue. It is multiple. And I think this is all in the name of improved driver safety, improved road safety, reducing fraud, reducing theft. This is a very good thing for the industry and longer term, steady state. It's -- and I think that's an important point because you think about in the near term, no doubt it's impacting our business because you've got what I talked about earlier in terms of a current unprecedented situation with -- you look in October as a great example, load-to-truck ratio and tender rejection is moving higher despite weaker demands because all of the supply is coming out. So it's painful in the near term for us in terms of financial performance because we're getting squeezed on the buy side with weaker demand environment. So there's no real accretive spot opportunities to help offset that squeeze. But that's also mechanical, right? That's what happens when you've got a large book of business with Tier 1 enterprise shippers and no spot environment. You then fast forward to steady state if you've got an environment that is cleaner from a supply standpoint with higher quality supply, higher-quality brokerages that is a good thing for freight rates longer term, and it's a good thing for road safety longer term.

So in this framework where you have kind of flattish freight, but you have capacity coming down, you could have a good outcome for rates. However, it can be challenging for brokers. How long do you think -- like each cycle is different, but if you look at historical cycles, how long do you think the squeeze last? I mean just like you're getting squeezed in October, getting -- starting to get squeezed in 3Q. I mean is this -- this runs through 2Q next year? Could this run longer than that? Is -- I mean it would be nice to -- I think you say it's what is it a good squeeze or something or good whatever term you use, but good and bad. But you'd like to get through the bad or the challenge and get to the good news on the other side. So any thoughts on how long that might last.

Yes. I don't have the crystal ball in terms of how long the squeeze will last. We are in unprecedented times in terms of going on year 4 of this freight recession. But I think we gave some color on the earnings call in terms of last time we had a squeeze like this. Within 2 quarters, we have that rebound. But ultimately, every cycle is different, and it comes down to supply and demand. So does supply keep coming out at the rate that it's been coming out? And do you see any kind of rebound in demand across the key verticals that we serve, which are food and beverage, industrial manufacturing and retail e-commerce. The key signs that I look for are what's going on with the industrial manufacturing PMI, especially the new orders component, what's going on with building permits as well as consumer confidence. And really, the housing market is also really important for the freight market, as you know, about 15% to 20% of overall freight demand in every new truckload or every new home, sorry, is the equivalent of 6 to 8 truckloads. So getting that long end of the curve to come down in terms of mortgage rates would be helpful. We are sitting at 12-month lows in terms of mortgage rates, and you've seen a recent increase in applications. So to the extent that sustains that will be good for our brokerage business, and it'll also be good for the last mile business given our exposure to big and bulky.

So what's the prior period you referred to as an analogy from when there was a squeeze?

We're going back to, I want to say, the -- I think the 2019 time frame for legacy RXO when we talked -- when we saw that gross margin performance dip and then the 2 quarters [ subsequent then ] rebounding.

2018 or '19?

I think 2018, 2019 around...

Okay.

And that also speaks to the earlier question that you had, Tom, on why it's so important to continue to focus on our ability to procure transportation effectively, right, regardless of what happens in the market as we strive to hitting that 100 basis points of improvement of long-term productivity gains -- sorry, long-term purchase transportation gains that will clearly help offset some of the squeeze to the extent that we can achieve that faster. So when we think about our business model, you're never going to avoid the squeeze, right? We've got a book of business that's 70% plus contractual in nature, and our book of business we've got a little SMB, but it's mostly large Tier 1 enterprise shippers. So when you've got that large book of business with higher PT costs, that's what happens on the gross margin line in terms of the squeeze impact. And to your point, the good squeeze versus the bad squeeze. We've had multiple episodic squeezes over the last 3-plus years since we've spun and it's been because you've had every time there was an event you think about road check week or any kind of winter storm, it's always met with rising rejection rates, rising load truck ratios, but you always get back prior to -- you always get back to the prior baseline because ultimately, too much supply relative to demand. So we'll see how long this squeeze lasts. This has now been. We start to see a little bit of tightening into September, and now we're in December, and rates are still moving higher. So we should see if this sustains.

Okay. We've got a little less than 5 minutes left here. I want to ask you about AI. So when we look at transport who can benefit, just structure what they do from use of technology in AI, we think C.H. Robinson is kind of blazing the trail of driving a lot of productivity gains you see in their pretty big headcount reduction numbers, 30% headcount reduction overall versus '22. And I think it's hard to decouple how much is lean versus AI starting point. The asset-light model does seem conducive. So I think eventually, you'll see expeditors benefit from that? I know there's some dispute on that, some debate. But my own view is C.H. isn't the only one that can realize AI gains. The degree, of course, is different and whether you have lean, but why shouldn't RXO also be a name that can see some real benefits from that. I mean I tend to think we probably were pretty focused on Coyote integration. So that's the reason maybe it wouldn't be as transparent. But I know some of it's starting point what we're already doing. But help me think about why you shouldn't be able to do that? Or is there a kind of big future opportunity from use of generative AI, agentic AI.

Absolutely agree with the premise that RXO has the ability to go ahead and benefit from leveraging AI in a strategic way that's transformative across the organization that improves our operating margins longer term. So I think the premise absolutely sound. I mean we spent more than $100 million a year on cash technology spend. That's not just -- so that's across OpEx, CapEx. And we think about the investments that we've been making across the board goes back 10-plus years ago on the machine learning side in terms of some of the pricing algorithms, but specifically to your question on agentic and gen AI. We believe that we are entering an inflection point heading into 2026 with the rollout of many tools that we've been investing in for years. And it's not just the Coyote integration that, to use your word, sort of masked the investments that we've been making because we've been making these investments, and I would make the case that we've actually accelerated our time line and our road map with the Coyote acquisition. One of the added benefits was when we bought the company, we saw it was on some of their tech road map. And it was actually -- and we saw it was on ours and in some cases, one was already on the other road map and vice versa. So the ability to go ahead and leverage best of both worlds, processes and order flows and workflows rather into the combined tech data set, I think, is really, really important. So it all starts with having a clean set of data, right? If you think about building upon an integrated data lake, RXO data, Coyote data, that's all one. On top of that, you have an orchestration layer. And then on top of that, you've got multiple agents that can go ahead and effectively increase productivity across the organization as well as introduce the ability to unlock incremental margin from top of the funnel opportunities. It's not just a cost play. It's also a revenue in terms of incremental margin play. And it's also a productivity play, right? Our productivity over the last 2 years is up 38%. So -- and we think we are still very much at the early innings of AI. So we've been rolling out GenAI and agentic AI and machine learning for a long time. This year, in particular, I think we talked a little bit about this on the earnings call. If I look at some of the tools that have been implemented, we've leveraged agentic AI solutions from from a carrier rep standpoint already, saving 10,000-plus man hours associated with the deployment of that technology. We've rolled out millions of lines of code in terms of leveraging some of the AI tools that are available to us as opposed to leveraging -- or in addition to leveraging some of our engineering talent. We've leveraged it in last mile in terms of image association and identification with respect to home installs. So it's across the board, and we are very much at the early innings with the opportunity to unlock significant potential heading into 2026 and beyond.

So what inning do you think you're at?

If we're doing this right, we're always in the first inning, right? Because ultimately, not to be cliche, but AI is -- we fundamentally believe that AI has the ability to structurally improve our margin profile longer term. I think it's also an important point that we are not a technology company. We are a tech-enabled company. How do we go ahead and invest aggressively in AI, aggressively in our tech road map and then marry that with the best operators in the industry to have that solution where we're leveraging tech effectively, and we're doing it with the best operators to have structurally higher margins longer term.

Right. Okay. That makes sense. Jared, thanks so much for joining us.

Thank you so much, Tom. Really appreciate it.

Yes. Thanks for joining us. Appreciate it.

Thanks.