GXO Logistics, Inc. Q1 FY2022 Earnings Call

Welcome to GXO Q1 2022 Earnings Conference Call and Webcast. My name is Darryl, and I’ll be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. 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 laws, 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 to the extent required by law. The company also may refer to certain non-GAAP financial measures as defined under the 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 this 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 the demand for its services and therefore actual results could differ materially from the 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 Investors section of the company website. I will now turn the call over to GXO’s Chief Executive Officer, Malcolm Wilson. Mr. Wilson, you may begin.

Thank you, operator. Good morning everyone and welcome to GXO’s first quarter 2022 earnings call. Joining me today are Baris Oran, our Chief Financial Officer, and Mark Manduca, our Chief Investment Officer. We have started 2022 with outstanding top and bottom line performance. Our revenue grew 14% year-over-year in the first quarter of 2022, and our organic revenue which excludes the impact of M&A and foreign exchange grew by 19%. This is our highest first quarter performance ever. Our adjusted diluted earnings per share increased by 59% year-over-year. Finally, our new business wins of $344 million is also a record for the first quarter, underscoring the growing demand for our best-in-class solutions. As a result of this continued strong performance, we are raising our full-year organic revenue guidance. We are clearly in an environment where supply chains have become far more complex and will require a much greater scale and innovation. Our role as a trusted long-term partner to global businesses is more critical than ever, which is why we continue to see record new business wins, a huge sales pipeline, and increasing demand for customer first-time outsourcing. All of our verticals are growing both organically and through new customer wins, and it is worth taking a moment to discuss where we are winning new business. While we continue to expand the scope of operations with existing customers and gain market share during the first quarter, first-time outsourcing, especially in the e-commerce and omni-channel sector, was again the largest source of our new business wins. Our first-time outsourcing contract wins included BT, Carrefour, Decathlon, Raytheon, and Zalando. We saw expansion of operations with several existing customers including Abercrombie & Fitch, Diversey, Ingersoll Rand, and iRobot. In the short term, as physical retail reopens, we have seen some shifts from e-commerce back to brick-and-mortar retail. However, our customers continue to invest heavily in developing the direct-to-consumer channel. When you combine this with our high revenue retention levels, we have great confidence in the robust nature of our growth trajectory in 2022 and the coming years. In early April, we were very pleased that Clipper Logistics shareholders voted in favor of our offer to acquire the company. We anticipate that this acquisition will be highly accretive to GXO’s financial results, our vertical expertise, and our geographic coverage. At GXO, we are proud of the way we do business, and we have made excellent progress establishing ourselves as the logistics partner of choice for forward-looking companies that share our commitment to ESG. As a new company, we have the unique opportunity to tailor our environmental, social, and governance strategy to what matters most: our people, our partners, and our planet. With the recent release of our inaugural ESG report, we're off to a strong start. In the report, we provide updates on our progress towards our global targets, share details of how we have delivered against our stakeholder priorities in the first months as an independent company, and preview our plans for the years to come. I will now hand the call over to Baris who will talk you through our quarterly performance in greater detail. Baris, over to you.

Thank you, Malcolm, and good morning everyone. To start, I'm going to review our record first quarter results and I'll discuss the durability and visibility of our contractual business model. In the first three months of the year, we delivered 19% organic revenue growth. Our fifth consecutive quarter of double-digit growth and secured a record number of new business wins. Net income attributable to shareholders in Q1 2022 was $37 million, which compared to $14 million a year ago. Adjusted EBITDA grew to $155 million, up from $143 million on a pro forma basis a year ago, and adjusted diluted earnings per share increased by 59% year-over-year. Our return on invested capital was stellar at over 30%. We are implementing larger and more complex solutions on an unprecedented scale, as evidenced by the investments we have made in the first quarter starting up these operations. This will drive full-year margin expansion, more visible in the second half of the year and into 2023. The average contract duration of our wins was approximately six years, which continues to expand our overall contract life. The strong secular trends within this business are demonstrated by the fact that we have raised our revenue growth guidance for the year. We have also introduced an adjusted EPS guidance of between $2.70 and $2.90 per share, implying a growth range between 29% and 39% year-over-year. Turning to cash flow, our business in the first quarter typically sees modest cash outflows due to seasonality. This quarter was no different, with $60 million in cash outflows in Q1 2022 versus $20 million in cash outflows in Q1 2021. As you may recall, we have said that our growth CAPEX to sales is approximately 2%. As we grow and implement new business, we had a modest-looking capital trend. We remain very confident in delivering our guidance of 30% free cash flow conversion from EBITDA in 2022. Our investment-grade rated balance sheet continues to be rock solid, with leverage under one-time last 12 months adjusted EBITDA. To conclude, GXO’s high earnings predictability continues to be underwritten by a tethered new business pipeline, longer contract durations, a highly variable cost base, the inflation pass-throughs, minimum volume guarantees, and best-in-class revenue retention rates. Our first quarter results clearly demonstrate that this business is not just an exciting structural growth story, but one in which we expect to deliver outstanding profits and strong cash flows with great returns for our investors. I will now hand the call to Mark to elaborate on our record wins, technology investments, ESG achievements, as well as our raised growth plans. Over to you, Mark.

Thanks, Baris. GXO delivered a record first quarter for new customer wins. We have won over $344 million in the first quarter, about two-thirds of that will fall this year, meaning we now expect over $1 billion in incremental 2022 revenue. Now importantly, we've also sustained our strong mid to high 90s revenue retention rate. Our wins and our $2.5 billion pipeline can be attributed to our reputation for quality and reliability, but also our leadership in technology-enabled solutions. We really are the innovation leader in our industry, and we never stop working to retain our technological edge. The rise that you can see in average contract duration in the first quarter reflects the fact that we are partnering on more and more complex solutions with our customers. Over the past few years, we've invested to increase the level of automation across our global footprint. Notably in the U.S., we've seen a year-over-year increase of more than 40% in automated solutions in the first quarter. And at the end of the first quarter, one-third of our revenue is driven from highly automated sites globally. This is driving real benefits for our customers across our business and for all of our stakeholders. For example, in a number of cases, co-boxes in GXO warehouses have materially improved productivity and accuracy rates while enhancing our already great employee retention rates. I would also note that we have recently launched a 3D automated packaging solution on e-commerce sites with custom-fit boxes to their contents, saving significantly on materials and contributing to sustainability. These technological advancements not only drive our business forward but are well-aligned with our firm belief that how we do business is every bit as important as what we do. As Malcolm mentioned, we published our inaugural ESG report last week, highlighting that we're on track to achieve our long-term targets while also supporting our customers as they work to achieve their own ESG goals. In particular, I'd like to call out a few key highlights from the report on the environmental side. Our greenhouse gas emissions fell by 3%, but what's more impressive here, given the growth of GXO, is that the per dollar of revenue actually fell by some 24% year-over-year. Additionally, nearly half of our global floor space is now using more efficient LED lighting. It's clear through both our wins and pipeline that we have considerable growth opportunities ahead as more and more customers are looking to GXO to optimize their warehouse, a mission-critical component of the supply chain. All of this is contributing to our raised guidance, and let me take you through those highlights. Firstly, in terms of organic revenue growth, we're now guiding to 11% to 15% for 2022, that's up from 8% to 12%. This reflects the phenomenal new business wins that we've seen in the first three months, the size of our sales pipeline, and the strength of our existing business. Secondly, we've provided adjusted diluted earnings per share guidance for the first time, and we're looking for this EPS of between $2.70 and $2.90. This implies a growth rate of between 29% and 39% this year and puts us in the top 20% of the S&P 400 Mid-Cap companies. In closing, we're clearly off to a phenomenal start in 2022. GXO has extremely high multiyear revenue visibility, some exceptional growth with global blue-chip customers, resilient returns, and excellent cash generation. We'll now open the call up to Q&A.

Our first question comes from Scott Schneeberger with Oppenheimer. Please proceed with your questions.

Thank you very much. Good morning gentlemen. For my first question, I'll ask if you could please discuss what you're seeing in supply chains right now from a macro perspective, how that's developed in recent months, and how it's impacting your business? Thanks.

Thanks, Scott. It's Malcolm Wilson, and let me come in and give you some background. So first and foremost, if I think about what GXO is seeing, well, you've just heard our call. I mean, it was a great quarter, and we're operating in a huge addressable market of $430 billion. We had great organic growth of 19%. As Mark just mentioned, our EPS guidance puts us in the top 20% of the S&P 400. We launched our inaugural ESG report, so really, it was a super quarter. What was very, very pleasing though was the level of new business that was being signed, $340 million. There was a huge amount of implementations taking place as well that will flow-through from 2021. So overall, very, very good. We've got to put that against the kind of bigger picture. What we saw really progressively from January onwards was in some of our customers, where we operate in an omni-channel capacity, so we operate e-fulfillment, but we also deliver into brick-and-mortar facilities for them. We've seen that consumers, as a consequence of the pandemic receding, have drifted back into the shopping mall. That's a great thing; we're happy about that. So we've seen some volume change as a consequence of that. We've also seen, of course, in Europe, the shock aspect of the Russian invasion of Ukraine. But that shock has really dissipated now, and sadly, people have become familiar with the situation. The last thing I want to comment on is the evident supply chain disruptions. Right now, a lot of customers across our North American and European business are affected by shortages of products as a consequence of the rise again of COVID in Asia, particularly in China, and of course, various types of shipping disruptions. Last year, it was Long Beach inbound port; this year, probably more outbound ports like Shanghai. So that's the kind of big picture. But overall, we are constantly monitoring our sales order pipeline. It's retained at a very high, very positive level, over $2.5 billion. Our conversion has remained very constant, with retention of customers. Contracting terms, if anything, are going upwards. The average for the quarter was around six years. So overall, we're not seeing the impact of these larger picture events. But I do want to say that in the end, we're not 100% immune to any kind of macro world. Interest rates are going up. We're not 100% immune to that. But I would say that the very nature of how we do business, the nature of how we strike our contractual deals with our customers, and our ability to pass through inflation really gives us a strong base. It shields us to a certain extent from these momentary volume modifications that we're seeing. We see a bit of softness on one customer. The scale of our business really tends to allow us not to see any major impact across our results.

Excellent, thanks Malcolm, I appreciate that color. For my follow-up, I'd like to ask about margins in the quarter. If you could please elaborate, looking at Slide 16, thank you for the bridge, you had going in the right direction performance improvements and other, if you could elaborate on that? And then obviously, you had this great new activity and new business start-ups, which is a bit of a headwind. So if you could just speak to how we should expect to see the margin develop over the balance of the year, kind of a thought of how you would bridge 2021 to 2022 in a similar fashion and elaborate on some of those drivers? Thank you.

Sure. This is Baris here. I'm going to take that margin question. We have recorded 19% organic growth in Q1, and when you look into the components of that growth, literally close to half is coming from net new business wins. Bearing in mind that our earlier guidance was about 5% to 8% of our organic growth would come from new business wins, we are clearly trending at the peak of this range. And then we start that new business due to the complexity of the solutions we provide to our customers. It takes time for each operation to reach margin maturity. This is raised by contract type; open book, or cost-plus contracts takes roughly three to six months to mature, while closed book and hybrid contracts take six to twelve months to mature. Accordingly, we'll see profitability from these contracts more prevalent in the second half of the year, which will drive our margin expansion on a year-over-year basis. So the impact of new business wins in Q2 will be less than Q1, but we will see a positive margin contribution starting in the second half of the year.

Actually, thanks for the color guys. I will turn it over.

Thank you. Our next question is coming from the line of Chris Wetherbee with Citi. Please proceed with your questions.

Hey, thanks and good morning guys. Maybe if I could just piggyback on that margin question, maybe understand it a little bit better as we think about really more bigger picture. So beyond just sort of the second half of this year as you think about the opportunity set in front of you, the pipeline that you're expecting, is there a way we can think about how much start-up costs should be sort of generally in the business in any given year? I don't know if that is a percent of revenue if you want to think about that as a percent of adjusted EBITDA margin, just want to get a sense of what should be sort of assumed in our expectations as we move forward beyond 2022?

Sure, Chris. As we have mentioned, this has been an extraordinary quarter of new start-ups. When you look into the Q1 detail, the delta in EBITDA was about 40 basis points. Of that, 68 basis points delta is coming from net new business wins, while the remainder reflects our operating activities, including operating excellence. This has been a very robust start-up time. We have been extremely busy, and it is reflecting that in our margins. Over time, in the second half, you will see more prevalent improvement in our margins. We're writing a lot of contracts, very solid contracts for return on invested capital. I'll give you an example; I was reviewing a contract with huge revenues and only 6% EBITDA margins but a return on invested capital of 86% and EBITA margin above our group average. This is the kind of contract that I will sign every day and all day.

Okay. Okay. So I guess it is not necessarily like a good rule of thumb that we could think about in terms of X revenue equals on an annualized basis, equals initial upfront start-up costs of something, some percentage of that. Is there any way to think about it in that context?

Yes, Chris. There's a couple of ways of thinking about this. So just to Baris's point about the pipeline, it's Mark here. We've got a very long duration pipeline. But really, what's happening in this $2.5 billion pipeline is that we are winning some great contracts, and those contracts have tilted to our strengths, which obviously are margin and return-enhancing. You’ll notice that in our presentation pack, 70% of our mix is coming from e-commerce, omni-channel retail, and consumer technology. All of the contracts that we signed through Q3, Q4, and Q1 have some element of automation attached to them. You'll know we've talked about automation contract wins as having 300 to 400 basis point margin improvement in our business. So there's lots to like here in the pipeline. There's lots to like in terms of the new wins that we're signing. We're winning a lot of outsourcing contracts, wallet expansion, and competitor wins in the business. And that, over time, will naturally be margin expansion enhancing and also return enhancing, as Baris and Malcolm have both alluded to.

Okay. That's really helpful. I appreciate the color, Mark. Thank you so much. Quick follow-up here, so just thinking about the current environment that we're in, e-commerce growth was fairly robust in the quarter from a revenue perspective, is there any way that we can look within the contract to get a sense of where volume is trending from a sort of quarter-to-quarter dynamic, just getting a sense of where you are relative to your sort of the floors and ceilings within the contracts, specifically on the e-comm side would be helpful?

Yes, let me help on that, Chris. It's Mark here. So if you think about our business right now, let's go back to basics in terms of the 8% to 12% guidance range that we had, so that was essentially coming from two elements. That was coming from existing growth, which was 3% to 4% at the time and then 5% to 8%. We've obviously raised that range to 11% to 15% for this year. That now goes, in essence, you can think about it as being existing customer wins of 4% to 5%, so that gives you a sense of what's going on in the underlying business, which, as you say, is highly skewed in our business towards e-commerce. And then, of course, new business wins in the 7% to 10% range. So if you think about that, that gets you, if you take 4% and 5% and 7% to 10%, that gets you to 11% to 15%, which is that new guidance range. I don't think in terms of your underlying point, the run rate, as you talk about in your question, I don't think it would be unfair to surmise that the existing customer range that we've talked about is tracking ahead of trend in the first quarter as we saw in the third and the fourth quarter as well. So underlying volumes, as Malcolm spoke about to Scott's question, looking good. The reason I'm also confident in the 7% to 10% range, just kind of looking into the looking glass, is the fact that the new customer wins are now accumulating at this $1.02 billion range. Well we've got a lot in the hopper in terms of new wins, as the guidance talks about. It's essentially the $830 million that we talked about at the last quarter, plus the $192 million from the last quarter. That basically is 10.5%, plus 2.5%, which means we've got a gross win rate already banked for this year of 12.9% in the bag, plus anything that we could potentially win in the April that's just passed and the May that we're currently sitting in. So that's what really drives our confidence in terms of existing customers, gross wins, and when you combine that with the fact that, as Malcolm said, this mid to high-90s revenue retention rate, that's very strong for a business services company such as us, as I'm sure you're aware. So you've got really everything heading in the right direction for this business. You've got existing customer growth, a stunning pipeline, stellar retention rates, and plenty of new wins coming through. So I hope that helps.

Yeah, it does. Thanks so much for the time. Appreciate it.

Thank you. Our next question comes from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.

Thanks operator. Hi everyone. Congratulations on the results. Malcolm, I want to revisit your comments from the first question, which was from Scott Schneeberger. Europe is experiencing a lot of activity right now, most of which poses macro challenges. Your customers are engaging in significant outsourcing projects, ranging from $10 million to $20 million, which are substantial investments for them. While I recognize that the markets you serve and the solutions you offer are benefiting from strong long-term trends, I'd like to know if the current challenges in Europe have caused any hesitation among your customers regarding deferring these capital projects due to the situation there. I'm not particularly concerned about growth in 2022 or 2023, but I do have some worries about the potential for a slowdown in growth in late 2023, 2024, or 2025 due to the long lead times involved in your business.

Yes, Amit, thanks for bringing that up. It's a really important question. As GXO, we have a good insight into what our customers are doing, and right now, e-fulfillment is significantly growing. While we have observed a return to brick-and-mortar shopping, the majority of our customers continue to shift more of their business online. This transition allows them to enhance the direct consumer experience and reduces costs by serving customers directly rather than relying on physical stores. Our e-fulfillment business, which represents about 50% of our overall activities, is thriving. We have ongoing discussions about projects focused on automation, which is essential for managing volume, and our sales pipeline is filled with new initiatives. In the food and beverage sector, demand remains steady, as people will always need to eat. Customers are increasingly recognizing the value of automation, leading to longer-term contracts. We are noticing a trend toward these long-term agreements because they involve more capital investments aimed at serving customers over the long run, often five to ten years or more. Across our overall business, the pipeline remains strong with many long-term projects. Unlike some companies expressing concerns about slowing growth, we are not experiencing that at all. Instead, we are witnessing a continuation of positive trends from previous years. The start of this year has been excellent for us, which is why we are raising our revenue projections. Our teams are incredibly busy with new implementations, and all of this work is geared toward long-term success.

That's pretty amazing. I think it speaks to the opportunity and the execution. So a couple of other quick ones, if I could. Baris, one thing that I noticed is when I look at the adjusted cost of the business, so taking out transaction and restructuring costs and deal amortization cost, the adjusted cost of the business was up year-over-year, but at a lower rate than revenue growth. I just want to think about we talk a lot about margins for this business, but at the end of the day, it's a very growth-centric business, and even if you don't expand margins, as long as you're not declining margins, your EBITDA is still growing. So as we think about the next three to four years, including startup costs, do you feel comfortable that the adjusted OPEX base of the company inflates at a lower rate than revenue, which allows you to drive some margin expansion, is that the right algorithm for the company?

Yes, I feel fully confident on that. As we look forward, we will have higher margin expansion, especially on EBITA. You should continue to see that our EBITA margin expansion faster than our EBITDA margin expansion. Currently, we are about 40% open book. After Clipper, we're going to be pretty much close to 50% open book, and that's going to be accelerating our EBITA margin expansion much higher than EBITDA.

Yes. I'm just more focused on EBIT because obviously, the useful life of your assets is tailored to how you price the business and your ROIC. But it seems like that should translate to EBIT as well. The last question for me, if I could. I'm sorry, I'm over my allotment, but I think it's an important question, is that you guys paid a very big price for Clipper Logistics on a pre-synergy basis. Post-synergies, it looks very compelling, but one could argue that you're capitalizing a lot of the benefits based on the pre-synergy price. Malcolm, I mean you've been in Europe for decades and been in this business for decades, what does Clipper give you that makes the price worth paying for? And can you just talk about the strategic rationale and why you're willing to pay such a high price on a pre-synergy basis for the company?

Yes, Amit, thank you. Let me provide feedback on that. You're correct that I've been in Europe for some time. When we started the spin-off as a business, we compiled a list of companies we admire, which we believed would present excellent M&A opportunities, and Clipper was at the very top. We were thrilled to reach an agreement and appreciate the Clipper shareholders who supported the deal. Regarding timing, it needs to go through a standard regulatory approval process. We don't foresee any issues, and we expect to close likely in the summer, possibly as soon as August, but more likely September due to the holiday season affecting the teams working on these matters. We are excited to welcome the new team members into our business. This acquisition is very advantageous for us; even in the first year, it will contribute positively. Although we are paying a good price, it comes with significant cost synergies, around $48 million, that are clearly defined. Our management team has extensive experience in M&A, integration, and realizing the benefits from this process. The business will enhance our e-fulfillment in our main markets with minimal customer overlap; there is maybe one or two customers currently in common, which is very minor. This creates a substantial opportunity for cross-sales. Many Clipper customers are multinationals, indicating they operate beyond just the UK. Additionally, Clipper excels in reverse logistics and returns management, areas where they have proven expertise and sophisticated software, which will allow us to utilize those capabilities across GXO’s wider customer base, not just in the UK and Continental Europe, but also extending to North America. Clipper's main operations are based in the UK, but they have effectively expanded, particularly in Germany, where they have seen considerable success. We have a strong interest in Germany, as it is on our list of M&A target countries. Merging our existing business with Clipper will provide us with critical mass in Germany, Europe’s largest economy. If we achieve growth in Germany comparable to that of our other markets, it will be immensely beneficial. The market is currently dominated by a few key players, but there is substantial opportunity for a new technology-driven company like GXO. Moreover, Clipper has successfully developed verticals, particularly in repairs and refurbishment, which we plan to leverage across our customer base. They have organically built a small network and also expanded through minor M&A, and we will continue that strong effort. There are significant advantages across our existing customer base, aligning well with ESG considerations. Lastly, in health care and life sciences, where scale is essential, combining that with GXO's scale is going to be beneficial. We are not involved in that sector today, but we expect it to grow considerably, and we have strong prospects for it. Overall, this is why we find the agreement so compelling, as we anticipate significant cost synergies and considerable top-line growth from it.

Okay, that’s very clear. Thank you, Malcolm, thank you everybody. Appreciate it.

Our next questions come from the line of Bascome Majors with Susquehanna. Please proceed with your questions.

Malcolm, you joined the GXO predecessor, Norbert, in the fall of 2007 and walked effectively right into a deep global recession and had to manage through that. Can you talk a little bit about the signs of the business changing that you saw 15 years ago and how those inform how you manage this business for downside risk into the current environment? Thank you.

Yes, for sure. I mean years ago, logistics, I have to say sadly, many years ago, was viewed as a commodity. It's no longer viewed as a commodity today. It's viewed as an essential part of doing business. It can make a difference to the success of any company when it comes to the consumer experience. That fundamental shift has changed over all those years. Today, we're an integral part of the customer activities that we work with. Those blue-chip customers, no wonder they sign five, 10, 15-year agreements because we become absolutely integral, very sticky with them. When we look at how we work together, it's very much a contractual type of environment. We have set boilerplate-type of agreements. That's why you've heard Baris mention about the pass-through of inflations; it's actually never a big discussion. Customers, particularly when you think about wage inflation and energy inflation, these are essential to delivering a great service. We never tend to have a big drama in discussions with them, even though they are actually cost increases; nevertheless, those tend to easily go through to our customers under the terms of the agreements we have with them. And more and more as Baris mentioned, we are seeing a lot of open book deals coming along. I think in these high levels of inflationary environments that we see, that's not a bad thing, that's actually a good thing for us. We're quite happy with those. So that's the overview that I can share with you. We've matured as an industry, full of technology, full of automation; I can remember in the days when a graduate trainee induction day would attract only a few people. Now it's thousands of people. People want to work for GXO because they see us as a super high technology company with a very loyal, strong, and structured customer base.

Thank you for that. And on the quantitative side, I know you talked about this in the Investor Day last summer, but the business is changing. You're doing a fairly sizable acquisition. I don't know, Malcolm or Baris, who wants to take this but can you talk a little bit quantitatively about your modeling for how the business would fare in a deeper recession, just want to understand how instructive the Norbert’s 2009 scenario is or is not? Thank you.

Sure, I'll take that. This is Baris here. When you look at our customer base, it's very strong, and our volumes are really strong, as Mark mentioned. We have seen a stellar 19% organic growth result as we are forecasting really continued growth in our business. However, if you go to see a downturn, 25% of revenue is fixed. And because of the resilience of our open book cost-plus contracts and inflation pass-throughs, our margins are very stable in different cycles. We have long-term visibility with booking revenue all the way to 2024 right now. We have fantastic visibility in 2022, 2023, booking into 2024. We also have minimum volume guarantees that reinforce our strength in bottom-up and down cycles. So the mix of our business is very resilient. It's a business for all seasons. Remember, the fixed revenue comprises 25%, while 40% is open book. We have minimum volume guarantees, inflation pass-throughs, and booking revenue all the way up to 2024 right now.

Okay, thank you for that.

Thank you. Our next questions come from the line of Brian Ossenbeck with J.P. Morgan. Please proceed with your questions.

Hey, good morning. Thanks for taking the questions. So I want to come back to the margins and the start-up costs, kind of a two-part question on that. Can you give us a sense, would these start to fade as GXO gets to a certain size or scale or would this be kind of just normal seasonality when you look at margins for the first half versus back half? It'd be helpful to kind of understand. And then also more near-term, given the environment and how tight everything is, would you say that these start-up costs are maybe a little bit more than you would have expected in terms of getting execution on time, the inflation, getting enough people in place to stand up these projects, which sound like they're kind of large; so comments on both those would be helpful?

Hi Brian, this is Baris here. Let me address that question. We achieved 19% organic growth, with a significant part coming from new business wins. We're trending at the higher end of our guidance range for new growth, which is remarkable. As Malcolm noted, we are very busy implementing contracts as our services are in high demand. We're delivering a lot to our customers. For instance, we recently launched on-site for a Valmont e-commerce customer, reducing their variable costs by 40% per unit and lowering their inventory by around 40%. Most importantly, we improved the Net Promoter Score, achieving a 45% increase, which indicates enhanced customer relationships. This is what is driving our new business wins. In Q1, we saw a 40 basis point change in EBITDA, with 68 basis points attributed to new business wins, indicating strong growth. In the second half of the year, you can expect margin expansion from these new business wins as their margins begin to mature.

Okay. But I guess in terms of looking forward, is this like the way the seasonality of the business should work where you just have start-up costs that just are higher in the first half versus the second half or does that depend on other factors like how much of its organic or not? Just trying to think about how we should be modeling this and really what's driving most of this impact here in the first half; would this be something which should be considered more so in the future or just part of the normal business?

During the peak, our customers don't like implementations. Everybody is very focused on ensuring the volumes are delivered to the consumer base. So that starts before Black Friday and ends with the returns process after Christmas. That's a period when we do not do a lot of implementations. We tend to focus on delivery. After that, there is, of course, an accumulation of new start-ups as we get ready for the next peak, which we anticipate this year. Therefore, you should see that on a year-over-year basis, on a quarter-over-quarter basis, because of the nature of our fulfillment business model and its peak season.

Okay. Understood. Just one quick follow-up. You mentioned returns in GXO Direct. I think in the past you've given some relative sizing in growth rates. Can you give us an update on both of those? Thank you.

Hey Brian, I'm happy to take that. So with GXO Direct, there's been huge demand for the GXO Direct service. We have been, as I mentioned to Chris, inundated with customer inquiries. Margins, you'll be pleased to know, for this year should be better compared to the base business, and they're growing substantially, which is a good sign. Very broadly, I think this year we're budgeting for around $400 million of revenue in that business, and clearly, there’s a lot of validation in the market by what you're seeing with some of the M&A in the space. You've obviously seen Shopify and Deliver. That to me is a very strong sense of validation that we're seeing interest and growth within that space. Like our broader business, it facilitates customers to get closer and closer, as Baris was talking about earlier, in this D2C element, getting closer and closer to their end consumers. The business will be one of the mainstays of what we continue to grow. To Malcolm's point earlier, it clearly links with what we're doing in the multi-tenanted warehouses of Clipper, which dominate their footprint. So we're very excited about what's going on within our base business in the U.S. As we acquire, Clipper will provide a growth avenue within the European portion, which will act to a certain degree as a GXO Direct Europe, so to speak. Very exciting times ahead and tons of growth in that business. Customers are falling over themselves to do business with us, and it's generating very good margins and returns.

Okay, thanks for your time.

Thank you. Our next questions come from the line of Hamzah Mazari with Jefferies. Please proceed with your questions.

Hi, this is Mario Cortellacci filling in for Hamza. Maybe could you just comment on what you're seeing on labor availability and labor inflation in your model and kind of how you're managing through that? I know that in your open-source contract, you can pass through some or all of that inflation or pressure, but maybe just going back to the implementation of these projects as well and the cost from maybe even a CAPEX perspective or implementation perspective, kind of what you're seeing on availability and then how you're managing through labor inflation there?

Yes, it's Malcolm. To address your question, the tight labor market we saw in 2021 has loosened, making it easier for us to recruit as more labor becomes accessible. However, it's important to note that this period is typically quieter for many of our customers and not as busy as we usually experience in the latter half of the year, as Baris pointed out. While labor availability has improved, in 2021 we managed to recruit all the necessary labor by focusing closely on our recruitment process; our recruitment teams are now integrated within the business, allowing us to stay updated on what is needed to secure the right volume and skills of labor. Our goal is to make GXO an attractive place for individuals to work, whether in warehouses, implementation teams, or as automation engineers. We take this seriously and review thousands of survey results from our teams each quarter. When we evaluate current labor wage inflation, it presents a mixed picture—some areas are seeing inflation around 10%, while others have decreased to 2% or 3%. By decentralizing our recruitment approach, we manage to fill our roles effectively. Although the peak season feels distant, our teams are already strategizing the resources required for upcoming sales events and product launches in the second half of the year. We apply the same careful planning to our new business implementations. Starting new business involves meticulous coordination, often merging machinery from various manufacturers and staffing all at a single site to launch a warehouse operation. Referring back to Baris's earlier comment, the first quarter was notably busy for us regarding implementations, which posed challenges for our operational teams; however, they have excelled, and we are all proud of their efforts.

Got it. And just for my follow-up, maybe you can just talk a little more about Germany, just who are the main competitors there, what is the pro forma market share that you guys will have with Clipper, and how big can that market be for you? And then I guess, just with that, what gives you confidence in your ability to win that business versus other players in the market that are much more established currently?

Yes. Germany, as I mentioned, is Europe’s largest single economy. It's a market that is good for outsourcing, and it's very open to outsourcing. When we evaluate our business today, it's small for GXO and larger for Clipper. When we combine both businesses, we'll have significant critical mass. With customer business, customers want to see what you do before granting a substantial contract. So, without those existing facilities, it becomes a real blocker for business growth. When we align our business with Clipper, for the first time, we will have true critical mass, numerous locations to showcase to customers and various vertical expertise to share. I'm very confident that the GXO brand and our reputation for delivering reliable, on-time solutions; our use of advanced automation and commitment to improving customer service will drive accelerated growth in this market. Competitors will be similar to those in other territories we operate in, and there exist various established incumbent European players. The difference, however, is we're an emerging player backed by high-grade credentials. I am very confident that we will see an accelerated growth in the German market, alongside the growth across our broader business.

Understood, thank you.

Thank you. Our next questions come from the line of Ravi Shanker with Morgan Stanley. Please proceed with your questions.

Thanks, good morning everyone. I have a couple of questions regarding the resilience of earnings during a downturn, which I believe is a key aspect of our narrative. To start, Malcolm, you mentioned several times that you're observing a shift in demand towards stores, which you indicated is not necessarily a negative development. I would like to gain a clearer understanding of this, especially since the majority of your sales come from e-commerce. How do you view this shift away from e-commerce towards physical stores?

Well, for one, a lot of our customers are actually e-commerce omni-channel. We operate e-fulfillment and also deliver into brick-and-mortar facilities for them, so from a GXO perspective, we're not worried about whether we're delivering into stores or online. A momentary drift back to brick-and-mortar shopping is expected and is generally welcomed. However, it is not changed significantly manufacturer or retailer sentiment, as they are still eager to drive more business online, which is lower cost and improves access to the consumer experience. Our e-fulfillment, which is around 50% of our activity, is growing at a tremendous pace. The sales pipeline features numerous projects aimed at this capacity and automation, solidifying the future-proofing for us. We are not experiencing major downturns, just some momentary trends to watch, and our growth remains firmly on track.

Understood. Yes, not complaining about being able to go out either. And maybe the second question is on the same topic, can you just help us understand kind of what the construct of your contracts are like because obviously, in a downturn, your customers are going to see volumes decline. But how are you protected on that? I mean do you guys have take or pays in your contracts, do you have for minimum volumes, how does that kick in? I'm just trying to figure out kind of what the floor is on earnings if there is a fairly severe recession? Not that, that's the basis, but checking.

Baris, maybe you can comment.

Sure. Our contracts are very well structured for volume fluctuations. Remember, nearly 40% are open book cost-plus contracts, which are very resilient. Within them, there's 25% of fixed revenues, and they don't require a lot of upfront CAPEX. Inflation pass through is not a concern. The volumes on these contracts do not really impact our business. The remainder of our 60% contracted revenue consists of closed book and hybrid contracts, which also include roughly 25% fixed revenues. So these do not influence margins significantly based on volume. Our workforce is mostly flexible and very scalable; more than 50% of our costs are derived from our workforce, which lends itself well to scaling operations up or down in alignment with our volumes. Thus, the mix of our business is very resilient and positioned to sustain through market volatility.

Okay, understood. I will follow-up offline as well. Thanks so much for the time.

Ladies and gentlemen, that is all the time we have for questions today. I'd like to hand the call back to management for any closing remarks.

Thank you, operator, for managing the call so well. This is Malcolm. I want to conclude the call with a few comments on behalf of myself and my colleagues. First, this is our third call, and I hope everyone is becoming familiar with our process. We're a company that strives for achievement and delivering strong results, managed by a hands-on team that is closely connected to our business and the markets we serve. The upcoming acquisition will be integrated smoothly, and we are confident in our execution. The company is in a strong position as we continue to benefit from our launch and see significant demand for outsourcing logistics. E-fulfillment makes up about 50% of our business, and it is growing rapidly, even as customers return to in-store shopping. We are leveraging our first-mover advantage in warehouse automation and technology, and we see no signs that this trend will falter. Overall, this past quarter has been exceptional for us. While I won’t recap everything we've discussed, it was truly a great quarter, and we are very pleased with our progress, especially considering our company has only been around since last August. There is still much more to come. I’d like to close the call by thanking everyone for joining us today and for your support of GXO.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful day.