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

Good morning, everyone. Thank you for joining us today. I'm Scott Schneeberger, the Senior Industrial Transportation Services Analyst at Oppenheimer. It's our pleasure to have RXO here to speak on the company's investment story. We have with us from the company, CEO, Drew Wilkerson; CFO, Jamie Harris; Chief Strategy Officer, Jared Weisfeld; Chief Market Strategist, Kevin Sterling. RXO is a leading tech-enabled transportation brokerage platform with truck brokerage a cornerstone asset. RXO's truck brokerage business is an industry leader with differentiated technology applications contributing to above-industry growth as well as solid margin. We're using a fireside chat format. I'll ask management some high level questions upfront to get us an overview of the business. And later in the session, I will facilitate questions from the audience, so feel free to send any questions along. So without any further ado, I'll get started. RXO is a relatively new publicly traded company following its November spin-off from XPO. Gentlemen, could you please provide an overview of the services RXO provides in the primary end markets served.

Scott, good morning. Thanks for having us. You said that RXO is a leading tech-enabled truck brokerage platform and that's the cornerstone of our business. When you look at how we made up our truck brokerage business, we work with some of the largest customers in the world. So I think Fortune 100 customers where we do business with over 50 of the Fortune 100 and over 200 of the Fortune 500. We do business with them and we were able to aggregate capacity for them by working with small to mid-sized carriers. So connecting small carriers with large shippers. We've got 3 complementary lines of business that support our tech-enabled truck brokerage platform. The one where there is the most synergies is our managed transportation business. So that is where a customer outsources all of their transportation to us and we act as their transportation department. The reason the synergies are so strong is because we've got a strong truck brokerage group that is able to provide capacity as a carrier to our managed transportation team. The next line of business that I'll highlight is our freight forwarding team. And when you think of freight forwarding, think of things coming over from Europe and Asia via ocean as well as air. And that helps us have visibility as what's going to be hitting the market for our truck brokerage on over-the-road trucking. The other thing that we've done in our freight forwarding business is we've really diversified it to have more domestic products that help drive growth into our truck brokerage group. So the domestic products are things like transloading, cross-dock facilities, things that -- if you think of something coming off the port that you're able to transload and get it to a facility and then put it on a truck, customs brokerage is something that lives in our freight forwarding group. So something that's very complementary overall. And then the last one that I'll highlight is our last mile business. So think big and bulky goods that are being delivered into the home. So washer dryer, refrigerator, things like that that are coming in and out of the home, and we're the largest provider of big and bulky goods across the country. We've got facilities that put us within 125 miles of 90% of the U.S. population. So somewhere where we continue to go out and take share. The one good thing about last mile is, while there's not a crazy amount of operational synergies with truck brokerage, from a customer synergy, there's a lot. And so if you think of these large Fortune 100 companies that you're going into a home and you're their last brand representation for a customer, that gets us into the C Suite a lot with these customers and that allows us to talk about our other lines of business, mainly truck brokers.

Great. Thanks, Drew. The truck brokerage industry has historically increased its penetration within the 4 higher truckload market. This has gone on for a long while. If you could discuss the secular trend and the underlying drivers and what you expect going forward?

Yes. So I mean, just go back to whenever I started, and I've been doing this for over 16 years, and whenever I started, brokers had less than 10% share of the for-hire trucking market. Today, it's over 20% share and we expect that to continue to grow. We expect over the next 5 years more to be closer to 30%. And as you look out longer term, I see no reason why truck brokerage will not be able to get into the 40s. And when you look at like what I talked about earlier, as far as who we do business with, you think of small trucking companies. Large shippers aren't going to go sign up thousands of small trucking companies to do business with. That's where you have a strong broker who is able to come in and aggregate that capacity for the customer. A couple of trends that you've seen coming from truck brokerage are things like drop-trailer. We've been doing this for over a decade, built it up for retail and e-commerce customers, but really do it across all of our verticals now. And that is something that allows us to look and feel like an asset-based carrier, but do it with more capacity. When you think of what we've got access to, we've got access to over 100,000 carriers and access to 1.5 million trucks. So being able to aggregate capacity and have really just more than enough capacity than what any large shipper actually needs is a true benefit for us.

From 2013 to 2021, RXO has outpaced the growth predominantly organically in the truck brokerage industry itself by nearly 3x. If you could provide an overview of the drivers and perspective on the company's competitive differentiation and its potential to continue to achieve outsized growth with -- specifically within the brokerage industry?

Yes. I think it's important to start with one of the comments that you made there on the organic piece. If you look over the last 6 years, 100% of our growth has been organic. If you look over the last decade, 90% of our growth has been organic. So organic is our way of growth and how we view the best option to create strong shareholder returns. When you look at why we're outperforming the industry, it starts with our technology. We've been investing in technology for over a decade. That's allowed us to create a wide gap between ourselves and the competition. And we've built our technology for customers, for carriers and for employees. So for customers, our goal is to be a tool that they're using every single day because our technology will tell them things like what day of the week they should ship something or what mode of transportation they should use. Do you have the opportunity to consolidate things. When you look at the carriers, the first thing that you have to have for them to come to your platform is scale. You don't want small carriers to have to leave your platform to find their next load. And we've been able to achieve that. If you look at the carriers who are logging into RXO Connect, we talked on our earnings call last week about 79% of the time whenever a carrier logs on to RXO Connect, they're coming back to Connect within a week. So that tells you for a small trucking company that their next load is likely coming from RXO. We've also been able to create some value drivers within RXO Connect for carriers, things that give them discounts on fuel, tires, roadside maintenance, hotels, SIRIUS Radio, anything that a trucker uses on their daily life that pulls them back to the system that's very easy for them to use, where they can pick up their cell phone, book a load, negotiate with no human interaction. And then the last one is one that I'm passionate about because I came from the desk level as you start thinking about employees, it's really just about being able to increase the loads per day. And as you look at how we ended that timeframe that you talked about, 2021 and look back over 5 years, we grew volume at nearly 3x the rate of what we were growing headcount. So our productivity and our employees continues to increase because of the technology. The second piece that I'll highlight for why we're able to outperform the market is we've got really good relationships with our customers. And we've got really good relationships with our customers because we've got strong service, because we've got a history of creating results in their transportation and supply chain spend. So whenever they're coming back to whenever they're going into RP, they're coming back to us. And they're not just awarding us the business that we've hauled in the past, they're actually giving us more freight. Last quarter, our top 20 customers grew volume by 13%.

Let's move now to technology even deeper. It's been a focus since we started covering the business over 10 years ago. We witnessed the early days of RXO's Freight Optimizer technology, then under XPO's umbrella, and now obviously, as you're out on your own, it remains a backbone of the organization. From the RXO's led the digital evolution of the industry and it's garnered an early mover advantage, could we speak to RXO's opportunity and potential to maintain its digital differentiation within the -- in the brokerage business?

We don't think we're just maintaining it. We think that we're expanding and the gap is widening between our technology and what's out there in the industry. And when you look at the competitive moat that's around it is, our algorithms get smarter with every load that goes into it. So the more volume that we're driving through our system, the smarter our algorithms get specifically on the pricing side. And that's been one of our differentiators when you see that not only are we outgrowing the industry and not only are we doing at best-in-class margins, if you look last quarter, our gross margin percent for our truck brokerage group was over 16%, which was best in the industry. So we have our technology that not only helps us grow volume, not only helps us increase employee productivity, but it also allows us to operate at best-in-class margins. Jared, do you want to touch a little bit on how the technology integrates with some of the customers and the carriers?

Yes, absolutely. I mean, Scott, when you look at our technology, it was built from the ground up with 3 cohorts in mind. It was built for our people, it was built for our carriers and it was built for our customers. So for our people, we use our technology every single day to increase productivity and efficiency and drive number of loads per head per day. So when we think about that ramp, we still think there's significant headroom over the next few years as we continue to invest in tech and increase the productivity of our people. From a carrier standpoint, you think about RXO Connect and RXO Drive, which is the mobile app that's been downloaded over 1 million times, which grew over 45% year-on-year this most recent quarter. It's the heart of the operating system of our carriers and it really is increasing that top of funnel and then increasing engagement that Drew just spoke to in terms of 7-day carrier retention at 79% the most recent quarter, which is up about 500 bps sequentially and then average weekly user is up 25% year-on-year. So continue to go ahead, not only increase the top of the funnel, but then increase the stickiness and the engagement with those carriers, which results in a very strong carrier retention. And then for our customers, it's all about the digital integration where we've had significant progress on the customer side. And we reported in the most recent quarter that loads created or covered digitally reached 96%. So we've had significant progress across the board in terms of continued technology momentum and adoption from our customers and carriers.

Just on this topic, if you guys could take us back a moment. You were an early mover in this. Could you kind of talk about when RXO started the digitization process of brokerage and maybe vis-a-vis the competitive -- differentiate yourself from your competitors? How much of a head start did you have? And clearly, you are advancing that from what you just mentioned.

For me, I started in my interview process with Brad talking about seeing an industry that was ripe for disruption with technology because there wasn't a lot of technology in the transportation industry, specifically in truck brokerage and how do you create stickiness with customers, carriers and your employees. So for us, it started on day 1, whenever we were building the system, and we started building the system from scratch. And you talked about building Freight Optimizer, that was our first tool. Now that's just a piece of the umbrella of what is overall our RXO Connect to where a customer is able to go in. And from end-to-end on a transportation movement, no matter what the mode of transportation is, no matter what line of business they're working with for us, they're able to see exactly what is going on with their current order, their future orders, their past orders. They're able to pull reports that help them drive decisions for their business. So it started day 1 and it's not something that we plan on slowing down anytime soon.

Let's talk about the margins. RXO has had solid margins among industry leaders in the truck brokerage industry. If you guys could discuss the drivers, how they've afforded you, the cost efficiencies and admirable productivity that you displayed?

Jamie or Jared, do you want to hit on margins?

Yes, I'll get started. We had great margin this quarter from a brokerage standpoint. We were flattish year-over-year, which we felt like was a good outcome. Our other lines of business were up 160 basis points. Overall, our total company was up about 80 basis points year-over-year. We are able to buy transportation at a very good rate. We focus heavily on the relationships that we have, both on the shipper, but also the carrier side. And I think you see that demonstrated as we're able to hold and maintain margins and even grow margins in what's a very tough economic cycle. Our other lines of business, Drew talked about, a lot of the synergies that we have between our companies. We're able to -- especially in our managed transportation business, that's a nice flow-through to the other lines of business that gives us insights to the business that others just don't have. And again, we're able to deliver margins that are really best in the industry because of what we can see in the marketplace and how we can go execute on -- especially on our carrier side of the ask.

I want to go now into the cycle where we are just in the macro environment. So it's basically truck brokerage. Where -- could you talk about RXO's recent performance relative to the industry and cover some broader views of what you see in the macro? Where we've just been? And where you think it's going?

So there's no question that we're in a tough macro environment right now. And with that, we were able to grow volume 6% on a year-over-year basis, which is best in the industry again or the best that I've seen from any publicly traded companies out there at this point. So being able to grow volume in this part of the cycle. It's the toughest part of the cycle to grow volume because what you start to see is there's not a lot of spot loads out there right now, your contractual pricing is coming down because we've seen our customers, their path has gotten smaller. But what's happened is, they've started to consolidate the number of carriers that they're working for. And that's where we've been a winner is, they're sort of consolidating. We've gotten a bigger piece of the pie. So when you talk about where we are, we're in a down part of the cycle. But what we've done is we've positioned ourselves extremely well for when the market inflects that we're going to be able to go on a strong run, because when the market inflects, what you'll start to see happen is, you'll start to see tender rejections increase. And when tender rejections increase, that's going to create a lot of spot opportunities and customers are going to go to the people who have serviced their freight well and people who have been able to deliver solutions for them and will be a big winner for that. When you think about mini bids and projects, if the port backs up, we were a big winner a couple of years ago whenever the port backed up. And if anything like that, if there's congestion there, then we expect to be a winner again. But we're at a point in the cycle where it is about building the base, creating a larger base that when the market inflects, we're able to go on that much stronger over and run. The important piece is, if you think about the last time that the cycle was down in '18 and '19, we've got roughly more than 55% more volume today than what we had during that time. So our base is that much bigger. And we went on a really good run in. So I feel good about when the market does inflect the run that we'll be able to go on this time.

I want to touch on, you recently opening a cross-border facility in Laredo, Texas. Could you provide the strategic positioning and your potential to garner incremental new business from that move? Just some backdrop of why you performed that strategically and what you hope to achieve from it?

We think that you're going to continue to see more and more near-shoring in between the U.S. and Mexico. And what we've been able -- what we've seen in our own business, if you look at the most recent quarter, we actually grew our cross-border loads by over 30% on a year-over-year basis. So we are seeing the demand that comes into it. And our Laredo facility, if you go down there, it's right there at the World Trade Bridge. So for us, it's prime time real estate. It's easy to get in and out as far as what you're doing there. From a customs brokerage standpoint, you can do all of that at our facility. From a cross-stock standpoint, to be able to load from a U.S. carrier to a Mexican carrier is something that you're able to do at our facility. If you've got something that just needs to be stored for a little while, that's something that we do as well. We've seen extremely strong demand from our customers and our pipeline in Laredo is extremely strong. We're going to fill the building up fairly fast.

I'm going to take it off brokerage for a moment and kind of go to last mile. It's always been a really intriguing business and RXO's last mile business is clearly in a leadership position. Now you recently implemented some rate increases given your value proposition. Could you discuss how that should develop financially going forward? Maybe Jamie, that's for you. But just overall, if you all could address the strategic positioning of last mile in the market, I think that would be very useful to us as well.

I'll kick it off. Our last mile business, very good about it, leader in the industry, we have a great service record. Business has been tough over the last few years, a lot of competitiveness in the marketplace. We had a good cycle of going back to customers and getting some price increases that we want to provide a great service. We also want to be paid for that service. So we feel like we had a really good year in terms of our ability to get some price that we feel like we deserve. I think we said in the quarterly calls, you'll see that kick in more in the second quarter because a lot of those price increases came through late in the first quarter. So you'll begin to see that cycle from a quarterly standpoint begin in Q2 and on throughout the year. Overall, it's a business that we're spending a lot of time on. As Drew announced in the earnings, we have a new leader in place, Paul Boothe, who came over from our Managed Trans. A strong leader I think is a testament to the company's leadership that we're able to take of Paul Boothe, put him over in last mile and bring a gentleman, Brian Dean, in to step right into the role in Managed Trans. Fernando has done a great job. He loves the customer. So he will go back to being heavily focused on the customer moving forward as he was in the past. So we feel like we've got a good team. We feel like we've positioned ourselves to win in last mile. We will -- we're very -- we'll be able to grow our EBITDA this year on a year-over-year basis. So we've got a lot of good things heading in a good direction.