GXO Logistics, Inc.

Welcome to the GXO third quarter 2023 earnings conference call and webcast. My name is Daryl 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 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 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 the 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 investor 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.

Thank you, Daryl, and good morning, everyone. With me in Greenwich today are Barry Shoran, our Chief Financial Officer, and Adrian Stock, our newly appointed Chief Automation Officer, a first for GXO. We're excited to have him update you on our automation strategy and how it will lead to further growth and higher returns for GXO. Turning directly to the third quarter, we're pleased to report that we delivered record revenue of $2.5 billion, growing 8% year over year, of which 3% was organic growth. We've talked to you many times about the resiliency of our business model, and we're demonstrating just how beneficial that is proving to be this quarter. While the macro environment is uncertain, we're performing strongly in those areas where we do have control. New business wins. profits and free cash flow. Barish will give you more detail on our updated full year guidance in just a moment. Our adjusted EBITDA grew to $200 million and our adjusted diluted earnings per share was 69 cents, both coming in above expectations. On top of that, a few weeks ago we closed the acquisition of PFS Web and The incremental benefit during the last part of the year allows us to raise both our adjusted EBITDA and adjusted diluted earnings per share guidance for the third time this year. The results this quarter demonstrate two key strengths of our business. First, it illustrates that our model is working exactly as it's designed to. We're effectively managing all aspects of our long-term contractual business to deliver consistent margins and drive adjusted EBITDA growth. Second, it shows an acceleration of the structural trends that are driving our growth. Customers are coming to us more than ever, and our value proposition for them is only growing stronger as they loop to us to drive improved productivity, optimize their working capital, and improve their services to their ever more demanding end consumers. This is clear from our new sales wins and our pipeline. We closed over $180 million of new sales wins in the third quarter, nearly half of which came from companies outsourcing their operations for the first time. These fantastic customers included Carlsberg, Daikin, Farfetch, SodaStream, and Versace. And in October, we began an exciting new partnership with the Quality Group, a great win for us in Germany. These customers joined the exceptional blue chip brands that continue to rely on GXO for their logistics needs. Also, in the last couple of weeks, we've entered into a significant new long-term contract for a fully automated warehouse project with a leading global sporting brand. We're thrilled to partner with this brand to enable their long-term growth ambitions across both e-commerce and retail. We're positioning the brand to optimize their inventory and costs by leveraging GXO's industry-leading expertise and technologies. Adrian will provide more detail on exactly how we do this for our customers in just a moment. It's exactly why we've created this new role of Chief Automation Officer. We're not only proud of our results this quarter, but also excited by what's ahead. we've secured more than a half billion dollars of new business for 2024, tracking ahead of where we were this point last year. Our average contract length remains strong at around five years. GXO is winning market share from our competitors. Our total new contract wins in the quarter are up 15% year over year. even after our record-setting second quarter. Our pipeline remains solid at around $2 billion. It's distributed evenly across our operating geographies, and it's well diversified across both consumer and industrial verticals. We're excited by the opportunity to continue to grow our market share. I mentioned earlier that one of the key milestones this quarter is the acquisition of PFS Web, a premier e-commerce fulfillment provider based here in the U.S. PFS serves over 100 of the world's most iconic brands, including L'Oreal, Pandora, Procter & Gamble, Yves Saint Laurent, and the U.S. Mint. It has a great track record of profitable growth from its premium service offerings. We believe the combination of GXO and PFS strengthens our book of business by bringing exposure to key growth verticals, including health and beauty, jewelry, and luxury goods. PFS continues to deliver robust growth and is winning great new contracts with brands like Glossier. We'll build on this momentum and we'll leverage PFS vertical expertise to complement our existing business and grow into the massive addressable market on a global basis even faster. We celebrated closing the transaction with the PFS team in Dallas the week before last, and the level of excitement was palpable. On a personal note, I'm delighted to be working with this team. Like GXO, it's clear that the high calibre of their people is why PFS has been able to build such an incredible business. And lastly, on that note of people, we're proud to have won numerous awards for employee satisfaction and inclusion this quarter. I'm very pleased that our constant efforts to create the best possible workplace for our people and to make GXO the employer of choice in our industry are being recognized. In summary, we're confident that we're positioned to capitalize on the immense growth potential within our industry and the continuing tailwinds of automation, outsourcing, and e-commerce. Now, I'll hand it over to Barish to walk you through the numbers and our updated guidance. Barish, over to you.

Many thanks, Malcolm, and good morning, everyone. This quarter, we delivered a strong set of results, including great new sales wins, resilient adjusted EBITDA, and finally, outstanding free cash flow conversion. As Malcolm mentioned, we delivered a record $2.5 billion of revenue in the quarter. This represents 8% year-over-year growth, about 3% of which was organic. Our top-line performance clearly reflects the impact of near-term macro-advance on customer volumes. And as we highlighted in prior quarters, all other areas of the income statements reflect the incredible stability of our business and our continued strong management execution. Our operating income was up 25% year-over-year in the third quarter. We delivered adjusted EBITDA of $200 million. we are delivering consistent adjusted EBITDA margins as a result of our resilient business model, despite the headwind of 90 basis points from pension and FX agents. And they have improved 20 basis points sequentially since the second quarter, while these headwinds have increased. This margin strength is driven by our continued focus on cost discipline, specifically productivities we are driving in our site-level operations and in our central efficiencies initiatives. We also delivered net income attributable to shareholders of $66 million and adjusted diluted earnings per share of 69 cents. Our return on invested capital was once again robust at well above 30%. Our accelerating new business wins year over year highlight the ample opportunity for our business to continue to reinvest and generate these levels of returns in the future. I would like to particularly highlight our free cash flow, which was a record $191 million for the third quarter, helped by strong cash collections and methodical deployment of capital. We are on track to deliver our free cash flow conversion target of approximately 30% of adjusted EBITDA for the full year. We reduced our net leverage to 1.6 times as of September 30th. We have no debt repayments due in 2024. Our balance sheet remains rock solid and investment grade after our acquisition of PFS Web. And we expect to end the year with net leverage of around 1.7 times. On PFS, I'd like to take a moment to welcome our new colleagues. The strength of talent of this team is just phenomenal. We are thrilled to have completed this deal. Plans to accelerate our growth together are already underway, and as Malcolm mentioned, we believe this is positioning GXO for continued and accelerated growth. Our acquisition of PFS exemplifies our approach to M&A. We are highly selective in our choice of targets, and we established a track record of pursuing companies that bring opportunities to expand our presence in key markets and further enhance our offerings for new and existing customers. In PFS, we bought a double-digit growth trajectory at a very attractive valuation. Going forward, we will continue to deploy our excess cash in the best interest of our shareholders, which includes either share buybacks or accretive M&A. Turning to full year, you'll see that we are revising our full year 2023 organic revenue guidance from 6% to 8% to 2% to 4%. For this holiday season, we are seeing lower customer volume growth than anticipated, particularly in consumer-focused sectors. In many cases, and in contrast with last year, the global brands we are serving are prioritizing pricing over volume. This is resulting in a more uncertain peak. In addition, some seasonal Christmas pop-up projects will not recur this year because of lower customer volumes. This is a one-off impact in the fourth quarter, causing our organic growth to be softer. Our adjusted EBITDA and free cash flow remain robust due to the structure and predictability of our customer contracts, which helps to insulate our financial performance from volume swings. The incremental benefit from our acquisition of PFS gives us the confidence to upgrade our fully-adjusted EBITDA guidance to $730 million to $755 million. We are also pleased to upgrade our guidance for adjusted deleted earnings per share to $2.55 to $2.65. And finally, Following our free cash flow results this quarter, we are reiterating our full-year free cash flow conversion target of approximately 30%, as well as our return on investors' capital target of about 30%. Looking ahead, our long-term growth is underpinned by our continued new business wins. This reflects the value of the services that we are providing to our customers. helping them to manage their businesses more efficiently in the current environment. We won $841 million of new business year-to-date. We've got $520 million of incremental revenue booked for 2024, and nearly $200 million of incremental revenue booked for 2025. In the third quarter, almost half of our new business wins were outsourcing. They're making more headway into our half trillion dollar total addressable market. At the same time, we continue to produce profits and cash flows throughout the cycle. Our margins are resilient and our free cash flow conversion is rock solid. We will continue to manage GXO with a rigorous focus on contract governance, cost discipline, and capital location to serve the interests of both our customers as well as our shareholders. And now, I'll pass the mic over to Adrian, who was named as our first Chief Automation Officer in July. He'll brief you on one of our most important levers for growth and value creation, our automation strategy. Over to you, Adrian.