On the earnings call Wednesday for publicly traded 3PL RXO, Ravi Shanker of Morgan Stanley asked the question that lingered after the upbeat statements by company management: How can this company’s leaders be so optimistic?

Shanker is one of the network of transportation analysts who have sat through one dreary Q1 earnings call after another, with executives across the spectrum all talking about the “soft” market — a four-letter word that has come up on virtually every call — and forecasts that were optimistic based on the notion that things couldn’t keep getting worse in freight markets from the perspective of brokers and carriers. (For shippers, it’s a great time.)

“I’m trying to understand how much of this is idiosyncratic to you, with you guys just doing an incredibly good job with execution, versus how much of this is genuinely the cycle of the market picking up, especially in the last couple of weeks of April,” Shanker said. 

Background chuckles could be heard on the call among RXO (NYSE: RXO) management. Drew Wilkerson, the company’s CEO, cautioned, “I want to be clear. There’s still a tough macroenvironment that we’re in.”

Wilkerson reiterated several times during the call that the load-to-truck ratio he sees in the market is 2-to-1. He said it is the lowest he has seen in his 16 years in the freight market. 

“I haven’t seen it go below 2-to-1 for any sustained amount of time.” 

But Wilkerson also said that “we feel like there are signs that are pointing toward a more positive direction from a capacity standpoint, which will benefit that difference.”

However, he was not ready to say that rates had fallen to their lowest level. “We’re not going to call the bottom, but there are signs of optimism as we look ahead,” Wilkerson said. 

Wilkerson earlier in the call said RXO in the first quarter began to see “for the first time” trucking capacity exit the market. 

“That’s the first thing you see before tender rejections start to increase,” he said. “And so for us, that’s something that has us excited as we look forward.”

RXO’s earnings, only the third since it was spun off from XPO Inc. (NYSE: XPO) last year, reflected the same declining market that other executives have cited on their respective calls and which spurred Shanker’s question. 

But the one number that the RXO executives talked about that was very much in its favor was adjusted gross margin as a percentage of revenue. In truck brokerage, it was flat at 16.3% from the first quarter of 2022. For what RXO calls “complementary services,” that measurement rose to 21.1% from 19.5%, for an overall increase in margin as a percent of revenue to 18.8% from 18%.

The outright dollar numbers, not surprisingly, all declined. Truck brokerage revenue was $600 million, down from $824 million. Complementary services declined to $437 million from $524 million. The total revenue decline net of eliminations — which were equal for revenues and costs — was 23%. 

The cost of transportation services secured by RXO was down slightly more, by 25.6%.

Within the complementary services sector, last-mile revenue slipped just $6 million, to $246 million; managed transportation fell to $117 million from $139 million; and freight forwarding came in at $80 million, down from $139 million.

The net income figure for RXO is an easily remembered number: zero. The company recorded that level of net income after $5 million in operating income was offset by other charges to wind up with the flat number. A year ago, net income was $39 million. 

However, adjusted net income, a non-GAAP measure, was 11 cents per share, down from 39 cents per share. RXO’s adjusted EBITDA margin, a non-GAAP measure, was 3.7%, down from 5.7% a year earlier. 

That 11 cents figure was above what the transportation group at TD Cowen said in a post-earnings report was the consensus forecast of where RXO would come in.That number was 7 cents per share. 

RXO executives on the call made several references to increasing the company’s market share. The TD Cowen report said the fact that RXO’s performance topped its industry peers suggests that those gains are real. One key number was that brokerage volume was up 6%. 

Jared Weisfeld, RXO’s chief strategy officer, said the company is “comfortable” with a prediction that it will have volume growth in the second quarter compared to Q2 2022. The mix of RXO’s customer base would suggest a better second quarter, he said, adding that cost reductions made in recent months will be part of the “full run rate” for the second quarter. 

As a result, he said, EBITDA should grow sequentially from the first-quarter figure of $37 million on an adjusted basis. It was $75 million a year earlier.

Investors appeared to like what they heard. On a down day for equities overall, RXO’s stock rose 5.97% to $19.54. 

More articles by John Kingston

RXO’s Q3 full-quarter earnings reported to SEC; Jefferies gives ‘buy’ rating

XPO brokerage spinoff RXO gets near-investment grade debt rating from S&P

C.H. Robinson’s Q1 was weak; April’s freight market was no better

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