GXO Logistics, Inc. Q2 FY2023 Earnings Call

Welcome to the GXO, Second Quarter 2023 Earnings Conference Call and Webcast. My name is Daryl, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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 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 and 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 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 its filings with the SEC. It is not possible for the company to actually predict demand for its services, and therefore actual results could differ materially from guidance. You can find a copy of the company's earnings release, which contains additional important, information regarding forward-looking statements and non-GAAP financial measures in the Investors section of the company's website. I will now turn the call over to GXO's Chief Executive Officer, Malcolm Wilson. Mr. Wilson, you may begin.

Thanks, Daryl, and good morning, everyone. Thanks for joining us today for our second quarter 2023 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. Before we review the quarter, I want to start by acknowledging that yesterday marked our second anniversary since becoming a publicly traded company. We've had a stellar first two years, delivering eight straight quarters of revenue and adjusted EBITDA growth, posting consistently excellent operating results and signing 100 new partnerships with blue-chip customers all over the world, while enabling their businesses through our best-in-class tech-enabled solutions. We have solidified ourselves as a globally recognized brand for logistics excellence and are part of the Fortune 500. We are committed to ambitious environmental, social and governance goals and are tracking strongly on our sustainability targets. I'm also particularly proud to note that this quarter's employee sentiment survey reveals the highest level of team member engagement and job satisfaction ever recorded. This past January, we held our first Investor Day as a standalone company. We unveiled our strategic plan and financial targets for 2027 and had the opportunity to showcase our unique value proposition to the broader investment community. It's been a fantastic two years, and I wanted to take a moment on behalf of the team here with me in Greenwich and our entire global leadership team to thank our employees, our customers, and our shareholders. Now turning to the quarter, I'm pleased to say that we delivered both top-line and bottom-line growth. Our revenue in the second quarter was $2.4 billion, growing 11% year-over-year with 3% organic growth. Our adjusted EBITDA was $190 million, also up year-over-year and above our expectations. As a result, we are reiterating our full year organic revenue growth guidance of 6% to 8%, and we're raising our full year adjusted EBITDA guidance by $10 million, bringing the midpoint of our range to $740 million. This quarter, we won our highest ever value of new sales wins, beating our prior record, which was set in the second quarter of 2022. Among our contracts signed this quarter, our new partnerships and expansions with a terrific group of customers, including Boeing, Eddie Bauer, PepsiCo, Sainsbury's, Schneider Electric, and TJ Maxx. We recently announced an expansion with Abercrombie & Fitch to the UK after launching our first operation for them, a highly automated distribution center utilizing goods-to-person robotics here in the US last year, and IKEA recently ranked our site in the US number one in its global network for productivity, service quality, and inventory accuracy. A few weeks ago, we also announced the signing of a multiyear agreement with Heineken. Over the past two years, we've significantly transformed their distribution network, enhancing efficiency, service, and sustainability. In the quarter, we also launched our business in Germany, which is an exciting new market for us, and we are looking forward to meaningfully growing there in the coming quarters and years. I want to provide an update on one more point. We mentioned last quarter that we were in the process of strengthening our tech organization to ensure we have the right structure to meet the huge demand for our services. This means both looking at the organizational needs today, where we're increasing our total operational tech by over 60% year-over-year on a quarterly basis, and anticipating our growth over the coming years. I'm pleased to say that we completed that review, and you may have seen last week's announcement regarding the appointment of Adrian Stoch to the role of Chief Automation Officer. Some of you have met Adrian already; he served as the President of our Consumer Division in the US since 2021, where he's driven record wins and has been looking after some of our highest profile customers in this capacity. He has delivered substantial improvement in productivity through the deployment of automation and technology in complex consumer solutions. In his new role, he will be looking after our operational tech, including automation, machine learning, and artificial intelligence as they relate to our underground operations on a global basis. I'm delighted to have Adrian's unique expertise in this capacity going forward. So in summary, we're proud that we're one of the few companies in our industry that is expecting to grow top and bottom line this year. Since our spin, we've demonstrated our strength and resilience in a changing macroeconomic backdrop quarter-by-quarter. On top of that, we continue to deliver record levels of new sales wins, which will propel our future growth and underpin our confidence in our 2027 targets. And with that, I'll ask Bill to update you on what we're seeing on the ground. Bill, over to you.

Thanks, Malcolm. Good morning, everyone. As Malcolm said, we are very excited to have delivered a record amount of new sales wins this quarter, nearly $500 million, beating our previous record. And with our record pre-pipeline, we are continuing to see many more opportunities for growth. We see more and more brands partnering with GXO to modernize their supply chains and optimize their operations. What is really changing of late is that this is now happening at a greater pace and scale than we've ever seen before. This is a dynamic growing market, and we are winning a larger share of these bigger business opportunities. And this is all due to the GXO difference. As we first mentioned last year, customers are increasingly realizing the possibility of what logistics done right can achieve and that business as usual will no longer work. You see this in our second quarter wins, with some notable newly outsourced business, including Eddie Bauer, Ingersoll Rand, and Sainsbury's. With Sainsbury's, we have already successfully gone live with two of the six sites that we were awarded in April. These sites are doing millions of case picks per week. This highlights just how fast we can move on the ground. Sainsbury's is a very exciting partnership for GXO, and it also showcases our leading capabilities for large outsourcing deals. As customers continue to seek large transformative deals, we are in a prime position to convert more and more of the $300 billion in-source market. We are also seeing many of our customers deepen their existing partnerships with GXO. We are very excited to be going live on a huge new European site for JD Sports, which highlights how we're expanding our partnership, which started in the UK and is now expanding across Europe. We are also working with this customer to support driving their growth globally, where they are looking to leverage our best-in-class capabilities. We also grew partnerships with a number of other existing customers, including Javieris, Nike, and PepsiCo. This is proof positive of the GXO difference, reflecting the transformative value that a scaled tech-enabled partner brings to the customers. Stepping back, the makeup of our wins and our pipeline continues to reflect the diversity and vibrancy of our business. For example, our rapidly growing industrial activity in the US has already won almost as much business from global leaders like Boeing and Schneider Electric in the first half of the year as it did for the whole of last year. Our pipeline stands at $2.1 billion, up year-over-year, and this is even after our record new business wins in the quarter. Over half of our pipeline is made up of new logos, that is companies that are looking to outsource and reevaluate their supply chains. This plays to GXO's core competency. It is worth mentioning that our pre-pipeline is also up about 30% year-over-year. One of our customers recently told me that GXO is, and I quote, 'the port in the storm.' We understand the market. We understand the need for agility, and we bring to life the quantum leap that they can gain through our scale, expertise, and technologies. That is why they turn to us. We are deploying this game-changing technology at a breathtaking pace, including a site soon to go live, with approximately 5,000 automated shuttles and pouches in what will be one of Europe's largest and most automated e-commerce sites. As Malcolm mentioned, we recently added Adrian Stoch to our global leadership team in the new role of Chief Automation Officer. I've known Adrian and worked with him since he joined GXO, and he is the real deal. He joined to lead our consumer business and demonstrated right away his expertise in running complex customer operations. For example, one of Adrian's recent automation transformations drove an 18% reduction in cost per unit for the customer. As we highlighted at our Investor Day, as more customers in more markets embrace the increasingly critical need for automation, GXO wins more market share, and this grows our top and bottom lines further. With Adrian at the helm, it is safe to say that our pace of tech deployment is just getting started. We are really excited by our growth. We are winning larger opportunities, many of which are first-time outsourcing, and our existing customers are turning to us to help support their ambitious growth plans. As our wins and pipelines show, we are set up for a very strong 2024. And with that, I'll hand you over to Baris, to walk you through our numbers and guidance. Baris, over to you.

Thanks, Bill, and good morning, everyone. We are very proud of the results this quarter, and we are confident in our outlook for the remainder of 2023 and beyond. As Malcolm mentioned, for the second quarter of 2023, we generated revenue of $2.4 billion, an increase of 11% year-over-year, including 3% organic revenue growth. Our technology, aerospace, and Continental European parts of the business continue to lead the pack on organic revenue growth. We saw this trend continue through July. Our adjusted EBITDA in the quarter was $190 million, up 8% year-over-year. We are delivering consistent adjusted EBITDA margins as a result of our resilient business model. Despite the non-operational impact from FX hedges and pensions, which was 70 basis points, our margins are strong and resilient. This was driven by our productivity initiatives, both central and at the site level. Our margins are up quarter-over-quarter by 100 basis points, and all of this gives us great confidence in our margin expectation for the second half of the year. Our adjusted diluted earnings per share was $0.70, up from $0.68 in the prior year. Our operating cash flow was $61 million, and our free cash flow totaled $3 million. Taken into account the strength of cash flows we anticipate for the remainder of the year, we prepaid $115 million of debt ahead of schedule. Demand for our services continues to expand, as seen in the record number of wins, and we continue to write high-quality contracts with blue-chip customers that deliver attractive returns. Our revenue from automated operations continues to grow faster than our overall growth level, and our operating return on invested capital remains well above the 30% target. Looking ahead to our expectations for the full year 2023, we are reiterating our organic revenue growth guidance range of 6% to 8%. We are also maintaining our approximately 30% free cash flow conversion rate for the full year of 2023. With respect to our balance sheet, we will continue to deploy our capital in the best interest of our shareholders, including deleveraging, buybacks, and accretive M&A. We are also pleased, for the second quarter in a row, to raise our full-year profit guidance for both adjusted EBITDA and adjusted diluted earnings per share. We’re raising our adjusted EBITDA guidance by $10 million, bringing our full-year range to between $725 million to $755 million. This reflects better-than-expected performance in our operations. We are also raising our adjusted diluted earnings per share guidance by $0.05, bringing our full-year range to $2.45 to $2.65 per share. Looking beyond 2023, we believe we are in a great position for next year, with nearly $0.5 billion of incremental business already secured for 2024. In addition, we have over $100 million locked in for 2025. One of my core focus areas as CFO is to continue to maximize shareholder value by allocating capital in contexts with high returns, attractive growth, and strong cash flow generation, and there are a lot of opportunities to do this. And with that, I'll hand you over to Mark.

Thanks, Baris. In a dynamic environment, we've delivered a strong first half of 2023. As Bill spoke about, we set a record for new business wins in Q2, which alongside our vibrant pipeline sets us up for strong topline growth into 2024. Moreover, thanks to these recent new wins, we now have visibility for growth into 2025 and 2026 on our journey to achieving our 2027 targets. You heard Baris’ comments about the counter-cyclicality of our margin profile. There are very few companies in this market that are combining growth with margin resiliency. We've been saying it for two years, and now we’re proving it. This is a resilient business and a rare breed of an asset, and this is a management team that's delivering on its promises. And with that, we'll turn back to Daryl for Q&A.

Thank you. We’ll now be conducting a question-and-answer session. Our first questions come from the line of Stephanie Moore with Jeffries. Please proceed with your questions.

Hi, good morning. Thank you.

Good morning, Stephanie.

Good morning. So, congratulations on another nice quarter. Just looking at your organic growth performance year-to-date, I think with 7% growth in the first quarter and 3% in 2Q, what gives you confidence in your ability to see a step-up in growth in the second half to kind of meet your full-year 6% to 8% target? And maybe within that, if you could just talk about, how your thoughts for peak season, and maybe what you're seeing in your different geographies too? Thank you.

Thanks, Stephanie. It's Malcolm here. Let me give some color around that question. Our business is doing really well. When we think about the kind of verticals that we're operating in, so the customer industries, our industrial, aerospace, food service, tech, autos, they're really doing well across all of our regions. But of course, our consumer-facing business, our e-commerce, our brick-and-mortar omnichannel retail business, that is slower right now, and it's clearly a function of the softer macro that we're seeing across all of our business, every region, every geography. When we think about the holiday season, we're already, and have been now for around a month and a half, in deep discussions with our customers. That's the normal phasing for when we're doing this process. We're collecting customer intel and customer information, customers are actually committing to fund incremental resources. So this year, just like previous years, we'll be hiring around 15,000 to 20,000 new team colleagues to cope with committed customer demand, particularly around the holiday season, which is our biggest quarter. So, when we bring all these factors into play, we're in pretty good shape. In addition to that, I do want to call out new business. We've had two really stellar quarters. I mean, quarter two for us as a business was an absolute record. We signed nearly $500 million of new business. A lot of the business signed in the last few quarters is impacting now, as we're progressing into the second half of the year. We talked and you will have seen in our press releases early in the year about the Sainsbury's huge business win, that's already going live. We're already implementing on different sites. All of those benefits are kicking in to the second half of the year. So all-in-all, when we put all of these factors together, we're feeling very good about where we are in the second half. Of course, we're watching carefully the macro, but we're now a number of months away from the end of the year. We know that as we get into the first part of September, that's when we really see peak season volumes really maturing for our business. That's the time we really know that would be the acid test. But right now, everything we're seeing is giving us a very good feeling about our overall view for the full year. That's why we've reiterated our full-year guidance. It may be useful; I'll ask Baris to just share how our year has progressed so far compared to last year, because it is an interesting dynamic.

Thank you, Malcolm. In Q2, our organic revenue growth was 3%, and we saw a low-to-single digit impact from lower volumes, with the omnichannel retail vertical being softer, but stronger in aerospace, technology, and food services. As Malcolm mentioned, we had strong wins. Our margins are not particularly sensitive to volumes. It's not a business that has much operating leverage. In the second half of the year, we'll have easier comparisons, especially for the fourth quarter of last year, 13% versus the second quarter of this year. We're working on peak planning for our customers. We'll have greater clarity in September, and our working assumption for the peak is a similar performance to 2022, which was rather soft. One other thing to remember is, we have won a lot of new outsourcing contracts, and these will yield revenue contributions as we move into Q3 and Q4, and that's how we are comfortable with the rest of the year for our revenue growth.

Great. No, really helpful. And then just as a follow-up, could you provide a bridge to your free cash flow in the second quarter, and then how we should think about the cadence of free cash flow in the back half of the year to meet your conversion target? Thanks.

Hi, it’s Baris here. On the free cash flow side, we had $3 million positive in Q2, and we continue to guide for EBITDA to free cash flow conversion of about 30%. This quarter was driven by our cash cost of our productivity integration initiatives, which was roughly $23 million cash outflow. The accounting charge was earlier, but the cash payment was this quarter, in the second quarter, with roughly around $40 million for the timing of working capital. Our cost initiatives overall have very attractive ROI and payback, and it's clearly seen in our projections and EBITDA upgrades. Our CapEx is entirely within our control as we continue to scrutinize every dollar spent. The prepaid debts around $115 million indicate our comfort level for the second half, and our actions actually show the comfort level we have for the second half of the year.

Got it. Thank you so much.

Thank you. Our next questions come from the line of Scott Schneeberger with Oppenheimer. Please proceed with your questions.

Thanks very much. Yes, so a very strong new business win quarter. And, I assume, I think you mentioned that, I'm not sure. I don't recall retention probably still mid-to-high 90s, but the organic growth did decelerate a bit. It sounds like that was volume pressure, maybe consumer discretionary activity. Could you discuss what transactional volume was in the quarter, and where you expect that to go, and what you are doing with that variable cost management correspondingly? And then lastly, how we should see that come through in the margin over the next couple of quarters? Thank you.

Hi, it's Baris here. Let me help you out with the volumes, and the margin trajectory and how we manage our costs throughout our cycle. As I mentioned, we've seen some softness coming from the retail vertical, our omnichannel retail, and then strength in aerospace technology and food services. As we look into the first couple of weeks of July, that trend tends to continue, but we started seeing further moderation and slight improvement in some of our facilities in the UK and US. It's too early to call whether it's a major optic or not, but we are starting to see moderation. As you would recall, roughly 70% of our cost structure is variable. This business is designed to scale up and down costs; there are facilities that double in size during the peak and go back to their normal shape after the peak. So, we have the flexibility to do that. You're seeing that in our margins having been very stable throughout the cycles. Remember, roughly half of our business is closed book, and half of our business is open book cost-plus. This gives us a lot of resilience through cycles as you see it in our margins.

Thanks, Baris. And congrats on the EBITDA performance in the quarter and the increase in EBITDA. Could you just provide us a bit of the components or the drivers of the EBITDA bridge from the prior guidance to where we are now? What's been behind that the main components? Thank you.

Sure. The majority is coming from our productivity gains, not only at the central initiatives, but at the site level our productivity has improved, and there is some support coming from the exchange rates as well. That is making up the upgrade in the EBITDA.

Great. Thanks. I'll turn it over.

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

Good morning. Your wins halfway through this year, as you talked about earlier, just give you a tremendous start on next year's top line growth. Of course, the comps are going to get pretty difficult or at least more difficult, but the sales pipelines are near record levels, and you've got another nine months or so to add more new deals that can move the needle before you get to ‘25. Given all that and adding in that head start, Europe stabilization, and maybe a soft landing in the US looking more likely today than it did this time last year, it does feel like next year is setting up to reach or exceed your longer-term view of that mid-to-high teens EBITDA growth over time. So, it's a lot of words to basically ask, is that kind of view towards 2024, at least on a preliminary basis, reasonable from where we sit today? What could still get in the way of achieving that? Thank you.

Thank you. As we look into our progression in our top line and new wins, it's phenomenal. As you highlighted, the numbers are achievable into 2024. A couple of additional things, I would like to remind you that are going to support us into our EBITDA next year. Our productivity initiatives as you would recall are driving around $26 million of benefit this year. The run rate is going to be about $40 million by the end of the year. So, there's going to be about $14 million that will support our EBITDA next year. Additionally, with the updated exchange rates, we are expecting maybe a single-digit uplift coming from FX as well. That should support our EBITDA further into 2024.

Is there anything as you look forward that you're fearful of or that can maybe get in the way?

Well, I mean, this business is very, very resilient. We are now 100% immune from macro, but we have shown you quarter-after-quarter resilience from the swings. So far, we are doing really, really well. We have phenomenal wins. Our productivity efforts on the ground at the site level and at the center level are delivering. We look very comfortably into 2024.

Thank you, Baris.

Thank you. Our next questions come from the line of Chris Wetherbee with Citigroup. Please proceed with your questions.

Hi, thanks. Good morning. Maybe picking up on the cost and synergy opportunities, Baris, can you just lay out what's in the back half, what's been realized so far from the cost takeout as well as the synergies around Clipper and what we're expecting by quarter for the next two quarters of the year?

Sure. So far in Q1, we generated about $4 million benefits. In Q2, we generated about $5 million benefit from both integration and cost-takeout productivity initiatives. For the balance of the year, we expect another $17 million, roughly even across the quarters, and that's going to get to $26 million impact for this year. Of course, the run-rate is going to be $40 million by the end of the year.

Okay. That's very helpful. And then, Bill, maybe you can talk a little bit about what you're seeing on the demand side, particularly from the consumer, the e-com vertical. There's been some discussion about whether inventory destocking has started to wind down or maybe it's still in process. You've talked a little bit about the peak season. Volumes were down mid-single or low-single digits, I think, in the quarter; maybe if you could start with how that progressed. Is that still sort of the right run-rate as we're sitting here in 2Q? And those big picture thoughts around the consumer or e-commerce verticals would be helpful.

Yes. Hi, Chris, this is Bill. What I would tell you is, let me tell you a little bit about what we're seeing in the selling with the new customers. This will relate to your question; the pipeline is growing, and we're seeing e-com customers leading a big parade here in new business. We're seeing the return of $100 million deals. If you look at our top 200 prospects, they are above $10 million each. If you look at our top 10, it’s $20 million, and if you go to the larger accounts, they're $100 million. So, we're seeing bigger deals coming in. This is because customers want to restructure their supply chains and move into new markets. I'll give you one example. What we're seeing is more and more opportunities, and the opportunities are coming faster and larger, as I mentioned. This is because our brand is becoming a beacon for customers who want to renew their supply chains. They really look to GXO as a leader in this with both automation and the ability for scale and expertise. What we're seeing is the kind of change where we have had customers who've visited our sites, seen the processes, and they're very comfortable transitioning over. That's the kind of change that's happening now. We have customers who are doing fairly well, better than average, and their volumes have come up. We have customers who are being strategic; they're not discounting. So, we'll know more as we get into September, and we're really planning heavily with customers right now. I believe that the fourth quarter looks a lot like last year's fourth quarter.

Okay. One just point of clarification in terms of the pipeline relative to conversion, are you suggesting that there might be a faster pace of conversion out of the pipeline?

Yes. The acceleration of our pipelines is up well over two times now. It's really moving and generating a lot of value for us. The amount of customers, what you saw in the almost $500 million, the amount of opportunities, this will continue as we go forward. I would say that aerospace, industrials, high-tech, and I mentioned e-com, they're all looking for a big 2024.

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

Thanks. Hi, everyone. I just want to circle back maybe to Bascome’s question on next year's kind of revenue outlook. If I look at the new business wins, $457 million, I guess you're talking about that being incremental revenue in 2024. That implies something like 4% to 5% revenue growth for next year. Of course, there are another six months to go for additional wins. We got some hopefully cyclical volume recovery. It seems like the progress you're making on the net new wins should bridge you to double-digit, low-double-digit growth next year in terms of revenue. But then I look at consensus, and it's saying it's going to be 8% next year. I'm just trying to understand what the right way to think about revenue growth next year is. It feels like low-double-digits is achievable. It looks like you'll need to start getting to those numbers to hit your 2027 target? If you can talk about that, that'd be great.

Hi, Amit, it's Mark here. I agree with everything you're saying in terms of the theoretics of it. So, what have you got in your favor here? You've got clearly the record new wins, which is growing the snowball in our business, which has historically been the biggest part of our 8% to 12% revenue growth. You've heard as well in Bascome’s question about the fact that our retention rate has been extremely strong in that mid-to-high 90s. So, that's very low attrition for those gross wins that you're talking about. Bill has talked about the strong pipeline. It's converting well, and we’re seeing a lot of big $100 million customers coming to us. Malcolm talked about the weak comps for the second part of this year. All those factors are running in our favor as we move into next year, and we believe it will be a strong year.

Okay. A bumper year, not a bumpy year, right?

It is. Remember those cover several areas, and we do things more efficiently across the business conducting activities that are not related to core business. Some are procurement-related, some involve outsourcing non-core activities like call centers and data centers. We've also reduced our non-operational, non-customer-facing staff by about 10% year-to-date. These are all paying off quite well. By the end of the year, we'll be running a hitting a run rate of about $40 million by 2023, and that is going to increase within 2024. We will continue to reap benefits from this. This productivity program is not over. We are executing more steps, and we'll continue to see benefits from that.

Okay. All right. Thank you, guys. Appreciate it.

Thank you. Our next questions come from the line of Allison Poliniak with Wells Fargo. Please proceed with your questions.

Hi. Good morning. The new business wins, you talked quite a bit about automation. What about the other services components? Are those increasingly part of these contracts in terms of whether it's return or repair? Just any color there. Thanks.

Yes. Hi, this is Bill. Yes, definitely, and returns are reversed, growing very well at 27% in Q2. We continue to see enormous potential in this category moving forward. As an example, we were able to convert 600,000 units from B to A for one customer, meaning bottom-line dollars for them in a large amount. Those benefits are visible when we show live examples to customers. When people come in, we can demonstrate the values of reverse across Europe and the U.S. This is definitely a huge growth area for us, involving automation and analytics as part of our value-added services.

Got it. And then you certainly had sizable wins from competitors this quarter. Is it really just driving the automation opportunity that you can provide them? Or is there anything else that's kind of leaning them more towards GXO versus the other competitors at this point?

Yes. Here's what I would tell you. I was with a customer last week in Memphis looking to do some work in the U.S. They had visited sites in California and Tennessee. I met with them, and we were going through the numbers and discussions. They conveyed that we've just visited over five sites for GXO, and these are the finest sites we've visited. They consistently see that the processes and practices, the automation, everything we do is repeatable. This is critical for customers to see. They don't see the same continuous improvement with others. Engagement is key; we've just recently finished a survey indicating strong feedback from our employees. Engagement is vital, and they see it when they walk through our sites. This is fundamental for our success.

Thank you. Our next question comes from the line of Jason Seidl with TD Cowen. Please proceed with your questions.

Hey, thank you, operator. Good morning, gentlemen. And a special congrats to Adrian for his new role. Adrian, I know we talked a little bit about this in the past. I mean, you guys are utilizing some AI already in your network and having some success putting that new technology to use. Can you talk a little bit more about it, and how you think that could be used to win further customers down the road?

Hey, I'll stop there. It's Mark here. Adrian is not with us today, but only in spirit, exactly in spirit. AI is very important to us. We've been working on this for five years. This has significant scale in a very fragmented market. That scale from an artificial intelligence standpoint, and the data that that scale yields makes us a very likely winner in this arena going forward. It's an area of huge excitement for us, and it's going to drive a lot of accuracy and efficiency for customers going forward. Bill, do you want to talk about some specifics?

Yes. I'll give you some examples. As Mark mentioned, it's been in our DNA. We've worked for years with analytics with our customers. We handle returns, processing inside the site. We're always tracking these numbers, figuring out how to improve. AI takes that data and starts to automate it, helps us redesign transportation networks, improving automation productivity. It can look at the data coming out of automation and guide product movement. Finally, it assists in how we pack, maximizing packaging use, lowering costs and improving ESG. So, it's an immense value we're creating.

I appreciate the color on that. I guess my follow-up is on M&A. Does all this new growing business put potentially M&A on the back burner? Or are you still looking at it? Can you talk about what you're seeing out there in the market in terms of multiples?

Jason, hi, it's Malcolm. Let me touch on that. We’re growing at stellar volume, taking market share. Customers want to work with GXO to leverage automation. That's why we appointed Adrian. Sometimes there are vertical specializations or geography specializations where customers want to see local operations. That's where we're focused on an M&A route; it helps accelerate growth. From a business perspective, we're already the largest pure play in the world. However, we are open to specialized opportunities. Baris, can you provide insight on multiples?

What we are focusing on right now is where we can have additional capabilities and customer relationships. We're looking into capabilities in North America, including Canada and Mexico, as well as in Germany. Our cash flow generation and deleveraging are priorities. When we consider M&A, we benchmark it against buying back shares and decide what's best for shareholders. There are some sellers out there, but expectations from private sellers have not come down as much.

Makes sense. Gentlemen, appreciate the time as always.

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

Great. Thanks, everyone. Bill, maybe for you, another question on the pipeline. Your business has impressive brands and names there, with a distinctly consumer/retail tilt. Is that a deliberate decision? Are you prioritizing consumer retail over industrial? What's the e-commerce mix there? Where do you think that end market pie chart looks like maybe three years out?

Yes. Thank you, Ravi. E-commerce is a large focus today as they work to restructure their supply chain. There are definitely winners in the market performing well; their supply chains are advanced. We're also doing a lot of work in aerospace due to the return of flying. Industrial work is growing for us. A large portion of our pipeline involves new logos, which is beneficial, as companies that haven't outsourced before see the need to work with experts. We also take over in-place operations, giving immediate value, while also allowing for future enhancements.

Got it. That's super helpful. Also, you mentioned that e-commerce participants are transforming their supply chains. How do you see that evolving? What role does GXO play in that? Does that mean more warehouses and inventory to store? Do you anticipate that everyone else will follow? Please unpack that a little.

Yes. Because of our expertise, we become very core to their business. Some operations, like returns, are crucial to companies as they work on new supply chains. This is why the returns area has been growing. Reaching closer to the market is about a cost and speed advantage. With our GXO direct model, customers can have core central processes and leverage GXO for flexibility and speed in necessary markets, thus saving time. These trends will continue with our ongoing expansion into the UK and other regions.

Thank you. Our next question comes from the line of Brian Ossenbeck with JPMorgan. Please proceed with your questions.

Hey, good morning. Thanks for taking the questions. Maybe for you, Bill, can you talk more about the German market? It seems like it was a long time coming. You were serving it from a couple of different countries before, but now making a concerted effort. Can you discuss if that was customers pulling you into this $20 billion market, and how it looks ramping up?

Yes, I'll talk from the selling side and let Malcolm discuss the market perspective. We've developed a strong sales team in Germany and are focused there now. There is a strong pipeline with great opportunities. We already have operations in Germany from Clipper, and we see substantial growth going forward for 2024, 2025, and beyond.

It's a huge addressable market; I mean, it's a $100 billion market. We're pleased to be in there. Since acquiring Clipper, we've integrated that business with GXO. We've opened a state-of-the-art facility in Dormagen to showcase our new technologies. Adrian will spend time there to help demonstrate our capabilities. Overall, we're optimistic, as we see tremendous growth potential, both organically and through specialized M&A in Germany. It will become a vital market for us.

Okay, thanks for that. As a follow-up on Central efficiencies, can you talk more about what you're expecting at the site level? Is that expected at this point in the cycle when things slow down a little? Can we look back and improve on some of these sites? Is that reflected in your numbers for the back half of this year? What do you see for next year?

Yes. We are improving at the site level. Adrian's appointment will also help in deploying small tech in addition to automation. If you look at the organization at the site level, we are focusing on our layers and cost controls. All these factors are part of our productivity efforts and are clearly paying off. You'll see progress toward the year's end and into next year. There's more to come on that side.

Okay. Thanks, Baris. Appreciate it.

Thank you. Our next questions come from the line of Jeff Kauffman with Vertical Research Partners. Please proceed with your questions.

Thank you very much, and thank you for fitting me in. Just a broader picture question: You talked about what’s going on in your pipeline with your customers. As we start to see more of these complex assignments, can you talk about expected margins with the implementation of more automation?

Sure, we see about 200 to 300 basis points higher margin in automation. Many of the new projects involve lots of automation that, even in first-time outsourcing of existing facilities. Those automated facilities drive productivity, and our customers see the payoff, leading to longer-term contracts and attractive returns.

Baris, thank you. That's all I have.

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

Thanks, Daryl. And thanks again for hosting our call today. We appreciate it. GXO, we've now delivered a strong first half to 2023 and have now raised our 2023 adjusted EPS and EBITDA guidance twice. Importantly, we have great confidence in achieving our 2027 target. While the macro is not providing much of a tailwind for underlying volumes, we're excelling in everything that we're controlling. We've delivered record wins and have a very exciting pipeline for the future. Growth opportunities are abundant in our business. This sets us up for a great 2024, and through strong EBITDA and EPS returns for our shareholders, we expect all these benefits to continue. Our results today and our upgraded guidance show that GXO is proving itself as a resilient growth leader. This success is largely due to our team's focus on delivering best-in-class services to our customers and helping them navigate the current environment. With that, we'll bring the call to an end. I'd like to finish by wishing everybody a great rest of the day. Thank you all for attending the call.

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.