Welcome to the RXO Q3 2025 Earnings Conference Call and Webcast. My name is Michael, and I will be your operator for today's call. Please note that this conference is being recorded. During this call, the company will make certain forward-looking statements with the meaning of federal securities laws, which, by their nature, involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in the forward-looking statements. A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings as well as in its earnings release. You should refer to a copy of the company's earnings release in the Investor Relations section on the company's website for additional information regarding forward-looking statements and disclosures and reconciliations of non-GAAP financial measures the company uses when discussing its results. I will now turn the call over to Drew Wilkerson. Mr. Wilkerson, you may now begin.

Good morning, everyone. Thank you for joining today. I'm here in Charlotte with RXO's Chief Financial Officer, Jamie Harris; and Chief Strategy Officer, Jared Weisfeld. This morning, we announced our third quarter results. Year-over-year, overall brokerage volume grew 1%, driven by less-than-truckload volume growth of 43%. Brokerage truckload volume declined by 11% year-over-year but increased by 1% sequentially. Last mile stops grew by 12% year-over-year, the fifth consecutive quarter of double-digit growth. And we added cash to the balance sheet and had 56% adjusted free cash flow conversion. Brokerage gross margin was 13.5% and RXO's EBITDA was $32 million in the quarter, below our expectations. Contrary to our assumptions on last quarter's call, the market tightened in September. Capacity began exiting in certain regions, driven primarily by regulatory changes and enforcement. About 2/3 of RXO's freight in the quarter came from regions where buy rates increased and this impacted our results. Buy rates increased faster than our contractual sale rates with no meaningful corresponding increase in accretive spot opportunities. We take our commitments to our customers very seriously and continue to honor the service commitments we made in the quarter. Industry tender rejections in the third quarter were 6%. RXO's were just 2%. This built trust and strengthened relationship with our customers, and you can see the impact of our efforts and recognition we recently received from blue-chip customers, including United States Cold Storage, Owens Corning and Altonium. Reliably serving our customers' freight at this point in the market cycle will position RXO to win more spot loads and mini bids as the market recovers. Now I'd like to provide you with the details on our fourth quarter expectations, including EBITDA between $20 million and $30 million. The biggest driver of the sequential decline is volume weakness within our last…

Thank you, Drew, and good morning. Let's review our third quarter performance in more detail. Our results were slightly below our outlook. For the quarter, we reported $1.4 billion in total revenue, gross margin of 16.5%, adjusted EBITDA of $32 million and an adjusted EBITDA margin of 2.3%. Gross margin and adjusted EBITDA were primarily impacted by the increase in cost of transportation, further broad-based demand weakness and continued headwinds in the automotive sector. As Drew mentioned, cost of transportation increased without a corresponding increase in sale rates or accretive spot opportunities. This caused a margin squeeze on our contractual brokerage volume during the month of September. Jared will provide more details later in the call. Automotive was a continued headwind and represented an approximately $5 million year-over-year margin impact in the quarter. As we discussed over the past 2 quarters, this freight is time critical and with high service requirements and typically carries a higher-than-average 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 $0.01. You can find a bridge to adjusted EBITDA on Slide 7 of the earnings presentation. Now I'd like to give an overview of our performance within our lines of business. Brokerage revenue was $1 billion and represented 70% of our total revenue. Overall, brokerage volume growth was 1% in the quarter. We had strong LTL growth of 43%, which was offset by 11% decline in full truckload volume. The year-over-year decline in truckload volume was impacted by overall demand weakness, softness in the automotive sector and efforts we undertook with customers to optimize price, volume and service. Given the market tightening in September, brokerage gross margin was down 90 basis points sequentially to 13.5% at the low end…

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 that include Coyote's results in the prior period. Brokerage volume in the quarter was up 1% year-over-year, outpacing the cash freight index. LTL volume increased by a strong 43% year-over-year. LTL represented 31% of brokerage volume in the quarter, up 900 basis points year-over-year and down slightly from the second quarter. Truckload volume was down 11% year-over-year and represented 69% of brokerage volume, up 100 basis points sequentially. Similar to last quarter, truckload volume was impacted by a decline in automotive, efforts we undertook with customers to optimize price, volume and service and broader market weakness. From a vertical perspective, automotive volume was down 22% year-over-year. In the industrial and manufacturing vertical, encouragingly, we saw a slight pickup sequentially, which was largely driven by special projects. Industrial manufacturing volume declined by 3% year-over-year. Contract volume was 71% of our overall truckload volume in the quarter. Contract business declined by 200 basis points sequentially and 100 basis points year-over-year. Spot represented 29% of our truckload volume in the quarter, up 200 basis points sequentially and 100 basis points year-over-year. This was partly tied to the Coyote technology integration. As we migrated shippers to RXO Connect from Bazooka, we benefited from an increase in API connectivity. This enhanced connectivity will also benefit the combined organization when the freight market eventually recovers. However, given the weakening demand environment, the spot opportunities were less robust when compared to the second quarter and not enough to offset the squeeze on our contractual book of business. Before reviewing our financial performance and market conditions in more detail, I'd like to talk…

It is now time for our Q&A session. Our first question will come from Stephanie Moore with Jefferies.

I wanted to get a sense, I guess, just on the underlying market dynamics and specifically the supply environment, which you've touched on here, but there's a lot of debate on whether these federal enforcement actions will be enough to shift the supply-demand balance. So the first question is, do you think the recent supply exits are sustainable and enough to structurally reduce market supply? And then second, if this is, in fact, the final squeeze that we would expect to see at the bottom of the cycle, if demand doesn't materialize near term, what actions can RXO take just to manage gross profit per load for, say, the next couple of quarters?

Stephanie, it's Drew. I'll take the first part on reducing capacity, and Jared will take the second part of your question on the gross margin dollars and gross profit per load through a quarter. When you look at what's going on, on the supply side, as I said in my prepared commentary, I think this is the biggest structural change potentially in transportation. Compare it to something like ELDs. And when ELDs were enforced, drivers had a choice of whether or not they were going to invest into their equipment and continue to haul. At this point, they don't have a choice. They're being pulled off the road if they're non-domiciled drivers or the English language proficiency doesn't meet their requirements. So I think it's a much bigger change than what anything that has happened in the industry in the past. And it is something that will take out capacity in a major way in large percentage points. The one thing that we still need is for demand to return overall. As demand returns, what that does is it creates a much sharper inflection as the market comes back.

And Stephanie, on your second part of the question in terms of if this is the final squeeze, but demand doesn't recover, what actions can we do? I would point to the $30 million of new cost initiatives that we announced this morning, more than $30 million, where you will see a partial impact here in the fourth quarter. We continue to streamline the cost structure of the business, and we see significant opportunities as it relates to improving that cost structure longer term. As you think about additionally heading into next year, and Drew touched on this in the opening remarks, our cost of purchase transportation benefits as carrier reps continue to gain incremental efficiencies on RXO Connect and Freight Optimizer, the ability to go ahead and become more productive and benefit from a PT standpoint, I think, are very real. And then the last thing I'd close with is, I think Jamie touched on this. Ultimately, we are seeing lower interest rates and some benefits associated with the recent bills that were passed through Congress as it relates to potential investments in the U.S. as well. So as you think about what this is setting up for when supply eventually continues to normalize combined with a demand inflection, it could be pretty strong on the other side, but enforcement does need to sustain.

Our next question comes from Brandon Oglenski with Barclays.

Drew, this is going to come off a little critical, but I think it's probably for the betterment of everyone on the call. I mean let's take it at face value. Your adjusted EBITDA guide here is down about 40% at the midpoint year-on-year, and that's a year-end Coyote. We really thought Coyote was going to be transformative, a pretty big acquisition for a company of your size. I guess looking back, are there things that you maybe wouldn't have done? And I mean, maybe to exemplify it, I think the last couple of years, you guys have said, look, 1Q is usually a lot weaker than 4Q. Is that what we're to infer here? And if that's the case, I mean, I guess investors are probably going to look for more tangible actions here on earnings.

Yes, Brandon, thanks for the question. If you look back at the Coyote acquisition, on people, customers and technology, we have done extremely well. But the financial results are not where they need to be. And the biggest miss off of that was whenever you went into the 2025 market, we made a decision on pricing, and we took price up off of that. I made the wrong call on that one. And that is something that has impacted overall volumes. And if you go back and you look at our history, we've outgrown the market for several times. I look forward to us getting back to the days of where we are the market leader and we're the transportation leader from a growth standpoint of taking market share. Clearly, 2025 is not where we want it to be overall. As you go from 4Q to 1Q, first, I would say, let's start with the third quarter. Typically, from the third quarter to the fourth quarter, you see brokerage and last mile go up from an EBITDA perspective. That is not what you're seeing this year. So the headwind going from 4Q to 1Q is not the same as what it typically would be. We also have the cost actions that we have taken that will be impacted from 4Q to 1Q. So I don't think it's an apples-to-apples. Demand is still an unknown as we go into Q1 and are we still getting squeezed as we go into Q1? That's unknown. But ultimately, what is happening in the business right now is setting up for a very, very good thing.

I appreciate that, Drew. And Jamie, can you talk to your adjusted leverage calc that I think speaks to some of your covenants? And is that going to be challenged just given the earnings outlook here into the fourth quarter, especially as you move forward?

Yes. Thanks. Yes. So we ended the quarter at a leverage of a net 2.3. If you look forward to the midpoint of our range at the end of Q4, say, 20 to 30, at 25, you'll be about 2.8. Our covenant is 4.5. So we've got a lot of headroom. We have a very strong balance sheet. We've got access to several hundreds of millions of dollars of capital. So we're not concerned about that. One thing I would point out, we had -- as Drew said, we had a strong cash flow quarter, 56% conversion, added cash to the balance sheet. As we look forward to the fourth quarter, we will have the semi-annual bond payment, which is normally due in Q4, which we'll make that. And so we'll use some cash in the fourth quarter. But as you look at '25 holistically, one thing really important to point out, there's about $65 million or $70 million of cash outflows in 2025 that will not reoccur in '26. Three drivers: #1, in the first quarter, we had $25 million of cash usage to finish paying for transaction fees related to the Coyote acquisition that happened in '24 is purely timing. Secondly, our total spend on restructuring and integration will go down approximately $30 million year-over-year. And then third, our CapEx will go down $10 million to $15 million. So if you think of all those together, we've really got $65 million or $70 million of cash outflow in 2025 that will not reoccur. If you put that in context of the $25 million midpoint of the range for the full year, that means we would be producing $20 million to $25 million of free cash flow in '25. So if you think about it at the bottom of the cycle, very strong. It really sets up nicely as the cycle improves, that number will go up. And so all that taken together, we have a very strong cash flow business. We have a very strong balance sheet. And we always watch the balance sheet closely, but we're -- it's not something that we're overly concerned about right now, but we do pay close attention as you'd expect us to.

Our next question comes from Ravi Shanker with Morgan Stanley.

So it's a bit of an AI arms race out there in the brokerage space. It's all about how many agentic AI bots you have and how many press releases you put out. But you said that your customers are telling you that you have the best and easiest tech out there. Can you just unpack for us the process of going out there and selling your tech platform to your customers? Like what are they looking for? How do you drive conversion? And kind of how do you differentiate yourself with what else is out there from a tech world? Because sometimes it may be hard to see for us in our seat.

Yes. Ravi, one, I appreciate the question. The only thing I would level set on is it's not about press releases for us. It's about results for employees. It's about results for customers. It's about results for carriers. And we are hitting an inflection point with our AI investments that we have been making. Not only have we been running an integration, we have been investing in AI, and we've been investing in it heavily. When you look on the ability of what we're able to do on the pricing side, it is something while we had a very strong pricing algorithm that's allowed us to outperform the market from a margin perspective for a decade plus, it is getting better. When you look at the way that we are communicating with carriers, it is changing, and it is allowing our reps to spend more time focusing on solutions. And then the last thing is even if you look at our last mile business, we've done things like whenever you're doing an installation versus a person going in there and getting a photo and checking it, we've been able to actually do that with an AI bot that is checking everything from an installation standpoint, which is critical to our customers and consumers and how that process unfolds. So for us, very excited about hitting an inflection point with AI and what it will actually mean from an operating margin perspective to the business and look forward to hosting you next week and let you actually see it on the floor of how it impacts carriers lives, how it impacts customers and how we're interacting with them so that you can see it live and in person.

Great. Looking forward to that as well. Maybe just a quick follow-up. Your 4Q guidance is predicated on the current demand-supply equation holding, right? So if for some reason, the supply side or the enforcement drops off or supply side gets looser, your 4Q gross margin will be better than guidance?

Ravi, as you think about the range that we provided for Q4, $20 million to $30 million of adjusted EBITDA, the midpoint assumes that current market conditions in terms of the intensification that occurred in the month of October with respect to market tightness given the supply dynamics that we talked about, that sustains throughout the rest of the quarter. The low end assumes that the market further tightens in terms of that squeeze impact without a corresponding increase in demand in spot opportunities. So that environment would result at the low end. And for the high end, to your point, as you think about either the market tightening to the point where it results in some pressure in waterfall routing guides and some spot opportunities and/or if there is an easing in buy rates, that would allow gross profit per load to improve from current levels to get to the high end of our guide for Q4.

Our next question comes from Chris Wetherbee with Wells Fargo.

I guess I want to ask a question about operating expenses and your ability to maybe sort of rein those in a little bit as you go forward in this weaker market. Maybe you can talk a little bit about the potential opportunities you have. It looks like if I just sort of zone in on direct OpEx and labor expenses, those have been relatively flat in this market over the course of the last few quarters. Is there work that you can do there to try to adapt to what has been obviously a more challenging outlook?

Yes. So this is Jamie. We've taken a lot of cost actions since then, $155 million in total, including the synergies we've gotten from the acquisition. We're constantly looking at our expenses. If you look at our P&L, a lot of the direct OpEx that you see in the P&L relates to our last mile and our managed transportation business. SG&A that shows up in the P&L across all the business lines. there's still plenty of actions that we can take. We've talked about automation. We've talked about process improvement. One of the things that we're constantly working on, Drew mentioned in his remarks, footprint, how do we consolidate footprint so we can give the same level of high customer service and fewer square feet of space and fewer facilities. Those are the type of things we're constantly working on. So the answer is yes, there is more that we can do, and we're constantly working on those type of activities. And you can see it with the $30 million that we announced today. I mean that's a constant process that we're going through.

Okay. That's helpful. And then I guess, maybe, Drew, if we could sort of zoom out a little bit and try to get a sense of maybe how we come out of this dynamic that we're in right now. I don't think we typically see the cycles turn simply driven by the supply coming out. And it seems like that's happening without any demand, I guess. Maybe help us a little bit as you think about the next couple of quarters as you guys are planning for the sort of demand environment. What do you see out there? You obviously need demand. Where do you think it comes from?

Yes. I think, Chris, there's a lot of things that we're watching on the demand, as Jamie alluded to in his prepared comments. We're watching what happens on the interest rates. We're watching what is happening in the homes. We're paying very close attention on the automotive side. As you know, in automotive, there is the managed expedite portion. And that's when everything breaks down and you have to get something to a plant to avoid shutdown. That's a big piece of our business. And when you look at what that piece of the business was during the peak, it was around 13% of our gross margin dollars in brokerage came from expedite loads. Right now, we're sitting at around 1% or 2%, so to see where the business can go to getting back on track from that perspective. We've always had a big presence in retail and e-commerce, and we have a lot of great relationships there. From the Coyote acquisition, we gained a lot of exposure to food and beverage. And one of the things that we've been really focused on, on the sales side is expanding in the technology vertical and expanding in the high cargo value goods area. And we have got a very good pipeline. We're seeing good wins in those areas and look forward to the results. The second part of your question, I think, was more on the market and what's going on. And what I would say is this is not an episodic squeeze. This is not DOT checkpoint weak. This is not produce season. This is not a weather impact. This is a structural change that is taking place in the industry if it persists. And so supply coming out is real, is happening. And on the other side of that, with the demand, that sets up extremely well for large carriers, specifically brokers who have good relationships with their customers who provide good service, can provide a comprehensive set of solutions and have great technology. We fit -- we check the box on every one of those. So this is mechanical and part of what we go through at this point in the process, but we know what's on the other side of it.

Are you willing to sort of venture a guess on what the capacity rationalization might look like in terms of percent of the fleet?

Chris, we're watching a lot of the same things that you're watching. And I mean, if you take out the private fleets and the large carriers, there's numbers out there that it could be 15% to 20% of capacity. And if that happens, that is a big change within the industry and a lot of capacity that we'll be exiting.

Our next question comes from Ken Hoexter with Bank of America.

So Drew or Jared, I just want to understand kind of the messaging here for the fourth quarter. Is this just the squeeze of the spot price that shifted quickly? Are you seeing an acceleration in the demand falling away? Just it seems like such a significant -- more significant change for a fourth quarter outlook than we've heard from other carriers that have also reported within the past week. So I just want to understand what you're seeing, maybe that's a little different. Is the cost exposure unique to RXO in terms of -- you noted 2/3 of the cost came from regions where the buy rates increased. Is that maybe something more particular to RXO than your peers? Or is it the capacity tightening more in Texas and California? So any thoughts? I know it's a long question, but any thoughts on that would be helpful.

Ken, it's Jared. So when you think about the bridge from Q3 to Q4, typically, both brokerage and last mile are up sequentially from third quarter to fourth quarter. This year, we are assuming that they are both down sequentially. And that's a function of both of what you cited in terms of lower demand and higher PT costs. So on the demand side, we are seeing lower demand across the business. We saw that play out throughout Q3, and we are expecting the same in the fourth quarter. I'd say specific also to last mile, we did see a drop off, call it, after the Labor Day time frame with respect to goods for big and bulky. So last mile is seasonally up into the fourth quarter, and we are expecting that to decline sequentially given that decline in big and bulky demand. With respect to the question as it relates to purchase transportation costs, right? So when you think about our business, to your point, we did see about 2/3 of states where we were moving goods from an outbound standpoint, our PT costs going higher in the third quarter. So I'd say it moved modestly higher in the month of September, but that acute tightening really did happen over the last 4 weeks after the emergency order on non-domiciled CDLs came into effect at the end of September. And we've seen that play out with gross profit per load and gross margin compression within the brokerage business in the month of October. And what makes this interesting and unique to Drew's point, where this is very structural from our standpoint because this is not an episodic squeeze like we've seen over the last 3 years where whether it's seasonality due to produce season or DOT Checkpoint, this is a lot of capacity that is coming out of the market. And ultimately, it's happening at a point where we are having weaker demand trends. So you don't have routing guide pressures to allow for accretive spot opportunities, so that's really what's playing out here, Ken.

So just to clarify that, Jared, because again, I'm just trying to compare it versus what we've heard from some peers, right? So the lack of spot opportunities, but are you seeing that core demand falls faster? I'm just trying to differentiate kind of why we're seeing maybe some cost or some margin accretion at some relative peers versus the continued pressure. I get the cost side; I think you made that quite clear in terms of the speed with which this is happening. So is anything also happening on the demand side?

So yes, demand has weakened. I would also -- when you look at our mix, mix is very different across different businesses and different brokerages, right? So for RXO, our contractual book of business, which was just north of 70% of our volume in the third quarter from a brokerage standpoint, really, if you think about largest shippers in North America, Tier 1 enterprise-class shippers, not as much SMB, right? One of the benefits associated with the acquisition of Coyote was we did get an SMB business, but ultimately, that's probably around 10% of total volume. The big bulk of our exposure really is large Tier 1 enterprise class shippers. So I do think that mix is also important. And I go back to the earlier question as it relates to automotive, which certainly has been a headwind for the business as well as an example, throughout the year, I suppose with the managed expedite type freight. So I would certainly highlight mix as a big difference.

Ken, I would also -- I'll expand on it a little bit. I think there's a lot of public data out there that shows what's going on with demand. If you look at the cash freight index, it shows that it is down 7%. If you want to dive specifically into truckload, FreightWaves SONAR has got a product out there that shows it is down sitting around 17% right now on the truckload side. So I think it's not necessarily taking our word for, just look at the public data out there available in the truckload market.

Our next question comes from Scott Group with Wolfe Research.

So again, just sort of like a big picture. We're talking about a tightening market. And at the same time, like your truckload rev per load goes from up 3% to up 1%. Drew, you've been doing this a long time. Have you seen this before where the market tightens and your buy rates go up, but like industry spot rates or sell rates don't move? I don't know that I've seen this before. And then ultimately, I guess what I'm trying to understand is like if a typical squeeze for your business is a quarter or 2 and then eventually you sort of like benefit from it. Like do you think this is a -- if it's supply driven, is it a longer squeeze this time? Or do you think, hey, this can't -- this dynamic of buy rates up and sell rates not moving can't last. And at some point, the sell rates are going to have to start moving pretty quickly?

Yes. Scott, I think that everything that you just said points to it being a structural change that has happened in the industry because it is something that we all have not seen before and shaking out this way. As far as how long the squeeze is, yes, I don't think it would be wise of me to venture a guess on how long the squeeze is because I don't think that anybody saw the upside and the downside of the cycle lasting 5-plus years at this point. So I don't know how long the squeeze will be. But yes, we are in the thick of it right now as something that impacts our margins. I'll tell you, if you go back and you look at the time of ELD, you actually saw our margins fall to 11.5% during that time. And within 2 quarters, you saw more than it makes up for that on the recovery side. Now there was demand there. So I think that demand is a key point. But I do not think that the capacity coming out in this situation is the same as ELD. I think it's in a much bigger way because at ELD, you had a choice of if you were going to spend the money and invest in your equipment to meet federal mandates. This time, you don't have a choice, you're just coming off of the road.

All that makes sense. Can I just ask one quick follow-up. I think you mentioned that buy rates have gone up like $0.06 or something. How -- is there any like sensitivity like every penny or a buy rate equals how much of operating income or EBITDA? Any sort of sensitivity there?

Yes. I mean for us, Scott, the industry went up $0.06. We were much less than that. And I think that goes to the benefit of the Coyote acquisition of being able to buy better than market. So for us, in a quarter, every penny that it goes up is $2.5 million of EBITDA.

Our next question comes from Jordan Alliger with Goldman Sachs.

Yes. Just -- maybe just to follow on, on thinking about the purchase transport and the squeeze. Obviously, there's decent squeeze going on, PT is going up. I mean doesn't that read that as we get into the contract season next cycle, which I presume starts in earnest in early next year or March or something that we should see significant increase in or at least an increase in contract rates and the squeeze should be going away?

Yes, Jordan, I think it will still depend on what happens with overall demand. And bid season is underway right now. We're in the middle of some of our largest bids. Yesterday in Charlotte, we had 7 of our largest customers, and we spent a lot of time talking about our pricing strategy with them, talking about how we could draw synergies between the customers that were in the room from a capacity standpoint, talking about what was going on with the federal mandates. So for us, we look at every customer as their own story as we go through the bid cycle. So is there the opportunity for rates to go up? Absolutely. But I think some of it depends on what's going on in the market as that customer's bid is going on. So I'm not going to forecast on where rates are going to go for next year. But what I will say is as routing got start to break down, that's where spot loads come in, and those are at a much higher revenue per load.

Well, I guess just as a quick follow-up. I mean, given what you're seeing in purchase transport, I mean, is the -- do you feel that the customers you're talking to are understanding that you're going to need to push rate up?

We have very close relationships with all of our customers. Every one of them has got their own story. And for us, it's about providing a solution for them and for us that works for both the long -- short and the long term. So our customers are very well aware of what's going on in the market right now.

Our next question comes from Tom Wadewitz with UBS.

So I wanted to swing back a little bit to just kind of how we should view the run rate in 4Q and what that implies for '26 or just broad brush how to think about '26. If you kind of take midpoint of your EBITDA guide for 4Q, add it up with the 3 you reported, you get $117 million for EBITDA base in '25, if you kind of put seasonality on the $25 million in 4Q, it's probably well below $100 million. So I guess, I know you've got the $30 million of cost saves, you've got other initiatives. But I mean, do you think '26 EBITDA is more closer to $100 million or closer to $150 million? Or just -- it seems like hard to know what's the right ballpark even to be in given 4Q is so tough.

Yes. This is Jamie. As you know, we do one quarter at a time. As we think about '26, as you know, there's a lot of unknowns heading into next year, we've got the volume demand, where does it go? We got the cost of purchase trends. How long does the squeeze endure? How does it get a little worse? Does it get better and when? You mentioned this. We do have a significant amount of cost that we've taken out of the business. Some piece of that is a run rate into '26. We've got the purchase transportation opportunities. Drew talked about 30 to 50 basis points to date. Much of that is showing up in the P&L as cost avoidance. That will translate. We will get more of that. We will get to that 100 basis points. And so I don't think you can take kind of a Q4 project into a Q1 or a Q2 because, again, Q4 is subseasonal. We would expect both last mile and brokerage to be up sequentially from Q3 to Q4. It's not, it's actually down. That being said, what that translates into a Q1 is not going to be normal. Also as it relates to the rest of the year. And as this demand -- as this market sets up, as Drew talked about on the capacity side, when demand comes back and it will come back, there are a lot of things going on out in the macro, the demand will come back, when, we don't know for sure. But when it does, we're set up very well to be a beneficiary of that.

Tom, I agree with everything that Jamie just said. But one thing that I would add is if you look at what's happened in the industry over the last 7, 8 weeks and the impact that has had to financials, it's running in the negative way. It works the exact opposite whenever the market starts to turn on the positive way. And this is an industry that turns very, very quickly, and you've got the opportunity as the market recovers to expand margins in a big way.

Yes. Okay. That -- it seems like you could have a setup for a big improvement in second half '26, right? So that seems like a thing worth considering as well as a tough run rate coming in. I wanted to ask for like a second question and a follow-up. How do you think about what's important on enforcement and supply side? I mean I think -- I wonder if there is some avoidance of enforcement areas where the capacity that's questionable in the market, understands where the enforcement is taking place and then you avoid that. So part of the capacity doesn't leave the market that kind of sits on the sidelines or maybe just avoids or maybe given the way the interstates flow, they're across multiple states and you can't avoid enforcement. I just wanted to get your sense on that because it seems like such a big question and the potential impact is so large, but just kind of hard to know if it all comes out or not.

Yes. I mean, Tom, we're watching extremely closely and it's something that we support. When you look at what this does for the industry, it makes it a safer industry. It eliminates fraud. It reduces theft. So this is a positive thing for the industry. It also puts something front of mind for our customers. And customers are going to look at who they're doing business with. They're going to look to do business with large, financially stable companies that have provided them with great service. They provide them with solutions. They've got good technology that allows them to make better decisions as a customer and they're going to go back to the people who have delivered for them in the past. And we think that we've set up very, very well in that market.

Do you have any visibility on kind of avoidance? Or is that hard to measure from the carriers?

Yes. This is Jamie. I mean, personally, what I see going on with the enforcement and I think what the industry sees going on right now is I don't think there's going to be -- this is not a state-by-state enforcement issue. This is more of a federal enforcement issue. And so regardless of where a carrier may be, I think they're subject to being taken off the road wherever. And it will take some time, but we are seeing the impact of the capacity, and it impacted it very quickly. And so I don't think we would say there's any one spot that folks can go run loads in that is not under risk of being caught. And so I think it will be a continued enforcement.

Tom, just remember, you only have to drive a few hundred miles in any direction to be in another state line.

Yes, right. Well, that's where it seems like it's maybe tough to -- maybe some states are easier but hard to avoid states that are enforcing pretty significantly.

Our next question comes from Jeff Kauffman with Vertical Research Partners.

Group question, I know nobody can predict how long this squeeze is going to go on. But I guess kind of following Scott and Jordan's question a little bit, if things just stayed static where they are right now, where the market is, I know you talked about 1 to 2 quarters, 2 to 3 quarters. How long would it take you to price up to where this was not impacting the franchise anymore if it didn't get worse from where it was?

Yes. I mean the biggest thing that we're watching right there is what happens on tender rejections. And if you look, even though demand is down significantly, tender rejections have gone up to over 6%. So right now, you are starting to see capacity push it to where it goes. And it's not necessarily as much on the contract rates that you're watching right there. It's more what happens on the tender rejections whenever routing got start to break and on the spot. So that's with demand extremely depressed, you're starting to see pressure on tender rejections. So that's mostly what I'm watching right now, Jeff.

And where do we need to see normally tenders to get to where you can push price? Does it need to be above 8? Does it need to be above 10? Kind of where is that historic kind of breaking point?

Yes. It needs to be at 10 or above. That's typically whenever you start to see tender rejections called spot loads. Whenever it gets into the mid-teens, that's excess of spot loads. And if you get back into a COVID-like environment, it was -- I think it was sitting in the high 20s, low 30s during that time frame.

But your point would be in the long run, this is a good thing. And when the market does stabilize, we're better off would be the...

In the long run, this is not a good thing. This is a great thing. You're talking about the carriers that customers are doing business with the people who have been there for them that they know that have the right qualifications on who they're doing business with. That's what they're looking for. And for us, the quality of carriers that we work for, the bar is extremely high. This is not something that we just started doing because of the federal mandates. If you go on and you look at our website, you can't go on and start a trucking company and do business with today. A lot of the large brokerages, you can go on and start doing business with today. We want to be able to monitor your safe set score. We want to be able to see a history of what you've done. A lot of other brokers, you can go out there and you can do your first loads with them digitally. And while digital is an important aspect of being able to do freight, the first thing that we want to do is get to know the carriers that we're doing business with. So we don't allow your first few loads to be booked digitally. We want to know who we're doing business with as you come on to the platform. We built the business off of high cargo value, off of automotive. So the vetting process for carriers for us has always been very strict and always been above federal guidelines. And so we think we're in a very good position to win off of that.

That appears to be our last question. I'll turn the conference back to Drew Wilkerson for any additional remarks.

Thank you, Michael. We're in a squeeze, but I remain extremely confident in RXO's ability to deliver outsized earnings growth over the long term. Our improved cost structure, larger scale, continued focus on profitable growth, best-in-class technology and ability to generate cash are differentiators for RXO. We remain focused on what has made us so successful over the past decade plus. We provide exceptional service, a comprehensive set of solutions, cutting-edge technology and deep customer relationships. Thank you all for your time today and look forward to seeing you soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.