Not quite eight months after XPO Logistics announced it was spinning off its tech-enabled brokerage business, a new publicly traded company, RXO, launched on the New York Stock Exchange on Nov. 1.
RXO is the country’s fourth largest broker of full truckload freight transportation, according to the company. In its final quarter under one roof, XPO reported that the brokerage grew volume by 9% YoY and reported a gross profit margin of 19%.
We sat down with CEO Drew Wilkerson shortly after RXO went public to talk about the new company and the state of the trucking industry and brokerage in general. (Interview has been edited for length and clarity.)
HDT: Please share a little bit about yourself and your background.
Wilkerson: I grew up in the transportation industry, and I've been doing multimodal third-party transportation for over 16 years. I started my career with C.H. Robinson, where I did a number of different roles. I work on the customer side, on the carrier side, and I even did some outside sales for them. I came over to XPO in the early days, It was one of the first acquisitions that Brad did; he acquired a business called Continental Freight in Columbia, South Carolina. And they had a couple offices in the Carolinas. I was running both of those and just continued to pick up more and more responsibility within the brokerage within the brokerage team and eventually oversaw all of our brokerage team. And for the last three years I [was XPO’s president of North American Transportation.] And that's led by our tech-enabled truck brokerage platform and complemented by managed transportation last mile and freight forwarding. So I've been doing that for three years. And now for three days, I've been the CEO of RXO.
HDT: Let's talk about why RXO and XPO split.
Wilkerson: I feel like two reasons.
One is, the operational synergies were not strong. When you look at what we had, from a sales side, we had already split it out; we had one person who was focused on what is now RXO and one person who was focused on LTL. We had our technology split out. Even down to human resources. So there's just there's not a ton of operational synergies there.
The second piece is shareholder value. What we heard back from investors was, hey, we don't want to have an asset-based LTL company [and] a tech enabled truck brokerage platform [and] we're really hoping you [divest] this operation in Europe that was asset-heavy as well. They wanted something that was clean, easy to understand, that they can take our KPIs and put them up against any of our competitors and see how we would perform.
So for us that's an exciting moment, because for the last decade, we've had best-in-class results, [in] taking market share and doing it profitably in the brokerage industry. Over the last eight years, the brokerage industry has grown at over a 9% CAGR. And we over that same time period, we’ve grown over 27% CAGR.
HDT: And to what do you attribute that success?
Wilkerson: Two things that I'll highlight.
Technology is number one. Our technology helps customers get product to the end consumer faster, and it also helps them save money.We've got access to a lot of data, we've got over $3 billion worth of data annually from our truck brokerage team. We've got $4 billion of freight under management from our managed transportation team. So having the data is step one. Step two is knowing how to use the data so that you can help them route their freight in the most efficient manner. You can look at creating multi stop runs for them. You can look at creating milk runs, dedicated capacity, where do you need trailer pools? What mode of transportation should you be using? What day of the week should you ship something? All of that is stuff that our technology helps enabled them to do.
The second thing that I'll highlight is we've got really good relationships with our customers. Our top 10 customers have been with us for 16 years on average. And if you look with our brokerage team, the top 20 customers have been with them for 13 years, on average. Last year, they grew their volume with their top 20 customers by nearly 30%. So customers aren't just coming back to us and saying, ‘Hey, we want you to hold on to what we have.’ They're saying, ‘We understand that you've got the best service in the market, you've got great technology, you're helping us be more efficient, we want you to hold more of our freight.’ And we're seeing that again this year as well.
HDT: Tell me a little bit more about that technology piece. I remember, a while back people were saying and “Uber for freight” would put brokers out of business.
Wilkerson: We built our technology to help us grow volume, expand margins, and increase employee productivity. So when you look at that, we had to focus on three things. We focused on the customer, we focused on the carriers that we partnered with, and we also focused on the employees.
On the customer, it really comes down to having a lot of data, helping them use that to help them make decisions. So, you know what day of the week they should ship something, what mode of transportation they should use, do you have the opportunity to consolidate a shipment, can you look at how you're routing the freight in a different way; all of those things are something that our technology tells them.
For the carrier side, you have to have a lot of volume, or the carrier's going to go to another platform to find their next load. So as one of the largest truckload brokers, we've gotten a lot of volume to be able to offer them. And then we made it very easy to use. They can pick up their cell phone, they can book a load, and negotiate, do all of that with no human interaction, all while getting access to our best in class rewards program, which gives them discounts on things like fuel, tires, roadside maintenance, things that allow a trucker to run with more free cash flow, which is how small trucking companies run the business. They run it for free cash flow. And these things help them out with that.
The last piece is on the employee side. I told you earlier that I came from the desk level; this is something that is important to me, that’s near and dear to my heart, is how do you make the job for them to become easier? How can we make it more efficient? And if you look at how we ended last year, and you look back five years, we grew volume at nearly three times the rate that we're growing headcount. So what that means is, our employees are able to do more loads per day, and not actually put in more hours of work.
So, technology is at the heart of what we're doing at RXO, and that has been the reason that we've been able to disrupt the transportation industry and grow so much faster than everybody else.
HDT: Our audience is primarily fleets. So, tell me about the motor carriers that you work with and how this spin-off may benefit them or affect them.
Wilkerson: We work with mostly small trucking companies. We work with mid and large sized as well, but our average fleet has under six trucks. Just under half of our carrier base have one truck. And you know, the overall trucking industry is a fragmented industry. We play a part in giving small trucking companies access to freight from some of the largest shippers in the world. They'll continue to see the volume go up with RXO and that'll give them more opportunities to haul freight.
We've also done things on the carrier side. We work with them as we're building out our app, and we asked them, what's most important to you? And it was fuel price, and where does my next meal come from? So for the fuel price, we’ve got that flagged to where they can see exactly what the price of fuel is. And they've got the rewards program that also gives them discounts on fuel based off of service and volume that they do with RXO. On where's the next meal going to come from, we asked them a follow-up question: What's your favorite restaurant? And the answer was far and away Subway. So we flagged Subways on the app. We've built the technology just to make their life easier and more efficient and continue to pull them back to do business with RXO.
HDT: Things have been a bit tumultuous the past year in looking at rates. We've seen the spot market come down from record highs. We've seen contract rates trending back up. What's viewpoint on the state of the market?
Wilkerson: You've definitely seen a drop-off in spot rates. Now what I'll say is over the last several weeks, we have seen that flatline a little bit, so that they're not continuing to drop. At this point, we'll see what happens as we head into 2023. Contract rates have held up pretty good for the most part. But heading into next year, I do expect them to be down on a year-over-year basis — not by ton, but they will be down. For us, we we've got so much contract volume — 73% of our business is contract business, that’s higher than anybody else in the industry. So that tells carriers, ‘You can come to us and get the most consistent freight out there today.’
HDT: We keep hearing about a possible recession; what are your thoughts on the general state of the economy and the industry?
Wilkerson: We're paying close attention to everything that’s going on with the [economic] macro environment. We’re talking to our customers on a daily basis. With that said, we're positioned to outperform in any market and continue to take share. Customers are coming to us faster than what they've ever come to us before. Our bid cycle is actually stronger than what has ever been right now as we're entering into the fourth quarter. We're adding new customers at a record rate, and we're still growing with existing customers because of the service that we offer.
This is such a massive industry, that you can still go out and take share. I mean, the overall for-hire trucking market is $400 billion. Remember that our truck brokerage is $3 billion. So of the for hire trucking market, we've got less than 1%. And we're growing three times faster than what the industry is growing at. We've got a long runway of profitable growth ahead.
HDT: One of the reasons for separating the LTL business and the brokerage business was to allow both companies to focus more closely on their strategic priorities. Can you tell us a little bit about those priorities for RXO?
Wilkerson: The first thing is, customers and employees are going to have a management team that’s singularly focused on RXO. In the past, one of the things that we did for professional development, and just for company awareness, was we had people know everything that was going on in all of the business units. So for instance, I would sit in the LTL monthly operating reviews and LTL meetings, and even the European transportation, whereas now 100% of my time is focused on RXO.
We'll continue to focus on technology, and how we can continue to grow volume, increase our margins, and help our employees become more productive in their day-to-day. We've got a long runway in all three of those. We'll also continue to focus on the customers. We want to show the customers why we are the best place for them to do business. And we will focus on bringing on new customers.
And then the last thing is the people. We've got a great culture. People want to come work for winners. They know that we're taking market share, and we're growing faster than anybody else out there — and we're doing it profitably. And we're disrupting the industry with our technology. So people want to be a part of that, but making sure that we're bringing on people who fit within our culture and our values.
HDT: Thinking about the carrier audience, anything else you'd like them to know about?
Wilkerson: I would just say thank you. We appreciate the support that you've given us over the last decade at XPO. We look forward to forming even stronger partnerships over the next decade at RXO. And the best is yet to come on. We've done a lot of great things on technology to make it easier and more efficient for them to do business with us. We're just getting started. We've got a long runway of continuing to grow with our carriers. And we're very thankful for the support that they've provided to us.
HDT: Any hints on what kind of things you're looking to do with that technology?
Wilkerson: You've got a widely read publication and I do not want to give my competitors a roadmap to what we're building. But I'll just say that we'll continue to focus on things that pull carriers back to our system and make their lives easier.