GXO Logistics, Inc. Q4 FY2022 Earnings Call

Welcome to the GXO Q4 and Full Year 2022 Earnings Conference Call and Webcast. My name is Kevin, and I'll be your operator for today's call. 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 make certain forward-looking statements within the meanings 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 are made only as of today, and the company has no obligation to update any of these forward-looking statements, except to the extent required by law. The company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules during this call. Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables are on its website. Unless otherwise stated, all results reported on this call are reported in United States dollars. The company will also remind you that its guidance incorporates business trends to date and what it believes today to be appropriate assumptions. The company's results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates, changes in global economic conditions and consumer demand and spending, labor market and global supply chain constraints, inflationary pressures and the various factors detailed in the filings with the SEC. It is not possible for the company to actually predict demand for its services, and therefore, actual results could differ materially from guidance. You can find a copy of the company's earnings release, which contains additional important information regarding forward-looking statements and non-GAAP financial measures in the Investors section of the company's website. I'll now turn the call over to GXO's Chief Executive Officer, Malcolm Wilson. Mr. Wilson, you may begin.

Thank you, Kevin, and good morning, everyone. I appreciate you joining us today for our fourth quarter and full year 2022 earnings call. With me in Greenwich are Baris Oran, our Chief Financial Officer; Bill Fraine, our Chief Commercial Officer; and Mark Manduca, our Chief Investment Officer. It was a pleasure to dedicate some time a few weeks ago at our Investor Day to share a deeper dive into our business, the value we add and our strategy for the coming years. As a reminder, during our Investor Day presentation, we announced our financial targets for 2027, which are as follows: we will more than double our top line from the end of 2021 to $17 billion and deliver compounded annual organic growth of between 8% and 12%. We'll nearly triple our adjusted EBITDA over the same period to about $1.6 billion. We'll generate more than $2 billion of free cash flow by 2027 and will deliver operating return on invested capital of above 30%. And just to reiterate, these long-term targets do reflect our expectations of a softer macroeconomic environment in the near term, which we anticipate will be the case through the majority of 2023. For the benefit of everyone, we've posted the transcripts and video on our investor side. But today, we are here to focus on our 2022 full year earnings, our performance in the fourth quarter and our 2023 outlook. So let's turn to that. For the fourth quarter, we delivered excellent financial and operational performance. We generated revenue of $2.5 billion, reflecting organic growth of 7.5% and adjusted EBITDA of $205 million. These results reflected robust new business growth, strong year-over-year adjusted EBITDA growth, and sustained margin expansion through the second half of the year. For the full year, we delivered revenue of $9 billion, organic growth of 15.4% and adjusted EBITDA of $728 million at the top end of the range we provided at our Investor Day. In addition to our strong operational performance during this year's peak season, we also increased our overall warehouse tech by about 40% year-over-year with pilots, ramp-ups and rollouts of several different types of operational technology across all of our geographies. Additionally, to enable customers to quickly scale capacity up and down, specifically during peak, we trialed a new approach where we deployed several hundred pieces of tech to support volume spikes. For the customers who participated in this pilot who were experiencing volume surges of up to 200% in comparison to a non-peak day, this was an incredible enabler of success during this year's holiday season. The fourth quarter was also a busy time for us internally as we kicked off the smooth integration of the Clipper business. We've already made huge progress on realizing our cost synergies and now expect the bulk of the over $40 million to come within the first 2 years. Importantly, we also signed the first of what we expect will be several significant customer contracts, combining Clipper customer relationships and GXO capability. These revenue synergies will be substantial in the coming years. They will also be above and beyond the $40 million of cost synergies. In the fourth quarter, GXO achieved a stellar level of new business wins, closing nearly $200 million of new contracts, including partnerships with Barilla, Boeing, Farfetch, Kingfisher Beer, Nike, and Sharp Ninja. I also want to take a moment to say thank you to all of our GXO colleagues who delivered a strong peak season and full year and who strive every day to make our organization a great place to work. I'm proud that just last week, we were named one of the top 50 companies in the U.S. for diversity. Now turning to 2023. We're pleased to reaffirm our guidance of 6% to 8% organic revenue growth and $700 million to $730 million of adjusted EBITDA. Given the business we've already closed through the fourth quarter of 2022, combined with our strong sales pipeline, we're starting the year with a high degree of visibility to our growth. So in closing, it's been a great fourth quarter, and we're proud to have delivered another stellar year in 2022. Looking ahead, in 2023, we'll remain laser-focused on delivering our guidance and executing on our long-term business plan, and we're looking forward to continuing to create value for our customers, our employees, and our shareholders. With that, I'll hand you over to Bill to add more color on our commercial landscape. Bill, over to you.

Thanks, Malcolm, and good morning, everyone. During our Investor Day, we talked about the GXO difference. Our unique combination of technology, scale, and expertise which drives our partnerships with amazing brands and grows our market share. Our new business wins from the fourth quarter of 2022 contributed nearly $200 million to future revenue growth. Therefore, for 2023, all of our wins to date have accumulated to around $661 million of gross in-year revenue. Looking beyond the fourth quarter, our sales momentum is strong. We've continued to win great contracts early in the first quarter of 2023, one of which, as Malcolm mentioned, is Farfetch to support Reebok brand launch and omnichannel logistics throughout Europe. This was a customer previously served by Clipper and is our first major cross-sell coming shortly after completing the transaction. This customer needed the breadth, flexibility, global scale, and expertise of GXO in a networked multi-site operation across Europe. They also needed this solution to go live within a few weeks of the contract being signed and a partner that could then deploy automation to drive efficiency and higher volumes in the future. Now turning to our pipeline. At $2.1 billion, we're up versus the third quarter, reflecting a growing number of customers coming to GXO in this environment and underscoring our confidence in future market share gains. Importantly, the pipeline is turning over rapidly. We have lots of exciting growth opportunities in all of our verticals and geographies, including a number of sizable outsourcing projects and expansions with existing customers. Now I'd like to take a moment to comment on what we're seeing on the ground and how this positively impacts our growth. In 2022, as the world came out of the pandemic, there was a clear realization of the importance of reassessing and rebuilding supply chains in order to emerge stronger. The conversations we're having with our customers reflect that they need an optimized supply chain solution today, while at the same time, they're looking to strategically reposition their end-to-end supply chains for the future. As the partner of choice, GXO is leveraging our best-in-class technology to drive optimal accuracy, speed and efficiency for our global blue-chip customers. Let me give you a couple of examples. First, the world's most advanced technology companies are turning to GXO for solutions. In the fourth quarter, we expanded our partnership with one large U.S. tech customer by leveraging our transformational work over the past 12 months. Last year, we took over one of their operations within 72 hours of signing the contract. And within 30 days, we were meeting or exceeding all KPIs. Over the past year, we've transformed their operations and delivered a 10% improvement in accuracy, a 10% reduction in stock outs, and a 17% reduction in staff turnover. The trend towards nearshoring is gathering pace. Over the coming years, roughly $3.5 trillion worth of global trade is forecast to come back onshore. For the warehousing industry, this represents a multibillion-dollar opportunity, and we're already seeing this in our pipeline with many of our conversations related in some form to inventory management. For example, just in case versus just in time, or diversification of their global warehouse footprint. One area we're seeing this theme emerging strongly is in the semiconductor sector. We are perfectly positioned to benefit given that GXO is a critical partner to a number of the industry leaders in this space. Overall, it's becoming clear to many of the world's leading brands that business as usual is no longer an option. The current environment is leading more and more companies to look to outsourcing as a solution. They're turning to experts like GXO. We stand ready to support customers all over the world as they look to us to help redesign their supply chains, taking advantage of our technology, scale, and expertise. This GXO difference is why we are gaining market share. With that, I'll turn it over to Baris.

Thank you, Bill, and good morning, everyone. As Malcolm mentioned, for the full year, we generated revenue of $9 billion, adjusted EBITDA of $728 million and net income of $197 million. Our adjusted diluted earnings per share for the full year 2022 is $2.85, up 36% from $2.09 in the prior year, driven by our EBITDA growth and aided by the addition of Clipper, which was EPS accretive in 2022 and will be more so in 2023. We finished the year at the top of our guidance range with 15.4% organic revenue growth. We undertook a sizable bolt-on acquisition in the form of Clipper Logistics which is well underway in terms of integration and also performing extremely well. As always, impressively, while executing this high level of growth, we maintained our resilient contract mix, drove high levels of customer retention at the mid- to high 90s and increased the revenue drive from highly automated operations. Moreover, our operating return on invested capital increased to 40% from 35% in the prior year, driven by the surge of our EBITDA. Additionally, our free cash flow conversion at 33% was above our 30% guidance. This is a business that is producing growth, returns free cash flow while integrating a sizable acquisition. Our strong cash conversion has enabled us to pay down $50 million of debt ahead of schedule and to rapidly reduce our leverage levels to 1.8x, trailing 12-month adjusted EBITDA, down from 2.1x at the end of the third quarter. In the fourth quarter of 2022, we generated revenue of $2.5 billion, adjusted EBITDA of $205 million and net income of $46 million. Our organic revenue growth rate was 7.5% in the quarter, despite tougher comps, reflecting the contractual nature of our pricing in our business. In the context of this strong revenue growth, adjusted EBITDA grew by 23% year-over-year this quarter, 3 times our revenue growth. Now turning to 2023. We are reiterating our guidance of organic revenue growth of 6% to 8%, which reflects a softer macroeconomic environment this year. We are also reiterating our adjusted EBITDA guidance of $700 million to $730 million, and that's including an assumption of approximately $70 million of headwind coming from foreign exchange and reduced pension income, exactly as we mentioned on our Investor Day 4 weeks ago. Excluding these non-operational factors, our 2023 EBITDA would be growing at high single digits. To further emphasize the stability that this business enjoys, we have well above 90% top line visibility for this year. In terms of phasing, we expect the percentage seasonality of our revenue and adjusted EBITDA by quarter to be very similar to what we have seen since the spin-off. In addition, we have updated you during our Investor Day presentation on a number of initiatives that will drive our EBITDA growth over the planning period to 2027. These included gains from our core growth, automation and value-added services, adapted technology and artificial intelligence, productivity initiatives, and Clipper synergies. In the fourth quarter, with shareholder value in mind, we launched the efficiencies project we discussed in the Investor Day, which will contribute through 2023. We booked the first $18 million in restructuring costs. These actions will have a less than 2-year cash-on-cash payback. Turning to our balance sheet. We expect that our leverage will be around 1.5x by the end of the year, and that's driven by our strong ongoing cash conversion of roughly 30%. After 6 quarters as a publicly traded company, our predictable results, and our guidance reflects our secular growth, contractual infrastructure like trades. This is a business with a high degree of resiliency and long-term visibility, which gives us great confidence entering into 2023. And now I'll pass you over to Mark.

Thanks, Baris. GXO has delivered another strong quarter, taking share through tech leadership and through the tremendous value that we deliver to our customers. This business combines predictability and growth at its bedrock. Firstly, on predictability. Unlike a transactional business model, where pricing is driven by short-term supply and demand, our pricing is driven by long-term contracts with inflation protection embedded within them. Combine that with a large and diversified pipeline that we continue to convert upon, and it should come as no surprise to hear Baris say that we have well over 90% revenue visibility for this year. Secondly, on growth, we've won contracts worth $661 million of gross revenue for 2023. That equates to 7% gross revenue wins versus 2022's revenues of $9 billion. If our pipeline is anything to go by, there will inevitably be further wins in both Q1 and Q2 of this year that will likely contribute even further to 2023's growth. Combine these gross wins with a low attrition rate in an inflationary environment, and you can see why we are so confident about our 6% to 8% organic revenue growth for this year. We've done 6 quarters without missing a beat. We successfully undertook a significant acquisition that is already delivering accretion. In January, we were pleased to share our 5-year strategic plan. This management team delivers on its promises. With that, we'll open the call up to Q&A.

Our first question today is coming from Stephanie Moore from Jefferies.

I think first off, I think it might be helpful if you could just give us a little bit of color of what you're seeing in the macro landscape, particularly between the U.S. and Europe? And then just beyond that, what macro assumptions have you kind of baked into your guidance specifically for this year?

Thanks, Stephanie. It's Malcolm. We're experiencing growth across all our regions in North America, Continental Europe, and the U.K. There are some areas of significant strength, but we also see weaknesses in certain markets, creating a mixed situation overall. North America is performing the best, while the U.K. and Continental Europe are facing challenges due to a softer macro environment, higher energy costs, and elevated mortgage rates affecting consumers' disposable incomes. We notice various trends across sectors; our industrial and technology verticals are performing particularly well. All our warehouses are fully utilized, and our customers are satisfied with our services. Regarding inflation, I believe we've seen the worst of it. In the last quarter, we typically needed to offer wage increases to attract seasonal staff, but this peak season, we did not have to. Looking into 2023, our new business pipeline remains very robust, and we recently signed $200 million in new customer contracts, which is encouraging as we approach year-end. All this gives us confidence in achieving 6% to 8% organic growth for the upcoming year. We’ve already seen a positive start in January, aligning well with our expectations. As a management team, we are cautious but optimistic about the year ahead. Mark, could you provide some additional details?

Yes. Thanks, Malcolm. Stef, it's Mark here. Happy Wednesday. So let's just hit a couple of points. I'm just going to reiterate exactly what Malcolm said in terms of our confidence. Baris made a great point. We have over 90% revenue visibility for 2023. And that's what we mean when we say that this business is infrastructure-like contractual based as a business model. So we're not a retailer, and we're certainly not a transactional business. So I love it when you ask the macro question because we're a different read of asset. So in terms of the 6% to 8% organic revenue growth for 2023, the guidance is a relatively easy one. There are two buckets to consider: net new business wins in the first bucket and existing customer growth. So our net new business wins, we've got $661 million worth of wins already for 2023 in the bag. That is a gross number, which when you compare it with the $9 billion of revenue from last year in 2022 gives you 7.3% gross growth. Now in terms of the calculation of this number, you should take off, obviously, attrition, let's call it, roughly low single digits from what we said about penetration rates. And then equally, you need to add on something, as Malcolm said, in terms of being able to achieve new wins in both Q1 and Q2 of this year, and that will allow you to essentially take those numbers and get within touching distance of the 6% to 8% already even before you've considered the base existing operations growth. So if you turn to the second side of it, we've done net new business wins. Turning to the base business, you've got two things, price and volume. If you combine the two, I think a good gauge for 2023 is roughly low single digits, and that's in line with our recent run rates as well. So you can see Net new business wins and existing customer growth gets you comfortably, as Malcolm said, to 6% to 8%. And Malcolm used the word prudent. This is a prudent and sensible forecast from a prudent and sensible team. And it's also worth noting in terms of this idea of duration in this business and visibility, we also have $177 million already signed for 2024. So you've got growth, you've got your resiliency, and you've got your predictability staff.

Got it. That's helpful. Just a quick follow-up here. As you consider the various factors, where do you see the new business wins as well as the performance of existing customers standing today? Of the two, which do you think offers the greatest potential for upside?

Stephanie, this is Bill. I want to share some of our recent business successes, and I’ll emphasize this multiple times today. Let me highlight three key points. First, we have existing customers who are already benefiting from automation. They are expanding their operations with us, recognizing the value of automation in transforming their supply chains. For example, I'm in discussions with a company in March that operates in Europe and is planning to expand into the U.S. and Canada, seeking automated facilities. This reflects the growing trend of businesses realizing the necessity for automation. Second, we’re seeing increased interest from companies that have not yet outsourced. Nearly one-third of our upcoming new business opportunities come from brand-new clients. These firms understand they are falling behind, as their internal teams lack the capacity and experience in automation that we offer. They are approaching us to evaluate their operations for possible takeovers. Notably, we closed two significant deals in December under this model, and we have additional plans for takeovers this January, where we aim to enhance these existing sites through automation. Finally, our current partners and those already outsourcing but not yet automating are eager to embrace automation. They’ve witnessed the benefits through the media and case studies of our successful partnerships. As we discussed at our Markets Day, we can demonstrate substantial improvements from existing automated sites, such as drastically reduced workforce turnover. We are extremely enthusiastic about the potential for new business growth, and we expect this momentum to carry forward.

Your next question is coming from Scott Schneeberger from Oppenheimer.

Congratulations on your first year as an independent company. For my initial question, I’d like to follow up on Investor Day. Could you clarify the transition from 2022 EBITDA to 2023 EBITDA, highlighting the major factors impacting that change? Additionally, Baris, I believe you mentioned that we should expect revenue patterns in 2023 to be similar to those in 2022. Should we expect the same for EBITDA? I'm interested in your thoughts on that.

Scott, our EBITDA results for the year will be driven by, as I mentioned, the headwinds, which are nonoperational in nature, roughly $70 million coming from FX and pension income. Those were compensated by the tailwinds from our organic growth incremental revenues from legacy Clippers, synergies from the legacy Clipper integration, and our central efficiencies project that we highlighted and we started. On the impact of FX, there has slightly improved for our 2023 guidance, but the pension income is slightly worse. So the net effect is still $70 million. If it was not for these nonoperational headwinds, our EBITDA would have increased by about high single digits year-over-year. Looking into the phasing of this year, our phasing of EBITDA loss was about 21% in the first quarter, 24% in the second quarter, 26% in the third quarter, and 28% in the fourth quarter, and we're going to be roughly about the same. This is a fulfillment business, and this reflects our seasonality.

Great. I appreciate that color. And then for a follow-up, just curious on capital allocation priorities in 2023. And maybe if you could provide a little perspective on the M&A pipeline.

Of course. As always, our priority is on shareholder value creation. We are a growth enterprise and we have a strong pipeline that Bill has mentioned, and we have operating return on investment in excess of 30%, that's a 3-year cash-on-cash payback for a 5-year project. So our short-term priority is to generate free cash flow and maintain a strong investment-grade balance sheet, which is very important for our customers. They want us to be financially strong. We expect to return leverage levels to about 1.5x by the end of 2023. At the end of the year of 2022, we stand around 1.8x, down from 2.1x at the end of the third quarter. Beyond this, in the long term, we will continue to evaluate all the opportunities to create value for our shareholders specifically through accretive bolt-on M&A, which we will evaluate alongside the potential of returning capital back to shareholders through a buyback. We do have a sizable pipeline of potential M&A targets, both in North America and Europe, but they are weighing them against other opportunities investing in our stock through a buyback. But in the short term, our priority is paying down debt to create room for further capital allocation.

Our next question is coming from Chris Wetherbee from Citigroup.

Maybe picking up a little bit longer term and thinking about the 2027 targets that you guys outlined at Investor Day. So understand the headwinds that you're seeing in 2023 and how that may impact or mute EBITDA relative to 2022. The 2027 targets imply a pretty meaningful sort of reacceleration of the business in '24, '25 and beyond. So can you give us a sense. And I don't know if this is a question for Bill or Baris in terms of the visibility you have, particularly to 2024, as you're building out your book. I know you're adding business to the 2024 pipeline now, but just sort of how do we think about that reacceleration? And what's driving it?

Yes. As you will recall, our EBITDA bridge in the Capital Markets Day, a very sizable component of that was coming from our core growth and then followed by our mix changes, including automation and value-added services. That was making roughly about 85% of the EBITDA bridge going from around $600 million to $1.6 billion at the end of 2027. The remainder was basically adaptive technologies, central efficiencies, and Clipper synergy. That was making up the most of that. Growth is such an important part of that bridge. When you think about our pipeline, we are on our way in line with our plan to execute on that. Would you like to give further comments on how our pipeline is building up and how we progress to 2027?

Yes. Thank you, Baris. A few things that are happening is, one, with the automation that's in place today, meaning just across the market. But the expertise that we've developed around that means that we're much more sticky with our customers to start. The customers we have are looking to expand with us, and they're also looking to renew with us. All our large customers looking to renew because they don't have to go anywhere else to get the automation that's already here. At the same time, the complicated thing to do in our industry is break somebody away from a competitor because there's a cost of moving. But the fact that we have the automation drives them this way. People are making decisions. Two of the last big closes we talked about in December. As I mentioned, we're takeover places, but one was a takeover place in term and one was from a competitor. The reason they came was that they didn't see the same value where they were after a 10-year experience with the competitor. That's not about the competitor; it's about our automation prowess. Our churn rate and our ability to turn up our pipeline and grow our percentage close are both happening again because of automation and solutioning. We're able to show tremendous value to our customers. So those things will grow the pipeline. They will also accelerate the pipeline and they're bringing more people into the pipeline. So all those things together give me great confidence in 2027 that we can get there.

Okay. That's helpful. Regarding the near term, you mentioned that Clipper synergies are expected to materialize after the peak season since significant changes are challenging before that. However, it seems you are more optimistic about achieving these synergies sooner and possibly exceeding expectations. Can you elaborate on the timeline for Clipper synergies in 2023? When can we expect those benefits to be realized and how quickly?

Sure. Let me take on the cost side and Bill, you come in on the revenue side, what we're seeing from our wins and pipeline perspective. We already kicked off the project and the EBITDA impact for this year is going to be about $10 million, but the run rate will be higher. We are well on our way to meet the expectations we set out, and we have an opportunity to beat that expectation. As you would recall, the EBITDA uplift from Clipper cost synergies was about GBP 36 million, and GBP 10 million will be realized in our EBITDA this year. Bill?

Yes. Thank you. What we saw my first visit to a legacy Clipper site was in the Netherlands back when we first made the transaction. They have a great relationship with Farfetch. When we got there, we showed Farfetch the capabilities of GXO, and that's why we've just gained a new opportunity. I was talking to the team in Germany yesterday. They're seeing the same thing that the opportunities in Germany are expanding and growing because of the relationship. Where we have the service repair technology that we're doing that Clipper was already doing, we're now bringing it to all of our customers across Europe and using it as a way to kind of catapult a platform that's out to them. If you're a retailer and you have any electronics coming back to you in a return process, we're the ones that can come in and repair that for you. That's a huge benefit for the market, both in ESG and in revenue growth. So all those things are tremendous for us from the legacy GXO company.

Next question is coming from Amit Mehrotra from Deutsche Bank.

I appreciate the opportunity to ask a question. I wanted to follow up on Chris' question regarding the increase in EBITDA from 2023 to 2027. You're projecting more than a doubling of EBITDA during this period, which equates to over 20% compounded annual growth. Considering that there isn't much operating leverage in the business, I would assume that this aligns with your revenue forecast as well. Can you share if you see this growth as fairly linear? Should we anticipate a revenue and EBITDA increase of over 20% in 2024 to kick off the journey toward the 2027 target? A bit more clarification would be helpful since this represents a significant escalation, and it would be easier to understand the trajectory involved.

Sure. Let me kick it off here, Amit. When you think about our trajectory, it's reflecting in 2023, 6% to 8% organic revenue growth. And it's based on a softer macro environment, and it is a prudent approach for this year. In January, we are trading it in those lines of 6% to 8% organic growth so far. As the global economy starts accelerating, we will see an expansion in our growth in 2024 and onwards, and that's going to get us to our 2027 target. That's all part of the plan that we have built. It's a bottom-up plan. It's not a top-down plan, and it is based on our customers' forecast. As Bill mentioned, they are still investing in a lot of direct consumer but also automation to take a lot of the costs out. There's a lot of discussions happening around outsourcing, and that's going to accelerate our growth. Bill?

Yes. Amit, what I'd add to that is that when we talk about the structural change that customers are going through, in the past, a company might come to us and want to open on site, maybe 2 sites. This is an entire change of their supply chain. That's really what people are seeing is the supply chain they had in place isn't operational for the future, and they have to change it. We're talking about companies that may have 10 sites across the U.S. and may have another 5 or 6 across Europe. They need to reset those sites, whether they do it in the existing location or whether they close those and outsource and do something else, but they need to change. That’s where the growth really starts to accelerate because it’s not just we close one. The customers we closed in the fourth quarter and this quarter, they plan not just to do that one site, but the plan is to do the other 10 sites that these customers have as we go and do the first one. So the first one is that we'll build it. And after that, it will accelerate, and we'll go do the other one. So that's another big part of where the growth comes from.

Got it. So just Baris, if I just want a clarification. So you're basically saying the growth kind of gets back to maybe low double-digit trends and then what bridges you to the 20% plus EBITDA is the cost savings and efficiency. Is that the right interpretation of what you just said, Baris?

Exactly right. That's the trajectory that we're forecasting right now.

Okay. And then just as a follow-up, if I could. I wanted to also piggyback on the M&A question from Scott, I think. So I think historically, you guys have been underrepresented in Canada and Germany, and particularly like the pharma or healthcare vertical? And Malcolm, I wanted to ask you directly because I know you've been in this business for a few decades now. I know you knew the Clipper asset and knew it well, and that was a real great opportunity for you. Do you see any opportunities like that? I know it's a fragmented market, but do you see any opportunities like in the verticals or geographies where you don't have a lot of overlap today, where there's Clipper-like assets in those verticals and geographies that may not be available today, but something on your watch list? If you could just talk about that.

Yes. Amit, thanks for the question. Absolutely. When we look across our business, as Baris mentioned, right now, our focus is on deleveraging our investment grade. But there will be a time when we're in a better shape, and we are able to do M&A or buyback, whichever is the better logic for our shareholders. When we look at M&A, we're always focused on bringing something new into GXO. Clipper was a great example. We brought tech renovation, tech innovation, we got into Germany, and we brought new verticals like healthcare. So that's a really good example of how GXO looks at M&A. We're not interested in buying volume with the largest pure play contract logistics company in the world; we don't need volume. What we're interested in is bringing something new that we don't currently do right now. If I look across the landscape, probably right now, when we think about the economic environment, North America is super interesting for us. There are a ton of hidden gems on our radar. Between Baris and myself, the rest of the team it's about cultivating business relationships with these companies as we want them into the wide arena; it's about building a relationship with the businesses far in advance. For sure, right now, we talk about things that could be of interest in '24 or a little sooner. But that's typically how we approach it. It's the right approach for us, and I think it sets us up for success for the longer term.

Would you be surprised if GXO did not do another deal before the middle of 2024? Would that be surprising to you? Or would that be kind of in line with your deleveraging focus?

Well, it all depends on what the set of opportunities we have in our hands. We'll take a look at where the opportunities to reinvest in our stock is and what the opportunity to invest in an accretive M&A is. When you look at the M&A opportunity, can we scale them up faster? Can we give them additional capabilities? Can we make them more profitable? It’s going to be weighed against the share buyback. That’s what we're going to have. But by the end of 2023, we will have room.

Our next question is coming from Brian Ossenbeck from JPMorgan.

Just to revisit Clipper and the synergies, you've clearly outlined the cost aspects, which seem to be progressing a bit more quickly than anticipated. However, when do you expect to provide more details on the revenue side? It appears that Farfetch was the initial entry point. It could be of significant size now or in the future, so could you share some insights on this and how we should approach these synergies now that there seems to be some positive movement in that area?

Yes, Brian, it's Malcolm. Let me cover that question. Obviously, right from the get-go, we were focused on the cost synergies because those are easy for us to get to. We have to remember that up to October of last year, we were still under the whole separate order. We were really kind of prohibited from getting into too much detail with the Clipper customer base. Since that point, though, we've merged all of the sales organization. You're quite right, the Farfetch deal that Bill referred to in the Netherlands is just a classical example of, they had a great relationship with a strong blue-chip luxury brand, but it was really difficult for them to expand that outside of the U.K. in the Netherlands. With GXO, it’s a no-brainer. We're absolutely delighted to assign that new arrangement. Our sales teams are working together now very diligently; we're focused on a number of different verticals. Pipeline is good. Pipeline is strong. Customers are readily accepting GXO. They are really welcoming the new capabilities, and the scale of our combined business. We don't have the precise details yet; it's not an exact science, but if I had to make a view on it. I think it's going to be a number of hundreds of millions of dollars of incremental synergy-type sales that we're going to see over the next couple of years; it's really the icing on the cake of what has already been a super piece of M&A.

If I can add to that. The thing I'd add to that, Brian, is that the GXO-Direct network that we’ve developed well in North America. We’re bringing that expertise to the European market. We're starting in the U.K., where they're going to use the legacy Clipper multisite locations to begin it in. That will be another significant add for us. A lot of good customers there, a lot of opportunities, and it will be the ability to showcase and grow that in the market. To Bill's point, we've got the pedigree on GXO Direct; we did very well on that last year: did about $300 million of revenue, that was up 32% year-over-year, and the margins on that business are very strong, roughly at 10.8%. So there's lots of growth ahead as both Bill and Malcolm said.

Okay, next question is coming from Amit Mehrotra from Deutsche Bank.

I appreciate the chance to ask a question. I want to follow up on Chris' earlier inquiry regarding the increase in EBITDA from 2023 to 2027. You're projecting a more than twofold increase in EBITDA during that period, which translates to over 20% annual growth. Given the limited operating leverage in the business, I assume that this also reflects your revenue projections. Is that increase relatively straightforward in your view? Should we anticipate a similar over 20% increase in revenue and EBITDA in 2024 to initiate that growth toward the 2027 target? A bit more detail on this would be helpful, as it represents a significant jump, and understanding the trajectory would make it easier to comprehend.

Sure. Let me kick it off here, Amit. When you think about our trajectory, it's reflecting in 2023, 6% to 8% organic revenue growth. And it's based on a softer macro environment, and it is a prudent approach for this year. In January, we are trading it in those lines of 6% to 8% organic growth so far. As the global economy starts accelerating, we will see an expansion in our growth in 2024 and onwards, and that's going to get us to our 2027 target. That's all part of the plan that we have built. It's a bottom-up plan. It's not a top-down plan, and it is based on our customers' forecast.

Yes. Amit, what I'd add to that is that when we talk about the structural change customers are going through, in the past, a company might come to us and want to open on site, maybe 2 sites. This is an entire change of their supply chain. That’s really what people are seeing is the supply chain they had in place isn't operational for the future, and they have to change it. So we're talking about companies that may have 10 sites across the U.S. or may have another 5 or 6 across Europe. They need to reset those sites, whether they do it in the existing location or whether they close those and outsource and do something else, but they need to change. That’s where the growth really starts to accelerate because it’s not just we close one. The customers we closed in the fourth quarter and this quarter, they plan not just to do that one site, but the plan is to do the other 10 sites that these customers have as we go and do the first one. So that growth comes from doing more and more, and we are fully engaging our customers.

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