GXO Logistics, Inc.

Welcome to the GXO third quarter 2022 earnings conference call and webcast. My name is Doug, 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 company 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 filing. 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 may also 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 relief, and the related financial tables are on its website. Unless otherwise stated, all results reported on this call are reported as 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 markets 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 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 investor 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.

Thank you, Doug, and good morning, everyone. Thank you for joining us today. With me in Greenwich today are Baris Oren, our Chief Financial Officer, Bill Frane, our Chief Commercial Officer, and Mark Manduka, our Chief Investment Officer. Jumping right in, The third quarter of 2022 was another outstanding quarter for GXO. We posted strong operating and financial results, grew our relationships with several of our large global customers, and added many others. And in October, we received final regulatory approval from the UK Competition and Markets Authority for our acquisition of Clipper Logistics. In the third quarter, I'm proud to report that we've delivered our highest ever quarter of revenue, $2.3 billion. Despite foreign exchange impacts from the softening euro and pound against the US dollar, This result was driven by strong organic revenue growth of 16% combined with our high level of customer retention. We also delivered record adjusted EBITDA in the quarter, which was up 19% year over year, driving sequential margin expansion as we've completed the outsized volume of operational startups that we were implementing in the early months of the year. As Baris will discuss in a moment, we've also delivered strong results on free cash flow and adjusted earnings per share. This quarter, we continue to gain market share as customers look to outsource more business in order to improve service and reduce costs. It's very clear that many new and existing customers are reassessing supply chains post-COVID. We signed new contracts with both existing and first-time outsourcing customers as we continue to grow our market share with international brands. We signed new contracts with Boeing, LVMH, Nike, Samsung, Sky TV, and Syngenta, to name just a few. Half our wins in the quarter came from new sites with largely existing customers, and half were from market share gains from our peers and first time outsourcing customers. I also want to take a moment to touch upon the Clipper acquisition. This is a fantastic company that we've acquired. Clipper is a true diamond. They've got an impressive customer base, expertise in a diverse range of high-value added service offerings, and most importantly, stellar people. Additionally, Clipper helps bolster our already industry-leading ESG credentials. With the focus on reverse logistics and repairs, Clipper is helping to do great business for customers in a manner that is good for the environment. For example, Clipper repaired around 1.5 million pieces of consumer electronics last year. reducing CO2 emissions and enabling the circular economy. The majority of RFPs across the markets now reference ESG credentials and core values. And our leadership position here is a real competitive advantage. As you may recall, we closed the Clipper deal back in May. This enabled us to ensure continuity and stability for Clippers customers and top talent. At that time, we were also able to put in place favorable borrowing arrangements, which Barris will touch upon shortly. With regulatory approval now secured, we're moving forward with the integration, and I'm pleased to note that we anticipate delivering the lion's share of the planned £36 million of cost synergies in 2023 and 2024. We'll be able to discuss our progress in more detail at our investor day, scheduled for the 12th of January. Looking at the fourth quarter for the group, we expect continued top-line and margin growth. Based on the early indications of peak and our updated forecast, we're reiterating our full year guidance. We are anticipating a smoother peak holiday season in 2022. Last year, the whole market experienced sporadic supply chain disruptions, as well as scarcity of inventory and labor. This year, Most of our customers have good levels of inventory, and labor is much more readily available. Looking beyond peak, we're confident on 2023. Based on our wins to date, we've already secured nearly half a billion dollars of incremental revenue for next year, strengthening our visibility for 2023 and beyond. Our global sales pipeline has remained strong. Conversion is healthy, and tech demand, as you can expect, is continuing to accelerate. Warehouse outsourcing continues to grow, as exemplified by our $2 billion sales pipeline, even after announcing significant wins. We've seen in the past that this demand for our services and solutions will accelerate during a period of economic uncertainty as customers look to reduce costs while improving the consumer experience. We are an enabler of productivity through technology, and customers are increasingly seeking us out to drive efficiencies in their business. We're differentiated in the industry as the tech leader. This quarter, we deployed the most technology in our history. Deployments in North America and Europe are over 50% higher in 2022 than in 2021. So in closing, while we recognize the more dynamic macro environment, When we look at our customer base, our strategic relationships, the projects we're implementing in the coming quarters and the high degree of visibility our contractual business model affords us, we're continuing to be confident about our growth and performance in 2023. Bill will speak more on our commercial outlook and what we're hearing from customers, but first, I'll hand you over to Baris to walk through the financials.

Baris, over to you. Many thanks, Malcolm, and good morning, everyone. We are pleased with our excellent third quarter results as we delivered a record quarter for revenue and adjusted EBITDA, along with strong free cash flow. This is our seventh consecutive quarter of double-digit organic revenue growth an all-time record. This result was driven by 16% organic growth, which was underpinned by implementations and our mid- to high-90s revenue retention rate. Our organic growth was strong across all verticals and geographies, and we're maintaining our revenue retention rate by delivering consistent, high-quality service. It is important to note that you're seeing organic growth across our diverse vertical base, with particular strength recently coming from consumer packaged goods, technology, and industrials, which in aggregate are similar in size to our largest vertical omnichannel retail. This is a balanced business. Net income attributable to shareholders this quarter was $63 million, and diluted earnings per share was 53 cents. Adjusted diluted earnings per share was 75 cents, up 34% year-over-year, driven by adjusted EBITDA growth and the continued lower cost of financing. The second record we set this quarter was our adjusted EBITDA, which at $192 million was up 19 percent year-over-year. And our return on invested capital is well above our 30 percent target, as we maintain our quality governance on new contracts. Turning to cash flow, we had strong working capital management in the third quarter, delivering operating cash flow of $116 million, compared to $105 million in the same period last year. And our free cash flow for the quarter was $47 million, putting us on track to deliver 30% adjusted EBITDA conversion for the year. We anticipate strong free cash flows in the fourth quarter. We took the opportunity to begin de-levering from Clipper acquisition. At the end of the third quarter, our leverage levels stand at 2.1 times trailing 12 months adjusted EBITDA. down from 2.3 times at the end of second quarter. We plan to maintain our deleveraging trajectory, and we expect that our leverage will be around 1.5 times by the end of next year, opening the door for further shareholder-accretive capital allocation. Our balance sheet is rock-solid and investment-grade, and we continue to generate solid cash flow. Looking ahead at the full year 2022, our current internal forecast is showing mid to high single-digit organic revenue growth for the fourth quarter. As Malcolm mentioned, there were a few transient factors related to last year's peak season, including the timing of startups, extraordinary volumes, and a tight labor market, which we don't expect will recur this year. On this last point, it's worth noting that across our business, we are no longer finding it necessary to pay holiday season incentives to attract and retain our team members. Beyond Q4, looking into 2023, we are currently projecting at least high single-digit organic revenue growth. Driven by our long-term contractual relationships, our continued high revenue retention rates, and the nearly half billion dollar of incremental revenue already secured. We will provide full financial targets for next year on our fourth quarter call. We are laser focused on continuously improving our business. 2023 will be a year of balancing productivity and growth. With the benefit of operating as a standalone company for one year, we have kicked off a number of internal studies assisted by Accenture. We'll be sharing further detail on the productivity initiatives we are implementing during our investor day. Like most global companies, we are experiencing headwinds due to FX and rising interest rates. And we have taken measures to manage our downside risks. We continue to monitor the markets closely. Moving from the macro markets to GXO, there are significant tailwinds to being a pure play contract logistics provider, especially in this environment. The vast majority of our business operations occur inside the four walls of the warehouse. And we have contractual relationships that include inflation pass-throughs, and minimum volume guarantees. This is a low-risk business model with long-term contracts that are not exposed to short-term rate fluctuations in the shipping or transportation markets. The current market backdrop gives us an opportunity to showcase the resiliency of our contractual business model. And we have strong outlook driven by balanced growth in our geographies, and verticals. With that, I'll turn it over to Bill, who will give you more detail on just what we are doing for and hearing from our customers. Over to you, Bill.