GXO Logistics, Inc. (NYSE:GXO) Q2 2023 Earnings Call Transcript

GXO Logistics, Inc. (NYSE:GXO) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: Welcome to the GXO, Second Quarter 2023 Earnings Conference Call and Webcast. My name is Daryl, and I will 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 statement on behalf of the company regarding forward-looking statements, the use of non-GAAP financial measures and the company guidance. During this call the company will be make certain forward-looking statements within the meanings of applicable securities laws, which by their nature involve a number of risks and 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 forward-looking statements in the company’s earnings release or made on this call are made only as of today, and the company has no obligation to update any of these forward-looking statements, except to the 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.

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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 of the company’s website.

I will now turn the call over to GXO’s Chief Executive Officer, Malcolm Wilson. Mr. Wilson, you may begin.

Malcolm Wilson: Thanks, Daryl, and good morning, everyone. Thanks for joining us today for our second quarter 2023 earnings call. With me in Greenwich are Baris Oran, our Chief Financial Officer; Bill Fraine, our Chief Commercial Officer; and Mark Manduca, our Chief Investment Officer. Before we review the quarter, I want to start by acknowledging that yesterday marked our 2nd Anniversary since becoming a publicly traded company. We’ve had a stellar first two years, delivering eight straight quarters of revenue and adjusted EBITDA growth, posting can consistently excellent operating results and signing 100 of new partnerships with blue-chip customers all over the world, while enabling their businesses through our best-in-class tech enabled solutions.

We have solidified ourselves as a globally recognized brand for logistics excellence and a part of the Fortune 500. We are committed to ambitious environmental, social and governance goals and are tracking especially strongly on our sustainability targets. I’m also particularly proud to note that this quarter’s employee sentiment survey reveal the highest level of team member engagement and job satisfaction ever recorded. This past January, we held our first Investor Day as a standalone company. We unveiled our strategic plan and financial targets for 2027, and have the opportunity to showcase our unique value proposition to the broader investment community. So, it’s been a fantastic two years, and I wanted to take a moment on behalf of the team here with me in Greenwich and our entire global leadership team to thank our employees, our customers and our shareholders.

Now turning to the quarter, I’m pleased to say, we delivered both topline and bottom line growth. Our revenue in the second quarter was $2.4 billion, growing 11% year-over-year with 3% organic growth. Our adjusted EBITDA was $190 million also up year-over-year and above our expectations. As a result, we are reiterating our full year organic revenue growth guidance of 6% to 8%, and we’re raising our full year adjusted EBITDA guidance by $10 million, bringing the midpoint of our range to $740 million. This quarter we won our highest ever value of new sales wins, beating our prior record, which was set in the second quarter of 2022. Among our contracts signed this quarter, our new partnerships and expansions with a terrific group of customers, including Boeing, Eddie Bauer, PepsiCo, Sainsbury’s, Schneider Electric, and TJ Maxx.

We recently announced an expansion with Abercrombie & Fitch to the U.K. after launching our first operation for them a highly automated distribution center utilizing goods-to-person robotics here in the U.S. last year, and IKEA recently ranked our site in the U.S. number one, in its global network for productivity, service quality and inventory accuracy. A few weeks ago, we also announced the signing of a multiyear agreement with Heineken. Over the past two years, we’ve significantly transformed their distribution network enhancing efficiency, service and sustainability. In the quarter, we also launched our business in Germany, which is an exciting new market for us and we’re looking forward to meaningfully growing the, over the coming quarters and years.

I want to provide an update on one more point. We mentioned last quarter that we were in the process of strengthening our tech organization, to ensure we have the right structure to meet the huge demand for our services. This means both looking at the organizational needs today, where we’re increasing our total operational tech by over 60% year-over-year on a quarterly basis, and anticipating our growth over the coming years. I’m pleased to say that we completed that review, and you may have seen last week’s announcement regarding the appointment of Adrian Stoch, to the role of Chief Automation Officer. Some of you have met Adrian already, he served as the President of our Consumer Division in the U.S. since 2021, where he’s driven record wins and has been looking after some of our highest profile customers in this capacity.

He has delivered substantial improvement in productivity through the deployment of automation and technology in complex consumer solutions. In his new role, he be looking after our operational tech, including automation, machine learning, and artificial intelligence as they relate to our underground operations on a global basis. I’m delighted to have Adrian’s unique expertise in this capacity going forward. So in summary, we’re proud that we’re one of the few companies in our industry that is expecting to grow top and bottom line this year. Since our spin, we’ve demonstrated our strength and resilience in a changing macroeconomic backdrop quarter-by-quarter. On top of that, we continue to deliver record levels of new sales wins, which will propel our future growth and underpin our confidence in our 2027 targets.

And with that, I’ll ask Bill, to update you on what we’re seeing on the ground. Bill, over to you.

Bill Fraine: Thanks, Malcolm. Good morning, everyone. As Malcolm said, we are very excited to have delivered a record amount of new sales wins this quarter, nearly $500 million, beating our previous record. And with our record pre-pipeline, we are continuing to see many more opportunities for growth. We see more and more brands partnering with GXO to modernize their supply chains and optimize their operations. What is really changing of late, is that this is now happening at a greater pace and scale than we’ve ever seen before. This is a dynamic growing market, and we are winning a larger share of these bigger business opportunities. And this is all due to the GXO difference. As we have first mentioned last year, customers are increasingly realizing the possibility of what logistics done right can achieve and that business as usual will no longer work.

You see this in our second quarter wins, with some notable newly outsourced business, including Eddie Bauer, Ingersoll Rand and Sainsbury’s. With Sainsbury’s, we have already successfully gone live with two of the six sites that we were awarded in April. And these sites are doing millions of case picks per week. This highlights just how fast we can move on the ground. Sainsbury’s is a very exciting partnership for GXO, and it also showcases our leading capabilities for large outsourcing deals. As customers continue to seek large transformative deals, we are in a prime position to convert more and more of the $300 billion in-source market. We are also seeing many of our customers deepen their existing partnerships with GXO. We are very excited to be going live on a huge new European site for JD Sports, which highlights how we’re expanding our partnership, which started in the U.K. and is now expanding across Europe.

We are also working with this customer to support driving their growth globally, where they are looking to leverage our best-in-class capabilities. We also grew partnerships with a number of other existing customers, including [Javieris] (ph), Nike and PepsiCo. This is proof positive of the GXO difference, reflecting the transformative value that a scaled tech-enabled partner with decades of experience in bringing the customers. Stepping back, the makeup of our wins and our pipeline continues to reflect the diversity and vibrancy of our business. As example, our rapidly growing industrials activity in the U.S. has already won almost as much business from global leaders like Boeing and Schneider Electric in the first half of the year, as it did in the whole of last year.

Our pipeline stands at $2.1 billion, up year-over-year, and this even after our record new business wins in the quarter. Over half, our pipeline is made up of new logos, that is companies that are looking to outsource and reevaluate their supply chains. This plays to GXO’s core competency. And it is worth mentioning that our pre-pipeline is also up about 30% year-over-year. One of our customers recently told me that GXO is, and I quote, the port in the storm. We understand the market. We understand the need for agility, and we bring to life the quantum leap that they can gain through our scale, expertise and technologies. That is why they turn to us. And we are deploying this game changing technology at a breathtaking pace, including a site soon to go live, with approximately 5,000 automated shuttles and pouches in what will be one of Europe’s largest and most automated e-com site.

As Malcolm mentioned, we recently added Adrian Stoch to our global leadership team, in the new role of Chief Automation Officer. I’ve known Adrian and worked with him since he joined GXO, and he is the real deal. He joined to lead our consumer business and demonstrated right away his expertise running complex customer operations. For example, one of Adrian’s recent automation transformations drove an 18% reduction in cost per unit for the customer. As we highlighted at our Investor Day, as more customers in more markets embrace the increasingly critical need for automation, GXO wins more market share, and this grows our top and bottom lines further. With Adrian at the helm, it is safe to say that our pace of tech deployment is just getting started.

We are really excited by our growth. We are winning larger opportunities, many of which are first time outsourcing, and our existing customers are turning to us to help support their ambitious growth plans. And as our wins and pipelines show, we are set up for a very strong 2024. And with that, I’ll hand you over to Baris, to walk you through our numbers and guidance. Baris, over to you.

Baris Oran: Thanks, Bill, and good morning, everyone. We are very proud of results this quarter, and we are confident in our outlook for the remainder of 2023 and beyond. As Malcolm mentioned, for the second quarter of 2023, we generated revenue of $2.4 billion, an increase of 11% year-over-year, including 3% organic revenue growth. Our technology, aerospace, and Continental European parts of the business continue to lead the pack on organic revenue growth. And we saw this trend continue through July. Our adjusted EBITDA in the quarter was $190 million, up 8% year-over-year. We are delivering consistent adjusted EBITDA margins as a result of our resilient business model. Despite the non-operational impact from FX hedges and pensions, which was 70 basis points, our margins are strong and resilient.

This was driven by our productivity initiatives, both central and at the site level. Our margins are up quarter-over-quarter by 100 basis points, and all of this gives us great confidence in our margin expectation for the second half of the year. Our adjusted diluted earnings per share was $0.70 up from $0.68 in the prior year. Our operating cash flow was $61 million and our free cash flow totaled $3 million. Taken into account the strength of cash flows we anticipate for the remainder of the year, we prepaid $115 million of debt ahead of schedule. Demand for our services continue to expand, is seen in the record number of wins, and we continue to write high quality contracts with blue-chip customers that deliver attractive returns. Our revenue from automated operations continues to grow faster than our overall growth level, and our operating return on invested capital remains well above 30% target.

Looking ahead to our expectations for the full year 2023, we are reiterating our organic revenue growth guidance range of 6% to 8%. We are also maintaining our approximately 30% free cash flow conversion rate for the full year of 2023. With respect to our balance sheet, we will continue to deploy our capital in the best interest of our shareholders, including deleveraging, buyback and accretive M&A. We are also pleased for the second quarter in a row to raise our full-year profit guidance for both adjusted EBITDA and adjusted diluted earnings per share. We’re raising our adjusted EBITDA guidance by $10 million, bringing our full-year range to between $725 million to $755 million. This reflects better than expected performance in our operations.

We are also raising our adjusted diluted earnings per share guidance by $0.05 bringing our full-year range to $2.45 to $2.65 per share. Looking beyond 2023, we believe we are in a great position for next year. With nearly $0.5 billion of incremental business already secured for 2024. In addition, we have over $100 million locked in for 2025. One of my core focus areas as CFO is to continue to maximize shareholder value by allocating capital into context with high returns, attractive growth and strong cash flow generation, and there are a lot of opportunities to do this. And with that, I’ll hand you over to, Mark.

Mark Manduca: Thanks, Baris. In a dynamic environment, we’ve delivered a strong first half of 2023. As Bill spoke about, we set a record for new business wins in Q2, which alongside our vibrant pipeline sets us up for strong topline growth into 2024. Moreover, thanks to these recent new wins, we now have visibility for growth into 2025 and also 2026 on our journey to achieving our 2027 targets. You heard Baris’ comments about the counter cyclicality of our margin profile. There are very few companies in this market that are combining growth with margin resiliency. We’ve been saying it for two years and now we’re proving it. This is a resilient business and a rare breed of an asset, and this is a management team that’s delivering on its promises. And with that, we’ll turn back to Daryl, for Q&A.

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Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Stephanie Moore with Jeffries. Please proceed with your questions.

Stephanie Moore: Hi, good morning. Thank you.

Malcolm Wilson: Good morning, Stephanie.

Stephanie Moore: Good morning. So, congratulations on another nice quarter. Just looking at your organic growth performance year-to-date, I think with 7% growth in the first quarter and 3% in 2Q, what gives you confidence in your ability to see a step-up in growth in the second half to kind of meet your full-year 6% to 8% target. And maybe within that, if you could just talk about, how your thoughts for peak season, and maybe what you’re seeing in your different geographies too? Thank you.

Malcolm Wilson: Thanks, Stephanie. It’s Malcolm here. Let me give some color around that question. So, our business is doing really well. When we think about the kind of verticals that we’re operating in, so the customer industries, our industrial, aerospace, food service, tech, autos, they’re really doing well across all of our regions. But of course, our consumer facing business, our e-commerce, our brick-and-mortar omnichannel retail business, that is slower right now, and it’s clearly a function of the softer macro that we’re seeing across all of our business, every region, every geography. When we think about the holiday season, we’re already and have been now for around a month and a half in deep discussion with our customers.

That’s the normal phasing for when we’re doing this process. And we’re collecting customer intell, customer information, customers are actually committing to fund incremental resources. So this year, just like previous years, we’ll be hiring in from the market around 15,000 to 20,000 new team colleagues to cope with committed customer demand particularly around the holiday season, holiday season for us is our biggest quarter. So, when we bring all these factors into play, we’re in pretty good shape. But on — in addition to that, I do want to call out new business. We’ve had two really stellar quarters. I mean, quarter two, for us as a business it was an absolute record. We signed nearly $500 million of new business. And a lot of the business that we’ve signed in the last few quarters is impacting now, as we’re progressing into the second half of the year.

We talked and I think you will have seen in our press releases early in the year about the Sainsbury’s a huge business win, that’s already going live. We’re already implementing on different sites. So, all of those benefits are kicking in to the second half of the year. So all-in-all, when we put all of those factors together, we’re feeling very good about where we are on the second half. Of course, we’re watching carefully at the macro, but we’re now a number of months away from the end of the year. But clearly, we’re watching carefully the macro, we’ll know in earnest, and I think, as we get into the first part of September, that’s when we really see peak season, holiday season volumes really maturing along for our business. So, that’s the time we really know that would be the asset test.

But right now, everything we’re seeing is giving us a very good feeling about our overall view for the full-year. And that’s why we’ve reiterated our full-year guidance, may be useful. I’ll ask Baris, to just come in and just share in terms of how our year has progressed so far compared to last year, because it is an interesting dynamic.

Baris Oran: Thank you, Malcolm. In Q2, our organic revenue growth was 3%, and we saw low-to-single digit impact from lower volumes, with omnichannel retail vertical is softer, but stronger in aerospace, technology and food services. And, as Malcolm mentioned, we had strong wins. And as you can see, our margins are not really particularly sensitive to volumes. It’s not a business that has much operating leverage. In the second half of the year, we’ll have easier comps compared to — especially the fourth quarter of last year, 13% to be exact, versus the second quarter of this year. And we’re working on a peak planning for our customers. We’ll have greater clarity in September, and our working assumption was in the peak. We will have a similar peak of 2022, which was rather soft.

One other thing to remind ourselves, we have won a lot of new outsourcing contracts, and these are takeover in-place. And, the revenue contributions of those you will see in Q3 and Q4, and that’s how we are comfortable with the rest of the year for our revenue growth.

Stephanie Moore: Great. No, really helpful. And then just as a follow-up, maybe if you could provide a bridge to your free cash flow in the second quarter, and then how we should think about the cadence of free cash flow in the back half of the year, to meet your conversion target? Thanks.