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

Well think about it, what you've heard this week, how difficult it is for asset-based carriers to get drivers.

Absolutely. Yes. That's been absolutely the theme.

Right? So think about that, as you think about the next couple of years, it's so difficult for them to find drivers and also look for the high-quality driver, that kind of limits a little bit of the amount of capacity we can provide. Whereas a broker, we can come in, we've got access to over 100,000 carriers or 1 million power units. So we've got access to the capacity that an asset-based guy might have trouble getting because of the driver situation and how tight it is.

And before we leave this topic, I just -- Kevin reminded me with his comment there in terms of some of the other news that we've heard this week at your conference, just to be clear, diesel was not a headwind for RXO. And I just want to emphasize that because I think it's a really important point, given the move up that we've seen in diesel pricing over the last, call a month or so, it's a pass-through, right? So there's -- through the cycle, there is no material impact to our P&L. So you think about more difficult to find capacity that Kevin just talked about. That's a good thing for our business, higher diesel prices. It's a fuel surcharge on to our shippers, no impact at all to the business. So I just wanted to emphasize that.

Great. So lots of supply-side capital industry-wide, you guys are gaining share, idiosyncratically, Coyotes firing in all cylinders. What does that feel like in terms of the rate opportunity as you go into bid season for next year and maybe kind of pivot back from spot to contract as you renew your contract?

The -- it's a great call. And we've seen so much momentum on our revenue per load in the business from earlier this year to now. I think in the month of July, we talked about our revenue per load alone was up almost 25% year-on-year, that's excluding fuel and that's excluding length of haul, right? That's pure rate. And that's obviously a function of both spot and contract on a blended basis. So we are -- we talked about in the positive update last week that we are still phasing in higher contractual rates. And we expect that to continue, no doubt in part due to the supply-driven recovery that we're seeing. Even though we're in what remains a slow soft demand environment, the reality is for the prevailing rate in the overall for-hire truckload market, it's just the intersection of supply and aggregate demand, right? So much capacity has come out that has yielded an inflationary environment. We finally did have a slightly positive [ CAS ] update the other day, but you think about rates up in the spot market more than 30% year-over-year with prior to this month update on CAS, shipments being down year-on-year for the industry every single month since January 2023, is a testament to how much capacity has come out. So we certainly think that we're going to be continuing to phase in newer and higher contractual rates through the end of this year, and that will also -- as you think about that phasing, that will also obviously be a tailwind into 2027.

Got it. I'd say that demand part, where you said kind of -- it's still kind of pretty soft, I guess that was the only maybe a little bit of an offset to your message last week and the update last week. Obviously, industry-wide, nothing you can do about it. But are you seeing any green shoots, any forward look at all, kind of does it feel like people are paralyzed by situation in Middle East, high inflation. Obviously, you've got a rate hike today. So does it feel like that's the new world? And so if that's a new world, is this where we're going to be? Or do shippers say, "Guess what, we just need to move on and we will start building a metric [ here ]."

To be clear, when I'm talking about demands softness, that's industry-wide, we're not seeing that at RXO, right. RXO volume is growing, and we're going to be growing low to mid-single digits year-on-year in Q3 despite that. Different sectors of the economy, we're seeing different things. And I think in industrial manufacturing clearly has been stronger year-to-date. Anything consumer-related, given -- obviously, to your point, higher interest rates, higher mortgage rates, 30 years now at 7%, accrued through 100, clearly weighing on sentiment. So I think that's kind of how we think about it, 2 side of the economy, industrial manufacturing, data center on 1 side, consumer on the other, housing on the other. But the fortunate position that we're in, given the strength of our pipeline, we're able to offset the broader market weakness and continue to gain share in a more accelerated way versus the rest of the market.

Got it. I want to switch a little bit, talk about Coyote. Kevin, you kind of mentioned that in your earlier remarks about how that's allowing you to go to market in a much more front-footed way, if you will. Talk about how that's realizing customer conversions, pricing gains. Obviously, you've delivered the synergies on the cost side, what can we expect Coyote can bring to the table in the up cycle kind of from a revenue perspective?

Yes. I think first and foremost, scale. And it's -- what made Coyote attractive, not only was it from the customer base, we're very different customer base. They were strong in food and beverage and transportation, and we were strong in retail, e-commerce, industrial. So it's a very different customer base. When you do brokerage M&A, if there's a lot of customer concentration, customer overlap, it just doesn't work. And so from that standpoint, just the customer base is very different than ours. But to a carrier base is very different than ours. RXO can kind of built their carrier base on the small carriers. Jared was talking about this earlier, guys with less than 10 trucks. Coyote built their carrier base on larger fleets with private fleets, access to private fleets and really kind of finding backhaul opportunities for private fleets. That's key because if you're a private fleet, you've got a heavy fixed cost infrastructure on an equipment run the assets. But then if you could find a backhaul link for that private fleet that just really helps them out a lot. And that's how they build that business. And now we've got access to the RXO small fleet, private fleets, looking for backhaul opportunities, just better pricing, but that scale now going to market. I was just on the floor this week, Jared and I were both in Charlotte this week and is being on the floor talking to some [ like RXO ] people, how excited they are to have access to such a more fleet, just better -- just more opportunities to buy better.

Got it. That is great to hear. So we're going to come into the last 10 minutes here. I wanted to kind of shift gears a bit and talk about 1 of our favorite topics, which is technology and AI implementation. 9 months ago, you guys were super generous to kind of invite me out to see what you were building. It seemed very exciting 9 months ago. I'm sure a lot has happen since.

You should come back.

And I should. Thank you for that. I will absolutely take you on that. But maybe give us a sneak peek on what you guys have done in the last 9 months, what's been rolled out, what's in the pipeline and what's yet to come?

So I touched on this a little bit earlier, but I want to expand on it because it's so important because technology has the ability to what we believe is to structurally improve the margins for RXO and obviously industry over the long term. And when we think about technology, we think about it holistically across our key pillars, it's volume, it's margin, it's productivity and it's service. We're not building tech for the sake of building tech. If it doesn't check the box on 1 of those key pillars, if it doesn't drive a strong return, we're not going to do it. So that is our key philosophy, and it's so important because ultimately, it has the potential to really move up the profitability and the operating margins of the industry longer term. So what have we been keenly focused on? No doubt if you look at any of our earnings materials or listen to our calls, the #1 thing we continue to highlight is the success and the progress we've seen with our AI spot quote agent. I think we talked about it when you were out in Chicago and the deployment of that is widespread across the organization. We're seeing unbelievable success across cohorts that have been adopting it in aggressive ways. And you're seeing relative to prior in terms of an improvement in both gross product per load and an improvement in truckload volume when compared to not using it, and it is now fully deployed. So having that ability for any of our customer reps have access to this tech, at their station without leaving the environment that they're in, where you get an inbound request from a customer and from a shipper. And instead of going to 17 different screens to build the order and figure out what the right price is, which impacts your response time and then shockingly, there's a pretty strong correlation between response time and actually winning the load, you're now able to go ahead and do it as a seamless environment where request comes in. And instantaneously, we're pinning our real-time pricing algorithms on the back end, and we know exactly based on 20 years' worth of data between legacy RXO and legacy Coyote, it's so imperative to make sure that you've got a clean data lake, which that's what my CIO tells me. And when you think about the cleanliness of that data, the ability to go ahead and do that on a real-time basis. You've got an order coming in at a specific time, on a specific day, on a specific way, and we know with a pretty good probability we need to go back to that shipper to win that rate based on our proprietary data that's really, really powerful. And when you think about unleashing that across the organization, what does that yield? It yields incremental margin at strong profitability, incremental gross profit dollars drop from gross profit to EBITDA anywhere between 60% and 80%. And you're obviously seeing a lot of that operating leverage play out in real time right now given the strength of our results. And you're also seeing that in terms of the ability for us to grow the business without meaningfully adding to headcount. And that's also such an important point. We think about the ability to grow our volume by 30%, 40%, 50% over, call it, the medium term. How do we do that with a fraction of incremental head count additions to really drive strong power for operating margins in the business.

Great. One of the things you showed me when I was there was a to do list slide where you had a bunch of green items already rolled out, a bunch of white items in development, a bunch of yellow items TBD in the future. What is that ratio of white, green, yellow looks like right now?

Highly confident. Everything that you saw that was in development is now all in green. And I think that's a really important point where it doesn't just go green and then we're done. It's green and then we iterate and we've got a whole set of incremental initiatives that we're going to deploy across the organization. Because it's not just an AI spot quote agent, how are we thinking about deploying both Agentic and generative. How we think about deploying it across all of our lines of business between managed transportation, last mile and our complementary services. And we obviously spent a majority of the time here talking about brokerage because it's the lion's share of our business, more than 70% of revenue, but the ability to speed onboardings within managed transportation, where we manage $4 billion of freight under management, and we're the largest provider of managed expedite in North America. And there's a strong relationship between our brokerage business and our managed trans business. If we can deploy AI and technology in more aggressive ways to speed up onboarding, that's really, really helpful from an efficiency standpoint and can help grow the flywheel. Same thing within our last mile business, just getting more efficient throughout the entire organization and constantly making sure that we're challenging ourselves to find the next best thing to continue to invest it.

Got it. When you think of the holy grail of technology implementation here, which is a completely automated transaction from origination to execution, billing settlement, where are you in that life cycle right now? Kind of what percentage of that transaction do you think is fully automated? What percentage of that is -- what percentage of what product transactions will you automate? And do you think we ever or when do we get to that 100%?

Well, the -- I'm not sure I agree with the premise that, that's necessarily the holy grail because I do want to emphasize that we think about not only deploying tech, but we deploy it from the perspective of having a human in the loop. The relationship is so important in this business. This is a people-based business. If you think about what we spend our money on any given year, irrespective of the cyclicality, it's our people, it's our technology and it's our real estate. Those are our 3 largest costs. And when we think about going to market, there is a huge opportunity. And I agree with the premise of the question that ultimately, can we become more efficient in terms of increasing the productivity of our people from a loads per person per day standpoint. And the absolute -- the answer to that is absolutely yes. Can we be more efficient on automating back office as we think about order to cash, FABP? Absolutely, yes. But do we want to completely cut out the human in the middle? The answer is absolutely no. We're ultimately, we think about our sales organization across the business. And we want to make sure that we've got multiple touch points across the organization from inside sales to outside sales with multiple different contacts at our shippers to really build our strategic relationships. What our tech folks, our senior tech product folks always say is, how do we go ahead and empower and enable our people to become more efficient. So they are spending more time building relationships with our shippers because that's going to yield better results over the long term.

Great. Can we unpack that a little bit because that's a very important point here. Candidly, 1 of your peers have made a big deal about talking about massive head count reductions because of AI. I think they've said they can increase their transactions by 10x without adding headcount, which seems like a staggering number. It seems like you have a very, very different philosophy to what productivity looks like in an AI-driven world and a very different philosophy to headcount. Can you just kind of differentiate that a little bit and kind of talk about why your approach is maybe better than theirs?

Yes. I'm not going to -- we have a ton of respect for our largest competitor, and we see them every day and they have had incredibly strong results and they're doing a fantastic job. So -- but on the margin, are there some incremental differences? For sure. In terms of human in the loop, thinking about that relationship. But I do think there's probably more in common than not as it relates to ultimately can tech drive productivity. I think the answer to that is yes. And we have seen a reduction in our brokerage headcount, right? It's down, call it, mid-teens percent year-over-year. But I do think that the point that we fundamentally believe that leveraging relationships with technology is a winning proposition over the long term.

Got it. That is super helpful. Any questions from the audience here? We have 1 there and 1 upfront.

Could you talk a little bit about your expectations around insurance costs as we look towards renewal of insurance next year, both for yourself but also for the broader industry and kind of like the range you see for the broader industry? And what -- if that could precipitate share gains for you into next year?

For sure. So the answer to the last part of your question is absolutely in terms of facilitating share gains when we think about the fact that RXO is in such a strong competitive position relative to the many brokers that are out there, especially the small and medium brokers. But there are even some large-scale brokers that don't have robust insurance towers like we do. We're towered up like an asset-based carrier with $100 million per incident, and that's really, really robust. So when we think about the premiums that are running through our P&L associated with excess casualty, which I think is what the question was as we think about the potential premium increase heading into 2027, what we said and continue to believe is that we will be materially better than the rest of the industry. And there have been some crazy estimates that have been out there. So you need to put things in perspective that when you hear some of these large increases, not all brokers are created equal, and they're not coming from the same starting place, right? We're fully powered up. We've got best-in-class vetting, best-in-class safety, really strong processes that are internally built which is why -- and we leverage technology, which is why we've had significantly better than industry rate increases over the last few years. And based on feedback that we're hearing from our insurance partners, we expect to be materially better than industry in terms of rate of change increase heading into 2027 as well. When we're in a position to sort of give that estimate, we certainly will as we continue into the renewal cycle, which will be later this year. But we feel very, very good about our position heading into '27.

Do you have a sense of what the industry number might look like?

The range of estimates is so wide, Ravi, because ultimately, when you're dealing with a base of competitors that may not have even insurance at all or a very de minimis amount, I mean you've seen estimates that are up there, which is 5x, right? Because ultimately, you're dealing with smaller brokers that don't have any of those benefits that I just described to. So you've seen crazy estimates that are out there for the industry. When we think about the competitive position that we're in, the years of processes that we've built and going back to what we talked about earlier, like foundationally, how was RXO built. It was built on mission-critical freight high cargo value. And when that's the starting place, you're in a really, really good spot because the vetting processes are so robust. So we feel really good about our position heading into '27.

And Ravi, some of those things, too, the small brokers to Jared's point, you don't have insurance, your framing is [ going up ] a lot, might go from 0. Or if you just -- you don't have the compliance of vetting that we have, maybe just rely on government data, which [ sometimes ] they only rate like 8% of the carriers or something. If you're compliance and vetting, if that's it, you're going to be paying a lot more, if you can even get an insurance.

[ Nat ], you want to squeeze in? A little bit over time here.

I know we talked a lot about truck brokerage, but it would be helpful to hear a bit more about last mile and your man transportation business, how you see those businesses scaling over the next few years, especially if we do see an up-cycle?

Absolutely. So managed transportation, we are executing incredibly well. And we talked about onboarding $100 million of freight under management additionally in Q2, another $100 million in July. We're now north of $4 billion of freight under management within managed transportation and that is extremely synergistic with our brokerage business where ultimately, we service that freight well, brokerage has the ability to be a carrier to our Managed Transportation business and it helps the organic growth of the combined business. So -- and the pipeline there is quite strong, and the team continues to win get awarded new business and onboard significant amounts of freight under management. In last mile, the team has executed incredibly well in what has been clearly a soft housing market like we talked about. But the team has punched out, stop growth over the last few years because we're gaining share in a pretty significant way relative to our competitors. Notwithstanding the fact that clearly, we talked about Q3 being a seasonally slow period for last mile and some additional headwinds that have already been factored in to outlook, which were more than offsetting with the core strength in our brokerage business. But we think about last mile, we are the undisputed industry leader in last mile with #1 share. And ultimately, to Kevin's point earlier, we believe we're setting up for a multiyear recovery. And when we have a housing recovery, whenever that may occur, not only will it benefit the brokerage business of the [ freight ] for RXO and for the industry as it sets up industry capacity, we'll have a double benefit within RXO because it will also be a tailwind for our last mile business.

Gentlemen, thank you for bringing the energy to the last session of the day. Thank you.

Pleasure always, Ravi.

Laguna, thanks for having us. Thank you.