Jason Seidl: Well, that’s some great color. If I could just quickly follow up here. How should we look at future M&A sort of after Wincanton guys, are you looking at expanding into some different geographies?
Malcolm Wilson: Yes. Jason, it’s Malcolm here again. I think right now, our focus is on digesting Wincanton as Baris mentioned, it’s a sizable business. And our teams, they’re very skillful at integrating business businesses. As I mentioned, Wincanton comes with just a very admirable team of people. So, we’re really delighted on that. But right now, our focus throughout ’24, really ’25 is going to be really on the integration of that. Thereafter, look, as we’ve explained, business strategy is always to consider M&A when it’s appropriate, when it can bring something new to our business. Wincanton, a great example, new verticals. Verticals that we’re not present in right now that are very difficult to enter without actually being present in the market.
Clipper, you remember when we acquired Clipper, two years ago now, we said very clearly that this would give us the springboard into Germany. And now two years on well, you’re really seeing the evidence of that strategy coming into life. And that’s what makes our M&A strategy, I think, a very exciting one. So, we’re not really thinking now about M&A for the future. Right now, all mines on making a very smooth integration, delivering on what we’ve committed to in terms of the Wincanton deal.
Jason Seidl: Makes sense. I appreciate the time as always, gentlemen.
Operator: Our next question comes from the line of David Zazula with Barclays. Please proceed with your question.
David Zazula: Just noticing the cash flow guidance, Barish, has not changed from what you had previously had. If you could talk about expectations on the cash flow side for the Wincanton acquisition and your expected profile and how that converts to dollars?
Baris Oran: Of course, David. Our cash flow in Q1 was actually better than last year, about $26 million year-over-year up. Our strong Q1 puts on track to achieve 30% to 40% EBITDA or free cash flow conversion guidance. So, when you’re calculating the expectation for the entire year, I would take the — including the Wincanton contribution and increased EBITDA number, then you convert into cash flow. Our working capital management has been favorable. We continue to be favorable in 2024. And despite investing very heavily in a lot of projects, we have a very high capital discipline throughout the enterprise. We have high cash flow generation expected this year, above our long-term target of 3% to 30% to 40% in 2024, and we still write high-quality contracts with high return invested capital.
David Zazula: And then on the Levis contract, I don’t know, Richard, who wants to take, but you hinted some automation opportunities in some existing automation. Can you discuss the current automation level of the facility there and what the automation opportunity might be?
Richard Cawston: Yes, absolutely, David. So, in fact, the Levis is fully fitted out with state-of-the-art automation, end-to-end processes, some really showcase phenomenal attributes to the site, along with its ESG credentials. As you know, about 42% of our operations are automated. That’s split into fixed automation around 30% and what we call adaptive tech on around 12%. Now that adapted tech is absolutely fly in. These are the robots, the robots, the shuttles and the AI-driven technology that’s coming to the market. You saw our Digit robot announced last year, our humanoid robot or the earlier part of this year. So that sort of technology we can plug and play into many existing operations, and we can also use it to pivot manual operations into long-term automated operations. When we do that, we improve the margin. We generally drive longer duration contracts, and we enjoy better returns that we share with our customers. So, it’s a great thing.
Operator: Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Ben Moore: This is Ben Moore for Amit at Deutsche Bank. Your 2027 EBITDA target has moved down more than your revenue target implying a lower EBITDA margin. Can you let us know why that’s happening?
Baris Oran: Ben, this is Baris. Let me take that question. If we go look into how our margin is improving throughout the new plan from today to 2027, there are primarily three buckets from today’s margin. First is automation. Looking forward, we expect about 30 basis points of incremental margin from higher levels of automation adaptive technology deployment. We are particularly encouraged with how AI is improving the ROI of automation for our customers. Number two, Wincanton, we have great confidence in achieving the cost synergies of £45 million given our muscle memory of achieving higher percentage of revenues with Clipper integration, this £45 million is equivalent to about 35 basis points of margin improvement out to 2027.
And the last component is productivity and central efficiencies and synergies from prior acquisitions. As a reminder, we have a run rate of about $40 million in 2024 from these programs and we expect another $35 million of savings. So around 30 basis of margin improvement out to 2027. So, three components: automation, 30 basis points Wincanton 35 basis points and productivity and central efficiencies primarily giving us another 30-basis point margin improvement versus this year.
Ben Moore: Great. And maybe a two-parter. In terms of still assuming the 10% revenue CAGR growth, what is the confidence level in that? And when can we see some operating leverage in the direct operating cost line? What can you do to drive less inflation and cost creep in that line item?
Baris Oran: We have a $2.2 billion pipeline increasing wins and improving consumer environment, giving us great confidence as we look into the future. It’s going to be a gradual climb. But if I give you the entire bridge of revenue — organic revenue growth of 10%, we roughly expect that to come from 10% coming from new business volumes to have a low single-digit impact contribution and that is expected to ramp up ’24 and ’25 and hitting the potential pricing to come around inflation, which we took about 2% to 3% and the remainder is coming in line with inflation. As far as business model is concerned, we are working on central efficiency programs which we have highlighted last year, and you see in our financials this year, we are putting more and more efficiencies.
That is going to give us further margin uplift, taking cost out from our central cost and support cost structure. But remember, Ben, it’s a contractual business model, we have high variable cost, low fixed cost and limited operating leverage in our business model that has always been the case for the last three years. The operating leverage is primarily going to come from the central cost, the site level cost of SG&A and other items. And we have been working on those, and we have been taking costs out structurally.
Operator: Our next question comes from the line of Bascome Majors with Susquehanna. Please proceed with your question.
