Truck load broker RXO ready to go to market alone

Earlier this month, the country’s fourth-largest truckload broker went into business for itself. RXO, a tech-enabled brokerage and logistics platform with more than $5 billion in annual revenue, has been divested from the remaining parts of what was once a multi-modal transportation and logistics giant.

The spin-off of XPO Logistics (NYSE:XPO) created two independent public companies: RXO, an asset-light only transportation and logistics provider, and XPO, an soon-to-be-only pickup truck company.

XPO is still trying to divest a European transport unit. The company spun off its contract logistics business, GXO (NYSE: GXO), last year and sold its intermodal segment in March.

“The spin-off establishes RXO as an independent leader in asset-light transport. As a technology-enabled, pure-play company, we have a clearer identity, mission and value proposition,” CEO Drew Wilkerson told FreightWaves.

“Our management team can now focus exclusively on truck brokerage and its complementary services. This unique focus will drive performance, accelerate growth and unlock significant shareholder value.”

Brokerage growth curve up and to the right

Based in Charlotte, North Carolina, RXO (NYSE: RXO) has a full suite of services including managed transportation, last mile and trucking. However, in the weeks before and after the spin-off, RXO’s truck brokerage segment, valued at more than $3 billion, has been the focus of investor interest.

The unit has grown nearly three times as fast as the rest of the industry over the past decade, posting a compound annual growth rate of 27% since 2013. Notably, less than 10% of that growth came from mergers and acquisitions.

The formula began working with some of the country’s largest carriers, creating what RXO refers to as power trails. The data obtained by covering numerous loads in these lanes shaped the company’s customer service today. It encourages decision-making around things like the best shipping day for a customer, whether shipments should be consolidated, or whether it makes sense to provide a multi-stop approach to delivery.

Today, the brokerage business offers shippers a network of around 100,000 carriers and more than 1.5 million trucks. The RXO Drive app, which connects carriers to the platform, has been downloaded 850,000 times. In the third quarter alone, 10,000 carriers were added.

RXO works with 58 of the top Fortune 100 companies. It has worked with its top 20 brokerage clients for an average of 13 years. The volumes of this group increased by 30% in the past year.

The company plans to grow volumes year over year again in the fourth quarter, even as freight demand slows. Looking ahead to 2023 and beyond, the growth plan is unlikely to slow down. RXO expects to continue taking market share in the $400 billion rental truck market, and doing so profitably.

“It will definitely still be a stock gain, but it will be a profitable stock gain,” Wilkerson said.

He noted that along with double-digit volume growth over the past decade, earnings before interest, taxes, depreciation and amortization have also grown double-digit.

“I don’t expect that to slow down any time soon,” Wilkerson continued. “There may be a cycle, there may be a year where it doesn’t if the economy slows down, but we will make up for it in another year when things start to pick up. I am confident that no matter where the market goes, we will outperform.”

The Company’s long-term goal is Adjusted EBITDA of between $475 million and $525 million by 2027, compared to $302 million for the 12-month period ended June 30.

Importance of good technology and a widely used app

A report by UBS Securities (NYSE:UBS) showed that XPO Drive (now RXO Drive) was the most downloaded app.

Year to date through September, RXO held a 9% market share of total app downloads across a group of 26 brokers, logistics technology companies and tail lifts. The company held a 22% share among the major brokers with apps in 2021 and so far into 2022. That number rose to 31% in September.

In comparison, TQL and Uber Freight (NYSE:UBER) had stocks in the mid- to high-teens during these periods, with CH Robinson (NASDAQ:CHRW) and JB Hunt (NASDAQ:JBHT) achieving nearly 10% penetration.

Not surprisingly, the report showed a high correlation between app downloads and the pace of revenue growth.

“Apps are important because they connect to the individual trucker, which facilitates the two-way flow of information. When a driver has the broker app, it provides real-time visibility of the location of the cargo the driver is handling. And if the driver is the one booking their loads, the app can provide an important mechanism to find loads,” said Tom Wadewitz, UBS transportation analyst, of the importance of apps in connecting with small shippers and owners.

“The app can also facilitate forward visibility of where and when capacity becomes available, which is helpful for a broker when booking future loads,” Wadewitz added.

Wilkerson said technology is and will continue to be a key driver of margins going forward.

“Technology has expanded our margins significantly over the past decade and I don’t expect it to stop,” he commented.

Adjusted EBITDA margin for RXO was 6.4% for the third quarter and nearly 6% for the 12-month period ended June 30. Wilkerson sees room for further growth as its technology approach focuses on three areas: volume growth, margin growth, and employee productivity.

“We will definitely continue to try to increase the overall margin through the use of automation and digitization in the company. Our people will continue to be able to handle more loads every day,” said Wilkerson.

The market has turned, but the playbook has a reputation for it

Capacity has eased, charging options on the spot market have fallen and spot prices have been falling since the beginning of the year. But the contractual side of the house remains in order.

“Things aren’t as bad as they seem across the board,” Wilkerson said. “E-commerce and retail are definitely down, but pretty much… one in two volumes are up year-over-year, compared to tough competition.”

Retail and e-commerce freight makes up just over a third of RXO’s revenue mix. Also, as of the most recent quarter, the brokerage unit had 73% of its business under contract, 75% of which was tied to annual contracts.

This business is often associated with dedicated or committed capacity components. Also, RXO offers power-only services with drop-and-hook trailer capabilities. Internally, it rents out trailers, but also uses customer trailers and assets from carrier trailer pools, which allow it to flexibly adapt capacity to market changes.

“There are a number of things you can do to make it look and feel like an asset-based shipper, only with unlimited capacity,” Wilkerson said.

The firm’s overall cost structure is 87% variable (90% variable in brokerage). With a small percentage of fixed costs in the income statement, brokers can react flexibly to market fluctuations and often adjust the number of employees to the volume.

“There’s a playbook for every market,” Wilkerson said. “If you look at the results we’ve had over the past decade, we’ve seen a number of different markets … both up and down, and we’ve outperformed in all of them, and [I’m] confident that we will continue to do so here.”

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