RXO, Inc. (RXO) Earnings Call Transcript & Summary

Okay, great. Welcome everybody to kicking off the 2023 Citi Industrial Conference. Very excited to start the transport track today which is going to be very busy with a company that I think is very interesting, RXO. From RXO, we have Drew Wilkerson, who is the CEO; Jamie Harris, CFO; and Jared Weisfeld, Chief Strategy Officer joining us here. So gentlemen, thanks very much for joining us.

So I want to just jump right in and kind of get things kicked off, I think you're a great company to start with because we can get a little bit of a flavor of what's actually going on in the market right now. I think there's been some question about sort of where we are in the cycle. Fourth quarter was soft. I think you guys noted on your conference call not a lot of a peak season there. January, I think, from a freight data standpoint has been better than unexpected. And now we're into February, I think the question is, where are we now? So maybe kick off a little bit with Drew, maybe you want to comment a little bit on what you've been sort of seeing, hearing from your customers. I know you're sitting down with your customers earlier this week or over the weekend, so would love to get your perspective.

Yes, so it's exactly like you said, Chris. The fourth quarter, there was less volume out there in the marketplace, but we were still able to go out and grow volume. We grew volume by 4% on a year-over-year basis, and we said that January's volume accelerated over our fourth quarter growth rate on a year-over-year basis. And that wasn't because the market picked up, we felt like that was a little bit of idiosyncratic with RXO and what we're doing with our customers. Our pipeline is enormous right now. If you look at how we finished the year, our pipeline was the strongest that has been since pre-COVID. So we've got a lot of great things going on with our customers. When you look at where we are right now, sitting here in February, not a lot has changed since the earnings call, that was just a couple of weeks ago. It's still a softer market, which is what we expected. As we look out further in the year, we are cautiously optimistic about the back half of the year. And you're right, I just came from a large customer event where we had a number of customer meetings, and they're using the same terminology as cautiously optimistic about the back half of the year. A lot will depend on what happens with the consumer later in the year.

Got it. No, that makes sense. So I guess, let's think about the truckload market specifically. So it is the barometer of the freight market, it's been quite weak over the course of 2022. Do you think that we're seeing any signs that sort of the bottom is being put in from a rate perspective. What's your perspective on how rates are going to play out this year?

We've said out that for on the contract side, we expect our contract rates to be down on full year, around 10% on a year-over-year basis from '23 versus '22. On the spot side, they're down significantly, but what we've seen over the last several weeks is that you started to see that flatlining out. One of the things that I said on the earnings call, and I'll hold to it here is, we didn't call the peak whenever the rates have peaked. I don't want to call the bottom, but there are definitely signals that rates have flatlined.

Okay. Okay. That's interesting. And then I guess when you think about the contract side of it, down 10%, I think, is your target. There's been some indication as we've gone through the early parts of bid-season that maybe rates are down a little less than that. So kind of want to get a sense of how you're seeing bid season develop for you? How far are you through at this point? And I guess, it sounds like from your experience at 10% is probably still the right number?

Yes. 10% still our midpoint for where we're expecting contract rates to be down on a year-over-year basis. And when you look at where we are in the bid cycle, our heaviest bids come starting at about the midpoint of Q4 and they run through Q1 and so we're right in the middle of bid season right now. We've got a lot of great feedback coming in from our customers, and we've got strong relationships there. So I'm confident in our growth trajectory based off the customer relationships that we have. If you look at our largest customers, they've been with us for 17 years on average. They come back to us year after year, and they continue to give us more freight because of the history we've got to create solutions in their supply chain and their transportation network.

So when you think about that growth rate. So I think 4% was the load growth in the fourth quarter. You said January was stronger than that. It sounds like that still is a consistent message from your perspective. Walk me through these conversations that you're having with those contract customers? So what is it that is driving that incremental load? Is it just that you're newer to the market that they haven't worked with you and your capacity and your capabilities are expanding? Sort of what is the value proposition that you're selling them to get that load growth when other folks aren't?

Yes. So well think about it, it's not necessarily new to the market because our largest customers have been with us 17 years on average whenever you go back and look at some of the acquisitions that we've got in place. The conversations always start about solutions that we can create for them. So whether it's a [indiscernible] program, whether it's dedicated capacity, whether it's go anywhere rates, there are a number of different solutions that we can put together to create for customers that contribute to their success. But the first thing that we have to do is we have to be able to pick up and deliver on time. Customers judge it on our service and they reward us based on our service. That's why they come back to us and give us more freight on a year-over-year basis. So those conversations are ongoing and they're going well, and we expect that to continue.

Got it. And then, I guess, as you think about sort of the competitive landscape in brokerage, do you think that there's anything going on with any of the peers that it makes life either sort of more challenging or a bit easier for you as you think about your opportunity to continue to take share?

The brokerage industry has always been dynamic. If you think about brokers, there are 17,000 brokers across the country. And there's always been different strategies that have played in brokerage. You have some folks that will lead on price. You have some folks that focus solely on technology. And you have some operators who are very strong operators that have been strong incumbent players. But for us, we positioned ourselves a little bit different. And if you think about how we started, we started out investing in technology day 1. We started with what is now RXO Connect building that over 11 years ago, but we paired it with great operators. So it has never been tech or operations, it's tech and operations, and that's a winning solution for our customers and for the carriers that we're partnering with.

So give us an example of the type of technology that we're talking about. I think we all hear a lot in the investment community about technology and brokerage, and we've seen the demo at the Investor Day in terms of what the user interface looks like, and that's interesting. But sort of what is it that is the selling point? What are the types of products that you're offering to your customers that are different than what your peers are offering?

Yes. So when we go to a customer with our technology, we're not looking to lead on price and save them money on point A to point B. What we do is we take our technology and the data that we have and we look at their overall transportation network to see how we can make life more efficient for them. So can we consolidate freight? Can we do mode conversion for them? Can we make a multi -- something that is a 1 pick, 1 drop, a 1 pick 2 drop, so we are able to get more freight on the truck. So it's really looking at the freight holistically on the customer side. And we use our data to tell them what days of the week they should ship, what modes of transportation they should use. And if you look at some of our largest customers, they've even come to us to decide where they should place -- strategically place their warehouses to best optimize their transportation network.

Okay. So it is a pretty holistic solution for them. That sort of brings me to the next question I wanted to ask, and that's really the types of freight you're moving. So we oftentimes just sort of naturally gravitate towards thinking everything is truckload when we're talking to folks like you, but I don't think that's necessarily the case. So when you think about that 4% growth in the fourth quarter and then an acceleration in the first quarter, how much is truckload roughly speaking? And are you seeing better growth in other parts of the market, LTL or otherwise?

Yes. So truckload is our bread and butter. I mean that's how we built the business, was on 53-foot dry vans and for that business, that business is continuing to grow. We will always grow as what we do on the truckload side. But we are expanding out in other modes. LTL is around 10% of our business. And that's got a nice trajectory for us. It's one where we've had some good wins over the last 6 months or so and one that we think we can go out. But we also have a long runway in flatbed and refrigerated and over-dimensional type freight. So if you look at all modes of transportation, we'll continue to grow all modes of transportation.

Okay. Got it. I guess, I want to talk a little bit about capacity next and understanding you have a lot of, I think, small carrier relationships, we're all sort of wondering about how capacity comes in and out of this market. So what are you seeing from a capacity perspective? And have you seen real capacity leave the market or has it just gotten a bit more sort of static for a period of time?

Yes. We haven't seen capacity leave the market. We continue to see carriers come on and on board with RXO Connect. And part of that is because of what RXO Connect offers them. So when they come on to RXO Connect, they don't have to leave the system to find their next load. It's very easy to use. They can pick up their cell phone, they can book a load, negotiate, do all that with no human interaction. And then the next thing they get is they get RXO Extra, which I'm sure you've read about and what RXO Extra is it gives them discounts on fuel, tires, roadside maintenance, hotels, Sirius Radio, the things that a trucker is using in their everyday life, we give them discounts based off of the volume and service that they're providing to us. So that's something that's sticky and continues to pull them back to RXO Connect and the important step for us is not necessarily about how many carriers are signed up or how many trucks we have in RXO Connect, which we have a lot. We've got over 1.5 million trucks in RXO Connect. But when you look at what we do with those carriers is how often do they come back to the system. And 74% of the time, these carriers come back to the system within a week. So what that tells you is a lot of the carriers that we are working with have 1, 2, 3 trucks. That tells you that for them, their next load comes from RXO Connect.

Okay. And I guess I just want to make sure I'm clear. When you guys are thinking about capacity, are you saying that you're not seeing capacity leave for the folks that you are connected with and doing business who are providing capacity to your market or maybe more broadly, has there been any capacity when you sort of look around the truckload market and how that's played out?

So when we're speaking about ourselves when we say that we haven't seen -- we've actually seen capacity -- more capacity coming into RXO Connect. But when you look at the marketplace, I haven't seen a ton of capacity exit. And I don't know that you will see a ton of capacity exit, I think that what you could see is you could see some folks, some owner-operators who bought trucks during the pandemic and the rates have fallen off of that, you could see them do a shift from being an owner operator to driving for a smaller company. So it becomes more of a capacity shift than a capacity exit.

Got it. Okay. That's a good point. I think that's important to clarify. Can we talk a little bit about capacity or carrier economics, particularly for the smaller guys and sort of the value proposition? I guess I wanted to maybe drill down into the sort of dollars and sense of what you ultimately can benefit from them for them, I should say. So when you think about on a per mile basis with or without fuel, what is the rough type of savings that you can provide to those carriers?

Yes. So it really depends. Like I said, it's off of the volume and the service. So there can be significant discounts off of fuel, and it helps us to where we may not actually -- if they're looking at a couple of different loads, we may not have to be the best paying load in the marketplace. So it can really be of what is the value that this is going to add to them because of the fuel discounts that they get from us, from the tire discount, roadside maintenance is pulling everything in. I don't want to give a hard and fast number. I can just tell you that it's significant enough to them that it continues to pull them back to the platform.

You should also think about it as a pretty robust carrier rewards program with multiple tiers, almost think of it as an airline frequent flyer program, where the more you drive with RXO Connect, the more rewards you will get, and it will go directly into the carrier's bank account. And that really does create stickiness in this flywheel effect where they continue to drive on RXO Connect. That's why we have that robust 74% 7-day carrier retention. And in return, when you think about how RXO was built, it was built with the largest shippers in North America, right? We serve over 50 of the Fortune 100, over 200 of the Fortune 500, and they know they're going to get the best possible quality from a carrier perspective just be given that those carriers are then incentivized to come back onto the platform because of that robust service that we provide from a carrier rewards perspective.

And Chris, we'll add one thing to that. I think qualitatively carriers are very small 1 to 5 trucks generally, we're able to connect them to large shippers that they probably would never have the opportunity to ship for otherwise because of our technology. And that's a real advantage for us.

Okay. That's helpful. And when you think about brokerage penetration into the truckload market sort of broadly, so you guys are growing faster than many of your peers, but the market does have the ability to continue to penetrate and to grow faster than the broader truckload economy, which is most likely going to be tied to sort of consumer activity. So -- what do you think that sort of market growth rate looks like over the course of the next couple of years or maybe put it in the perspective of your forecast period?

Yes. So if you look at where we are, go back to whenever I started my career and brokers had less than 10% of the for-hire trucking market. Today, it's got over 20%. And what we expect is over the next 5 years is it to be up around 30%. And I think as you look out longer term, you can see that number go into the 40s.

Okay. Okay. So lots of room…

We've got a long runway, and we've been leading the market, taking share from asset-based carriers. If you look from 2013 through 2021, our brokerage grew nearly 3x at what the brokerage industry growth -- the brokerage industry grew at over 9% CAGR. We grew at over 27% CAGR during the same time period.

Okay. Okay. Let's talk a little bit about the spot market. So I think that's one thing that I think people are very interested to hear sort of what's going on there. And I think when we looked at your mix of business, and you've talked a lot already this morning about the contract side of the business, and that's obviously been a benefit for you guys. What's happening in the spot market? How sort of -- where do we sit on maybe a historical scale of sort of weakness -- relative weakness in the spot market?

Yes, there's not a lot of spot freight out there right now. When you look at the spot market, rates are down on the spot market. And for us, we're broken down but roughly 3/4 of our business is on the contract side and around 25% is on the spot side. But for us, the value that we add to customers is that we're able to flip that fairly quickly. We flipped it as much as 1,000 basis points in a quarter. So if the market tightens, because we serve our customers so well on the contract side, we will be their first call for projects, mini bids, spot freight, we even have, in the past, gone through with our customers as the market turns, and we will provide them rates so that it doesn't hit the spot market and that we become their first call on those loads as well.

Where do you think that range is, the 75%-25% contract spot? What do you think the range is? Are we at the bottom of where spot is going to be for you guys, 75% is higher than a lot of your peers on the contract side.

Yes, I think it's higher than pretty much everybody. Again, I think that speaks to the testament of how much our customers trust us and how much they reward us. They don't look at us like another broker that comes into the network. They treat us like a strategic carrier that has long-term relationships and has added value into their transportation network. When you look at it, we've seen our spot mix go as low as in the half 40% for where we've been and is a little as 20%.

Okay. So spot is going to be somewhere between 20% and sort of maybe 40%, 45%, something in that ballpark? Okay.

We're at the high end right now, contract to spot.

So how does that work through a cycle. So let's sort of play out 2023 and assume that we do have sort of a first half destocking that works its way and it's relatively orderly and there is maybe optimism about potential restocking in consumer says relatively healthy into the back half of the year. How would you think sort of that spot contract ratio develop over the course of the year? Is it another quarter or 2 down at these levels before it starts to get better on the spot side?

Like I said earlier, we're cautiously optimistic on the back half of the year. And what you would see is you would see us -- we said again that we would grow volume again in the first quarter. So we're confident that we'll grow volume, but you will see our gross margin per load come down a little bit during that time. And what would happen is if the scenario that you laid out is in the back half of the year, you would see that our contract gross margin per load may come down a little bit, but we would see a lot more spot freight and our spot gross margin per load would go up and so would our volume on the spot loads. So it will be a good market for us to be able to play in -- and as I said it on the earnings call that this is my favorite part of the cycle, and this is my favorite part of the cycle because of what you're positioning yourself for when the inflection turns. The last time that this happened, you think about the early parts of COVID, and we went on a very good run. So we're prepared to do it again whenever the market does inflect.

Got it. The profit per load, I think, is an interesting point. And what I did want to talk about, I think you guys have said that you're relatively close to your sort of average from a profit per load perspective. So let's talk a little bit about putting that into some context. So I think you guys maybe don't necessarily want to say what -- how far down trough is on that. But maybe kind of walk us through the timing of that as well? Is it another few quarters before you start to see that kind of get to the point where you feel like there's less downside?

So on the earnings call, we talked about in Q4, our gross profit per load, which we're not going to tell is as much as you want, is in line with our 3-year historical average, right. So from that basis, we then talked about into Q1, we talked about and the first half that moderating. So I think it's fair to assume that in Q1 in the first half of the year, our gross profit per load will be less than our 3 years. So it does speak to the optimism that we have into the back half of the year with respect to gross profit per load pumping at some point. I know you're looking for quantification in terms of where is gross profit per load relative to the trough. But I'd say, as we think about it, I think the dynamics that you should be thinking about are really what Drew talked about, where when you think about the ability for us to outgrow so significantly from a volume standpoint that really does mitigate pretty nicely the moderation and gross profit per load. And 1 thing I wanted to point out is what we're seeing based on conversations with our customers, I think it's really important is -- and you touched on this earlier, we grew volume by 4% in Q4. We grew at a faster rate in the month of January. We're going to grow volumes again in Q1. We're benefiting from a carrier consolidation process because what Drew was saying earlier, we are viewed as a core carrier from our Tier 1 shippers. And when you think about what happened in COVID with respect to the amount of brokers and carriers that were added, that's now getting consolidated in some cases, 60%, 70%, 80% plus and RXO, even though the pie is shrinking is gaining a larger percentage of that pie. So that really does not only position us incredibly well for when the cycle inflects. But right now, when we're dealing with this moderation of gross profit per load, we have the ability to grow volumes, which helps, obviously, from a total gross profit dollar standpoint.

So thinking about that cycle of gross profit per load, should we assume that there's the ability to sort of make new highs as you go through a cycle? I guess I just want to make sure I understand the sort of contextually how to think about that or has historically have you been relatively within bounds. This has been an interesting cycle where, obviously, from a rate perspective, we saw extraordinarily high rates, particularly on the spot side, where I would imagine, would generate significant profit per load. So how do we put that into context as we think out, trying to project through this next cycle?

We do think, over time, our peaks and troughs will be moving higher from a gross profit per loading standpoint. And a lot of that goes back to the technology, right? When you think about the fact that we've invested hundreds and hundreds of millions of dollars building this tech platform from day 1. It goes to speak to our pricing algorithms, it goes to speak to all of the proprietary investments that we've made. And I think this is also an important point. We've talked a lot about brokerage, but talk about the synergies of our tech spend across the entire organization, where not only do we have the ability to leverage the brokerage business, but we're also leveraging billion dollars of freight under management within our managed transportation business, which has doubled over the last 3 years. So you think about the ability to synthesize all of this data in real-time, leveraging artificial intelligence and machine learning, everything you'd expect us to do that really does benefit us in terms of the long-term thinking with respect to how we're thinking about gross profit below trajectory and how we're thinking about the ability to maintain best-in-class profitability.

Okay. It's helpful. Let's talk a little bit about margins and obviously, margins, gross profit margins were up nicely in the last quarter. So can we walk through what sort of the outlook would be for a year like this where we have a moderation of contract rates and how that ultimately should play out?

I'll start. So we had -- obviously, revenue was down top line, but our ability to buy transportation really exceeded that. And so we ended up with a really good growth year-over-year in terms of gross margin. As we look forward, as Drew and Jared both said, we're cautiously optimistic about the second half. There will be moderation in that margin just simply because we'll see the gross margin per load go down. I think Jared had an important point. We believe, over the long term, that the trough will be higher and the peaks will be higher as we go through time. But we do see some moderation in the near term. But again, cautiously optimistic for the back half of the year and heading into next year.

Just 1 of the points to think about in the back half of the year that a lot of people have talked about is when you look at last year, we had a pretty nasty winter and that impacted produce season. This year, we've had a pretty mild winter. So we should have more of a produce season than what we've had, which will impact capacity and would be one of the things that you can lean towards counting on tightness towards the back half of the year.

When do we start to see produces an kick off?

Late March.

Got it. Okay. That's helpful. So something we look forward to in the relatively near term.

Hope so.

So let's talk a little bit about automation. So you mentioned technology and how that's going to ultimately help from a -- through the cycle type of margin dynamic for you. I know you've talked about a relatively high number of loads that get covered on one side or the other from a technology standpoint. So -- what are some of your goals or targets on that automation side, whether it be on the fulfilling on the carrier side or the customer side, what do you think you can get some of those numbers to over time?

We're at a pretty impressive number right now. 87% of our loads are created or covered digitally. Jared said on the earnings call that we expect that number to continue to grow and you look into the first quarter. And over time, we -- since it's only half of the order, you'll see that number hit 100% created or covered. And we've got -- we've made a lot of progress on the customer side and have a strong integration with our customers. We still have a lot of room to grow with our carriers. When you're talking about smaller trucking companies, sometimes it is harder to get them to come over and adapt to the technology, but we've got a long runway there that we think will contribute significantly over the next several years.

So what's the sort of roughly speaking, the profit dynamic of a load that has a degree of automation associated with it. I guess that would be the first question. And maybe the second question is how does that differ from a nonautomated more manual load and then is there a difference within that between one that is automated on the carrier side versus the customer side?

So on the carrier side or on the customer side, you typically see the gross profit percentage run right in line, whether it is -- whether it's done digitally or whether it's done by human interaction. The difference becomes in that whenever is done digitally, the EBITDA margins of it go up. And so that's a significant tailwind for us. We've got -- like I said, we've got more tail run on the carrier side than on the customer side.

So more room to improve on the carrier side, okay. Customers are more automated is the stance right now.

That's right.

Okay. Got it. That makes sense. So let's drop down sort of below that gross profit line and talk about sort of the operating margins, to your point, around EBITDA margins there. So I guess one of the things that we think about is sort of the seasoning of the workforce and how productive the workforce is, where are you in the workforce productivity sort of scale? Is there a lot more to go, how do you feel about that?

Yes. I think we have significant tailwinds with respect to our long-term outlook with respect to productivity. One of the most important metrics that we look at internally is loads per head per day. And when we look at where we are right now relative to think about a typical S curve, I think there's significant potential over the next 3 to 5 years. Furthermore, when you look at our 2027 guide that we have out there, which calls for EBITDA, about $500 million at the midpoint, which is about 60% higher from the LTM period, embedded within that is a significant increase from a productivity standpoint. If you go back just to give you some context, I think one of the examples we gave is if you go back to 2021, if you look at headcount versus volume over the prior 5 years, we grew volume at a rate of 3x faster than our headcount. So I think you'll continue to see us increase productivity. We mentioned on the earnings call that Q4 productivity did improve relative to Q3 levels, and we expect significant tailwinds over the next 3 to 5 years.

Is there a benchmark that we should look out there or any of your competitors sort of where you think you want to be over time or do you think you guys can set sort of the new measure for the industry?

We're looking at our internal benchmarks in terms of where we know we can be from a capacity standpoint relative to our current employee count and as we think about the investments in tech that we're making, which have a very high return on invested capital, where we think we can push the envelope from a productivity standpoint, we're pretty bullish over the next 5 years.

We've got a lot of respect from our competitors across the landscape but we've invested in tech from day 1. So we felt like we've got the best technology out there, which allows us to have some of the best productivity with our employees.

Okay. And certainly, if there's anybody in the audience who wants to jump in with a question, there is an opportunity for that. Just raise your hand, we can make sure we get to you guys. Okay. That's helpful. So when you think about automation, going back to that for a moment, what is the biggest sort of sticking point for the carrier base? I think there's a perception that maybe they're not necessarily as willing to sort of lean into some of these new technologies. But what's really happening on the ground with your carrier base in technology.

Yes. It just takes conversation and really, we have a pretty good success rate once we're able to get that carrier in and show them a demo even if it's just something that they're doing online. But there's an aging driver population. I think that driver -- average driver age is close to 60 years old now as you look at it. So getting them on the technology is a little bit more difficult than getting a customer who is more tech savvy. So for us, it's just having the conversations one at a time with the carriers and showing them the benefits of what it can do for them long term and help them run, especially for a small trucking company that does a lot of business with RXO, they can use it to run their whole fleet.

Yes. Okay. That's interesting. Okay. So let's talk a little bit -- I want to move away for a second from the core sort of brokerage business, to talk a little bit about last mile. So that's obviously something that you guys highlighted on the last call. I think December was a good month for you guys in the context of that business, but it happened during a peak that was not really a peak. So can you walk us through what you guys are doing right and why you're seeing that opportunity when maybe others aren't.

We're the leader in the last mile space, and we have been forever. When you look at our infrastructure that we've got set up around the country, we're within 125 miles of 90% of the U.S. population. So if a customer is doing last mile delivery going into someone's home on a national level, they want to talk to us. When you look at peak season, we really saw a lift in 3 areas: 1 was appliances, which is what we built the business off of; the second was on electronics, as you start thinking about TVs and things being delivered into folks' homes; and the third was on fitness. And all 3 of those performed well for us.

How do you think that plays out? I don't know if you've given specific commentary about that business in the first quarter relative to your brokerage business, but how do you think about either 1Q or maybe how 2023 is going to look?

Not necessarily just for the first quarter. We have opportunity to improve the profits of last mile as a whole as we look out in 2023. We were -- we honored our customer contracts last year. And one of the things that we saw is our carrier rates went up last year, but we held our customer rates. So now we've got the opportunity to get fair pricing for the value that we provide as the leader in the space to our customers.

Okay. What do you think the margins of that business can be over time?

If you look at the business, as a whole, if we get into the mid-single digits, then we'd be okay with that.

And how does that sort of play into your longer-term outlook? Is that sort of where you have it in the $500 million of EBITDA guide or the pipe?

We didn't break down specifically by line of business of how we were going to get there because there's multiple paths for us to be able to get there. There's multiple different ways that we can get there. So even if whether it's in the last mile of the EBITDA percentage or for some brokerage volume per load or margin per load or volume, there's multiple paths that we can get there for the $500 million and do it organically.

Okay. And in the last sort of 8 or 9 minutes that we have left here, I want to talk a little bit about sort of cash, capital deployment, those kinds of things. I think cash conversion is in the sort of 50% to 60% range, give or take, I guess, how do you think about sort of uses of cash? I think your debt balance is getting maybe -- your leverage is getting maybe towards the lower end of what your stated range is. What are you going to do with the cash?

Your point, we had a great cash conversion in the quarter. We were in excess of 60%. We talk about 50% to 60% on a general rule. As we look at capital allocation, first priority is going to be organic. We've grown 100% of our growth over the last 6 years has been organic. -- go back 10 years, it's over 90%. So that's number one. We have -- to the point about tech. We have a lot of technology opportunities to increase productivity, both operationally as well as back office. So we're going to deploy there. From other standpoint, we have a really good balance sheet. We're at 1.2x net leverage, the low end of our target range of 1 to 2. So that's -- it gives us a lot of optionality. M&A, we'll look at M&A. It's not a top priority, but we certainly will look at opportunities that make strategic sense. But also you have shareholder distributions in the form of a buyback or dividend, it's is something that we will look at in terms of the market conditions. But I think the big thing about our balance sheet, we ended a spend strong. We entered this 2023 strong. It gives us a lot of options. We continue to build a lot of free cash flow. And we have options to deploy where the market dictates is the best return on invested capital, which for us has been very, very high, and we expect to continue to be high.

Okay. Is there anything -- obviously, like you said, M&A is not necessarily the top priority, through the last several years, I think, as you've seen international players have an influx of significant cash because of where rates were, whether it be on the ocean side or otherwise, there has been interest in the space, broadly speaking. How do you guys kind of think about the world? And maybe a 2-part question. Number one, are there any verticals that are more interesting to RXO specifically? And then maybe Drew, if I could ask you to sort of pontificate about how you think about the industry over a multiyear period of time, would we expect to see more consolidation? Do you think it's going to be fewer larger players ultimately ending up dominating the space?

Yes. So I'll start and then Jamie can wrap it up. But when you look at the space, you're absolutely going to see more consolidation of it over time. It's an attractive industry. Specifically in the brokerage industry, you're going to have winners. And the winners are going to be the ones that have the best technology, have strong customer relationships and have strong balance sheet. And so we're in a position to continue to be able to go out and win and take market share on the brokerage side. As far as verticals that we want to be in, Jamie talked about the place where there is the most synergy in our business is between brokerage and managed transportation. And so for us, if there was something that was accretive in one of those areas, we'd take a look at it. But right now, we're happy to continue to go and grow organically.

The only thing I would add to that is M&A, if there's a vertical or some potential technology that we could buy and get immediately as opposed to growing it out over several years, would probably make sense. But we feel very good about our ability to go out and take share, especially as the market consolidates and to beat the competition. And so we will look at M&A if it makes strategic sense and an add-on or bolt-on type deal that would help us accelerate our growth opportunities.

And then maybe the last question I have is just sort of going back to that sort of competitive landscape again and thinking about the conversations around M&A and sort of the investment in technology, you had me thinking about this. I think a few years ago, there was a lot of discussion about the sort of digital entrants into the market or maybe tech first freight second. I think you brought this up earlier, and I think it's a really, really important point. It's hard to be one or the other and try to sort of have one follow the other. You guys, I think, have done pretty well doing both at the same time. But do you think all of those sort of digital freight platform survive over time? Have you been surprised by their ability or lack thereof to thrive in these markets? I guess I'm just kind of curious how you sort of sum up the competitive landscape with respect to those folks?

Well, not just in the digital folks, but if you lead on price, the first place that you get taken out by a customer is on price. So -- and the second thing is when you're talking about -- Jared talked about us doing business with 58 of the Fortune 100 and over 200 of the Fortune 500 companies, when you get that business, you have to be able to service it. You have to be able to service it at scale. So when you talk about doing 100 loads a day or 200 loads a day, it may not sound a lot as we're sitting here, but it's a lot to be able to service and handle. And the first time that you only pick up half of those loads, it creates a good opportunity for people like RXO to be able to go on there and pick up the freight. But that's not necessarily focused on digital, let's focus on anybody who comes in and leads on price.

I would add to that. I think the customer service aspect is so important when we combine technology with customer service, that's a differentiator. And I think coming from the shipper side, there's a lot that goes on with getting a load from point A to point B and maybe to point C and then getting that carrier home efficiently, it takes a lot more than just digital. That's a great platform to have, but adding that customer service tool really is a differentiator.

And if you think about it from an ecosystem perspective, right? It's also about the carriers when we talked about it, where it's not only about the customer service, it's not only about the shippers, but ultimately, it's providing access to massive capacity and doing so where we've got a robust 74% 7-day carrying retention. We reward our carriers that come back to RXO Connect. So it really is that flywheel effect, the stickiness of our carriers, the stickiness of our customers and that's why we've been able to take share profitably.

And then really, the last thing and I apologize because it was -- somebody had asked me about you guys had made some comments on the call, specifically around first quarter contribution to the full year. I just want to make sure that's sort of well understood. I think there's a range that you guys have given maybe high singles up to maybe 20% or so of the contribution for a full year. I don't know if there's any more granularity you can put around that or maybe you can at least give us a sense of what are the types of circumstances that could drive you to one end or the other of that range?

Sure. What I said on the call was when I look back to prior cycles with respect to the moderation in gross profit per load that we talked about, I've seen a quarter represent anywhere from high single digit to as much as low 20% of full year expected EBITDA. So that -- I just wanted to -- it's our first quarter out as a company. I thought it was important just to give that historical cyclical perspective in terms of how a quarter can represent -- how much of a quarter can represent with respect to full year. And I thought that was just a better way to help frame it, just to give you some kind of context and hopefully, that's helpful.

Yes. No, it is. It's very helpful. We appreciate that. Well, gentlemen, thanks very much for joining us. Really appreciate your time today.

Thanks for having us.

All right. Thanks, guys.