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

Good morning, once again. It's Jordan Alliger, and I'm pleased to kick off Day 2 of the Transportation and Logistics Component of the Conference with RXO. And we're very pleased to have Drew Wilkerson, CEO; and Jared Weisfeld, Chief Strategy Officer, all here to discuss the story, just a few quarters, maybe 2 under its belt as a standalone company. RXO continues to outgrow many of its competitors in brokerage. And we look forward to hearing about some of those key drivers behind the success. So I think we're going right into Q&A.

And maybe to kick it off, why don't we just start with growth. What would you say over the last couple of years or so has been the key success factors behind what seems to have been an outgrowth of the industry?

Well, it starts with customer relationships. And we built the business off of the largest companies in the country. So think Fortune 100, Fortune 500 companies. We do business with 58 of the Fortune 100 and over 200 of the Fortune 500. And to be able to service them, you've got to have really good service. You've got to be able to go in there and create solutions that are going to contribute to their success. And you've got to have technology. And so for us, the technology has been a differentiator for these customers because our technology will go in and it will help our customers do the simple things like tell them, "You need to look at shipping this on a different day of the week. You need to look at an alternate mode of transportation. There's an opportunity to consolidate here." Technology has been a huge differentiator for us from the customer perspective.

How much would you say over the last few years as you've grown was growth in the brokerage market overall versus maybe taking share? And if it is share, is it from larger players, smaller players, how do you assess that?

Yes. So one -- I'll step back to whenever I started in the brokerage industry. And I've been doing this for over 16 years now. And back when I started, brokers had less than 10% of the for-hire trucking market. Today, it's over 20%. And so when you look at it, one thing that has proven over the last decade is brokers are taking share from asset-based carriers and that's something that we expect to continue. Over the next 5 years, we expect that to come closer to 30%. And longer term, I think that you can see that get into the 40s for brokers in the overall for-hire trucking market. For us, yes, brokers are taking share from asset-based carriers. But when you look at the brokerage market, from 2013 through 2021, the brokerage market grew at over a 9% CAGR. So it was a strong growth. But we were able to grow at nearly 3x that rate at 27% CAGR from a growth perspective. So it's not just asset-based carriers. Our solutions -- and whenever we're walking in and talk to a customer, we're looking at the big picture and we're taking share across the board.

So there has been market expansion in brokerage and going from 20 to 30 is another big step up. Is it just capacity issues on the guys who own the assets? What are the key factors?

When you look at what the typical trucking company is, it's largely small trucking companies, think 1 to 10 trucks. And so if you're talking about a Fortune 100 customer or a Fortune 500 customer, they're typically not going to sign up these small carriers. So for us, you can come to large brokers like RXO and they can be an aggregator of capacity. And then you look at things that -- solutions that we've been able to create, is something like drop-trailer. And drop-trailer is something that we're -- we've been doing that for over a decade. And we built it off of retail and e-commerce customers. So we're really touching all verticals. And it allows us to look and feel like an asset-based carrier, just with more capacity. We've got access to 1.5 million trucks that we work with.

Is it been easier to get carriers to sign on with you as you've grown, I mean? And how do you think the carrier relationships will look going forward in terms of adding to the base with which you could work off of?

One, we've got a really good base right now. If you look at where we are right now, we've got access to 100,000 carriers. We've got access to 1.5 million trucks. So if you look at the base, we have access to a lot of capacity. The first thing that carriers are looking for is -- whenever they're logging on to a platform, do they have to leave the platform to find their next load? And because we're one of the largest truckload brokers in the country, you don't have to leave the platform to find your next load. We also just want to make it easy for them to use. So I mean, they can actually pick up their cellphone, they can book a load, negotiate, do all of that with no human interaction. And you get access to our overall rewards program, which is RXO Extra. And so if you think about stuff that pulls them back to the system, RXO Extra gives them discounts on the things that matter most in a trucker's life. So think about fuel, tire, roadside maintenance, hotels, Sirius radio. Anything that they're using on a daily basis, we give them access to a rewards program with discounts. And we base those discounts off of the volume that they do with us as well as the service that they provide for us. So the more volume they do with us and the better their services, the better discounts that they're able to get. And that pulls them back to RXO Connect as well.

I wasn't necessarily going to touch on this now, but it seems like a good segue from thinking about the technology and what you offer. And I know that's been a big part of how you talk about your company. So maybe discuss a little bit the technology front, the digital access that you provide, how you define digital? That always comes up as questions as well.

Sure. So taking a step back, if you look at how we invested in the platform, it was really across 3 different cohorts, right? We invested in our technology for our people, invested for our carriers and for our customers. So for our people it's how do we increase the efficiency of our -- and our productivity for our reps internally, right? How do we go ahead and increase number of loads per head per day. So that continues to be a significant tailwind for the business. If you look back to '21 and look back to the prior 5 years, we grew volume at a rate 3x faster than headcount and we continue to make productivity gains. From a carrier standpoint, it really comes back to not only increasing top of funnel, where we had cumulatively over million downloads this most recent quarter, which is about 45% year-on-year. But once you increase top of funnel, how do you increase engagement and stickiness on the platform? We had a 7-day carrier retention rate of 79%. We had weekly active user growth across Connect that drive our platform of 25% year-on-year. So they continue to come back to the platform. And part of that also is RXO Extra that Drew was just talking about in terms of one of the other value adds. And then for our customers, it's how do we integrate into our customers, leveraging APIs, ensuring that we have that connectivity between our system and their TMS, their transportation management system. So all of that resulted in a really strong quarter from a technology standpoint, where 96% of loads were created or covered digitally. And we continue to make significant progress on tech adoption.

Is there a difference between the customer side and the carrier side in terms of the technology usage?

Yes, for sure. I think we've had significant progress on the customer side in terms of digital adoption. And while the carrier side is strong and growing, I think there's significant white space ahead of us for us to go ahead and continue to increase that. So when you're boiling all that down, when you think about over the long term the ability to have a load that is fully digital what does that mean from a profitability standpoint? It will come in at higher incremental margins from an EBITDA standpoint. So I think there are -- there's a significant opportunity for us to go ahead and increase the amount of loads that are created and covered digitally longer term.

Okay. Is that formula -- I mean growing volumes 3x faster than headcount, I mean, is that going to normalize a bit? Or do you think that, that could continue to stay...

I think you need to -- the way we look at it is much more over a longer term, right? So if there's a particular quarter where we think it makes sense to strategically invest in the business, right, could that number have looked different in that particular quarter? Of course. But I think longer term, as you look at us investing in our sales force and us investing in the platform on the road to our '27 target of $500 million in EBITDA, you're going to continue to see us make significant productivity gains.

I mean it's sort of one of the questions that occasionally comes up, is with the technology -- and not just you guys, other competitors have put in technology. Should there be or could there be concerns about pricing because everyone can look at pricing. But I guess what I'm hearing is your plan would be if there was a long-term pressure on price, mitigate that with the efficiency? Is that how you look at it?

Yes. So I would say, first, I don't think that to be the case. So like whenever you look at who sets the market pricing, it's typically large asset-based carriers that are setting the pricing. And while brokerage has made a significant dent in the overall for-hire trucking market, it's still largely controlled by the asset-based carriers. So asset-based carriers set the pricing. And our goal as a broker is to come in and be somewhere around that and work with the smaller carrier who has less operating costs that we're able to pull the margin off of. If that's right -- because that's been a theory out there for a long time that there was going to be pricing transparency across the board and you're going to see brokerages margins continue to deteriorate. If that's something that happens, you may see our gross margin percentage fall off. But what you'll see is our EBITDA margins will actually go up and we'll be in the best position because of the early investments we started making in technology. The EBITDA margins could actually expand if that were to something to happen because you see more automation in the business.

But competing on price is nothing new in this industry, right? And ultimately, when you look at our value proposition, it really is volume growth and best-in-class profitability. And even over the last year or so as fears of incremental pricing have come into the market, we've been posting anywhere between 16% and 21% gross margins, which are best-in-class. So to Drew's point, that's not something that we think is base case.

Is there additional forthcoming technological advancements? Or is it more tweaking what you have now, would you say?

There's always more to come. I mean, if you look at one of the things that we're going to continue to invest in is pricing. While we have the -- what I believe to be the strongest algorithms out there on both the customer and the carrier from a pricing perspective, we'll continue to invest in AI and machine learning so that our pricing gets more efficient. Really, every load that we put into the system, the stronger the algorithms become and the wider the moat becomes for us from a technology perspective. We're going to continue to look for things that are more integrated from a customer standpoint. We're not going to give those away because we don't want our competitors to know some of the things that we're working on. And Jared talked about the carrier side. The carrier side while it is significant and it's growing, we do have a lot of white space for continued use of technology with the carriers that we're partnered with. And it's because they're smaller carriers. A lot of the carriers -- when you think of one truck owner-operator, some of those folks are still operating off a flip phone. So getting them on to an iPhone or an Android is step one for us.

Maybe you could have a phone program. Well, let's pull it back a little bit to the near term because certainly a big part of this conference is trying to figure out where we are in the cycle. I mean, it seems to be obviously very pertinent. I know you just reported not long ago, but maybe for everyone's benefit, sort of give some sense for what you're seeing demand-wise and perhaps maybe what your customers are hinting at as we go through the year?

Yes. So one of the things that we said in our earnings call last week was the first 2 weeks of April were fairly soft, coming off of quarter-end, coming off of an Easter holiday. The volume was not where we had hoped. But the last 2 weeks of April were fairly strong. And we just reported out last week, so not a lot has changed from the overall demand perspective. We've seen strong growth in technology and in health care from a vertical perspective. From an inventory level, retail and e-commerce -- last year every time I had a conversation with a customer, it was all about destocking their inventory. And now the conversations have shifted to where they are restocking the inventory. They're in a more stabilized environment. And so we view that as a potential tailwind, and retail and e-commerce is a good portion of our business. And even though it's a good portion of our business, we still grew volumes 12% last year. So that could potentially be a tailwind for us as that starts to come in. As I look back into the back half of the year and you take those market dynamics and you put it into -- the first quarter was also the first time that we've seen in a while where you saw more capacity exit the market than was entering the market. We view that as a good thing on a load-to-truck ratio basis, because load-to-truck ratio right now is sitting at 2:1. As you start to see capacity exit the market, that will cause load-to-truck ratio starting to rise. And as you start to see it starting getting at 5.5, 6, 7 to 1, what you'll start to see is tender rejections will rise. And it will start with asset-based carriers rejecting tenders. Then you'll see more on the brokerage side. And for us, we're going to be the big winners during that -- whenever that takes place. And you saw that for us in 2020 when coming out of a downturn. And as the market took off, customers leaned into who they trusted the most, who had delivered solutions for them. And we were big winners then. And we're positioning ourselves well for when the market inflects. In fact, if you look at from the last time the market inflected in 2018, 2019, our volume is up like 55% from that time period. So we've got a much stronger base than what we had last time and last time was pretty good to us.

But to be clear, as of now you haven't seen a green shoot, if you will, on rejections or...

No, rejections are still low. Load-to-truck ratio is still sitting at 2:1. We see reasons for optimism that I was pointing out, but we haven't seen it actually make the turn yet.

Got it. Okay. But look -- I mean, last quarter you outgrew your peers again volume-wise. We heard some of the long-term thoughts. I mean, is there -- does the long-term thoughts apply to the quarter 2, the outperformance volume-wise..

Absolutely. Yes. I mean, we're part of a large industry where the overall for-hire trucking market is over $400 billion. And if you look what our truck brokerage is, it's just over $3 billion. So we've got a tiny piece of a large market and we don't think that our growth should slowdown any time soon. I talked earlier about how we built the business of large customers. And we still have room to grow with our current large customers. We're not at the peak of the tipping point. And that's proved by last quarter. Our top 20 customers actually grew volume by 13% on a year-over-year basis. We've got the other half of the Fortune 500 companies to be able to go after. And we still have small to midsized customers that will be able to capitalize off of the capacity that we've built on these power lanes for some of the largest companies in the world. So we think that our best days are ahead of us and we're in the early days of growth.

Is it tougher, though, to get brand-new customers right now versus growing with existing? I mean is there bifurcation?

It was always tougher to get a brand-new customer. Yes, right now in a loose market it's tougher to bring on a new customer. We're doing it. We brought on some significant large customers over the last 6 months. But in a loose environment, there's a lot of people calling on them. And what you see customers do is they may have less volume overall, but they'll reduce the number of carriers they're working with so that they can try to keep people [ whole ]. We've been a winner of that as customers have reduced the number of carriers they're working with. Our piece of the pie has gotten bigger and that's preparing us even more for when the market inflects. But to answer your question, yes, it's always easier to grow with an existing customer than bringing on a new customer. Getting the first load is the hardest load to come back. Once you're able to get the first load, you're able to start showing them your service, solutions, technology. That's where the growth comes in.

You mentioned e-commerce and retail. I mean what is the pie for your verticals? Is that -- what proportion would you say that is versus...

That's the biggest portion of our vertical, but we've got a very diversified portfolio. If you look across the board, we're strong in food and beverage. We're strong in industrial, manufacturing, automotive, technology, healthcare. Like if you look across the board, we've got customers that touch all verticals.

Okay. Well, turning a little bit maybe to the price front or price side of the equation. Obviously, there's been price pressures in the world of trucking. What are you seeing from a price standpoint? Do you feel that -- some have talked about a stabilization occurring pretty soon, some may be a little later, a little unclear. What's your general take?

Sure. So from a pricing standpoint, I think when we're looking at overall calendar 2023, probably a good place to be in terms of contract pricing is down 10% to down 15%. And we're using our technology in a significant way to the point where, despite that kind of pricing pressure, you saw gross margins being able to be held flat year-on-year in Q1 at 16.3% within brokerage relative to the prior year. From a spot standpoint, to your question, when you look at the current environment, it's obviously a very loose environment with April load-to-truck ratio being around 2:1. But I think what we're seeing -- Drew was alluding to this -- some pretty good leading indicators that a bottom is trying to form. Unclear when that's going to happen. But what are we seeing, right? We're seeing load-to-truck ratio at 2:1. You go back to the '19 freight recession, anytime it was below 2:1, it didn't stay there for very long. You see what's going on with respect to carrier revocations. This is the first time in a while where we've had carriers leave the network sequentially. And from an overall industry standpoint, you're starting to see that accelerate. From a Class 8 production standpoint, you're seeing that down hard, right? April versus March was down about 40% month-on-month. So I think all of this, putting it all together, is getting to the point where we're starting to see early signs from a supply standpoint that it's getting healthier. You're starting to see some green shoots on the demand side, especially in retail, e-commerce with the rate of change within the retail and e-commerce verticals improving nicely from Q4 to Q1. So now I think we are -- we remain cautiously optimistic. But we'll certainly see what happens in the second half.

Is load-to-truck the key metric to assessing where the bottom may be forming would you say?

There's a few things that I look at. I look at what load-to-truck ratio is doing. I look at tender rejection. I look at capacity entering or exiting the market. Then I look at what my customers are telling me. Whenever I look for where the markets are going, those are the 4 things that I'm looking at.

In terms of the carrier exits, are you seeing that with your carrier partners?

We did see that go down for the first time in a while. And again, that's not necessarily a bad thing because we've got access to a lot of carriers. We've got over 100,000 carriers in the network. And the stat that I always look at is -- it's become more of a vanity metric in truck brokerage, of how many carriers you're working with, how many trucks you actually have access to. The stat that I lean on the most is how often are the carriers that you're working with coming back to you. And so that's where Jared hit on that if a carrier comes to do business with RXO and they do it through RXO Connect, 79% of the time, they're returning to the platform within a week. So you think about the carriers that we're working with are small carriers. That tells you a high likelihood that their next load comes from RXO.

I think, Jared, you mentioned that gross margins or net margins ever you want to talk about, it was flat as a percentage versus last year in the first quarter. Obviously, contracting spot are probably getting a little tighter. So I mean, how do you think about that net revenue margin now? I mean, I suspect there'll be a little bit of pressure?

Yes, that's exactly right. So gross margins within our brokerage business at about 16.3%, roughly flat year-on-year from a sequential perspective from Q1 to Q2. We talked about a slight moderation from Q1 to Q2 as the new contracts go into effect where we had most of our bids occurred within Q4 to Q1. Q2 will be the full run rate impact of that. And then from there, I think it really depends on how tight the market becomes from a load-to-truck ratio standpoint, right? We talked a lot about these forward-looking indicators, which are certainly encouraging. But when does that actually show up and manifest itself within a higher load-to-truck ratio. And when that happens, you'll certainly see the dynamics play out where you'll have our contract GP per load, be below our spot GP per load. But then you'll see us mix shift aggressively to the spot market. And you've seen that mix shift occurred. We're very nimble. We use our technology very efficiently and we can mix shift that as much as 1,000 basis points or more at any given quarter. We'll still hold the same contractual freight. But we'll mix shift from a volume standpoint pretty quickly to the spot. And it's an important point, too, where we're 77% contract right now, which is a pretty enviable position to be in. And what is that doing? It's positioning ourselves, for the future. So when the market does tighten, the customers that we have the relationships with where we're winning, when we go ahead and we're in an environment where the spot volume starts to come back, we're going to get awarded with projects, mini-bids, spot volumes. So we're in a prime position to go ahead and go on another run when the market inflects.