RXO Navigates Challenges with Optimism in a Cooling Market

Investor Reactions to Earnings Report

The latest earnings report for RXO revealed continued operating and net losses, prompting management to highlight several positive aspects during their first-quarter earnings call.

Only one primary question surfaced during the call concerning when the significant 3PL might see a return to profitability. Interestingly, it wouldn’t necessarily require a massive market shift for RXO to trade red ink for black.

Although analysts appeared minimally concerned about RXO’s performance, investors reacted differently. On a day when the broader equity markets rose, RXO’s stock was down 5.31% at noon, settling at $13.03 (NYSE: RXO). Comparatively, the stock had tumbled approximately 35% over both the past year and the last three months, hitting a 52-week low of $12.19 on April 21.

Management Highlights Positive Indicators

Management pointed to the swift execution and integration of the Coyote Logistics acquisition from UPS, finalized in September, as one of the bright spots. Various significant performance indicators also received mentions for their positive trends.

CEO Drew Wilkerson noted that earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at $22 million, aligning with management’s earlier projections. In contrast, the company reported an operating loss of $30 million, compared to a loss of $12 million in the first quarter of 2024, leading to a net loss of $31 million with diluted earnings per share reflecting a negative 18 cents, worsening from the negative 13 cents reported a year prior.

brokerage Volume Shows Slight Improvement

Chief Strategy Officer Jared Weisfeld remarked during the call that RXO’s brokerage volume fell by 1% year-over-year, which he described as better than the company had anticipated.

Significant Growth in LTL Division

Most notably, the surge in RXO’s less-than-truckload (LTL) business played a pivotal role, reporting a 26% increase in volume year-over-year. This success was attributed to effectively onboarding new customers, making the LTL business 25% of total volume for the first quarter — a 500 basis point increase from 2024’s first quarter.

An analyst inquired how RXO was managing to capture market share despite the overall industry trends. Wilkerson clarified that competitive pricing wasn’t the business model’s primary strategy, stressing the importance of aligning with overall market pricing.

Wilkerson has a broad perspective, noting, “What’s becoming evident is that LTL often represents a pain point for our customers. It’s typically a minor portion of their revenue spend and overall volume, yet it involves complexities such as tracking, claims, lost shipments, and juggling multiple carriers. Our reputation for service, nurtured in the truckload segment, has won over large enterprise customers, enabling us to expand our LTL offerings alongside truckload. It feels like we’re just getting warmed up in the LTL space.”

Truckload Volume Faces Challenges

While LTL flourished, the full truckload segment saw a decrease in volume by 8% compared to the same time last year, influenced by ongoing soft freight market conditions. RXO’s truckload automotive operations were particularly hard hit, with a staggering drop exceeding 25% year-over-year.

The breakdown of contract and spot business in truckload revealed a consistent trend with 73% of business being contract-based and 27% spot-based. Weisfeld mentioned that the long-standing subdued environment has left minimal opportunities for spot pricing.

Looking ahead, Weisfeld noted that RXO anticipates a rise in contract rates by low to mid-single digits this year compared to 2024, which reflects slightly positive expectations amid ongoing trials.

Other positive key performance indicators emphasized included a 4% uptick in revenue per load, exclusive of fuel and length of haul. Although exact figures on revenue per load were not shared, the data showcased RXO’s achievements in improving gross profit per load, particularly for its LTL division. Despite some indicators hinting towards declining trucking market health, the truck-to-load ratio tightened from 7-to-1 to slightly less than 5-to-1. This changing ratio signals a softer, more balanced market.

Looking Ahead: Potential Gains

Moving forward, management projects that overall volume might decline by a low-single-digit percentage compared to 2024, emphasizing that weaker truckload volume patterns would mostly be balanced out by robust LTL growth.

Importantly, wallet-friendly operational efficiencies are key to RXO’s strategy; Wilkerson anticipates up to $70 million in cash savings through the Coyote integration, a figure larger than the previously estimated $50 million.

Tariffs: A Double-Edged Sword

As seen in every earnings call this quarter, tariff discussions were prevalent, and Wilkerson acknowledged various customer responses to shifting market conditions. Some clients have accelerated inventory shipments; others have halted operations altogether, while several continue to operate normally.

The term “air pocket,” popular among industry analysts, emerged in discussion as it references a predicted decline in Chinese imports at U.S. West Coast ports due to tariffs looming on the horizon. Wilkerson indicated that while RXO is prepared for the impending decrease, it may also offer opportunities for acquiring transportation at reduced rates.

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