In a tough freight market that showed few signs of rebounding in the second quarter, the earnings announcement and analyst call of 3PL RXO tried to focus on the things that were positive.
The earnings call reflected a sentiment that has been heard on numerous discussions this quarter: There are signs of the freight market improving but not a clear inflection point.
Given that, CEO Drew Wilkerson opened the call with analysts by citing benchmarks where RXO (NYSE: RXO) earlier had provided guidance and met those targets to the higher end of the projected range.
For example, adjusted earnings before interest, taxes, depreciation and amortization of $28 million was down from $38 million a year earlier, but toward the higher end of a projected $24 million to $30 million forecast.
Full truckload volumes were down about 2% in the quarter, Wilkerson said, but that was still more than the projected decline. And he cited as one of the reasons for that a strategy discussed on the company’s first-quarter earnings call that it was not going to chase business that wasn’t profitable for the sake of generating volume.
“I’ve been doing this for 18 years and you’ve always had people who have used price as a way of getting business,” Wilkerson said, according to a transcript of the conference call. “For us, that’s never the way that we’ve looked at doing business. We always look at it on service, solutions, innovation and relationship and we think over the long term that our customers see significant value in what we’re providing to them as a carrier.”
Better gross margin
Wilkerson said the company in the second quarter had “focused on effectively managing our cost of purchased transportation” to reach a brokerage margin of 14.7%. Gross margin is measured as revenue less the cost of purchased transportation.
That is a 500-basis-point improvement over the first quarter, which was impacted by brutal January weather in some parts of the country.
But the truck brokerage segment at RXO continued a slide that has seen its revenue decline more than $65 million in just two quarters.
Truck brokerage revenue was $543 million in the second quarter. In the first quarter it was $564 million, and it was $610 million in the fourth.
That RXO suffered a decline in revenue is not surprising. At C.H. Robinson (NASDAQ: CHRW), the North American Surface Transportation segment, which houses the company’s brokerage activities, had second-quarter revenue that was less than both first-quarter revenue and that of the second quarter of 2023.
Big jump in LTL business
Another area of strengthening results touted by Wilkerson and other RXO executives on the earnings call was its growth in LTL. Year over year, LTL brokerage volume rose 40%, beating guidance of 30%.
“Our full truckload customers continue to award us LTL freight because of our strong service and relationships,” RXO Chief Strategy Officer Jared Weisfeld said on the earnings call. He added that LTL was 20% of the company’s brokerage volume in the second quarter, up 300 basis points from the first quarter and 500 bps from the second quarter of 2023.
The combination of the decline in truck brokerage and the large increase in LTL meant that overall, brokerage volume at the company was up 4% year over year from the second quarter of 2023.
Overall, RXO’s revenue in the second quarter dropped to $930 million from $963 million a year earlier, but its gross margin improved to 19%, up from 18.6% in the second quarter of 2023. It still had a GAAP loss of $7 million, though that included $11 million in one-off costs. Adjusted net income in the quarter was $4 million, compared to $10 million a year earlier.
Weisfeld, in discussing a strengthening market, cited a number that is still declining but at a slower rate: revenue per load.
While the specific figures were not disclosed, Weisfeld said the 7% decline in revenue per load was the fourth consecutive quarter in which that number got smaller and was an 800-basis-point improvement over the first quarter. He also said in June, full truckload revenue per load “inflected positively,” which was ahead of schedule.
When normalizing for those items, revenue per load on a percentage basis was down by just low single digits year over year, also moderating when compared to last quarter’s year-over-year decline.
C.H. Robinson, in its improving financials, has been citing gains in productivity as one of the reasons for numbers that have been surprising investors. But not to be outdone, Weisfeld said on a rolling 12-month basis, “productivity in our brokerage business as measured by loads per person per day improved by over 18% year over year.”
Another growth area cited by Wilkerson: the company’s asset-light last-mile business. The CEO said business had “achieved the fastest year-over-year growth rate in stops in nearly two years.”
The earnings report and conference call were the first since RXO announced in late June that it was acquiring Coyote Logistics from UPS (NYSE: UPS).
Wilkerson, asked by Bank of America Merrill Lynch analyst Ken Hoexter about the acquistion (who noted he was “surprised how little we’ve talked about Coyote given the scale of what you’re acquiring”), was reluctant to comment in great deal about the current state of the 3PL it is buying.
Wilkerson said Coyote had begun to experience volume growth “roughly in line with what was going on in the broader market.” But he said that given Coyote is not yet owned by RXO, he was reluctant to say more.
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