With spin-off from XPO Logistics complete, RXO hits the ground running

The debut of RXO was made official today, with the spin-off of XPO Logistics truck brokerage and asset-light transportation units now officially complete.

RXO began trading today on the New York Stock Exchange, and it is the fourth-largest full truckload broker in the United States. The company has roughly 7,400 employees, with its technology-enabled truck brokerage business connecting shippers across various verticals to around 100,000 independent carriers and more than 1.5 million trucks. RXO’s corporate headquarters are in Charlotte, N.C.

“Today is a landmark moment for our business,” said Drew Wilkerson, chief executive officer of RXO, in a statement. “With the launch of RXO, we’ve established a standalone tech-enabled pure-play that will continue to thrive in any market. RXO is well-positioned to unlock value for our stakeholders.”

Earlier this year, XPO said that the spin-off will represent a leading platform for North American tech-enabled truck brokerage services, citing its history of industry-best revenue and margin growth, a highly-efficient freight marketplace and access to a large amount of truckload capacity, in addition to its asset-light services, including last-mile logistics, managed transportation, and global forwarding.

In an interview with LM, Wilkerson provided a detailed overview of RXO’s approach to the market, including its goals and chief objectives.

LM: Now that the launch of RXO is official, where do things go from here?

Wilkerson: Well, first, you're going to have a management team that is solely focused on RXO. One of the things that we've always done at XPO for professional development, and even just people who have great ideas is, you really know, everything that's going on across the company. So, I would be in an LTL Monthly operating review, or I would go into a European transportation operating review. And now I'm fully focused on our RXO, and my management team is fully focused on RXO. The one thing that we've learned over the last decade is we have to be flexible and agile and ready to react within the market. For every market, there’s a playbook, and we've been able to execute that well over the last eight years. The brokerage industry has grown at a great clip. It's a good business to be in. It's currently over a 9% compound annual growth rate (CAGR), from 2013 through 2021, and, in that same time period we have grown at a 27% CAGR, nearly three times what the industry has done.

Our path forward is organic growth. We want to go out there and continue to take market share and do it profitably. We've got great relationships with our customers, and we've got the best technology in the industry today.

LM: What are the biggest things RXO brings to the table?

Wilkerson: We have more than 100,000 carriers on our RXO Connect platform [formerly XPO Connect]. That's our industry leading proprietary technology. And we've got access to 1.5 million trucks. So, when you look at the 100,000 carriers and you're talking about capacity coming in and coming out of the market, we actually added 10,000 carriers to our network last quarter. And the great thing about our platform is because it's so sticky with our carriers and it makes their job easier, allows them to put more money in their pocket, they continue to come back to us. For carriers, they return to the platform 75% of the time within one week. So that tells you for a small trucking company their next loads coming from RXO.

LM: Looking at the market environment, in the last few months spot truckload rates have fallen while things on the contract side have firmed up. How do you sort of view market conditions from here on out through year-end, and into the first quarter?

Wilkerson: For every market, there's a playbook, and you know we've seen a lot of different markets over the last decade. Whenever we first started to see capacity loosen in the first quarter and early into the second quarter, we knew that spot rates were going to drop dramatically, but we also knew that we were protected in that because so much of our business is contractual business. 73% of our business is contractual business. So, as the rate started to fall, we were able to hold the line with our customers on our contractual pricing, and we pulled down the cost of purchased transportation. Just over the last few weeks, we have started to see the spot rates level out. We're not calling the bottom, but we're just making a point. That is something we've seen our data and others have as well. It is something that's publicly out there, in that that the market and the spot rate has started to fall off.

And, as you think, on contract rates, and you head in the next year, the way that we're approaching that is we're in the middle of one of the busiest cycles I've ever had in my career at RXO. When you look at what we're seeing, rates are going to be down anywhere from 5% to low double-digits.

LM: With 73% of your business being contractual, when looking at what is happening with certain verticals, specifically retail, how are you seeing things play out, as it relates to things like your data and customer engagements, both at the moment, for Peak Season, and also over the last couple of years, too?

Wilkerson: We're going to have a muted Peak Season this year. It's going to be not in the same ballpark of what it was for the last couple of years. I mean the last two years as a whole there wasn't even a Peak Season. Those were peak years and was Peak Season throughout the entire year. For us as we go to look forward, though, outside of retail and e-commerce, pretty much all of our other verticals are up year of year on volume. So, one of the things that we said on our earnings call, which is interesting even with a muted Peak Season, is we're still saying that we're going to grow volume in the fourth quarter. Coming off those highs over the last two years…we're still going to grow volume on top of that.

LM: How are you viewing market conditions for the first half of 2023, given all the macroeconomic trends out there at the moment, including things like inflation, Federal Reserve interest rate cuts, gas prices, and high mortgage rates, among others? How do things like this impact the direction your business takes?

Wilkerson: We're paying very close attention to what's going on in the macro economy. We're having conversations with our customers as a whole. With that said, regardless of what's going on in the market, we're confident that we'll outperform the industry. We've got the best technology out there, and that technology allows us to operate at stronger margins. If you look at just the third quarter, we operated at 19% gross profit percentage. If you go back to second quarter it was at 21% gross profit percentage; both of those were best-in-class in the industry. There's a playbook for us to have, you know, no matter what's going on in the market. If the market continues to fall, and you see softening in the market, then purchased transportation will fall faster than the rate at which the customer rates fall. If the market tightens and you see load-to-truck ratios increase dramatically, then we'll hold the line on our contractual volume, and we'll still haul every load that we're supposed to haul contractually, and then we'll also pick up a lot on the spot side because you'll see asset-based carriers who start to shift and focus more on profitability on their asset, and even some of the smaller, mid-size brokers who start rejecting tenders on a contractual basis. And we'll pick that up on the spot which would then be at higher margins.

LM: What is RXO’s approach for things like capital expenditures (capex), hiring, and technology?

Wilkerson: For us, capex is low. It is less than 1% of revenue. The bulk of our capex is in technology, and we're very efficient in our capex spend. When our CIO Yoav Amiel comes to me about a project, I ask him three questions: what is this going to do to our volume? what's this going to do to our gross profit percentage? And what's this going to do for employee productivity? And if it's not a succinct answer of how it's going to help us increase on the bottom line, then we don't do it. Our technology actually helps us make money, and that's something that's differentiated within the industry. We'll continue to make sure that we spend the right capex dollars to get the ROIC (return on invested capital) off of that. As far as hiring, in our brokers team, we typically want to stay staffed up so that we can grow volume 15%-to-20% overnight. And that's the levels that we're sitting at now. We're hiring right now, but we've slowed down on hiring a little bit, as the market has slowed, but we are still hiring, and we are still staffed for growth, and we're confident that we will be able to take market share as we move into next year.

LM: Given that XPO has been perhaps the most active freight transportation and logistics company, when it comes to M&A activity, since its inception in 2011, how will RXO approach M&A? Will it be a key part of its playbook?

Wilkerson: We pay attention to everything that's going on in the market, so that we've got good awareness of what our competitors are doing, but also what's available. With that said, our best path right now is organic growth. If you look over the last three years, nearly 100% of our growth has been organic over the last decade. We'll still do what's in the best interest of shareholder value. If there is a tuck-in or a niche vertical, or something in manage transportation potentially, then we would look at it to see what is the value that it would bring to the shareholders overall.

LM: Shifting to technology, what are some of the key focus areas for the company as you get things going?

Wilkerson: We have built a moat with our technology. The more volume we add to the system, coupled with the more data that we have, then the more difficult the algorithm gets for anybody to be able to replicate. And when you look at what we've done, we've added a lot of data over the last decade. We've got every bit that we've ever done from the beginning, and so we know what we've won at, what we've lost at by lane and by vertical. We'll continue to invest into that overall. So, we've got a lot of opportunity to be able to continue to grow and take market share and invest into our technology.

LM: When you're working with your customers, what are sort of the key things they are telling you that they want and expect from an asset-light/ brokers type business? Also, when they're telling you about their problems or any type of issues they have, what are they telling you?

Wilkerson: It is really simple what our customers come to us for. They want to get product to the end consumer faster, and they want to do it in the most cost-effective manner. Our technology allows them to be able to do that. We look at how they can route their freight, what day of the week they should ship something, should they consolidate something if you've got an opportunity to create a milk run. All of those are things that we're doing for our customers that help them save time and money for that, and then the customers are always looking for things like: how well are you servicing the freight? do you pick up and deliver on time? And we do that as well as anybody in the industry. We have created solutions to have us look and feel like an asset-based carrier—like power-only, drop-trailer, and transloading—but it allows us to do it with unlimited capacity with 100,000 carriers and 1.5 million trucks.