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

All right. Hi there. How's it going? So welcome to day 2 of the JPMorgan Industrials Conference. I'm Grady Carr. I'm in Brian Ossenbeck's transports team. We will be kicking off with RXO, a USTL broker that spun off XPO in November of 2022. And I am joined by Chief Strategy Officer, Jared Weisfeld. Thank you for being here, Jared.

Thanks so much. Before we get started, just a really quick disclaimer. During this meeting, I will make forward-looking statements that, by their nature, involve risks, uncertainties and other factors that could cause actual results to differ materially. You can find a discussion of factors that could cause actual results to differ materially in our SEC filings and our earnings release.

So before we get into some Q&A, and by the way, if anybody in the audience has any questions, please raise your hand and we'll get you a microphone. But before we do that, can you give the audience and those who might not be familiar with the story a quick background of RXO and the environment it operates in?

Sure. Absolutely. So RXO was spun out of XPO on November 1 of last year. And historically, we were XPO's North American transportation business. When you think about RXO, 60% our business is our digitally enabled truck brokerage business from a revenue standpoint where we are the fastest-growing brokerage. If you look from 2013 to 2021, the brokerage industry grew at a nice clip at about a 9% CAGR. RXO's brokerage business grew 3x faster than that at a 27% CAGR. If you look at the rest of the business in terms of the 40%, that's nonbrokerage split into 3 complementary services, including managed transportation, last mile and freight forwarding. Maybe just a quick blurb on each one of those. Managed Transportation is when we manage the transportation department of one of our customers. So think of it as an outsource of the managed transportation business, where we have doubled our freight under management over the last 3 years to $4 billion. Last mile is -- we are the leader in North America from a big and bulky perspective. We reached 90% of the U.S. population within 125 miles. And from a freight forwarding perspective, it's a relatively small percentage of our business, about 7% of total revenues. And we've done a nice job diversifying the business over the last few years.

Awesome. So as we get started, I guess, just some market overview stuff and what you're seeing out there. This time last year, we were probably talking about the spot markets and weakness, and then obviously, we saw the eventual collapse there. How does the freight market look from now from your perspective? What are you seeing out there?

Sure. So relatively consistent with our expectations that we outlined on our earnings call a few months ago. So when we think about the freight market, Q1 is a seasonal low point for RXO and historically has represented the lowest percentage of full year EBITDA. We are cautiously optimistic into the second half of the year, and that really is rooted on based on what we're hearing from our customers, especially within retail and e-commerce. If you rewind back to last year, we grew volumes by 12% year-on-year. And for most of the year, retail e-commerce is actually a pretty big headwind for us. And you think about fast forward to the second half of this year, we are hearing the potential for restocking from our customers. I think that data is certainly supported from an empirical perspective as well. So I think the chance of another destocking is likely low, which, on a second derivative basis, should be a positive for freight volumes year-on-year within retail e-commerce. Outside of retail e-commerce, we continue to see strong growth with our other verticals. Retail e-commerce for the company is about 37% of total revenues. And outside of that, we continue to see pretty strong growth on a year-on-year basis.

Understood. Can you talk a little bit about -- obviously, the last 2 years, 3 years, nothing has been quite normal. Are you hearing anything about normal seasonality, normal operating conditions over this year?

Yes. So to your point, I'm not sure what normal is these days. But with respect to what we're seeing in the market, similar to what I said earlier, I think we're cautiously optimistic into the back half of the year. As we think about some of the near-term dynamics, we are seeing -- we saw a benign winter, right? So that could certainly lead to more of a robust produce season than we did this time last year. So I think that could be certainly something to watch out for as you look at load-to-truck ratios for the industry. But right now, we're pretty consistent with what we said on our earnings call in terms of our expectations.

Nice. Yes. And so on your earnings call, you mentioned the plus 4% volume growth in 4Q, which obviously is better than peers. And you guided to 1Q '23 will have some sort of year-on-year positive volume growth. Can you talk about the visibility into that as it stands right now and then when you might guide for the rest of the year and what that looks like in terms of volumes?

Sure. So taking a step back, like you said, in Q4 we grew volumes in our brokerage business by 4% year-on-year. We're the only publicly traded broker to grow volumes in Q4. We exited the year with tremendous momentum within our brokerage business. If you think about Q4 dynamics, we bid on 70% more revenue than we did in the prior year, and that really has fed into the momentum that we're seeing in the business heading into 2023. So in the month of January, we said that our volume growth accelerated relative to the growth rate in Q4, and we guided to Q1 volume growth, which we still remain confident in. As it relates to the rest of the year, obviously, we'll see how the year plays out. But importantly, I want to just reiterate the tremendous amount of momentum that we're seeing in the business with respect to bidding on 70% more revenue in Q4. And additionally, our sales pipeline in Q4 was the strongest it's been in about 3 years. So we're excited in terms of just the continued outperformance. When you look at Q4, our market share gains as the market has softened has actually accelerated relative to the overall market. So we're entering the year with a significant amount of momentum.

Nice. So we've done some extensive research on just the market in general and carrier capacity. It seems like everyone's talking about the supply and demand dynamics and the oversupply of carriers. Have you seen anything to say that carriers are leaving the market? When do you think they start to get squeezed?

Yes. No, so we're watching that closely. From an RXO perspective, we have not seen that dynamic yet. In fact, in Q4, our registered carriers were up 42% year-on-year. And I think that just speaks to the momentum that the platform has, why the carriers come back to RXO. They come back because they know they're able to get their next load from RXO, especially in times like these when the market is looser. They come back because it's the best technology platform that's out there. They come back because there's a tremendous carrier rewards program that's in place. Our 7-day carrier retention is at 74%. So ultimately, we're certainly looking at those dynamics as it relates to what supply and demand looks like in the overall industry as spot rates come down. And does that cause some carriers to exit the market later this year? Perhaps. That will be an interesting dynamic as it relates to what that means for the spot market in terms of stabilization from a pricing perspective. But from a carrier standpoint, we're still seeing momentum in terms of net carrier adds within RXO.

So on a similar topic, I kind of want to get into contracts a little bit. Are there any differences you're seeing in terms of mini bids, duration of contracts? Anything that's different on a contract structure and timing given the environment?

Nothing terribly different from a structure standpoint. I'd say the biggest difference we're seeing this year versus prior years is a consolidation of core carriers and brokers at our customers. And I think that speaks to one of the reasons why we're able to grow volume and gain share profitably. So in some cases, if you think about what happened during COVID where our customers needed a lot of capacity, so they were obviously onboarding carriers and brokers, and you fast forward now to the current environment that we're in, you're seeing a culling and the consolidation of those lists. And because RXO is considered a strategic carrier to our customers based on our technology, the service that we provide, the long-standing customer relationships, our top customers have been with us for 17 years. So that's what I would say is the biggest difference in terms of this bid season versus others where RXO is able to go ahead and benefit from that consolidation of the carrier list, where we're able to go ahead and increase our share. Even though the pie is shrinking, our share of that pie is increasing and ultimately setting us up for when the cycle does inflect.

Yes, I think that's a good segue to my next question here. So you've said that this is RXO's favorite part of the cycle, assuming because you can invest and then take share in the way back up. Does this mean a bigger productivity hit in the near term? And can you just talk about the strategy in 2023 and at this stage of the cycle?

Sure. So you're absolutely right. This is our favorite part of the cycle from the standpoint of ultimately when you look at what's going on from a broader market standpoint. It's really going to separate what we call the haves and the have-nots. Like do you have the scale? Do you have the technology? Do you have the ability to generate cash flow? And if the answer is yes, which it is for RXO, you're going to see us outperform and thrive in the current industry. So we're very excited about this part of the cycle because it really is going to demonstrate the ability for us to grow profitably and show the resiliency of our financial profile. With respect to our strategy at this part of the cycle, you're right. I mean, as we think about what our playbook is right now, our playbook right now for this part of the cycle is to increase volume and do it profitably. So when the cycle does inflect, we'll be able to go ahead and have a larger percentage of that pie. From a productivity standpoint, to the first part of your question, I don't like to look at productivity on any given quarter. I'd like to look at it on a longer duration because it will smooth out volatility to the extent that either we invest in the sales force or there's a change in profitability. I think the last stat we gave out there was that if you look at 2021 and you look at the 5-year period prior to that, we grew volume at a rate 3x faster than head count. And when you look towards our 2027 target of $500 million of EBITDA, you can certainly expect increased productivity and efficiency as it relates to that target.

Appreciate that. And moving to some numbers. The 1Q EBITDA percent range makeup, you guided anywhere -- that will make up high single digits to 20% of the full year. Can you kind of talk about that range, why it's wide and why you wanted to give that guidance?

Sure. So to clarify, what I said on the call was that at this point in the cycle, when I've looked in the past and you've seen the reduction in gross profit per load is that any given quarter, not necessarily a Q1 dynamic, that quarter can represent anywhere between high single-digit and low double-digit percentage of EBITDA. I thought it was important -- we're always going to tell you what we're seeing in the market. We're going to be transparent with the investment community at all parts in the cycle. And as our first quarter, as a public company, I thought it would be impactful just to share and give that kind of perspective in history as we think about the current cycle dynamics. And I think certainly, to keep in note is a large part of the reason for that EBITDA range can be what's happening with respect to cost of purchased transportation, right? When cost of purchased transportation is stabilizing as it is right now, that can go ahead and reduce gross profit per load, which is what we talked about on the Q1 call. So I just wanted to frame expectations as it relates to what a quarter can contribute from an EBITDA perspective relative to full year.

Got it. So not specifically 1Q, but any given quarter. Got it. Makes sense. Sticking with the purchased transportation and obviously a variable cost structure with 87% of the cost structure being variable, obviously, purchased transportation is a big component of that. How does the rest of the cost structure look in terms of SG&A and direct OpEx and your controls in there?

Sure. So you're right. RXO has a very highly variable cost structure. About 87% of our total costs, including the cost of purchased transportation is variable in nature, which provides us a lot of flexibility across economic cycles. When you look at the percentage of costs, excluding cost of purchased transportation that are variable in nature, it's about half and half in terms of 50% variable and 50% fixed, including direct operating expenses.

We sort of touched on this earlier, but I think it's a good point to make. And over the year, thinking about volumes and the dynamic with gross profit per load at this point of the cycle, you're thinking growing volumes in 1Q gross profit per load might be pressured there and then goes down further in 2Q. Can you kind of then offset that with margin dollars with volume throughout the year? Or what's the dynamic going throughout the year? And when does that kind of hit a floor and inflect?

Yes. No, that's the right way to think about it from the standpoint of the reduction in gross profit per load that we talked about on the earnings call and that I just mentioned as it relates to the dynamics of cost of purchased transportation stabilizing. But as a mitigant to that, certainly increased volumes are going to help in terms of the gross profit dollar offset. As you think about into Q2, what we talked about was first half of 2023, gross profit per load moderating relative to last year. And that's because of the contract dynamics that we've talked about, right? When you have contracts going into effect from Q4 and Q1, you'll see that impact into Q2. So I think what to look out for is when that load-to-truck ratio does inflect, right, which it's been hovering around 3:1 for 6 to 9 months now. When that does inflect, what you'll see is the contract gross profit per load go ahead and come down below what your spot gross profit per load is. And then what you'll see RXO do is -- we're incredibly agile and flexible to the point where you'll see us go ahead and move the business. We'll still haul the same contractual freight. What we'll do is we'll increase spot as a percentage of the business faster than anyone else out there. If you look back historically, we've increased spot or we've moved spot as a percentage of volume by as much as greater than 1,000 basis points in any given quarter. So we have the entire data science team. We leverage artificial intelligence and machine learning, as you'd expect, to have our own forecasts as it relates to pricing. And we'll go ahead and modulate the business accordingly depending on when the cycle does inflect. So I would certainly keep your eye out on the load-to-truck ratio, what that means for the broader business. And when that does inflect, right, I mean, during COVID, that was as high as 15 to 18:1. When that does inflect, you'll see us go ahead and pivot the business towards the spot business and the spot gross profit per load will be in excess of the contract gross profit per load.

That's great color. So obviously, we saw the 2027 guidance set out that was in a joint release with XPO. Can we talk about the CapEx at 1% of revenue throughout the cycle? Is there a possibility that you might need to spend more on technology and systems through '27 as competition ramps up as you see fit?

To lay the groundwork, at our Investor Day, we outlined the path to $500 million of EBITDA in 2027, which would represent an approximate 60% increase from 2022 levels where we put up around $300 million of EBITDA. When you think about the CapEx requirements associated with that guide, we talked about capital expenditures being approximately 1% of revenues. And that's in a cross-cycle dynamic. In years where revenue was lower, it could be higher as a percentage of revenues. In years where revenue is higher, you could see it lower as a percentage of revenues. So that will flex depending on revenues. But on average, it will be about 1% of revenues, and we feel very comfortable with that number in terms of no incremental investment above and beyond what we talked about, which is a really important point, right? RXO, we have first-mover advantage. We started this business back in 2011, have invested hundreds and hundreds of millions of dollars in the platform, building out RXO Connect, building out RXO Drive. So the incremental CapEx, which we're spending to remain competitive and continue to increase the moat and the distance between us and our competition, it's just -- it's going to be lower relative to the cumulative amount of CapEx that we've already deployed into the platform.

Right. And so embedded in that guide, obviously, mostly organic growth there. It's the #1 priority. Could there be any interesting bolt-on M&A? Are you entertaining that? How is that dynamic out there?

Sure. Maybe -- so to start, that guide is 100% organic. And before I get to your question, it may make sense to provide everyone with the growth algorithm to get us from where we are today to that $500 million of EBITDA. If you think about where RXO participates, we participate in a $400 billion for-hire truckload market. Brokerage, as an industry, has been gaining steady share. If you look back a decade ago, brokerage penetration of the for-hire truckload market was in the low double digits. That is now at about 22%. We expect that to get to the high 20s, close to 30% through our projected period. So you've got the for-hire truckload market that's growing at about a 2% CAGR. You've got brokerage penetration that continues to increase. You've got RXO which continues to grow in excess of the market. I mentioned earlier that from 2013 to 2021, we grew 3x faster than the market growth at about a 27% CAGR. We continue to expect that we're going to grow faster than the industry between now and 2027, which is going to feed into that growth algorithm. It is 100% organic in terms of the outlook that we provided. We also wanted to give a prudent outlook, and we also moderated gross profit per load assumptions just as it relates to understanding that '22 was an exceptional year. And we wanted to have prudent assumptions in the model. Additionally, we have incremental productivity and efficiency gains built into the model. So we do have a modest expansion of EBITDA margins within that target. So going back to the first part of your question, from M&A standpoint, organic growth is the #1 priority for the organization. We have a very high return on invested capital of about 42%. So the threshold for M&A is, by definition, going to be very high. 100% of the growth in our business within brokerage has been organic over the last 6 years, 90% plus organic over the last decade. With that said, we're obviously always going to pay attention to what's going on in the marketplace. If there's something that's small tuck-in that makes sense in a mode that we maybe don't have capabilities built out in yet, we'll go ahead and take a look. But generally speaking, organic growth is absolutely the #1 priority for the organization.

Sure. And that all makes sense. You kind of got into the competitive landscape there and just the industry and the size and the fragmentation. So I wanted to talk about some things competitive-wise. So obviously, you mentioned the 12% increase in volumes and then the 4% last quarter as well when maybe peers weren't growing at all. Can you talk about is the share gain that is sticky? What is this coming from? And what's the breakdown of these gains?

Yes. We think it's sticky. We think it's sustainable, and we continue to expect to outgrow the market. So when you think about why RXO continues to benefit from a share gain standpoint, it goes back to our scale, our technology, our customer relationships, all which drive a very high customer retention rate up into the high 90s. So where is RXO gaining the share? I mean, ultimately, we're not picky in terms of where we gain our share from, and it's pretty much across the board. If you look at the #1 place where we're gaining share, it's certainly going to be from asset-based carriers, right? And what I was just talking about earlier, you're seeing brokerage penetration increase from the low double digits up to 22%. We think that could potentially get up to 40% from -- so doubling of brokerage penetration from where we are right now. So that for sure is going to be the highest contribution from a share gain standpoint. But we're also gaining share within the category as well. So we're not picky. We continue to gain share, and we think that just ultimately speaks to the value proposition that RXO offers to our customers.

And that doubling that you mentioned, is there a good year ahead -- like what year would that be down the road? Or is that just a comment on looking at what's going to happen?

That's a longer-term outlook. I think we have certainly high confidence that by the end of this decade, we'll be approaching 30% from a brokerage penetration standpoint. And then longer term, we think there's an opportunity for that to get to 40% or above.

Sure. And then again, gross margins, obviously, are running ahead of peers. What is really driving that? And is that sustainable over the long term?

Absolutely. So from RXO's standpoint, it's not just about growth, it's about profitable growth. To your point, in Q4, our brokerage business posted about 18% gross margins, which was the highest of any of our publicly traded peers. So agreed. We continue to remain -- our strategy continues to remain very focused on profitable growth. And what's driving that? It really comes down to our technology, right? You look at the ability for us to leverage our pricing algorithms, which are based on artificial intelligence. Machine learning continued to get more sophisticated over the years and really benefits from the hundreds and hundreds of millions of dollars of CapEx that we've already deployed into the platform. The algorithms get smarter and smarter. Our ability to purchase transportation, we think, is best of breed. And we think the ability to go ahead and maintain best-in-class margins is absolutely sustainable.

All right. That's great color. Shifting gears a little bit to last mile. So last mile is obviously huge for you guys. And just looking at the pricing opportunity within last mile and how that's kind of boomed throughout the pandemic, anything you can speak to in terms of pricing quality in last mile?

Yes. So to give our own context, I mentioned this briefly in the opening remarks, but last mile is about 20% of RXO's revenues where we are the leader in big and bulky here in North America. So think about appliances, electronics, fitness where we actually had a really strong Q4 from a last-mile perspective, and we have the ability to go actually ahead. We grew stops -- ever so slightly, but we grew stops year-on-year in Q4, which I think was certainly better than the market as we benefited from those categories that I just mentioned. Heading into -- last mile is strategic for RXO from the standpoint it really gives us access to the C-suite of our customers because if you think about it, it really is the ultimate brand representation of that customer in the homes of consumers. So the ability for us to go ahead and access customer -- access the C-suite and be able to cross-sell RXO, I think, is pretty significant. If you look into '22, 62% of our revenue came from customers that did business with more than one line of business. So as it relates to the opportunity within last mile in 2023, I do think it's going to be somewhat idiosyncratic to RXO in terms of our ability to improve profitability within last mile year-on-year 2023 versus 2022. And that comes down to in 2022, we didn't take as much price as we needed to, to offset the impact of inflation where ultimately, we honored our customer contracts and commits. So heading into 2023, we touched on this in the earnings call, we feel very confident on the ability to improve profitability year-on-year. We're going to go ahead and take price to earn our acceptable economic rate of return. And if we can't, you'll see us walk away from some business. So it may be addition by subtraction in terms of the ability to improve EBITDA with revenue taking a step back. But ultimately, the #1 focus for last mile in 2023 is improving profitability.

Right. And do you think that we see elevated demand here in last mile? We saw, throughout the pandemic, the big and bulky kind of takeoff. Is that a profitable growth -- sorry, a profitable market right now?

So our last mile business is profitable. Certainly, our highest return on capital business and our highest profit margin business is our brokerage business. But heading into 2023, we'll see ultimately how the year pans out. We came off a strong momentum in Q4. Q1 is seasonally a lower quarter for last mile. But no, I mean, longer term we feel -- we're very confident in the strategy of improving profitability and being able to go ahead and serve our customers just given that we're the leader in the space.

You kind of touched on cross-selling opportunities. We tend to think of cross-selling opportunities within managed transportation and brokerage that play off each other well. Throughout the overall landscape of RXO, what are the cross-selling opportunities? What are your customers telling you?

Yes. No, that's exactly right from the standpoint of if you look at brokerage, which is about 60% of our revenue and the complementary services, brokerage and managed transportation fit like hand-in-glove in terms of the natural synergies between those 2 businesses. You think about the ability for managed trans to be a customer of our brokerage business and the ability to drive volume from managed transportation into brokerage. It's a really significant opportunity. But it's not just within brokerage. If you look at over the last 5 years, we call it synergy revenue, so synergy dollars available to the rest of the organization from managed transportation. That revenue growth rate has grown at over 50% CAGR over the last 5 years, and it really speaks to what I mentioned earlier in terms of us doubling our freight under management to $4 billion over the last 3 years. That's certainly a strategic priority for the organization to increase freight under management because that has significant benefits for the rest of the organization, in particular, brokerage.

And last general theme for today would be just the technology of the industry that is critical and sometimes hard to compare across the group. How do you guys think about your technology capabilities at RXO? And what do you offer and what do you see for growth in that?

Yes. Absolutely. So taking a step back, our technology is highly leverageable across the entire organization, built from the ground up, really built across 3 main vectors: built for our customers, built for our carriers and built for our employees. So let's unpack that a little bit because this is -- I think it's pretty important when you understand the RXO value proposition and why we're winning, why we're taking share, why we're doing it profitably. Technology is certainly a critical aspect of this. So number one, for our carriers, RXO Drive is the mobile app that's been downloaded over 925,000 times at the end of Q4, which grew about 45% year-on-year. That's at the core of our carriers in terms of their -- effectively using it as their operating system to go ahead and be able to book their next load, be able to bid against -- to be able to bid on that next load, be able to counterbid in real-time against our pricing algorithms, really ensure that they know how to get their next load and then take them back home and help reduce empty miles. So RXO Drive is at the core from that standpoint. And then from a customer standpoint, RXO Connect, which is the foundational platform of RXO could be used in several different ways. It could be used as the operating system for our customers or could be used with the TMS, the transportation management system, of our customers and then get integrated into the back end in real time. So having that interconnectivity between RXO Connect and our customers' TMS is essential. And then lastly, it was built for our employees, right? How do we increase the productivity and efficiency of our employees? I mentioned earlier that we have the ability to go ahead and increase efficiency between now and 2027 as we look at achieving our target model of $500 million of EBITDA. But building tech -- or leveraging tech to go ahead and make our employees more productive and efficient is absolutely critical. So putting all of that together, leveraging technology in a way, leveraging and harnessing our existing investment to enable a high return on invested capital is certainly part of the investment thesis. But it doesn't stop there. And I think this is also a critical point. It's not just about the tech. When we say we are a tech-enabled digital brokerage, we say that purposefully because without our people, we're not going to be able to be successful. So ensuring that we have best-of-breed operators paired with the technology, which is why when the tech was built, it was paired with the operators and all of those 3 constituents that I just mentioned, at heart, like that really is a differentiating factor. It's not just about the tech. It's best-of-class tech paired with best-of-class operators.

And where are you seeing any limitation in terms of adapting to the technology? Is this on the carrier side, they are kind of hesitant to adapt to the technology? And then in terms of covered loads, how do you quantify them? And what is it currently?

Yes. So last quarter, we talked about the loads that are created or covered digitally being at about 87%. We also talked about that growing sequentially into the March quarter. I think you're right. If you look at the breakdown of loads that are covered across -- covered or created across both the carriers and our customers, certainly higher on the customer side, we haven't quantified that percentage. But if you think about the carrier ecosystem, right, and some carriers certainly are on older phones, older technologies, not necessarily on the iPhone 14 Pro Max, right? So the ability to go ahead and migrate that carrier base to RXO Drive longer term, I think, it's a significant opportunity. And I think that's also an important point because if you look at the incremental margins associated with the load that is purely digital, purely autonomous, right, so created and covered digitally, it's certainly going to come at higher incremental margins relative to one that is not.

Right. Makes sense. And on that carrier side, on the Connect marketplace, how are you driving -- how are you bringing drivers back on? How are you retaining drivers? And can you talk about RXO Extra and kind of get into that, what that does for you guys?

Yes, absolutely. So we have a very strong 7-day carrier retention rate at 74%. So 74% of the time, the carriers coming back to us the next week. And you think about that relative to average length of haul, their next load is coming from RXO. And I think an important point of that is absolutely RXO Extra, right? We want to go ahead and incentivize the carrier base to stick with RXO for many reasons. And it's a very robust program and I think probably the most robust that's out there. So do you get discount -- they'll get discounts on fuel and tires, the ability to go ahead and get discounts on TVs for their sleeper cab. We just had a press release out 3 or 4 weeks ago talking about the addition of Sirius Satellite Radio in hotel rooms. So driving the higher carrier retention rate, I think, is critical in facilitating a flywheel effect, where they come back to the platform, they know they can get their next load, they know they can get these discounts. In return our customers, our shippers, right, we'll know that they're getting best-of-class drivers, and they'll then be incentivized to reward us with more volume and so goes the flywheel.

Great. And just to wrap up here, you've talked about profitability and the tendency of higher highs and also higher lows going forward. Kind of what are the key drivers and key limitations to this new base going forward?

I think that's certainly how we're thinking about it. I think as part of that, technology is going to be critical again, like our ability to continue to be best of breed, leveraging our internal pricing algorithms, leveraging our data, right? We haven't talked on this -- talked about this. But not only is it the $3 billion or so of revenue that we have in our brokerage business, but leveraging that plus our $4 billion of freight under management to ensure that we are holistically using the best data sources that are available to us, our proprietary data sources to ensure that we have the best pricing algorithms and the ability to go ahead and buy cost of purchased transportation better than anyone else and really leverage that in the context of our carrier base. And 47% of our carriers are just -- have one truck, right, single owner operator. So I think putting all that together, we certainly remain confident in the ability to go ahead and maintain best-in-class margins and the ability to go ahead and grow gross margins over time. I think the natural next question tends to be what if technology increases price efficiency, and therefore, you see gross margins come down longer term. Ultimately, while that's not necessarily our view, we'll be prepared for any scenario to the point where if you have scale, if you have best-in-breed tech, just like we do, what you'll see is even if that does play out, you'll see us go ahead and expand EBITDA margins longer term.

So when we think about RXO, we don't necessarily come -- questions about forwarding don't necessarily come to mind right off the jump. But we obviously did see forwarding boom during the pandemic. Can you talk about how this is normalized, and what's the solid thought process going forward for forwarding as part of the business?

Sure. So you're right. Forwarding is a relatively small percentage of our business. It's about 7% of revenues. Ocean rates have certainly come down significantly from the height of the pandemic at $20,000 a container to roughly $1,500 now. So I think that is in the process of normalizing. We'll see sort of how that market plays out from a freight standpoint with respect to air and ocean. But I think what's also important to realize is that RXO's business is pretty well diversified underneath freight forwarding, where while it's just 7% of our revenue, about half the profitability of freight forwarding is actually more domestic-type offerings. So think about transloading, think about down to the border from a custom standpoint. We've really increased that as a percentage of the mix. And that actually gets pretty exciting over the next 3 to 5 years. You think about the ability for -- or you think about the trend of onshoring, which continues to accelerate to the extent that we start seeing more production facilities located here in North America. I certainly think that could be a nice tailwind to the freight forwarding business longer term.

Great. And then I guess just to wrap up now that we have touched all 4 segments of the business. In terms of managed transportation, what are your objectives for managed transportation over the period of your '27 forecast? And is there necessarily a freight under management target?

So there's no specific freight under management target that we've shared as it relates to managed trends embedded within '27 guide. But I think you can certainly expect that we expect all of our businesses to grow between now and 2027. I think increasing freight under management within managed transportation is a strategic priority for the organization, not only because it will obviously benefit managed transportation, which is a very good business, very sticky revenue, think about on average 5-year type contract length, which benefits from a secular trend of outsourced transportation in good economic times and in bad economic times. So I think that's going to be a very steady business for us. But the ability to go ahead and increase freight under management is going to have significant benefits to the rest of the organization, like we talked about earlier, most notably within brokerage as it relates to the ability to go ahead and drive synergy loads or synergy revenue from managed transportation into our brokerage business. I certainly think that has the ability to go ahead and contribute longer term.

And do you guys quantify cross-selling opportunities or quantify a pipeline by any chance? Or would you going forward?

Yes. So what we've talked about is in '22, 62% of our revenue came from revenue -- came from customers that did business with more than one line of revenue, and we would certainly expect that to increase longer term.

Makes sense. All right. Again, if anybody from the audience has any questions, we're about up on time. But if not, thank you, Jared, for your time today, and I look forward to seeing what -- sorry.

Could you just discuss when do you think we're going to reach a floor in spot rates? And how much lower do you think we have to go?

Yes. No, it's certainly a good question. I think similar to the comments that I made earlier, we continue to remain cautiously optimistic about the second half of the year. So we think there will be demand drivers, particularly within retail and e-commerce to go ahead and help inflect the market. Similarly, we're certainly closely watching what's happening on the carrier side as it relates to profitability and whether or not we see any kind of dynamics to change that supply-demand balance from a carrier standpoint. But ultimately, a good broker will thrive in both good and -- in both a tight market and a loose market, which is what we're focused on, right? So when you think about how we're able to respond, I think what we're focused on is ensuring that if the market goes ahead and inflects in the second half, well, you'll see us go ahead and increase our spot business appropriately. And I talked about earlier about the ability to drive that greater than 1,000 basis points in any given quarter. If the market takes a leg lower, you'll see us go ahead and pull our cost of purchased transportation effectively to go ahead and cope with that environment. So ultimately, we're cautiously optimistic on the second half recovery. We're seeing that, based on our conversations with our customers, I think the destocking was significant within retail and e-commerce into last year. And that's sort of how we're seeing the market right now.

Thanks for your question. Well, Jared, thanks again for your time today. Looking forward to speak in the future.

Great. Thanks, everyone.