GXO Logistics, Inc. (NYSE:GXO) Q4 2023 Earnings Call Transcript

GXO Logistics, Inc. (NYSE:GXO) Q4 2023 Earnings Call Transcript February 14, 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 Fourth Quarter and Full-Year 2023 Earnings Conference Call and Webcast. My name is Darryl, 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 statement on behalf 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 law, 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 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.

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 GXO’s Chief Executive Officer, Malcolm Wilson. Mr. Wilson, you may begin.

Malcolm Wilson: Thank you, Darryl. And good morning, everyone. I appreciate you joining us today for our fourth quarter and full-year 2023 earnings call. With me in Greenwich are Baris Oran, our Chief Financial Officer; Adrian Stoch, our Chief Automation Officer. 2023 was a stellar year for GXO. We raised our adjusted EBITDA expectations through the year, delivering $741 million for the full-year. We converted a record 40% of that adjusted EBITDA into free cash flow. We signed a billion dollars of annualized new business wins positioning GXO for continued growth. We deployed a record amount of automation helping our customers to operate more efficiently and we acquired PFS, a premier fulfillment provider in high growth verticals.

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Q&A Session

For the fourth quarter of 2023, we generated revenue of $2.6 billion, and we delivered adjusted EBITDA of $193 million in line with our expectations. We benefited this quarter from our balanced portfolio over 1,000 companies partner with GXO across 27 countries where we operate. We handled record volumes for some while managing a softer peak for others. For the full-year 2023, we generated $9.8 billion of revenue, growing 9% of which 2% was organic. As you’ll recall, our initial adjusted EBITDA guidance for the year was a range of $700 million to $730 million. We are proud to say we beat the midpoint of that guidance by a healthy $26 million, with our full-year adjusted EBITDA coming in at $741 million. During the year, we closed the tremendous $1 billion of annualized new business wins, signing significant new partnerships and expansions with a diverse group of customers including Kellogg’s, LVMH, Nike, PepsiCo, and Unilever.

I can’t emphasize this point enough. GXO’s ability to win a billion dollars of new business with blue chip customers speaks volumes about the demand for our superior solutions. At the time of the spin we talked about a $450 billion total addressable market of which $300 billion is handled in-house presenting a huge growth opportunity. Only two short years later, about 40% of our wins in 2023 came from outsourcing, up from about 26% in 2022, as customers looped to GXO to make a strategic change in their business. We deployed a record amount of automation into our operations and set all time volume records at two of our highly automated sites. And we’re trialing some very exciting cutting edge technologies, including AI-powered robots and humanoids, which I’ll ask Adrian to update you on in a few moments.

Our expertise in automation and robotics continues to set GXO apart, and our market share is higher in verticals where we’ve automated for our customers. Our automated solutions enable us to improve service and lower costs for our customers. We are creating the warehouses of the future, and our leadership in this area is a critical part of our long-term growth trajectory. Through our acquisition of PFS, we’ve gained an amazing portfolio of over 100 of the world’s most iconic brands. PFS is a valued partner for brands looking to achieve a differentiated consumer experience in the luxury and beauty markets. This is a resilient and growing business that had excellent trading results in the fourth quarter. Now we’re focused on supercharging PFS’s growth.

For example, our recent North American expansion with Glossier was the product of a strong PFS relationship in one country and the global scale of GXO. Turning to our outlook for this year, we’ve issued guidance of 2% to 5% organic growth with $760 million to $790 million of adjusted EBITDA for the full-year 2024. Baris will cover the detail behind our financial projections. But I’d like to just touch upon a few trends we’re seeing that indicate a positive growth trajectory ahead. First, the pace of supply chain outsourcing is accelerating. I noted a moment ago that — about 40% of billion dollars of new sales wins in 2023 were activities that were being outsourced. Customers are increasingly turning to GXO to help them navigate the complexities of their supply chain operations.

Second is the increasing need for return and reverse logistics. Our reverse logistics grew faster than the group as a whole in 2023, and represents a high-single-digit percentage of GXO’s revenues, as both new and existing customers are increasingly asking us to help them manage this critical part of their supply chain. And the third, and perhaps the most pronounced, trend running through our commercial discussions is the demand for greater efficiency. In nearly every conversation, our customers are asking for our guidance on how to use automation to improve service and lower costs throughout their supply chains. As the leader in logistics automation, we’re uniquely positioned to deliver on these objectives and capture even more of our total addressable market.

We are continuing to sharpen our commercial strategy in order to meet the huge and accelerating demand for our services. On that note, we’ve appointed Richard Cawston, our Head of European Operations, to serve simultaneously in a newly created role of Chief Revenue Officer. Our customers are demanding more and more globally network services, and we’re adapting our organization to support them and capitalize on this accelerating trend. We are also doubling down on our automation leadership to improve our site level productivity, which Adrian will update you on in a moment. GXO is firing on all cylinders with a sound vision for what’s ahead. We’re winning incredible new business, growing share, and delivering best-in-class services to our customers.

And with that, I’ll hand you over to Baris to walk you through our financials and guidance. Baris, over to you.

Baris Oran: Good morning, everyone. As Malcolm laid out, 2023 was a remarkable year for GXO. Revenues grew 9%; operating income grew 31%; and net income grew 16%. We maintained an operating return on invested capital above our target of 30%. Delivered strong margin performance in a lower growth environment and converted more than 40% of our adjusted EBITDA through free cash flow. Turning to details, for the full-year of 2023, we generated revenue of $9.8 billion, growing 9%. We delivered adjusted EBITDA of $741 million. Our adjusted EBITDA margins were also resilient, overcoming a headwind of approximately 70 basis points, due to the net effect of pensions and FX. Our operating income for the full-year 2023 was $318 million, up 31% year-over-year.

We delivered net income of $229 million, up from $197 million in 2022. In the fourth quarter, we generated revenue of $2.6 billion, as well as adjusted EBITDA of $193 million. As Malcolm mentioned, we won a billion dollars of new business in 2023. And the average length of contracts signed in the fourth quarter set a new all-time record of well above six years. Our fourth quarter operating income was $87 million, growing 18% year-over-year, and net income was $73 million, up from $46 million in 2022. Our operating return on investment capital at 36% was once again well above our target. In 2023, we surpassed all expectations on free cash flow. We have sharpened our focus on capital effectiveness. From a CapEx perspective, we have allocated investments to technologies and services that drive greatest returns for our customers.

On the working capital side, we achieved stellar cash collection, all of which drives high compound returns for GXO. As a result of these actions, we delivered an outstanding $151 million of free cash flow in the fourth quarter, taking the full-year to $302 million. We converted more than 40% of our adjusted EBITDA, which was significantly ahead of our target of 30%. I’m very pleased that in 2024, we also expect to be ahead of this target. We lowered our net leverage levels to 1.6 times, down from 1.8 times at the start of 2023, which includes the financing of our $150 million acquisition of PFS. Operationally, we are ahead of the net leverage targets that we set at the beginning of 2023. Our balance sheet remains rock solid and investment grade.

We have no debt coming due in 2024, and we are pleased to have received credit rating outlook upgrades from S&P, Moody’s, and Fitch in 2023. This illustrates both the significant need for innovation in the market and GXO’s exceptional ability to meet that demand. Now turning to our guidance, for the full-year 2024, we expect to deliver organic growth of 2% to 5%. We anticipate a sequential acceleration of growth throughout the year. Our early trading results in January indicate that our first quarter organic growth shows an upward sequential trend. Based on the input from our customers, we believe the fourth quarter was the bottom. We are basing our full-year growth projections on the following factors. First, we have several significant new business starts ramping up throughout 2024, including notable wins in the aerospace and industrial verticals, as well as with brands such as LVMH, Mars, and Sainsbury’s.

Some of these are highly automated sites that take slightly longer to fully implement, hence the ramp up throughout the year. Second, while many of our verticals are performing very strongly, several of the consumer customers that saw softer volumes in the second-half of 2023 are expecting sequentially higher growth throughout the year. Third, our year-on-year comparisons get significantly easier as we progress through the year. We also expect to deliver $760 million to $790 million of adjusted EBITDA. And to reiterate, we expect to convert 30% to 40% of our adjusted EBITDA into free cash flow, about our 30% long-term target. This cash conversion trajectory points to approximately 1 time net debt to EBITDA by the end of 2025. Roughly, half of our billion dollar new business won in 2023 will go live in 2024.

And we already booked nearly $230 million of additional incremental revenue for 2025. All taken, we expect to see revenue accelerate through the year. With incremental 2025 revenue already 29% higher than at this stage last year. We are very excited about our long-term growth trajectory. GXO continues to drive and compound great returns on capital. Our operating return on invested capital is significantly above 30%. We have generated an unprecedented amount of cash flow this year, while taking our leverage to 1.6 times. This provides us with the balance sheet’s flexibility to continue our disciplined M&A strategy. While our primary focus is on organic growth, we are delighted to be able to allocate capital into more and more automation contracts that are getting longer, proving the value we create to our customers, global brands across the world.

And with that, I’ll hand it over to Adrian to update you on our automation progress and outlook. Over to you, Adrian.

Adrian Stoch: Thanks, Baris. Good morning, everyone 2023 was a standout year for GXO in automation. We won multiple long-term, highly automated contracts with global blue chips and over half of our billion dollars of new business wins in 2023 are expected to generate revenue from automated operations We are delivering on our long-term promise of increasing our revenue from automated operations, which has risen from 37% to 42% year-over-year as of the fourth quarter. A major contribution to this was increasing our total units of warehouse automation by about 50% year-over-year. We further entrenched our technology leadership position and trialed a broad range of new hardware and software solutions including humanoids, AI-powered robotics and autonomous vehicles.