RXO exec at UBS conference says 3PL’s market share still rising

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NEW YORK — RXO's chief strategy officer conceded to a conference here that he didn't have much fresh to say in terms of the company's market or overall outlook, but given the relative strength of the 3PL's first-quarter performance, no news remains relatively bullish news.

At the UBS Global Industrial and Transportation Conference, a two-day "dog and pony" for money managers eyeing investments in the sector, RXO Director of Strategy Jared Weisfeld said RXO (NYSE: RXO) is sticking to its earlier prediction that it would grow its brokerage volumes in the second quarter on a year-on-year basis. Those volumes were up 6% in the first quarter relative to a year ago in a period that marked one of the worst freight markets in several years.

The RXO forecast for higher volumes does not come with a specific number.

That prediction of an increase in second-quarter brokerage volumes "is not something we do lightly," said Weisfeld, the sole representative of the company at the gathering. "We took a look at all the evidence, all the business momentum that we had in the second half of April and the first half of May, and we were very confident.

RXO's earnings were released in early May, with April business done and May business more definitive at the time of the forecast.

"Our share gains are accelerating," Weisfeld said in an interview with Tom Wadewitz, the senior equity research analyst at UBS who leads the transportation group.

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Weisfeld said RXO, spun off as an asset-light brokerage last year from XPO (NYSE: XPO), is gaining market share. "And importantly, they’re profitable market share gains." He said gross margins in brokerage are "north of 16%" year on year.

RXO previously has set a clear financial goal: Have annual earnings before interest, taxes, depreciation and amortization of $500 million by the middle of 2027. The company had adjusted EBITDA in the first quarter of $37 million.

While the road to $500 million in EBITDA does include adding more customers in the small-to-medium business sector, the so-called SMB firms, Weisfeld said the shippers that utilize RXO are overwhelmingly the size of companies that could make it into the Fortune 500.

Asked what other 3PLs RXO runs into the most when pitching contract business to those customers, Wesfield's first answer was no surprise: C.H. Robinson (NASDAQ: CHRW), which before RXO became a stand-alone 3PL was pretty much the only pure-play, publicly traded brokerage company between when Echo Global Logistics was acquired by a private equity firm in 2021 and when RXO made its debut last year.

The other company Weisfeld identified was Arrive Logistics. "When you think about who we compete against and the dynamics of our market [large shippers], it really is just those two folks," he said.

While Weisfeld may not have supplied new numbers, he did talk about the strategy that has led to those recent and projected gains.

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"We don't compete on price in general," he said. "The asset-based carriers set the price."

Instead, he said, the focus is on service and technology. Weisfeld described customer support as "the intersection of technology and human capital." And while 96% of loads brokered by RXO in the first quarter were covered digitally, all drivers have carrier representatives assigned to them and they are often involved in ensuring the freight gets to the final destination.

Weisfeld also noted that 3PLs in general are riding a secular shift toward more shippers turning to brokerages for their freight needs. A decade ago, he said, brokers had market share in the "low double digits," but he put that figure now at "north of 20%."

"It's a better solution," he said. He cited broker access to "massive capacity" and "the ability to be flexible and agile and offer solutions." And it is because of those solutions, he said, that RXO has chosen not to try to compete through price, citing "service and technology" as the primary RXO value proposition.

Weisfeld said first-quarter contract revenue was about 77% of the company's overall revenue, which is high by historical standards. He said the range of that at RXO tends to be between 60% and 80%.

"We think about how we’re positioning the company for future market share gains for when the cycle inflects," Weisfeld said. (The terms "inflect" and "inflection point" was heard from multiple presenters at the UBS conference, a reference to the unknown date when the current weak freight market will turn higher.)

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Even as new data suggested that there is little sign of an upturn in the freight market, Weisfeld cited various conditions — echoed at times by others at the conference — that suggested a bottom may be at hand.

He said the "active network capacity" of carriers at RXO was down 3% sequentially in the first quarter from the fourth quarter of 2022. He said the load-to-truck ratio was below two in April, extremely low by historical standards; the inflection should take that up to four/six to one, he said.

Customers are reporting to RXO that their de-stocking of inventories is near an end or already has gotten there. "So I think all those are pretty positive forward-looking indicators as it relates to the bottoming process," Weisfeld said. "When will that happen? It's unclear."

Given the collapse in spot rates, the question was put to Weisfeld by Wadewitz: Why hasn't capacity pulled out of the market even faster?

Weisfeld cited several reasons for the stickiness of capacity. "Number one, the good times lasted for a long time," he said. Balance sheets might be relatively strong with cash stockpiled during the strong market of 2021 and the first half of 2022. "I think that likely has kept capacity in the system for longer than a typical cycle," he said.

A second reason: lower fuel prices. But Weisfeld noted that the growing reports of bankruptcies and shutdowns suggest that those factors can only go so far in keeping trucks on the road.

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RXO should have a good window into what is going on with independent owner-operators; Weisfeld said about half the capacity hired by the 3PL comes from one-truck fleets.