At the beginning of the month the nation’s fourth-largest truckload broker stepped out on its own. RXO, a tech-enabled brokerage and logistics platform with more than $5 billion in annual revenue, separated from the remaining pieces of a once multimodal transportation and logistics behemoth.
The spinoff from XPO Logistics (NYSE: XPO) established two independent, publicly traded companies: pure-play asset-light transportation and logistics provider RXO and a soon-to-be pure-play less-than-truckload carrier XPO.
XPO is still looking to divest a European transportation unit. The company spun off its contract logistics business, GXO (NYSE: GXO), last year and sold its intermodal segment in March.
“The spinoff establishes RXO as a stand-alone leader in asset-light transportation. As a tech-enabled pure-play, we have a more distinct identity, mission and value proposition,” CEO Drew Wilkerson told FreightWaves.
“Our management team can now concentrate solely on truck brokerage and its complementary services. That singular focus will bolster performance, accelerate growth and unlock significant shareholder value.”
Brokerage growth trajectory up and to the right
Charlotte, North Carolina-based RXO (NYSE: RXO) has a full suite of services, including managed transportation, last mile and freight forwarding. However, RXO’s more than $3 billion truck brokerage segment has been the focal point for investors in the weeks before and after the spinoff.
The unit has grown at a rate nearly three times faster than the rest of the industry over the last decade, registering a 27% compound annual growth rate since 2013. Notably, less than 10% of that growth came from M&A.
The formula started by working with some of the nation’s largest shippers, creating what RXO refers to as power lanes. The data gained by covering numerous loads on those lanes helped shape how the company advises customers today. It drives decision-making around things like what is the best day for a customer to ship, whether shipments should be consolidated or if deploying a multistop approach to delivery makes sense.
Today, the brokerage business provides shippers with a network of approximately 100,000 carriers and more than 1.5 million trucks. The RXO Drive app, connecting carriers to the platform, has been downloaded 850,000 times. During the third quarter alone, 10,000 carriers were added.
RXO works with 58 of the top Fortune 100 companies. It has been working with its top 20 brokerage customers for 13 years on average. Volumes from that group grew 30% last year.
The company plans to grow volumes again on a year-over-year basis in the fourth quarter even as freight demand is tapering off. Looking out to 2023 and beyond, there is little letup likely in the growth plan. RXO expects to continue to capture market share in the $400 billion for-hire trucking market, and to do it profitably.
“It’s definitely still going to be a share gain but it’s going to be a share gain profitably,” Wilkerson said.
He noted that in addition to double-digit volume growth over the last decade, earnings before interest, taxes, depreciation and amortization grew by double digits as well.
“I don’t expect that to slow down anytime soon,” Wilkerson continued. “There may be a cycle, there may be a year that it doesn’t do that if the economy is down, but we’ll make up for it in another year whenever things start to take off. I’m confident that no matter where the market goes, we’ll outperform it.”
The company’s long-term target calls for adjusted EBITDA between $475 million and $525 million by 2027, up from $302 million for the 12-month period ended June 30.
Importance of good tech and a widely used app
A report from UBS Securities (NYSE: UBS) showed XPO Drive (now RXO Drive) was the most downloaded app.
RXO held a 9% market share of total app downloads year to date through September across a group of 26 brokers, logistics technology companies and load boards. The company held a 22% share in 2021 and so far through 2022 among large brokers with apps. That number expanded to 31% in September.
By comparison, TQL and Uber Freight (NYSE: UBER) had shares in the mid- to high-teens during those periods with C.H. Robinson (NASDAQ: CHRW) and J.B. Hunt (NASDAQ: JBHT) near 10% penetration.
Not surprisingly, the report showed a high correlation between app downloads and the pace of revenue growth.
“Apps are significant because they provide a connection with the individual trucker which facilitates the flow of information in both directions. If a driver has the broker’s app it will provide real time visibility to the location of the load the driver is handling. And if the driver is the one booking his/her loads then the app may provide an important mechanism to find loads,” Tom Wadewitz, UBS transportation analyst, said about the importance apps play in connecting with small carriers and owner-operators.
“The app may also facilitate forward visibility to where and when capacity will become available which is helpful for a broker in booking future loads,” Wadewitz added.
Wilkerson said tech has and will continue to be a key driver for margins moving forward.
“Technology has expanded our margins a lot over the last decade and I don’t expect that to stop,” he commented.
Adjusted EBITDA margin for RXO was 6.4% in the third quarter and nearly 6% for the 12-month period ended June 30. Wilkerson sees room for further growth as the approach to technology is focused on three areas: volume growth, margin expansion and employee productivity.
“We’ll definitely continue to look to be able to expand margin overall because of the use of automation and digitalization within the business. Our employees will continue to be able to do more and more loads on a daily basis,” Wilkerson said.
The market has turned but the playbook has a call for that
Capacity has loosened, spot market load opportunities have fallen and spot rates have been in decline since the beginning of the year. But the contractual side of the house remains in good order.
“Things aren’t as bad as what as they seem to be across the board,” Wilkerson said. “E-commerce and retail is definitely down, but pretty much … every other volume is up on a year-over-year basis, and that’s up against tough comps.”
Retail and e-commerce freight accounts for just a little more than one-third of RXO’s revenue mix. Also, the brokerage unit had 73% of business under contract in the recent quarter, 75% of which was tied to annual agreements.
That business is often sticky with dedicated or committed capacity components. Also, RXO offers power-only services with drop-and-hook trailer capabilities. Internally, it leases trailers, but it also uses customer trailers and assets from carrier trailer pools, which allow it to flex capacity as the market changes.
“There’s a number of things you can do that make you look and feel like an asset-based carrier, just with unlimited capacity,” Wilkerson said.
The company’s overall cost structure is 87% variable (90% variable in brokerage). With a small percentage of fixed costs on the P&L, brokers are able to be nimble during market swings, often aligning headcount with volumes.
“For every market, there’s a playbook,” Wilkerson said. “If you look at the results that we’ve had over the last 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’ll continue to do so here.”
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