GXO Logistics, Inc. (NYSE:GXO) Q1 2024 Earnings Call Transcript

GXO Logistics, Inc. (NYSE:GXO) Q1 2024 Earnings Call Transcript May 8, 2024

GXO Logistics, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the GXO First Quarter 2024 Earnings Conference Call and Webcast. My name is Camilla and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this conference is being recorded. Before the call begins, let me read a brief half of the Company regarding forward-looking statements, the use of non-GAAP financial measures and the Company’s guidance. During this call, the Company will be making certain forward-looking statements within the meaning of applicable securities laws, which, by their nature, involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those projected in the forward-looking statements.

A discussion of factors that could cause actual results to differ materially is contained in the Company’s SEC filings. The Company’s earnings release or call are made only as of today and the obligation to update any of these forward-looking statements, except to extent required by law. The Company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules during this call. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the Company’s earnings release and the related financial tables are on its website. Unless otherwise stated, all results reported on this call are reported in United States dollars. The Company will also remind you that its guidance incorporates business trends to date and what it believes today to be appropriate assumptions.

The Company’s results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and consumer demand and spending, labor market and global supply chain constraints, inflationary pressures and the various factors detailed in its filings with the SEC. It is not possible for the Company to actually predict demand for its services, and therefore, actual results could differ materially from guidance. You can find a copy of the Company’s earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section on the Company’s website. I will now turn the call over to GXOs Chief Executive Officer, Malcolm Wilson, Mr. Wilson, you may begin.

Malcolm Wilson: Thanks, Camilla, and good morning, everyone. I appreciate you joining us today for our first quarter 2024 earnings call. With me in Greenwich are Baris Oran, our Chief Financial Officer; Richard Cawston, our Chief Revenue Officer; and Kristine Kubacki, our new Chief Strategy Officer. As you will have seen two weeks ago, we issued preliminary results for the first quarter of 2024 in conjunction with our bond offering to finance the acquisition of Wincanton. These results reflect the resiliency of our business model and the acceleration of our growth. Today, we’ll walk you through our first quarter and discuss our outlook for the remainder of this year as well as for our longer term 2027 targets. GXO had a strong start to 2024.

We generated revenue of $2.5 billion, up 6% year-over-year adjusted EBITDA of $154 million. We delivered positive organic revenue growth for the quarter and continued to gain market share. When we last spoke, we said that the fourth quarter was the bottom for organic growth, and that’s reflected in the sequential improvement in the first quarter as well as the sales and pipeline activity we’re seeing. We signed approximately $250 million of new business, up 55% year-over-year, including new contracts with Boeing, Guess, Michelin, Puma and WHSmith. More than half contract wins came from customers outsourcing to us or partnering with us for the first time. Earlier this week, we announced a landmark new 20-year partnership with Levis in Germany, where we have been building our presence following our acquisition of Clipper.

This will be a highly automated, newly outsourced operation with a lifetime value of nearly $1 billion. This is just one example of the trend we’re seeing where customers are looking for longer-term partnerships to address their fulfillment needs. To that end, our sales pipeline is growing and ended the quarter at $2.2 billion, a 12-month high. We’ve more than replenished the pipeline after converting $0.25 billion of new wins. We’re continuing to see larger deal sizes and longer contract lens. Additionally, the turnover of the pipeline is accelerating, creating more new business opportunities. Another highlight of the quarter was the announcement of Wincanton, which we closed last week. Wincanton exemplifies our M&A strategy. It expands GXO’s presence in strategic growth verticals in the U.K., including aerospace and industrials providing GXO with a springboard to offer these services across Europe.

And it will be accretive to earnings per share in 2024, excluding synergies on a pro forma basis and double-digit accretive, including full run rate cost synergies. Wincanton builds upon our proven track record of leveraging newly acquired platforms to drive growth through revenue synergies. For example, since the Clipper acquisition, we’ve executed on our strategy to establish a meaningful operating presence in Germany, the largest economy in Europe. As of the end of the first quarter, Germany is the fourth largest pipeline in all of GXO and one of the fastest growing. We’re converting it with high-quality deals like Levis. Similarly, when we acquired PFS in the fourth quarter of 2023, we set out to leverage the combination of GXO’s global footprint with PFS’s leadership position in health and beauty, jewelry and luxury.

Since the acquisition, we’ve integrated the two businesses and expanded legacy PFS customers like Glossier and REFY Beauty across multiple geographies. This is proof positive of our execution on our M&A strategy and especially of our ability to capitalize upon the strengths of companies we acquire. We’re speaking to major global customers every day. And as Richard will discuss in a moment, a consistent thread cautions, is the expectation of a gradual recovery of consumer goods demand. Businesses are building for the future, planning their fulfillment strategies to meet their expected needs and we’re positioning ourselves to take market share by providing best-in-class solutions. One way we’re doing this is through our intensified commitment to leading the market in automated and AI-driven fulfillment.

Automation is a key tenant of our value proposition. And we’re the first mover in trialing the integration of cutting-edge automation like humanoid and AI inside the four walls of the warehouse. We’ve recently introduced some exciting innovations in AI. First, the warehouse optimization pilot we mentioned last quarter was a success driving a productivity increase of approximately 15%, and we’re rolling out the app across our sites as we speak. Second, we’ve recently piloted a proprietary workforce management tool, which we developed in-house. Our tool makes more than 15 million decisions per minute to streamline inventory replenishment and adding about 7% of capacity at no additional cost. We will be deploying this solution broadly across our operations starting this year.

All this to say, I’m delighted with the way our business is performing, and we anticipate continued acceleration in organic revenue growth throughout 2024 and beyond. With our growing pipeline and accelerating pace of new business wins, our focus on automation and sales excellence and the pace of outsourcing in this $450 billion total addressable market, GXO is set to take significant market share over the long term. Now, I’ll hand you over to Richard to update you on what we’re hearing from our customers. Richard, over to you.

Richard Cawston: Thanks, Malcolm. Good morning, everyone. I’ve had the pleasure of meeting some of you over the past few years as the leader of GXO’s European business. In my new role as Chief Revenue Officer, my mission is to convert the significant market opportunity Malcolm just mentioned into outsized growth for GXO. And we’re off to a great start of doing just that. As Malcolm highlighted, our new sales wins signed in the first quarter totaled $250 million, which was an increase of 55% year-on-year and we’re on track to outperform our $1 billion of new wins from 2023. We serve the bluest of the blue chips and what we’re hearing from our customers, both current and prospective is the need to build efficiencies into their operations to support their future growth.

As a result, we’re seeing demand strengthening. I’d like to underline a few of the sales highlights from the quarter, which underpin our confidence in our growth trajectory. First, our pipeline stands at $2.2 billion quarter-on-quarter. We added more than $1 billion of new opportunities in the first quarter alone. Second, our customers are making faster decisions to outsource their supply chains, reflecting returning confidence in their long-term outlook. As a consequence, sales cycles are shortening and our pipeline is delivering results faster with deals getting larger and contracts getting longer. Third, significantly, more than half of our wins in the first quarter were with customers outsourcing or turn into GXO to support them for the very first time.

And finally, in addition to new logos, we’re also expanding our relationships with existing customers. We serve more than 1/4 of the Fortune 100 companies and the success of our London expand strategy is evident in that half of our revenues come from our customers we partnered with in more than one country. We’re seeing these trends develop across our regions. For example, this coming Friday will be cutting the ribbon on a new warehouse that is the largest building in the state of Maryland. We’re supporting personal care and appliance manufacturer, Conair in this 2.1 million square foot facility. This solution consolidates three sites into a single automated operation that handles all of Conair’s brands across retail and direct-to-consumer enabling their growth and combining fulfillment with high value-added services like product tested.

We’ve also recently expanded our 13-year partnership with global apparel company Guess, originally in Europe across the ocean to the U.S. turning it into a global partnership. Guess had previously run their North American operations in-house, and they’ve entrusted us to help them unlock value in their supply chain by outsourcing. We now operate three sites for Guess in Italy, the Netherlands and now the U.S. These are examples of our consultative approach where we engage with our customers at the highest levels of leadership to design a solution that fits their needs. In Europe, as Malcolm mentioned, we just announced our landmark Levis win. We’re delighted to take on a newly outsourced, highly automated operation for an iconic global brand.

I was in Germany last week to visit the site, which is Levi’s superhub. Allowing Levis to supercharge their omnichannel growth strategy. It was extremely exciting to kick off the partnership, the ambition and the momentum on both sides are palpable. This is Germany’s greenest warehouse. With phenomenal sustainability features that raised about in the logistics industry. This new win is especially significant because it exemplifies why a brand such as Levis partners with GSO to transform their operations and drive a competitive advantage through their supply chain. As Malcolm mentioned, in the past few months, we scaled up our sales and account management teams while intensifying our focus on high-growth verticals and geographies and to really capitalize on the opportunity.

We’ve had an excellent first quarter, and our investments in our team, strategy and processes are already translate into pipeline growth and new partnerships with blue chips across the globe. This is why I’m confident that we’ll deliver strong growth in new sales wins in 2024 and beyond, taking share of our enormous addressable market. And with that, I’ll pass the mic to Baris to take you through our detailed financials, 24 guidance, 2027 targets. Baris, over to you.

Baris Oran: Good morning, everyone. We started the year on strong footing, and we are pleased to see a continuation of the positive trends we noted on last quarter and the return to organic revenue growth. We believe that the fourth quarter was the bottom. For the first quarter of 2024, we generated revenue of $2.5 billion, growing 6% year-over-year, of which 1% was organic. Our organic growth was led by our largest verticals, omnichannel retail and technology, particularly in the semiconductor space. Our EBITDA was $154 million, we recorded a net loss of $36 million, which was primarily driven by a one-off legacy litigation expense as well as one-time transaction costs for Wincanton, which are in line with the costs associated with our earlier acquisitions.

As you noted on our call last quarter, our growth, margins adjusted diluted earnings per share and adjusted EBITDA this quarter reflects the optimization of our customer footprint, our productivity initiatives and our investments in our capabilities. Our laser focus on these capabilities is paying off, and you’ll see the results in our new business wins going forward. Our operating return on invested capital this quarter was above our target at 33%, demonstrating our ability to continue to invest back into our business with high returns. We expect to maintain this level of return going forward. In 2023, we surpassed all expectations on free cash flow, and we continue to generate excellent free cash flow this quarter which improved by $26 million year-over-year.

This underpins our confidence in our full year free cash flow conversion target. Our balance sheet remains rock solid, and we are committed to our investment-grade rating. We are expecting leverage levels of about 2.5x by the end of this year and about 1.9x by the end of next year. We have no debt coming due in 2024. As you know, one of our most important achievements this quarter was the acquisition of Wincanton which we completed last week. We acquired Wincanton at a very attractive valuation, taking into account the cost synergies we expect to deliver. The expected deal will be accretive to earnings in 2024, with double-digit accretion to adjusted diluted earnings per share once we fully integrate and this level of synergy realization is borne out in our previous acquisitions of Clipper and Kuehne + Nagel’s UK operations.

The business also gives us an exciting exposure to industrial and aerospace sectors in Europe with well-positioned customers like BAE Systems, EDF and Alstom. Wincanton carries a high proportion of resilient hosts contracts, which even before the £45 million of cost synergies, we expect Wincanton to contribute will deliver very stable, slightly lower margins as well as higher returns and predictable cash flow. Now returning to our guidance, for the full year of 2024, inclusive of Wincanton, we now expect adjusted EBITDA growth at the midpoint of our guidance range, which is $800 million to $835 million. We have reiterated our previous organic revenue growth guidance of 2% to 5%. Our first quarter organic growth shows an upward trend and we anticipate continued acceleration throughout the balance of the year.

April has shown an acceleration in organic growth versus the first quarter. We expect to convert 30% to 40% of our adjusted EBITDA into free cash flow above our 30% long-term target. We have also updated our 2027 targets. These revised targets reflect our performance for 2023 and our guidance for 2024. Additionally, following the close of our acquisition of Wincanton, the expected impact of this transaction is embedded in our new plan. Our revised 2027 targets, which include $15.5 billion to $16 billion of revenue and $1.25 billion to $1.3 billion of adjusted EBITDA reflect the following over the next three years. First, double-digit organic revenue growth on average over the period from 2024 to 2027 as we grow our wins and market share, reflecting a gradual recovery in our customers’ volumes through 2024 and 2025.

And second, margin expansion through our focus on business development, technology and automation with a significant focus on AI as well as cost synergies, we expect to deliver from Wincanton. We had a clear path to achieve compounding double-digit top line growth with 15% adjusted EBITDA CAGR and even faster growth in exhausted diluted earnings per share. GXO’s growth is accelerating, and we are delivering operating return on invested capital and free cash flow conversion ahead of our long-term targets. We’ve just completed a great acquisition at an attractive valuation, and we will continue to allocate capital in the best interest of our shareholders. And with that, I’ll hand it back over to Malcolm.

Malcolm Wilson: Thanks, Baris. We’ve had a strong start to 2024. We’re seeing growing demand from global blue-chip customers as they focus on sure of their supply chains. We’re positioning GXO to take market share as customers build efficiencies into their operations to support the future growth, and we’re making big moves in automation and AI. Our laser focus on profitable growth gives me great confidence in achieving our long-term targets and creating outsized shareholder value. And with that, we’ll hand the mic back to Camilla and transition to Q&A.

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Stephanie Moore with Jefferies. Please proceed with your question.

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Q&A Session

Stephanie Moore: Maybe I wanted to start with just the organic growth performance. If you could touch on the 1Q performance and maybe really focusing on that, maybe that same-store sales or volume component. But importantly, how that bridges to the full year expectations for 2024 and just what you’re hearing in the underlying operating environment to give you confidence in those — in that target?

Malcolm Wilson: Thanks, Stephanie. It’s Malcolm here. Stephanie, while we’re not seeing any material change in customer volumes, particularly on the consumer goods side, what we have seen is a more positive trend as we’ve gone through quarter one. When we compare quarter one to quarter four, we can see sequential improvements. And as Baris just mentioned, in early part of quarter two, April, already, we can see that trend has continued to go forward. When we see the three regions that we’re working in, continental Europe, well, that’s continued to be very resilient. I can’t say it’s growing, but it’s equally not deteriorating. It’s very resilient compared to what we’ve seen in the past. Our U.S. business, that’s a bit mixed.

And it reflects a wide range of different industries that we’re servicing. Consumer volumes are now stable. U.K., in fact, that’s been our strongest growth market during quarter one. And it’s interesting that, in fact, it was the first two short signs of slowdown in ’23. And it seems to be the first to show really strong signs of improving. So, all in all, that’s the picture that we see. If I look across every territory or what we can see, consumer demand for goods very different than consumer demand for services for goods, it continues to be sluggish. Companies are starting to restock. We can see that from the dialogue that we have with our customers. I think we’ve seen the bottom of the destocking environment. And what we clearly evidencing is customers in order to meet their plans, they’re going to need to start to restocking through the course of the year.

So that’s a good sign for us. But I do want to level set. Overall, it’s a sluggish environment in ’24, just as you see from many of the parcel carriers and the real estate companies, the destocking activity, that’s impacted, particularly in the small proportion of our business where we have multi-customer sites. So, we have capacity. But overall, from a Q1 highlights perspective, sales pipeline is business wins are up. Customer decision-making is speeding up. That’s probably the most important aspect $2.5 billion top line, 6% growth, $154 million, in line with consensus. Our Wincanton deal, as Baris mentioned, that’s a deal done at a very attractive price, increases in automation and AI. So overall, we’re off to a really good start. Baris, maybe you can comment on the actual evolution of growth as we expect this year.

Baris Oran: Sure. Let me first start with Q1. The bridge to our 1% organic growth in the first quarter is roughly new business contributing around 6.5%, volumes including customer consolidation of footprint sequentially improved from Q4, but still negative year-over-year, around minus 3%. Pricing mainly inflation is about 2% and the remainder is coming from the retention in line with our long-term averages. As Malcolm mentioned, April already shown an improvement versus the prior quarter. If I look at the entire year of 2024 the bridge for our organic growth is — which was about 2.5%. New business expected to contribute around 9% and as we continue to see a lot of takeover in place and outsourcing projects such as Levis. Number two, volumes plus consolidation of footprint expected to be around minus 3%.

Pricing primarily inflation around 2% and the remainder coming from the impact of retention, which we expect to be in line with our long-term averages. That’s our bridge for the entire year.

Operator: Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.

Scott Schneeberger: I want to focus on this new win of Levis pretty exciting for you. When will that start to contribute? Just an idea of when that — how that’s going to ramp and then also, you just kind of shared the contribution you’re anticipating from new business wins. But there’s been some discussion of this speeding up, Malcolm, you mentioned of decision-making. So, if you could just kind of work in what you’re seeing there much appreciated. And then lastly, as part of this long-term contract, 20 years, is this a new trend we’re seeing on Levis and I think we’ve seen that with other deals recently?

Richard Cawston: Scott, it’s Richard Cawston delighted to meet you this morning. It was my first earnings call, so I’m looking forward to a great conversation. Thanks for the question. We’re super proud about this win with Levis. It underpins our progression into Germany that we set out to do last year following the acquisition of Clipper that give us a strong foundation. It’s Europe’s largest economy, and we absolutely should be there with our automation, our know-how and our agility and our laser focus in the warehouse. And I think if you recall, last year, we opened up a speculative warehouse, which we don’t normally do in Germany because the opportunity is so big. And I’m pleased to announced that warehouse now include in aerospace wins that have come into us in this region.