GXO Logistics, Inc. (NYSE:GXO) Q1 2023 Earnings Call Transcript May 10, 2023

GXO Logistics, Inc. beats earnings expectations. Reported EPS is $0.49, expectations were $0.43.

Operator: Welcome to the GXO, First Quarter 2023 Earnings Conference Call and Webcast. My name is Sherry, 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 are 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 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: Thank you, operator, and good morning everyone. Thanks for joining us today for our first 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. We’ve started off 2023 in great shape. We’ve delivered a strong quarter. We’re progressing ahead of schedule on our integration of the Clipper business and we’ve laid the foundations for delivering our strong 2027 targets. Our revenue in the first quarter was $2.3 billion, growing 12% year-over-year. Organic revenue growth was 7% at the midpoint of our full year guidance range. Our adjusted EBITDA was $158 million in the quarter, up year-over-year and ahead of our expectations.

As a result, we are raising our full year adjusted EBITDA guidance by $15 million, bringing the midpoint of our range to $730 million. It’s been a great quarter of signing exciting new business and implementing automated solutions for our customers. Through the end of April we secured more than $800 million worth of incremental revenue for 2023, signing new partnerships and expanding relationships across multiple verticals and markets with a fantastic group of customers, including Google, Kellogg’s, Unilever and Vivienne Westwood. In particular, I want to highlight the new project we announced in April with Sainsbury’s, a leading U.K. grocery retailer. With a lifetime value of nearly $1 billion, this is the largest annual revenue contract awarded in GXO’s history.

Bill will talk in more detail about this in just a moment. These stellar new business wins demonstrate our unique value proposition as we bring our global scale, deep expertise, tech enabled solutions to bear for our customers. In the quarter we again set a new record for the deployment of operational tech, increasing our total tech and automated solutions by 64% year-over-year. Today operations utilizing automation or adaptive tech make up nearly 40% of our revenue, a number that will only increase to meet the enormous demand going forward, both for new implementations and for retrofitting of existing operations. We are also accelerating our deployment of machine learning and artificial intelligence, which boosts productivity significantly on top of the benefits of the warehouse tech itself.

In short, we’re seeing unprecedented demand from customers for solutions involving tech enablement and our leadership in this space continues to drive our growth and profitability, underpinning our confidence for both our 2023 guidance and our 2027 targets. To fully capitalize on the demand of our services in this area, while also strengthening our teams to support significant growth in the years to come. We’ll have more news on these initiatives next quarter. Also in the first quarter, we were pleased to announce that GXO Direct, our shared user solution has gone global. We’ve launched Direct across the U.K. with the rollout into continental Europe planned for later this year. This expansion comes through the blending of the best of both the GXO and Legacy Clipper capabilities and expertise, to create a differentiated offering.

And finally, just two weeks ago, we published our second annual ESG report. In it we’ve highlighted our progress on ESG, from emissions reductions to the development and belonging initiatives for our team members worldwide. We also outlined our new ESG goals, including safety targets. ESG is important for our customers, as we saw in the significant Sainsbury’s win, where our enablement of sustainability in their daily operations was a key factor in the decision to expand our business relationship. We’ve had a great start to the year. We’re raising our guidance and we’re looking forward with confidence. We’ve delivered strong wins, we have a robust sales pipeline and we’ve set the foundations to achieve our 2027 targets. With that, I’ll ask Baris to comment on the financials.

Baris, over to you.

Baris Oran : Thank you, Malcolm, and good morning everyone. We are proud of our results this quarter, as they continue to showcase both the strength and predictability of our business and to deliver on our promise of robust growth and resilient margins. As Malcolm mentioned, for the first quarter of 2023, we generated revenue of $2.3 billion and delivered 12% revenue growth, of which 7% was organic. In particular, our reverse logistics business grew organically at nearly 3x the rate of our group organic revenue growth. Geographically, our business in Europe has performed above our expectations and we’ve seen particular strength in the U.S. across technology and airspace verticals balancing consumer demand. Our adjusted EBITDA in the quarter was $158 million, growing year-over-year and reflecting the strength of our business model and our solid execution.

Our net income attributable to GXO was $25 million. Our adjusted diluted earnings per share for the quarter was $0.49, and our free cash outflow was $43 million, reflecting normal seasonality. We have accelerated our investment initiatives to grow our adjusted EBITDA faster, particularly in the automated facilities. At our Investor Day, we discussed the integration of Clipper and our central efficiencies program. I am pleased to tell you that both are running ahead of plan. First, Clipper is performing strongly and contributing above our expectations. The integration of the two organizations is progressing ahead of schedule, driving higher than expected results in the first quarter. The strength of Clipper business also gave us a foundation to launch GXO Direct in the U.K. Second, we continue to execute our central efficiencies initiative.

These include making our organization leaner, as well as optimizing our technology infrastructure, supplier network, and real-estate. We accelerated the benefits of these projects into the first quarter. So far this year we’ve won $1.7 billion of lifetime contract value. We maintained our rigorous consorts for writing high quality contracts and our operating return investments capital in the first quarter grew year-over-year and remained well above 30% target. Bill will give you more visibility on our great sales performance so far in 2023 in just a moment. We are reiterating our full year guidance for both, organic revenue growth of 6% to 8%, as well as free cash flow conversion of approximately 30%, which will drive our net leverage level down to around 1.5x by the end of the year.

With respect to our balance sheet, we will continue to deploy our capital in the best interest of our shareholders including continuously leveraging buybacks and M&A. We are also pleased to raise our full year guidance for EBITDA and EPS. We are raising adjusted EBITDA by $15 million, bringing our full year range to $715 million to $745 million. This is due to a combination of accelerated synergies from our integration of Clipper, early delivery on our central efficiencies initiatives and better than expected trading in the first half of the year. We are also raising adjusted diluted earnings per share by $0.10, reflecting an increase in our operating profitability, bringing our full year range to $2.40 to $2.60. In summary, we delivered solid growth this quarter.

We made excellent progress on our long-term targets and we secured major new business wins that will continue to propel our growth in the quarters and years ahead. These results and our upgraded guidance reflect yet again how resilient GXO is through cycles. This is the hallmark of our infrastructure-like business, serving global blue chip customers where prices are escalated in line with inflation, and we benefit from tailwinds of automation, outsourcing and e-commerce, all enabling GXO to deliver extraordinary returns. And with that, I’ll hand you over to Bill to talk about our wins to-date and what we’re hearing from our customers.

Bill Fraine : Thanks Baris and good morning everyone. 2023 is looking like a very exciting year for GXO. In the first quarter we did $162 million in new business wins and in April we won an additional $230 million of business. Combined we’ve banked nearly $400 million in year-to-date wins through April. By the end of the first quarter we had secured $782 million of incremental 2023 revenue. By the end of April this has increased to over $800 million. This equals year-over-year revenue growth of 9% year-to-date. On top of that, we have a further $362 million of revenue locked in for 2024, which puts us 38% ahead of where we were at this stage last year. Our pipeline of opportunities is $2.3 billion as of the end of the first quarter and this has risen further through April.

Don’t forget, this increase in our pipeline is after the significant Sainsbury’s win. As we look into our pipeline, we are seeing a greater weighting towards first-time outsourcing business, which makes up over a third of our opportunities, and our record pre-pipeline has doubled year-over-year, reflecting an increased demand from customers to invest in larger, more holistic partnerships. What our wins and opportunities speak to, and what we’re seeing on the ground, is that more and more customers around the world are recognizing that business as usual is no longer a viable strategy. As a result, the growing number of large global companies coming to GXO to help them redesign their supply chains, lower cost and improve their service quality is accelerating.

Let me walk you through a couple of examples. One of the world’s largest food service companies who started off asking for an operation on the West Coast has now progressed to asking how can we help them optimize their network across North America and Europe. And two other customers, an e-commerce company and a consumer product company initially called on us to bid on regional solutions and based on our proposals, realized the value of expanding the conversation to include a holistic review of their entire U.S. network. What I’m trying to say is that companies come to us with one solution in mind and are now working with GXO on a much larger scale. These are large transformative deals or big bold changes as one of our customers recently called it.

As the scale of what we’re being asked to do grows, so does GXO’s position as a trusted partner of choice. In addition to strategic partnerships with new first-time outsourcing customers, we’re also seeing continued expansion of our relationships with our existing long-term customers around the world. As Malcolm noted, in April we announced a new project with Sainsbury’s. This record setting win developed through a long-term partnership that we’ve grown from running reverse logistics to now operating all of Sainsbury’s outsourced fresh and frozen distribution centers. We’re partnering with them to drive, in their own words, one of their key competitive advantages for the future. This value based partnership is now a cornerstone in cementing our status as a leader in the food and beverage logistics sector.

Building these deep long-term relationships is just in our DNA. In the first quarter, we grew with a number of existing blue chip customers, including Kellogg’s and Google. We’ve also just won our ninth site with one of the world’s largest consumer packaged good companies. These are all great examples of the GXO difference in action. Finally, we are very excited about the expansion of GXO direct to the U.K. To-date we have a network of about 30 direct sites in the U.K., serving such brands as ASOS, L’Oreal and Marks & Spencer. Customers’ response to Direct has been strong and we look forward to growing Direct even further. We will launch Continental Europe later this year. This will expand our growth opportunities. With that, I’ll turn you over to Mark.

All yours Mark.

Mark Manduca : Thanks Bill. Indeed 2023 is off to a great start as GXO continues to take share through our global scale, our tech leadership and the tremendous value that we create for our customers. This is a business that combines predictability and growth at its bedrock. First, touching on our predictability. Unlike the transportation industry, where transactional pricing is driven by short term supply and demand conditions, our holistic pricing structures are dictated by long term contractual agreements with minimum volume thresholds and inflation protection embedded within them. And combined with our growing diversified pipeline and our record pre-pipeline which Bill touched upon in his comments, it shouldn’t come as a surprise that we’ve already secured well over 95% revenue visibility for this year.

Secondly, on the growth side, as of the end of April we’ve won contracts worth the equivalent of 9% gross revenue growth on our 2022 revenue base of $9 billion. And if our pipeline is anything to go by, we will inevitably secure additional wins in the coming months that will propel our growth in 2023 even further. Moreover, for 2024 we’ve already secured $362 million of incremental revenue through April. This puts us 38% ahead of where we were at this point last year, and given our buoyant pipeline of $2.3 billion, we’re confident that we’ll see revenue growth accelerate next year. Altogether, considering our low attrition rate in an inflationary environment, you can see why as a team we’re confident about our 6% to 8% organic growth range for this year, and our broader 8% to 12% CAGR through 2027.

We’ve delivered seven quarters without missing a beat. We’re on track to hit our 2027 targets and our business is firing on all cylinders. This is a management team that delivers on its promises. And with that, we’ll turn to Q&A.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Stephanie Moore with Jeffries. Please proceed.

A – Malcolm Wilson: Thank you.

Operator: Our next question is from Chris Wetherbee with Citigroup. Please proceed.

Operator: Our next question is from Scott Schneeberger with Oppenheimer. Please proceed.

Operator: Our next question is from Bascome Majors with Susquehanna. Please proceed.

Operator: Our next question is from Amit Mehrotra with Deutsche Bank. Please proceed.

Operator: Our next question is from Brian Ossenbeck with JP Morgan. Please proceed.

Operator: Our next question is from Allison Poliniak with Wells Fargo. Please proceed.

Operator: Our next question is from Ravi Shanker with Morgan Stanley. Please proceed.

Operator: Our next question is from David Zazula with Barclays. Please proceed.

Operator: Our next question is from Bruce Chan with Stifel. Please proceed.

Operator: Ladies and gentlemen, that is all the time we have for questions today. I would like to hand the call back over to Malcolm for any closing remarks.

Malcolm Wilson: Thank you, Sherry and thanks again for hosting our call today. We all appreciate that. Just a summary of our call. Look, we’ve started 2023 in a really strong manner and the raising of our 2023 adjusted EPS and EBITDA guidance, and importantly, I think it’s setting the foundations for the delivering on our 2027 targets. We’re gaining market share, we’re deploying more and more true technology across the near 100,000 different operating locations that we have. We’re seeing and we’re winning record sized customer contracts, that’s what we’ve explained to everyone, and we’re also seeing a truly exciting sales pipeline of further growth opportunities. I think we’ve all but complete now on what has been a benchmark deal and integration of the Clipper business.

This is a company that’s got M&A where it’s in our DNA. We can do it and we do it very well. We’re focused on delivering great value for our shareholders and indeed all of our stakeholders. So with that summary, I’d like to wish everybody a great rest of the day and thanks for joining us this morning.

Operator: Thank you, ladies and gentlemen. This does conclude today’s conference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day!