GXO Logistics Inc (GXO) 2024 Q2 法說會逐字稿

Hello and welcome to the GXO second-quarter 2024 earnings Conference call and Webcast.

My name is Donna and I'll be your operator for today's call.

(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 the call, the company will be making certain forward-looking statements within the meanings of applicable security 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 made 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 release and the related financial table on its website.

Unless otherwise stated, all results reported on this call are reported in United States dollars company would also remind you that its guidance incorporates business trends to date and what I believe 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, exchanges 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 now 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 information regarding forward-looking statements and non-GAAP financial measures in the investor sections 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.

Thanks, Donna, and good morning, everyone.

I appreciate you joining us today for our second-quarter 2024 earnings call.

With me in Greenwich are Baris Oran, our Chief Financial Officer;, and Kristine Kubacki, our Chief Strategy Officer.

GXO has delivered a strong second quarter, rounding out a great first half, and we're pleased to be reaffirming our full year 2024 guidance today.

During the quarter, we signed about $270 million of new business wins.

Our pipeline grew for the third consecutive quarter, standing at a new 12-month high $2.3 billion of high quality opportunities.

We're also seeing contract duration increase as customers look to outsource to a trusted partner with global scale who can manage the complexity of their supply chain, particularly proud of our progress in Germany, the largest European economies, which has been part of our growth strategy since the spin.

During the quarter, we signed a new deal with Tchibo, a leading German retailer and coffee distributor.

And we've gone live on the 20-year nearly $1 billion contract with Levi's that we announced in May.

We're also pleased to have expanded our relationships with several long-standing customers this quarter, including Boeing, Gas, Marks & Spencer and

[Rayfield].

Our land-and-expand strategy remains a core tenant of our long-term organic growth plan and today, about half of our revenue comes from customers.

We've grown to serve in more than one contract.

New contracts we win are the key to our growth through the first half we've won more than $520 million of new business.

And given our increasing pipeline, we're on track to sign a record amount of new business this year, underpinning our growth in '25 and beyond.

As we've mentioned, we believe we saw the bottom of the inventory cycle in the fourth quarter of last year.

We're beyond that inflection point and we're seeing volume trends beginning to improve.

At an industry level, e-commerce has returned to sustainable structural growth.

Customer demand for outsourcing has remained strong throughout the cycle as customers look to improve productivity, reduce complexity and recognize their supply chain as part of the strategy, about half of the contracts we've signed this quarter were for newly outsourced.

If it stays, we're also pleased to have completed our acquisition of Wincanton in the second quarter.

This deal exemplifies our M&A strategy in Wincanton.

We've acquired a platform to expand our presence in target verticals across the UK and Europe, including aerospace and defense and industrials, we have acquired Wincanton at an attractive valuation.

We look forward to accelerating our future organic growth with this acquisition.

As we have done with our expansion in Germany in both Europe and UK markets.

We're seeing our customers grow more confident and launch new and larger projects.

This bodes well for our future growth along with our acquisition of Wincanton in North America.

While we're currently seeing soft demand for goods, we've signed record new business wins in the first half of this year.

Our long-term contractual business model gives us confidence in delivering our 2027 targets of $15.5 billion to $16 billion of revenue and $1.25 billion to $1.3 billion of adjusted EBITDA.

And with that, I'll pass you to Barry to walk you through the quarter.

Baris, over to you.

Thanks, Malcom.

Good morning, everyone.

In the second quarter, we generated record revenue of $2.8 billion, growing 19% year-over-year, of which 2% was organic.

Our organic growth was driven by strength in diverse parts of our business, including aerospace, data center support and omnichannel retail, led by cold storage supply chain.

Our adjusted EBITDA this quarter was $187 million, and we delivered $31 million of free cash.

Yes, our operating return on invested capital remained above our target at 32% as we continue to invest in high-return projects for fuel our organic growth.

Our financial position remains rock solid, and we are committed to maintaining our investment-grade balance sheet.

Our net leverage was 3.1 times as of the end of the second quarter, we are expecting leverage levels of about 2.5 times by the end of the year and less than two times by the end of next year.

We have no debt coming due in 2024.

Our sequential acceleration in organic revenue growth in the second quarter reflects that we have seen an inflection point in our business, as Malcolm mentioned, we also continued our acquisition of Wincanton this quarter.

We are thrilled to have acquired this business at an attractive valuation, and we are well positioned to quickly deliver on our synergy target of $55 million.

We expect the acquisition will be accretive to earnings this year with double-digit accretion to adjusted diluted earnings per share once we fully integrate the two companies.

Beyond cost synergies, we will look forward to leveraging Wincanton expertise to accelerate our growth in the aerospace and defense and industrial verticals in the UK and Europe in line with our M&A strategy.

Turning to our guidance, as Malcolm mentioned, we are reaffirming our view for the rest of the year.

For the full year of 2024.

We expect to deliver organic revenue growth of 2% to 5%, adjusted EBITDA of $805 million to $835 million.

Adjusted EBITDA to free cash flow conversion of 30% to 40% and adjusted diluted earnings per share of $2.73 to $2.93. We also expect to continue to deliver an operating return on invested capital of above 30%.

While we are seeing many improving trends in our business, the tone of our customer conversations continues to reflect prudence in near term growth expectations.

Looking to 2025, do you expect the synergies from the Wincanton integration and automated solutions you're underwriting to drive increase profitability.

GXO is executing well on the long term strategy.

We are uniquely positioned in a highly fragmented industry and due to our long term contractual business model, we have a multiyear organic growth runway ahead of us.

We are generating strong free cash flows, enabling us to invest in our organic growth and strategic M&A, and we will continue to allocate capital in the best interest of our shareholders.

And with that I'll hand the mike to Kristine, our new Chief Strategy Officer, over to you Kristine.

Thank, Baris.

Good morning, everyone.

I'm excited to have joined GXO in April as Chief Strategy Officer.

I previously worked at investor relations and prior to that spent 17 years on the sell side.

I've met many of you already, and I look forward to keeping you updated on how we are building the supply chain of the future.

Malcolm and Baris have already reviewed our excellent progress in the quarter and the ways that we're adding value for our customers.

I'd like to drill down on our automation and tech leadership, the key differentiator that is going to enable GXO to keep expanding our lead in the market.

I've now visited several of our highly automated sites in different countries, as an engineer by training.

I'm excited by the level of tech in our operations, both because I understand the value proposition and because I recognize how difficult it is to do what we do.

The combination of our automation expertise and our approach to developing automated solution is clearly our differentiator.

GXO has helped shape the industry for years, and we continue to redefine the role logistics plays in the modern economy.

You may have seen the video we released this morning highlighting our progress in piloting human robotics to work alongside our associates.

We are the first to deploy human robotics in our live sites.

And while this technology is a few years away from full deployment, our engagement today with leading developers is helping shape the supply chain of the future.

We're also creating enormous value by deploying AI across our operations.

The insights we're gaining from applying AI to optimize fulfillment are changing the way we run our sites.

Our implementations of AI are skyrocketing with 10 times as many sites in deployment for 2024 versus last year.

Our role in research and development of supply chain automation is to serve as an operational incubator.

We partner with developers of cutting-edge technology and help them shape the prototypes to address practical use cases with a focus on financial results.

A combination of disciplined capital deployment and operational expertise means that we can identify which technologies will create operational value and deliver financial returns and which ones won't.

This approach is part of our strategy of efficient capital allocation.

It de-risks our innovation while affording us a first-mover advantage and the opportunity to trial emerging technologies without disrupting our operations.

GXO has consistently delivered operating return on invested capital above 30%.

And it is this focus on innovation and disciplined capital allocation that underpins our competence on delivering our 2027 targets.

Along with today's earnings release, we also issued an updated investor presentation on our website, which outlines our value-creation framework, including long-term growth, driven by secular tailwinds our global scale, our leadership in tech and automation and a laser focus on our customers.

As you can tell from today's announcement, the core fundamentals of GXPO business model are strong and our relentless focus on these priorities, combined with our capital allocation strategy results in a compelling long-term growth algorithm for GXO, we look forward to keeping you updated on our progress.

And with that, I'll turn it back to Malcolm.

Thanks, Kristine.

We build on our momentum from the first quarter and delivered record revenues in the second quarter with our pipeline at a 12-month high.

We have a clear line of sight to sign a record amount of new business this year, underpinning our confidence about accelerating our growth in '25 and beyond.

With that, I will hand the mike back to Donna and transition to Q&A.

Thank you.

(Operator Instructions)

Stephanie Moore, Jefferies.

Please go ahead.

Hi, yeah, good morning.

Apologize for that.

I was hoping you could maybe talk a little bit more about just the maybe the recovery that you're seeing in the UK and Europe, what you think is driving that in particular?

And then thoughts about on when you would expect to see the US starting to improve some or other and the maybe other levers that you can pull with your US customers given what kind of remains a weaker environment?

Thank you.

Hi, Stephanie.

Good morning, it's Malcolm here.

Let me just cover that point.

And so when we look across, in fact, all of our regions right now, what we're seeing is modest improvements in customer volumes compared to the last quarter.

Our core volumes, though, do remain relatively sluggish and generally flat year over year.

But we have got some areas now where we can see definite improvements coming through when they look in the different regions as you point out, definitely UK and Continental Europe, they've remained strong rates, about two-thirds of our business.

And while we're not yet seeing that return to growth in the North American market is still a little uncertain.

What we are seeing is a tremendous amount of new business activity.

In fact, we've signed more new business in our North American business recently done for a long time, I think, and I think we're on target for a record in our North American activity for new business signings, inventory levels also, we definitely started to see those return.

So from that low point at the end of last year, I think that was really the inflection point for inventory levels across all of the regions.

Definitely, we're seeing industry share levels coming back, customers already know starting, I think, to prepare for this year's holiday season.

Most pleasingly, as we just talked about in our sales have been strong.

It's been tough.

We've seen tangible improvements over the last quarter and in fact, year over year in terms of every region, our sales pipelines pre pipelines, the really very, very strong.

The time to convert is quick and deal sizes are getting bigger, duration of contracts are getting bigger.

So the recent announcements that we made about the Levi's contract where we are commissioning right now and going live in Germany for the operation of a large, automated site.

More and more of these kind of deals we're seeing more and more transformative deals are coming into our sales pipeline.

So on top of the $0.5 billion of new business that we've already closed one during this year, the second half of the year, which really promising.

And that bodes well for our growth in the second half of this year and indeed going into 2025.

I think the last point, just it's an important point, just to come back on alongside all of these innovations, we really are catapulting now we're really accelerating the deployment of a whole lot of technology across the business and in particular.

And we're very pleased that the way our trials are going with the very latest tech, these humanized robotics, where we're coupling them, and we're bringing them into our operations across or a real wide range of AI driven initiatives across a wide range of applications.

So I think definitely in Continental Europe, UK, we feel that the business is in a very good trajectory of growth.

And really, we'll see that also in the second half of the year and into '25.

North America is still a little bit uncertain, but we do see all the signs of an improving situation later in the year, not least the fact that we've got the holiday season ahead of us and this year, we can see, although it's very early in the cycle for planning with our customers.

We'll know much more by the end of August where we can see that our customers, particularly the consumer focus customers they are starting to plan out really know for a holiday season.

Last year was a very disappointing holiday season right now.

We feel this year's period will be better, a better period for us than last year.

Thank you.

A very detailed answer.

I appreciate it.

Just for my follow-up here, I wanted to maybe bear if you could talk through of free cash flow considerations for the second half realized the guidance has remained unchanged but does imply a bit of a step up in the second half versus the first half.

So if you could walk through some of those puts and takes, that would be great.

Thank you.

Our free cash flow was $31 million in Q2, up $28 million year over year.

Our strong first half was which was up $56 million year-over-year, puts us on a track to achieve our 30% to 40% EBITDA to free cash flow conversion.

Our working capital management continues to be strong in 2024.

And we expect that we are investing more and more in automation that will accelerate but we are comfortable with our guidance for the year.

And as you would recall, our cash flow tends to be second half two-thirds every year.

So our guidance is reflecting that.

Scott Schneeberger, Oppenheimer.

Please go ahead.

Thanks very much.

Good morning, all.

I want to follow up on now on transactional volumes.

It sounds it sounds like there's a bit of a geographical difference where you're still seeing the sluggishness that keeps you cautious in North America on various.

I guess it's for you.

Is it is it still sequential improvement to third quarter to fourth quarter?

That's what it sounded like in the answer to the last question, but it's just between the back two quarters of the year, how should we see that trend on and maybe with regard to our two year over year consideration as well?

And then I guess, Malcolm if you want to follow that.

Just how much is it a lack of visibility?

Is there in North America?

You mentioned no, maybe later this month you get a sense for the holiday season, but it sounds like your concern is broader than that.

So maybe touch on some other verticals in North America on in addition to retail or if it is just retail, that's a that's kind of the thing that has you a little bit on pause.

Thank you

Than you, Scott.

Let me cover the second part of your question first, this is Malcolm, and then I'll hand you over to Baris to cover the detail on the numbers.

So in fact, so you're right.

I think we have all year had a strong outlook for our European business.

That boards Well, clearly, obviously, we've just concluded on the M&A of Wincanton, and that's going to strengthen still further because it's going to expose us into a number of new verticals.

We're very pleased about that.

In North America.

I guess what we're seeing is in our industrials business, our Earth's Best business, our tech business and generally things that are directly linked somehow to the consumer.

I think there's still a degree of uncertainty we do when we're talking to our customers they anticipate this year that they are going to have more of a pronounced holiday season than what we saw in '23, '23 was very disappointing.

I think for everyone.

This year I think on the back of improving levels of inventory and inventory levels are growing in our warehouses.

And I think and the planning that's taking place right now, but also remembering one of the things that is directly within our control, highly predictable for us is the actual implementing of that new business that we won.

And we can see that our new business wins in North America have been very strong.

So whilst the here-and-now has a degree of uncertainty, that was really directly controllable by us.

So the new business that we've won and how we will implement that and the timing of those implementations, that's much more pronounced.

So it does give us a better feel for the second half of the year.

I don't believe Q3 is going to be a significant change over Q2.

But I definitely do see that when we look at our implementations of new business, what we're hearing right now from our customers and what we're seeing in our facilities, I do think we will see a noticeable change as we move into Q4.

And as we exit this year in '25 momentum as it were.

But maybe Baris, you can put a little bit more detail around.

Sure.

When you look into Q2 on and then you look at our existing facilities and includes network consolidation and the macro impact.

Our volumes were still down, but they are less down compared to the fourth quarter of last year.

We are we feel confident that we have passed.

The bottom is, as Malcom highlighted, we are expecting a better peak compared to Q4 of 2023, which was really, really low.

And we're already seeing this environment reflected in our current business.

Furthermore, as Malcolm highlighted, we see higher new business wins that will support our continued growth in the back half, especially in Q4.

And the profitability in the back half, especially in Q4.

Remember, Q4, we had easier comps.

Great.

Thank you, both on that And for my follow-up on, but I wanted to delve into a bit of the pipeline and the duration of contracts in the deck you cited, I think it was a new something new in the deck that the second quarter average contract duration of six months out, I think six years on excuse me.

And so that saw that that's impressive.

And I assume Levi's is in that.

So just curious, are is a lot of this all-time high or very long-time high pipeline is a lot of this longer duration contract.

And just curious, Malcolm, if you if you backout Levi's, assuming that's what's driving that so high in the second quarter.

How does the overall portfolio look as far as long-term contracts?

Because you have been winning a bunch of them on, is that looking a longer now on the total portfolio than it than it did just a few years ago and how much has that moved up?

And more importantly, looking at the port and the pipeline are you seeing more of these long duration on contracts to come?

Thank you.

Yes, Scott, definitely what we're seeing is the duration length of contracts that we're signing is gradually getting larger.

And I think what's driving that is just the amount of technology that goes into the solutions that we're designing for customers.

So new -- many customers are coming to us because, well, they look at us, they see a very trusted partner that's very tech forward thinking.

So they're eager to benefit from the solutions that we can design for them that are really driving more efficiency, more productivity, higher quality, but with that generally comes automation technology, whether that's goods to person, collaborative robots, deep-seated in building robotic activity or indeed what will be in the future.

These, very latest batch of technology, humanized type of robotics.

So generally that's what's driving this longer term of duration is very good for us as a business because it gives us a huge planning horizon.

You already know, we're seeing business continuity with customers stretching out right into the next decade.

So I think contract duration increasing deal size really getting bigger, you know, big customers are seeking to outsource more and more of what they traditionally might have done themselves, and that's driving just a larger scale amount of outsourcing so for us as a business, it's really a very good news aspect.

It's something that gives us a lot of confidence when we're planning out our business beyond '25 and even into '26 and '27.

It's one of the reasons why we're really feeling very strong, very confident about the midterm '27 plans that we announced earlier this year.

We've got a lot of confidence coming from just the sheer level of new business that's coming to us.

Obviously, we are hopeful that our core business and the economic environments in all the regions will improve from where it is right now.

But a good deal of what we are referring to is directly under our control when it comes to just actually the new business that we're entering into with customers.

Chris Wetherbee, Wells Fargo.

Please go ahead.

Yeah, thanks.

Good morning, guys.

I guess I wanted to talk a little bit about the guidance and just sort of make sure I understand the cadence for the rest of the year, particularly from an EBITDA contribution perspective, it seems like maybe 3Q is a little lower than what we thought might it could have been and were maybe a little bit more 4Q weighted now than we were previously.

So can you can you talk through a little bit of what we should see over the course of the next couple of quarters and what sort of drives that seasonality, which I guess maybe it's slightly different than what we've seen before presumably maybe Wincanton has got a little bit different seasonality.

Hi, Chris.

This is Bari here.

You're right, there is a peak period in Canada and that's going to have an impact.

PSS also has a sizable piece that's going to have an impact and also we are seeing more contribution from our new business wins ins this quarter.

In Q2, we had roughly 8% of our growth coming from new business wins, and we expect that to grow to 9% towards the end of the year in Q4, that's going to have an impact.

And remember, Q4, we really didn't we really had a low peak period last year.

So we have we are having really easy comps in Q4 of this year.

It's reflected in our numbers.

Okay.

All right.

That's helpful.

And then maybe if you guys could sort of opine to some extent on what we're seeing from a demand perspective?

This is more of a US question than it is European question.

Your thoughts on whether or not some of the activity we're seeing is pull forward from a peak season with people concerned about potential disruptions, maybe as port issues or if there are other factors kind of playing in there, some tariffs that went into effect in early August.

Just curious, you know, the relative strength of imports principally from a US perspective, is that something that you think persist or do you feel like your customers are talking at all about pull forward?

Chris, it's Malcolm here.

And right now I we don't actually see that the inventory levels that we're seeing is a result of a pull forward.

I mean, there's different activities in different verticals.

I mean, we saw in last year as an example, and in fact, in early parts of this year.

Some of our customers in different industries tangibly bringing products in earlier, potentially bringing product in earlier from a safety perspective in terms of near-shoring and other activities like that.

But in terms of our consumer-driven business right now, I think we are just naturally seeing a elevating return to a more normalized level of inventory holding in our warehouses to support a normal kind of business planning cycle that our customers are having.

And clearly right now, we're seeing early impact of inventory getting ready for the holiday season.

Which I think will be a very traditional holiday season.

I know you mentioned about possible disruptions, port disruptions.

You know, our industry, I think no, except and lives in a disrupted environment.

You know, I think our customers are very familiar with the fact that they have to think about think outside of the box and clearly, you know, in working with GXO.

So they're working with a partner that really is well.

We have a huge experience of being able to assist them in that in that cause.

And again, one of the important aspects.

We are deploying a ton of automation and technology into our businesses that does allow us to actually transact a lot of volume in a much shorter window of time.

So it's an added degree of safety for our customers as we as we head into the holiday season.

Very helpful.

Thanks for the time this morning.

Appreciate it.

Brian Ossenbeck, J.P. Morgan.

Please go ahead.

Good morning.

Thanks for taking the question.

Just wanted to ask a little bit more about the composition of the recent wins and how that might impact margins with start-up costs and things like that for the rest of the year into next year.

So it looks like some new business wins were a smaller portion of the book this quarter compared to last one.

So it looks like a lot more outsourcing does have an appreciable impact on the cadence of earnings here when you think about start-up costs investments and I guess more specifically, why the shift between this two quarter to quarter is that just lumpiness because of the contract are you seeing some underlying changes in the behaviors here?

Hi, Brian, this is Baris here.

The delta is coming from the large outsourcing contracts we have signed.

These are these are the large automated facilities that we took over from an in-house operation and we are automating.

And of course, the contribution from this, that's the automated solutions is higher the margin delta is higher from automation, and you'll see that in play as we take over the site and is the ramp of this activity in this new facilities.

Our overall is a trend on roughly half of our business has been coming from the first time outsourcing, but we do see quite a lot of demand, especially in the e-commerce as well on the demand for new facilities are, and we are still gaining market share from some of the smaller players as we are getting on and seeing opportunities for consolidating network of our customers into our more scaled operations.

So we are gaining market share from the smaller players as well.

So this quarter, I would say, is a unique quarter by itself over the longer term, you should see on the takeover in place still continuing, but we see new facilities, especially in the in the e-commerce.

The demand for e-commerce facilities has been somewhat robust recently, and we are seeing a lot more pipe in our pipeline as well.

So that's going to be more balanced as we look forward.

The profitability contribution, of course, on these automated facilities is higher and we'll see have them reflected in next couple of quarters as we ramp them up and into next year as well.

Got it.

That's helpful.

Thank you.

Just as a follow-up there again, maybe you can talk a little bit more about how the investments in productivity and sales force that you're talking about to start the year.

How those impacted the second quarter and how those have been implemented getting the sort of returns you expect?

Because ultimately, I know there's some seasonality into 3Q, but wanted to see just how much of a tailwind that's going to turn as you go from 2Q to 3Q?

Thanks.

We had sizable investment in our sales teams.

In fact, that was the margin drag in our Q2 around 10 basis points.

These facilities will take up some time up to ramp it up and operationalize above.

We are seeing a huge opportunity Our pipeline is very robust.

The Our pipeline is turning faster as well as well.

As our view rate has the rates have improved.

Therefore, we are definitely seeing a huge benefit of investing in our sales teams and our capabilities and the results are not in our numbers yet.

You will see them more vividly in the next couple of couple of years.

Okay.

Thanks very much.

Thank you.

Ravi Shanker, Morgan Stanley.

Please go ahead.

Good morning, everyone.

Maybe I will start with a question on the human noise that you referred to a few times on this call because that's pretty interesting area of research and lots of new developments there.

How do you see that kind of ramping and playing out kind of who are the players out there who can supply you with these human eyes?

How does that coexist with cobots?

How do you -- what do you see as the future of warehouse automation?

Hi, Ravi, it's Kristine here.

You know, existing robotic solutions have matured and matured in recent years, and they're somewhat limited in what they can that they can only perform specific functions.

And this is really where the human rights come in.

They have the capability of performing dynamic tasks in a human way and they're deep and they're developed to make human-like decisions and also highly suitable for to perform some repetitive, heavy lifting type tasks and really work along our with our associates.

We believe that the human eye category were really explode over the next couple of years.

And therefore, we're really leaning into it into the human eye space via our operational incubator program.

And we've even this morning just released a short video on the progress that we're making with human eyes.

So I would say stay tuned.

There's a lot going on in this space.

We're certainly very excited about the opportunities.

I'm really at the end of the day.

It's going to drive efficiencies for our customers, and we're excited about that.

And that's going to accelerate our GXO growth.

I've really got very exciting and offer a more mundane follow up.

Just to kind of confirm your message on what you're seeing out there because you have heard from some of your customers, even like consumer brands, but a mass-market consumer brands or there is some weakness out there.

You see it in some of the weak retail results that are pretty weak.

You're saying that you are seeing that as much.

I mean, you did say that the US is a little bit softer, what is the message on what do you think the inventory situation and demand environment isn't look like in the back half?

Yeah, Ravi, Malcom here.

Let me cover some of that.

And I'll ask Baris to also comment on it.

I think two things to consider this kind of hearing noise.

So obviously, we work with our customers for the second half of this year.

And within that, clearly, the holiday season, roughly about 50% of our business is really consumer focused.

It's directly to the consumer.

So in that regard, second half of the year is going to be influenced by the hearing now thinking what we can see is in the discussions that we're having with customers, they are planning for a holiday season, maybe there will be this year, unlike last year, a little bit more promotional activity, maybe even a bit of discounting who knows.

But definitely that's the here and now, but I think the other aspect is so much of what we do.

And as we've just talked a lot about the high levels of new business that is coming into GXO.

So these are really projects for the future.

We're kind of not a transactional kind of business.

We're really a longer term long term arrangement with our customers.

So we're looking out beyond '24 into '25 into '26.

That aspect of our business, I think, is very strong SaaS because that's the customers really kind of having to re-plan out and re-design out and their own supply chains.

And clearly, we're at the heart of that with so many of these big blue-chip customers.

Baris, can you add?

Yes, on the revenue growth in the second half of the year.

The delta is primarily coming from new wins that we are implementing.

And when you look into the underlying volume and network consolidation assumptions are in Q2, clearly we were negative and in Q3, we will we expect a similar trend and somewhat easing up into Q4, reflecting easier comps are in the Q4 versus Q4 of last year.

Which was which was a bottom for us.

But again, this reflects a negative volume and network consolidation environments that we are forecasting for the entire year.

Despite that, our growth is accelerating because of our new business wins.

Very good.

Thank you.

Thank you.

Jason Seidl, TD Cowen.

Please go ahead.

Thank you, operator.

Good morning, everyone.

I wanted to delve a little bit into the contract lengths, I think expanding makes it a lot more predictable for your earnings power over time.

You mentioned about half of the contracts you're signing are newly outsourced customers.

Are those customers pushing out the longer term as well?

And also, as we think about these longer term, some of the deals that you signed are sort of in the double digit years?

Or is there any difference in how we should think of the profitability of those contracts or how they're structured?

Yeah, the roughly this quarter, half of our new business wins came from outsourcing and it does include a number of automated facilities as well.

Then you have an automated facility to make it work to make it economically feasible.

You need to have a longer-term contract because it takes time to set it up.

It takes time to operate and you're putting a lot of resources.

You have to make sure software hardware and people work together to achieve the benefits.

And those do end up.

There are high value and higher margin contracts for us and the customers are relying on our expertise and basically trusting them trusting us with their brand to achieve those objectives and profitability.

So higher margin over time some start-up cost?

Higher margin overtime.

Of course, there's a ramp-up period of automation.

And but once it's come to a mature level, it is quite profitable and it's various.

Okay, that sounds great.

I wanted to just follow up here.

As I look into some of your end markets, every one grew, but food and beverage, which to me was interesting because that's the one that everyone would think of as more sort of steady state, what's going on in that?

It's basically reflecting the of the noise in the market as far as consumer companies are concerned at the moment on.

But on the other hand, we have seen a nice pickup in our omnichannel retail on our frozen network, which has been quite robustly performing.

So it said it's basically reflecting the consumer environment that we're living in right now.

Remember, in Q2, we still are facing negative volumes plus network consolidation impact and that will ease as we get into Q4 because of the contract effect.

And despite that, we are accelerating our growth because of our wins.

So it sounds like food and beverage will be positive in the back half of the year.

We do expect a better outcome from our food and beverage customers that they are at the back of the years and our frozen network is quite robust.

Thanks.

Appreciate the color and nice quarter.

Thank you.

David Zazula, Barclays.

Please go ahead.

Thanks for taking my questions.

I was wondering if you could talk a little bit.

I know you've discussed briefly before the impact of the Wincanton acquisition on margins in the second half.

I know they have a primarily open book contract structure.

So how you're expecting that to impact and how your conversations with customers have gone as far as how they want to keep their contract structure in place at least initially?

Hi, this is Baris.

Let me take the margin question, and I will refer to Malcolm on of the regulatory process because there are certain limits on what we can discuss and what we can contribute to Wincanton at the moment of the in Canton is an open book business smaller in size compared to GXO, although it's a high return on invested capital, it's a temporary margin drag until we start the integration, whilst we have completed the regulatory process and the peak is over this tough integration process.

This quarter, it was a drag in our margins, and I expect that drag to slightly increase into Q3 and Q4 as more and more a period of intensive is consolidating our operation of this will turn into a tailwind to 2025.

And given the roughly $55 million of cost synergies we are targeting once we start the integration process at Newcastle as far as the regulatory process.

Malcom, anything you would like to add?

Yeah, thanks, Baris.

Well in terms of regulatory process, it's a normal process in the UK, we know it very well.

We on the two case, very positively with the Clipper deal.

We anticipate that regulatory process being complete during September October.

Clearly the Wincanton business.

It does have a holiday season and it's straight into the holiday season at that time, as indeed is the existing GXO holiday season.

So we'll really commence the full-blown integration of the two businesses from January onwards.

And as Baris was indicating, I think it's quite likely that the majority of our synergy benefits will see being actioned and coming through into our numbers during the course of next year by -- during the full year, basically.

And in terms of some of the points about Wincanton, I mean, we had incredibly positive feedback from the customers and they like the fact that Wincanton is becoming part of a much larger global business today.

It's been primarily a UK organization.

The team members that we've had contact with a very broad superstars here, and we're very well.

We're very pleased to be welcoming those team members into our business.

So overall, all voice far too soon to start putting numbers around revenue synergies.

We do anticipate realizing some very healthy growth coming from the existing verticals.

But importantly, also Wincanton operates in a number of verticals that GXO is not present in right now in Europe verticals such as public expenditure and defense aerospace, a lot of different industrial activity.

And these are areas that today GXO is not as relevant.

And so it will help balance out our portfolio.

But many of these customers are, in fact, global customers so far, clearly unable to take the benefit of working with Wincanton because they're really a UK and centric business.

But in future, we can see a lot of opportunity of transporting doors business relationships, not just across UK, but Continental Europe and even here into North America with particularly on some of the aerospace and industrial type of customers that they're working with.

So overall, it's a very interesting, very exciting time for our UK business teams.

I know the two teams, whilst we do operate separately right now, which is in alignment with the regulatory rules, I know they're looking forward to coming together towards the end of the year and really being able to maximize the benefits that will come out of this or this deal that has been done.

Very helpful.

If I could squeeze in just one more.

You reiterated the cash flow guidance, which I think calls for some sequential acceleration.

Cash flow in the back half at the same time is it sounds like you're expecting maybe modest volume accelerations.

Maybe you could square the two as to how you are expecting good cash flow in the second-half?

Our cash flow do generally tends to be tilted in the second half so far on a year-to-date basis, we are better than last year.

So this gives us a lot of confidence that we'll be able to achieve the guidance range of EBITDA to free cash flow conversion.

And as I highlighted, as far as the volumes impact is concerned, last year, Q4 was really the bottom this that we've seen very, very low inventory levels and low inventory, low our volume levels, and we are going to be comping them out in Q4.

So we do expect an acceleration into Q4 in our organic growth range coming from the volume.

But beyond that, remember, we are expecting higher contribution from our new business wins that's going to be operational in Q4 as well.

So we are looking positively into the second half of the year.

Thanks very much.

Thank you.

Kevin Gainey, Thompson Davis & Co. Please go ahead.

Good morning, everybody.

I appreciate you taking the question.

I wanted to maybe go into talk about the AI deployments that you guys are doing on.

What is the customer demand for that?

And how are you guys planning that integration?

And maybe if there's like a line of sight of what the opportunity is for you guys to capitalize on that.

Hi, Kevin, it's Kristine here to talk a little bit about AI, AI is really an exciting point for GXO.

And as I mentioned our AI deployments are up 10 times year over year in 2024, and we're using AI to add value in a variety of use cases within our existing operations and some of those cases include optimizing picking managing inventory flow, predicting SKU replenishment modes and all of which really reduces our cycle time.

And this improved really dramatically the efficiencies for our customers and improved capacity that I think Malcolm talked about earlier.

So I think we're, you know, GXO, we're the leader in the automated supply chain solutions.

But I would say AI were really, really just getting started.

And the predictive power of AI is already changing the way that we run our existing sites.

And this will have a I will further enhance this advantage.

So I would say watch this space, and we'll certainly have a lot more to update you on our progress as we go forward.

Interesting.

And then maybe if you guys this is a more M&A style question.

When you guys make acquisitions, do you typically integrate them wholly or do you still consider them like subsidiary?

And how does that affect how you guys run those businesses?

Yeah, Kevin, it's Malcolm here.

We tend to have a strategy whereby we integrate all that because we feel that drive the best environment for our customers is the best environment for our teams.

Obviously, as a business, I think we're very well known for our very good way of working with all of our business associates and our team members.

This year alone, we've kind of already promoted around 2000 people into new roles, homegrown talent as it were.

So when we integrate businesses, of course, new employees, new colleagues coming into the company gain.

All of these benefits, both first and foremost as all as well.

You know, we've been very successful.

We have a very strong track record.

We do what we say we'll do when it comes to making very smooth integrations of business, our customers value the fact that we do that for fully.

We don't disrupt any business.

But in doing that also, it means we're able to leverage the strength of all of the business that we have in one particular geography and that's what drives the high degree of synergy cost synergy benefits and that we're able to achieve, you know, improved procurement, buying powers, doing things in the more smartest way in the most efficient way.

And that's what gives us confidence.

And we've done this several times is what's giving us a high degree of confidence in terms of the synergy savings that will come from the Wincanton deal.

And really, you know, from, I believe, January onwards, that integration will start in earnest and we'll purposely make sure it's still very smoothly very well, but to the best effect ultimately of our team members and, of course, our customers in India and US in the best interest of our shareholders.

Appreciate the color on that Malcolm.

And then if I could squeeze one more in for Baris, how are you guys thinking about capital allocation in the back half of the year?

On the ARC, we are focusing on generating cash.

Our first priorities are a growth enterprise to continue to invest in our new business opportunities, organic growth, and we are in the process of deleveraging and our first priority would be organic growth.

Once we go through the regulatory process, we will I'll start integrating Wincanton and will capture more cost synergies.

And we are really excited about the new business opportunities, working the teams working together can create for us in industrials, in aerospace and defense.

Everybody is getting ready for that, but we need to get the approval from the regulatory bodies first.

So our priority would be integrating growing organically and paying down debt.

Appreciate the time.

Thank you.

Thank you.

Ladies and gentlemen, that is all the time we have today for questions.

I would like to turn the call back over to CEO, Mr. Malcolm Wilson for closing comments.

Thank you, Donna, and thanks for hosting our call today, we really appreciate that.

We're pleased with the progress that we've made through the second quarter.

We delivered strong business witness and look forward to even more to come through our bigger sales pipeline.

And we are also looking forward to going live on a number of exciting new sites in the second half of this year, we've seen a return of larger, more complex projects into our sales pipeline.

As Baris mentioned, you know, the return also of a lot of e-fulfillment type of projects is very pleasing to see.

We're leading the industry with a growing number of innovative and game-changing technologies, which are all being proven right now in our science, including the latest batch of human eye type of robotics.

And while as Christine mentioned, just a whole host of AI initiative as becoming a norm in our business is a really, very exciting time for all of our teams working in the facilities.

As a company, we're excited to continue to deliver these great shareholder returns from the exciting growth that's ahead of us.

So with that, I'd like to wish everybody a great rest of the day, and thanks very much for joining us and your attendance on our call.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time and have a wonderful day.