Ravi Shanker: Got it. It sounds cyclical more than structural. And maybe as a follow-up here are going to which is given the strong free cash flow and the guidance for ’24, how are you thinking about the balance sheets and the priorities there and kind of any specific targets you’re going to identified on the M&A side?
Baris Oran: Yes, Ravi we do have a very sizable pipeline or M&A target in all geographies, all verticals, we’re actively working in a number of projects. But we are also very, very sensitive about shareholder value creation. We want to extract a lot of top line growth of incremental capabilities in additional verticals, capture a lot of cost savings, so that should pay for our shareholders. Otherwise, when we have excess cash, buying back our shares is another option. Investing in our company through buybacks is another option. We always weigh those and always put shareholder value creation top of mind.
Ravi Shanker: Very helpful, thank you.
Malcolm Wilson: Thank you.
Operator: Thank you. Our next questions come from the line of Brandon Oglenski with Barclays. Please proceed with your questions.
Brandon Oglenski: Hey, good morning and thanks for taking the question. I was wondering if you could talk to the organic growth outlook? Because I think if we go back to your Investor Day, the long-term CAGR was something like 8% to 12%, which is pretty significantly higher than what you’re going to get this year. And I think we’ve discussed the volume issue quite a bit on this call. But can you put it in the context of the sales pipeline because I think your pipeline was similar at this time last year. And in fact, contracted revenue for the next year was actually maybe a little bit higher if we go back just 12 months. So is it also just cyclical? And should we expect as volumes come back, the contracts come back and you could actually exceed the top end of that range for the next couple of years?
Malcolm Wilson: Hi, Brandon, it’s Malcolm here. Yes, I think in a nutshell, that’s how we do see things. So effectively, ’23, it’s been a sluggish year. We’ve seen that in customer volumes inventories that’s what we manage it throughout the warehouses. So — but as we’re going into ’24, we can see signs of a stronger sales pipeline, but also importantly, it’s not just about the size of the actual — the number of dollars in the sales pipeline is the kind of vertical activity that we see coming through. It’s the speed at which we can take business on. Big automated sites tend to carry a longer lead time for starting up then a kind of takeover in place. And one of the aspects we’ve seen throughout last year. And again, if we look at our sales pipeline, we can see quite a lot of projects where customers eager to transform their own supply chain, eager to transform their own warehousing activities.
They’re looking for GXO to step in to an existing operation. And then bring automation progressively through the life of the contract. And that can take several years, and there were some large high-profile customer examples of that during 2023 that we’re actually still implementing. So I think when we look at the future activity, all of the building blocks that we talked about in our Investor Day are really there. They’re on track lots of signing of high-quality long-term business. We saw that in ’23, even against that tough macro outsourcing, people choosing to outsource that big proportion of the addressable market that really was never really part of our calculation. That’s accelerating and again, we’ve seen that throughout ’23. We see it in our sales pipeline now going forward.
As Adrian has just mentioned, so much more in the context of automation and robotics is driving — it’s really driving business towards GXO. Even last year, 67% year-over-year increases of the deployment of these kind of projects. And as Baris mentioned, all the productivity project is well on track. So we’re really feeling good about the future outlook for GXO.
Brandon Oglenski: Appreciate that, Malcolm. And a quick follow-up for Adrian. On automation, I think you said you’re automated facilities went up like 50% this year. That’s pretty significant — or sorry, last year. Can you tell us about the margin profile of these contracts and potentially maybe higher capital investments as well?
Adrian Stoch: Yes, absolutely. So what we typically see with our automated projects, and this comment goes both to the large-scale automation and where we do the more modular retrofits as we see 200 to 300 basis points above the group average coming from automated operations. And this is really a proof out of the thesis that when we automate, we’re able to reduce the dependency on other elements of the cost structure, reduced dependency on labor to a certain extent. And so the automated opportunities and the efficiencies that we’ve always expected and suspected would come from those opportunities that they’re bearing out and what we’re seeing in the numbers.
Brandon Oglenski: Thank you.
Operator: Thank you. Our next questions come from the line of Allison Poliniak Cusic with Wells Fargo. Please proceed with your questions.
Unidentified Analyst: Hey, guys. Good morning. James on for Allison. I wanted to follow-up on Brandon’s question around automation and the organic revenue growth guidance. You’ve commented that the highly automated facilities have these longer lead times to start and it seems like the contract wins, at least in this quarter were a bit longer dated. Just 2024 — sort of have to work its way through like an organic revenue growth pocket in any way because what you’re winning is sort of longer dated out that sort of would fade over time? Or is it really just all essentially sort of weakness in sort of end market volume that’s sort of driving that organic revenue weakness versus the long-term guide?
Baris Oran: Hi, it’s Baris here. Let me help you off with that question. In fact, the reason we are writing longer-term contracts is because of we are selling more and more automation and technology. Some of these contracts are over 10 years, close to 15 years, are very, very sticky for our customers. And in this environment of high interest rates, the longer the contract, the more affordable for our customers and we expect that trend to continue. As you highlighted, it takes a while. It takes more than three quarters to get them up and running. It takes up to 15 months sometimes to get them at full maturity or margin and capacity. So we will see contribution from these implementations towards the second half of ’24 and in ’25 more vividly.
Unidentified Analyst: Got it. Got it. And is there any front-loading of expenses associated with those deals to in the front half? I’m just wondering if you could put a number around what that might be?
Baris Oran: Generally, the maturity of those contracts, the margins started very low and they mature over time. That’s especially for the automation content, that’s valid. However, what is impacting our margins is our investments in our core capabilities as well in our cloud-based systems, in our sales and business development teams and automation and robotics teams. This is — we are investing in those because we see huge potential for selling more and helping our customers more via these projects.
Unidentified Analyst: Thank you.
Baris Oran: Thank you.
Operator: Thank you. Our next questions come from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.
Amit Mehrotra: Thanks, operator. Good morning, everybody. I want to start with, I guess, a bigger picture question for Malcolm. Malcolm, we’re seeing high numbers of U.S. warehouse capacity that’s basically available for sublease or sublet. Think the number this morning in the Wall Street Journal was almost 160 million square feet available for sublease? Wondering how that impacts the business? Because on one end, I think your customer is more strategic, and obviously, the duration of the contract is longer. So I don’t know if this is more of a cyclical issue, but it will be helpful. I know you’ve been in this business for three, four decades. It would be helpful to get a little bit of historical perspective of the cyclicality in the amount of sublease capacity in the U.S. warehouse or the global warehouse market and how this maybe impacts the business in the near to mid-term?
Malcolm Wilson: Amit, hi, it’s Malcolm here. And your question is really topical. I’ve also seen plenty of news reports about incremental capacity here in the North American market. From our perspective, a good way to explain is the core of our business is contracted, long-term contracts. So customers tend to occupy a warehouse they fund the warehouse. It’s part of the cost makeup. It’s part of the contract makeup. So in regard to our core EBITDA, it’s actually quite a neutral aspect from our point of view. And you see that in our ’23, our actual EBITDA came in ahead of our original outlook. We were well ahead in terms of the full year. What you do see, though, and this is one of the big benefits that GXO brings to our customers is as inventory levels normally — we see inventory levels will flex in any year up and down, what we have seen through ’23 is a more pronounced lowering down of inventory levels.
So customers, it takes some time to change some time to change manufacturing plans, to reflect new sales outlook, but gradually, they’ve lowered down inventory levels. For us, we see that in the environment where we work with them proactively to consolidate warehousing activity. So for large customers, we might have several fully contracted warehouses, but we might also operate some transient warehousing where for GXO, we have relatively short-term commitments on it. Those kind of warehouses, it’s in our interest and it’s in our customers’ interest to contract those volumes back into our main centers. And that’s exactly what we’ve done. That’s what being a proactive partner is all about. But the end result of that is you’re absolutely right.
When you look at the real estate market, progressively, you end up with more empty capacity. So for us, we see we don’t see it so much in our profitability. We do see it in our top line growth because that volume, we’re no longer invoicing. And we expect to see that a research back pretty much in alignment with as we would expect the macro to start becoming stronger for consumer goods. Today, it’s already strong for services, but we needed to really recover properly for consumer goods. So I hope that gives you an understanding of how we see it as a business. But we are seeing exactly what is widely reported at the moment, but not really impacting us in terms of how we judge our profitability or how we judge our customer relationships. For those, it’s more an opportunity for us to demonstrate our worth to our customers.
Amit Mehrotra: Got it. Okay. That’s very helpful. And I just wanted to follow-up on the M&A question really quickly. Because if I look at the M&A strategy over the last couple of years, it’s really been about buying companies that within markets that you already have a pretty strong presence in. So I think about Clipper or the U.K. business [Indiscernible] even PFS. And generally, you’re taking out there’s significant cost synergies on the SG&A side. But then you also have verticals and geographies maybe that you’re underrepresented in. So as we think about like where your M&A focus is going to be going forward, if you can just talk about — are we talking about new verticals and geographies? Are we talking about the same playbook, which is, hey, we already have a great presence in this market, this vertical. Why don’t we just buy this company and kind of consolidate cost structures?
Malcolm Wilson: Yes. Amit, let me carry on the answer, Malcolm here. So we review everything on it. Clearly, there are geography where we want to be in new verticals. And when we enter a new vertical, typically, we’re focused on growing that new vertical. So PFS is a great example. It’s not a play about driving a lot of cost synergy. There is, of course, when you put 2 businesses together, you gain cost synergy, but it’s a play about driving bigger growth, and we’re off to a great start with PFS. It’s already — it’s doing very, very well. We’re very, very pleased with the PFS team and how that business is integrated into GXO. But there are other aspects where we have to look opportunistically as well. If there’s a business out there that we like, good quality, it’s in good condition and we can see big synergies.
