GXO Logistics, Inc. Q1 FY2024 Earnings Call

Welcome to the GXO First Quarter 2024 Earnings Conference Call and Webcast. My name is Camilla, 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 the company's 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 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 on 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, Camilla, and good morning, everyone. I appreciate you joining us today for our first quarter 2024 earnings call. With me in Greenwich are Baris Oran, our Chief Financial Officer; Richard Cawston, our Chief Revenue Officer; and Kristine Kubacki, our new Chief Strategy Officer. As you will have seen, two weeks ago, we issued preliminary results for the first quarter of 2024 in conjunction with our bond offering to finance the acquisition of Wincanton. These results reflect the resiliency of our business model and the acceleration of our growth. Today, we'll walk you through our first quarter and discuss our outlook for the remainder of this year as well as for our longer-term 2027 targets. GXO had a strong start to 2024. We generated revenue of $2.5 billion, up 6% year-over-year, and adjusted EBITDA of $154 million. We delivered positive organic revenue growth for the quarter and continued to gain market share. When we last spoke, we said that the fourth quarter was the bottom for organic growth, and that's reflected in the sequential improvement in the first quarter, as well as the sales and pipeline activity we're seeing. We signed approximately $250 million of new business, up 55% year-over-year, including new contracts with Boeing, Guess, Michelin, Puma, and WH Smith. More than half of these new contract wins came from customers outsourcing to us or partnering with us for the first time. Earlier this week, we announced a landmark new 20-year partnership with Levi's in Germany, where we have been building our presence following our acquisition of Clipper. This will be a highly automated, newly outsourced operation with a lifetime value of nearly $1 billion. This is just one example of the trend we're seeing where customers are looking for longer-term partnerships to address their fulfillment needs. To that end, our sales pipeline is growing and ended the quarter at $2.2 billion, a 12-month high. We've more than replenished the pipeline after converting $250 million of new wins. We're continuing to see larger deal sizes and longer contract lengths. Additionally, the turnover of the pipeline is accelerating, creating more new business opportunities. Another highlight of the quarter was the announcement of the acquisition of Wincanton, which we closed last week. Wincanton exemplifies our M&A strategy. It expands GXO's presence in strategic growth verticals in the U.K., including aerospace and industrials, providing GXO with a springboard to offer these services across Europe. It will be accretive to earnings per share in 2024, excluding synergies on a pro forma basis and double-digit accretive, including full run-rate cost synergies. Wincanton builds upon our proven track record of leveraging newly-acquired platforms to drive growth through revenue synergies. For example, since the Clipper acquisition, we've executed on our strategy to establish a meaningful operating presence in Germany, the largest economy in Europe. As of the end of the first quarter, Germany is the fourth largest pipeline in all of GXO and one of the fastest growing. We're converting it with high-quality deals like Levi's. Similarly, when we acquired PFS in the fourth quarter of 2023, we set out to leverage the combination of GXO's global footprint with PFS's leadership position in health and beauty, jewelry, and luxury. Since the acquisition, we've integrated the two businesses and expanded legacy PFS customers like Glossier and REFY Beauty across multiple geographies. This is proof positive of our execution on our M&A strategy and especially of our ability to capitalize upon the strengths of companies we acquire. We're speaking to major global customers every day. And as Richard will discuss in a moment, a consistent thread in our discussions is the expectation of a gradual recovery of consumer goods demand. Businesses are building for the future, planning their fulfillment strategies to meet their expected needs, and we're positioning ourselves to take market share by providing best-in-class solutions. One way we're doing this is through our intensified commitment to leading the market in automated and AI-driven fulfillment. Automation is a key tenet of our value proposition, and we're a first mover in trialing the integration of cutting-edge automation like humanoids and AI inside the four walls of the warehouse. We've recently introduced some exciting innovations in AI. First, the warehouse optimization pilot we mentioned last quarter was a success, driving a productivity increase of approximately 15%, and we're rolling out the app across our sites as we speak. Second, we've recently piloted a proprietary workforce management tool, which we developed in-house. Our tool makes more than 15 million decisions per minute to streamline inventory replenishment, adding about 7% of capacity at no additional cost. We'll be deploying this solution broadly across our operations starting this year. All this to say, I'm delighted with the way our business is performing, and we anticipate continued acceleration in organic revenue growth throughout 2024 and beyond. With our growing pipeline and accelerating pace of new business wins, our focus on automation and sales excellence, and the pace of outsourcing in this $450 billion total addressable market, GXO is set to take significant market share over the long term. Now I'll hand you over to Richard to update you on what we're hearing from our customers.

Thanks, Malcolm. Good morning, everyone. I've had the pleasure of meeting some of you over the past few years as the leader of GXO's European business. In my new role as Chief Revenue Officer, my mission is to convert the significant market opportunity Malcolm just mentioned into outsized growth for GXO. And we're off to a great start in doing just that. As Malcolm highlighted, our new sales wins signed in the first quarter totaled $250 million, which was an increase of 55% year-on-year, and we're on track to outperform our $1 billion of new wins from 2023. We serve the bluest of the blue chips. And what we're hearing from our customers, both current and prospective, is the need to build efficiencies into their operations to support their future growth. As a result, we're seeing demand strengthening. I'd like to underline a few of the sales highlights from the quarter, which underpin our confidence in our growth trajectory. First, our pipeline stands at $2.2 billion quarter-on-quarter. We added more than $1 billion of new opportunities in the first quarter alone. Second, our customers are making faster decisions to outsource their supply chains, reflecting returning confidence in their long-term outlook. As a consequence, sales cycles are shortening and our pipeline is delivering results faster with deals getting larger and contracts getting longer. Third, significantly, more than half of our wins in the first quarter were with customers outsourcing or turning to GXO to support them for the very first time. And finally, in addition to new logos, we're also expanding our relationships with existing customers. We serve more than a quarter of the Fortune 100 companies, and the success of our London expansion strategy is evident in that half of our revenues come from our customers we partner with in more than one country. We're seeing these trends develop across our regions. For example, this coming Friday, we'll be cutting the ribbon on a new warehouse that is the largest building in the state of Maryland. We're supporting personal care and appliance manufacturer, Conair, in this 2.1 million square foot facility. This solution consolidates three sites into a single automated operation that handles all of Conair's brands across retail and direct-to-consumer, enabling their growth and combining fulfillment with high value-added services like product testing. We've also recently expanded our 13-year partnership with global apparel company, Guess, originally in Europe, across the ocean to the U.S., turning it into a global partnership. Guess had previously run their North American operations in-house, and they've entrusted us to help them unlock value in their supply chain by outsourcing. We now operate three sites for Guess in Italy, the Netherlands, and now the U.S. These are examples of our consultative approach, where we engage with our customers at the highest levels of leadership to design a solution that fits their needs. In Europe, as Malcolm mentioned, we just announced our landmark Levi's win. We're delighted to take on a newly outsourced, highly automated operation for an iconic global brand. I was in Germany last week to visit the site, which is Levi's super hub, allowing Levi's to supercharge their omnichannel growth strategy. It was extremely exciting to kick off the partnership. The ambition and the momentum on both sides are palpable. This is Germany's greenest warehouse, with phenomenal sustainability features that raised the bar in the logistics industry. This new win is especially significant because it exemplifies why a brand such as Levi's partners with GXO to transform their operations and drive a competitive advantage through their supply chain. As Malcolm mentioned, in the past few months, we scaled up our sales and account management teams while intensifying our focus on high-growth verticals and geographies to really capitalize on the opportunity. We've had an excellent first quarter, and our investments in our team, strategy, and processes are already translating to pipeline growth and new partnerships with blue chips across the globe. This is why I'm confident that we'll deliver strong growth in new sales wins in 2024 and beyond, taking share of our enormous addressable market. And with that, I'll pass the mic to Baris to take you through our detailed financials, our 2024 guidance, and our 2027 targets.

Good morning, everyone. We began the year on a solid note and are encouraged to see the continuation of the positive trends we observed last quarter, as well as a return to organic revenue growth. We believe the fourth quarter marked our lowest point. In the first quarter of 2024, we achieved revenue of $2.5 billion, reflecting a 6% increase year-over-year, with 1% being organic growth. Our organic growth was primarily driven by our largest sectors, omnichannel retail and technology, particularly in the semiconductor industry. Our adjusted EBITDA for the first quarter was $154 million, while we recorded a net loss of $36 million, mainly due to a one-off legacy litigation expense and one-time transaction costs related to Wincanton, similar to the costs from our previous acquisitions. As highlighted on our call last quarter, our growth, margins, adjusted diluted earnings per share, and adjusted EBITDA this quarter demonstrate the optimization of our customer footprint, productivity initiatives, and our investments in capabilities. Our focused approach is yielding results, which you will see reflected in our upcoming business acquisitions. Our operating return on invested capital this quarter exceeded our target at 33%, showcasing our ability to reinvest in the business with high returns, which we expect to sustain going forward. In 2023, we exceeded expectations for free cash flow, and we continue to generate strong free cash flow this quarter, with an improvement of $26 million year-over-year. This reassures us in our full-year free cash flow conversion target. Our balance sheet remains robust, and we are committed to maintaining our investment-grade rating. We anticipate leverage levels of approximately 2.5x by the end of this year and about 1.9x by next year, with no debt maturing in 2024. One of our key accomplishments this quarter was completing the acquisition of Wincanton last week at an attractive valuation, considering the cost synergies we aim to achieve. This deal is expected to be accretive to earnings in 2024, with double-digit accretion to adjusted diluted earnings per share upon full integration, a level of synergy realization evidenced by our past acquisitions of Clipper and Kuehne+Nagel's U.K. operations. The acquisition provides exciting exposure to the industrial and aerospace sectors in Europe, serving well-placed customers like BAE Systems, EDF, and Alstom. Wincanton also has a strong proportion of resilient contracts, and even before realizing £45 million in cost synergies, we expect it to contribute stable, slightly lower margins alongside higher returns and predictable cash flow. Now, regarding our guidance. For the full year 2024, inclusive of Wincanton, we currently expect double-digit adjusted EBITDA growth at the midpoint of our guidance range of $805 million to $835 million. We have reiterated our earlier organic revenue growth guidance of 2% to 5%. Our first quarter organic growth indicates an upward trend, and we predict continued acceleration throughout the remainder of the year, with April showing improved organic growth compared to the first quarter. We project converting 30% to 40% of our adjusted EBITDA into free cash flow, exceeding our long-term target of 30%. We have also updated our targets for 2027 to align with our performance in 2023 and our outlook for 2024, incorporating the effects of the Wincanton acquisition. Our revised 2027 targets include revenue expectations of $15.5 billion to $16 billion and adjusted EBITDA of $1.25 billion to $1.3 billion. Over the next three years, we aim for double-digit organic revenue growth on average from 2024 to 2027, as we expand our wins and market presence, correlating with a gradual recovery in customer volumes through 2024 and 2025. Additionally, we intend to achieve margin expansion through initiatives in business development, technology, and automation, with a significant emphasis on AI and the cost synergies from Wincanton. We are on a clear path to achieving sustained double-digit top-line growth, with a 15% adjusted EBITDA compound annual growth rate and even faster growth in adjusted diluted earnings per share. GXO's growth is accelerating, and we are outpacing our long-term targets in terms of operating return on invested capital and free cash flow conversion. We have just executed a successful acquisition at a favorable valuation, and we will continue to deploy capital to maximize value for our shareholders. And with that, I’ll turn it back to Malcolm.

Thanks, Baris. We've had a strong start to 2024. We're seeing growing demand from global blue-chip customers as they focus on building the future of their supply chains. We're positioning GXO to take market share as customers build efficiencies into their operations to support their future growth. And we're making big moves in automation and AI. Our laser focus on profitable growth gives me great confidence in achieving our long-term targets and creating outsized shareholder value. And with that, we'll hand the mic back to Camilla and transition to Q&A.

Our first question comes from the line of Stephanie Moore with Jefferies.

Maybe I wanted to start with just the organic growth performance. If you could touch on the 1Q performance and maybe really focusing on that — maybe that same-store sales or volume component. But importantly, how that bridges to the full year expectations for 2024 and just what you're hearing in the underlying operating environment to give you confidence in those — in that target.

Thanks, Stephanie. Good morning. It's Malcolm here. Stephanie, while we're not seeing any material change in customer volumes, particularly on the consumer goods side, what we have seen is a more positive trend as we've gone through quarter one. When we compare quarter one to quarter four, we can see sequential improvements. And as Baris has just mentioned, in the early part of quarter two, April, already, we can see that trend has continued to move forward. When we look at the three regions we’re working in, Continental Europe has continued to be very resilient. I can't say it's growing, but it's equally not deteriorating. It's very resilient compared to what we've seen in the past. Our U.S. business, that's a bit mixed, and it reflects the wide range of different industries that we're servicing. Consumer volumes are now stable. In the U.K., in fact, that's been our strongest growth market during quarter one. It's interesting that it was the first to show signs of slowdown in '23, and it seems to be the first to show really strong signs of improvement. So all in all, that's the picture that we see. If I look across every territory, though, what we can see is that consumer demand for goods is very different than consumer demand for services. For goods, it continues to be sluggish. Companies are starting to restock. We can see that from the dialogue with our customers. I think we've seen the bottom of the destocking environment. What we're clearly witnessing is that customers, in order to meet their plans, are going to need to start restocking through the course of the year. So that's a good sign for us. But I do want to level set that overall, it's a sluggish environment. In '24, just as you see from many of the parcel carriers and the real estate companies, the destocking activity impacted particularly that small proportion of our business where we have multi-customer sites. So we have capacity. But overall, from a quarter one highlights perspective, our sales pipeline is up, business wins are up, and customer decision-making is speeding up. That's probably the most important aspect. $2.5 billion of top line, 6% growth, $154 million, in line with consensus. Our Wincanton deal, as Baris mentioned, that's a deal done at a very attractive price, increases in automation and AI. So overall, we're off to a really good start. Baris, maybe you can comment on the actual evolution of growth as we expect this year.

Sure. Let me first start with quarter one. The bridge to our 1% organic growth in the first quarter is roughly new business contributing around 6.5%. Volumes, including customer consolidation of footprint sequentially improved from quarter four, but still negative year-over-year, around negative 3%. Pricing, mainly inflation, is about 2%, and the remainder is coming from retention in line with our long-term averages. As Malcolm mentioned, April has already shown an improvement versus the prior quarter. If I look at the entire year of 2024, the bridge for our organic growth is about 2.5%. New business is expected to contribute around 9%, and we continue to see a lot of takeover in place and outsourcing projects such as Levi's. Number two, volumes, plus consolidation of footprint expected to be around negative 3%, pricing primarily inflation around 2%, and the remainder coming from retention, which we expect to be in line with our long-term averages. That's our bridge for the entire year.

Our next question comes from the line of Scott Schneeberger with Oppenheimer.

I want to focus on this new win of Levi's, which is pretty exciting for you. When will that start to contribute? Just an idea of when that's going to ramp? And then also, Baris, you just kind of shared the contribution you're anticipating from new business wins. But there's been some discussion of this speeding up, and Malcolm, you mentioned the speeding up of decision-making. So if you could just kind of work in what you're seeing there, much appreciated. And then lastly, as part of this long-term contract, 20 years, is this a new trend we're seeing on Levi's? I think we've seen that with other deals recently.

Scott, it's Richard Cawston. Delighted to meet you this morning. It was my first earnings call, so I'm looking forward to a great conversation. Thanks for the question. We're super proud of this win with Levi's. I mean it underpins our progression into Germany that we set out to do last year following the acquisition of Clipper that gave us a strong foundation. It's Europe's largest economy, and we absolutely should be there with our automation, our know-how, and our agility in the warehouse. If you recall last year, we opened up a speculative warehouse, which we don't normally do in Germany, because we saw the economic opportunities were so significant. I'm pleased to announce that that warehouse is full now, including aerospace wins that have come to us in this region. Pivoting to Levi's, it's a great iconic brand. We entered into a consultative process and a deep partnership. That's what reflects the 20 years. This is a high investment. Germany's greenest warehouse, so the development is a very big deal. So the partnership really reflects that level of scale and automation investment. But Levi's as an iconic brand, a 170-year-old company, when you think about these sorts of partnerships and that lifespan, it's entirely normal. When will it go live? In June, we start very slowly. We begin by taking over around 70 colleagues from Levi's, welcoming them into our 80,000-strong European workforce. We'll ramp up over the 12 to 18 months to full production, which is around 750 people and 60-some million units. This really will be a super hub for Levi's, and we're absolutely thrilled to become their partner.

Thanks, Richard. I appreciate that. I'm going to follow up, I think, Baris, probably for you. Just on the 2027 financial target update, could you bridge what's changed from your prior 2027 financial target update to what you have now? Just kind of compare and contrast the two.

No problem. Since January 2023 guidance, we've seen the realities of a lower volume environment reflected in 2023 and 2024 guidance, which has led us to rebase our expectations for 2027. This year, 2024, is gradually improving, but it's still a sluggish year. If I go into the components of our EBITDA targets, from the prior target to the current target, there are three components. About one-third of this impact comes from rebasing to lower volume levels in the consumer verticals we have seen in 2023 and forecasting in 2024. The rebasing effect is already in our numbers; it's primarily behind us. Another one-third is a result of customer realization of footprint given bigger product demand, which has impacted our revenues and also led to a slightly lower margin contribution. The last one is that, we still expect to see a margin offset from automation, and given significant wins in the first outsourcing, this ramp-up has simply been pushed out. Simply put, in 2023, we won a lot of first-time outsourcing projects with low capital intensity and automation. You can see that in our realization of free cash flow in 2023. So those three items represent the bridge from the prior 2027 target to the current one.

Our next question comes from the line of Jason Seidl with TD Cowen.

Impressive amount of new business wins. I wanted to explore what's going on in the marketplace a little bit. You mentioned you're taking market share. Do you think you're taking market share from existing players who are offering automated services? Or do you think you're taking more market share from players that aren't offering automation? Also, can you talk a little bit more about your technology offerings, including AI, and how you think they're helping you win business? And then I have a follow-up on Wincanton.

Great, great. Thank you, Jason. It's Richard Cawston again. I'll answer. Our focus is on this massive total addressable market we have of first-time outsourcing. We've seen that in the number of deals in our pipeline, and you've seen a pack of those customers come into our business for the very first time like WH Smith, Puma, etc. What they're looking for is our skill set to help them automate. Automation is, as you know, running at more than 40% of our activity, and it's in every tender, every submission we make, and it's in every discussion with the customer. Why is that? Well, it makes the efficiency more optimized. It covers difficulties like labor shortages. The returns on invested capital are strong, and the levels of automation are ever improving. It's absolutely what they want from us, and it's absolutely the skill set and agility GXO can bring to this massive TAM.

And Jason, it's Malcolm here. I think you mentioned you had a follow-up on Wincanton. Let me cover that. So clearly, we're very delighted to have made this agreement with Wincanton. The deal is now closed. It's a super deal for us. It's a great company, a great management team, a great team of people, and super customers. I do want to comment that we've been really bowled over by the very positive feedback that we've had from all of the Wincanton management organization and teams, and indeed, from the customers. So a big, big shout-out for that. As a business, this is going to bring us a lot of revenue synergies. We have not yet done the detailed work on it, but what we can see in our past experience with previous M&As with people like Kuehne+Nagel and Clipper and PFS, we can see very clearly the same characteristics. It's going to importantly open up big new verticals for us. This is going to make industrials not just our strength area in the U.K., but a strength area. Aerospace has big blue-chip customers and public sector spending. These are all things we can convert not just in the U.K. but across our Continental Europe-wide business. So it's very, very good from that perspective. It's accretive pretty much from the get-go, and that’s even in advance of the synergy savings we're going to bring in, about $45 million of cost savings. That sounds like a lot, but it's in line with what our experiences have been in Clipper, in PFS, and other M&As. We are very confident about that. It's really a very attractive deal from all of that side. Last comment to say is, there's still some regulatory process for us to go in. That's starting now, and we expect that will be concluded by the end of the year. We have a lot of experienced people working on that. They work with the CMA, just as we did with Clipper, so we expect a satisfactory outcome on that. My last comment is, I mentioned earlier, our U.K. business seems to be the market where we're seeing the earliest real recovery of consumer goods spending. So it's great news that we're doing this deal right now. I think the timing of it is really very, very good.

Sure. Wincanton is a sizable business with a top line of around GBP 1.4 billion, or $1.8 billion, all of which we will be capturing for 8 months in our P&L, around $1.1 billion. The EBITDA contribution this year will be about $45 million going from the consensus IFRS EBITDA and adjusting for the IFRS to U.S. GAAP adjustments. This is already included in our plan. Taking into account the funding we have done, we expect the Wincanton acquisition, prior to cost synergies, to be accretive, about $0.03 per share in 2024. That accretion will increase to double-digit percentages as we complete the integration. It's a very attractive valuation. We are very excited about the integration and potential prospects of Wincanton.

Well, that's some great color. If I could just quickly follow up here. How should we look at future M&A sort of after Wincanton? Are you looking at expanding into some different geographies?

Yes. Jason, it's Malcolm here again. I think right now, our focus is on digesting Wincanton. As Baris mentioned, it's a sizable business. Our teams are very skillful at integrating businesses. Wincanton comes with just a very admirable team of people, so we're really delighted about that. Right now, our focus throughout '24 and really into '25 is going to be on the integration of that. Thereafter, look, as we've explained, our business strategy is always to consider M&A when it's appropriate, when it can bring something new to our business. Wincanton is a great example of new verticals, verticals that we're not present in right now that are very difficult to enter without actually being present in the market. Two years ago, when we acquired Clipper, we said very clearly that this would give us the springboard into Germany. Now, two years on, you're really seeing the evidence of that strategy come to life. That's what makes our M&A strategy, I think, a very exciting one. We're not really thinking now about M&A for the future; right now, all minds are on making a very smooth integration and delivering on what we've committed to in terms of the Wincanton deal.

Our next question comes from the line of David Zazula with Barclays.

Just noticing the cash flow guidance, Baris, has not changed from what you had previously indicated. If you could talk about expectations on the cash flow side for the Wincanton acquisition and your expected profile and how that converts to dollars.

Of course, David. Our cash flow in Q1 was actually better than last year, about $26 million year-over-year up. Our strong Q1 puts us on track to achieve 30% to 40% EBITDA or free cash flow conversion guidance. So when you're calculating the expectation for the entire year, I would take into account, including the Wincanton contribution and increased EBITDA number, then convert that into cash flow. Our working capital management has been favorable. We continue to be favorable in 2024. Despite investing very heavily in a lot of projects, we have high capital discipline throughout the enterprise. We expect to see high cash flow generation this year, above our long-term target of 30%, which is 30% to 40% in 2024. We still write high-quality contracts with high return invested capital.

And then on the Levi's contract, I don't know, Richard or who wants to take, but you hinted at some automation opportunities in some existing automation. Can you discuss the current automation level of the facility there and what the automation opportunity might be?

Yes, absolutely, David. The Levi's facility is fully fitted out with state-of-the-art automation and end-to-end processes, showcasing phenomenal attributes, along with its ESG credentials. About 42% of our operations are automated, split into fixed automation at around 30% and what we call adaptive technology at around 12%. That adaptive technology is absolutely thriving. These are the cobots, the robots, the shuttles, and the AI-driven technology that's coming to the market. You saw our Digit robot announced last year, our humanoid robot in the earlier part of this year. This sort of technology we can plug and play into many existing operations, allowing us to pivot manual operations into long-term automated operations. When we do that, we improve the margin, generally drive longer-duration contracts and enjoy better returns that we share with our customers. It’s a great strategy.

Our next question comes from the line of Amit Mehrotra with Deutsche Bank.

This is Ben Mohr for Amit at Deutsche Bank. Your 2027 EBITDA target has moved down more than your revenue target, implying a lower EBITDA margin. Can you let us know why that's happening?

Ben, this is Baris. Let me take that question. If we look into how our margin is improving throughout the new plan from today to 2027, there are primarily three buckets from today's margin. First is automation. Looking forward, we expect about 30 basis points of incremental margin from higher levels of automation and adaptive technology deployment. We are particularly encouraged with how AI is improving the ROI of automation for our customers. Number two, Wincanton, we have great confidence in achieving the cost synergies of £45 million given our muscle memory of achieving higher percentage of revenues with Clipper integration. This £45 million is equivalent to about 35 basis points of margin improvement out to 2027. The last component is productivity and central efficiencies and synergies from prior acquisitions. As a reminder, we have a run rate of about $40 million in 2024 from these programs, and we expect another $35 million of savings, so around 30 basis points of margin improvement out to 2027. So three components: automation, 30 basis points; Wincanton, 35 basis points; and productivity and central efficiencies primarily giving us another 30 basis points of margin improvement versus this year.

Great. And maybe a two-parter. In terms of still assuming the 10% revenue CAGR growth, what is the confidence level in that? And when can we see some operating leverage in the direct operating cost line? What can you do to drive less inflation and cost creep in that line item?

We have a $2.2 billion pipeline, increasing wins, and an improving consumer environment, giving us great confidence as we look into the future. It’s going to be a gradual climb. But if I give you the entire bridge of revenue, organic revenue growth of 10%, we expect about 10% coming from new business; volumes to have a low single-digit impact contribution, and that is expected to ramp up in 2024 and 2025, hitting the potential in 2026; pricing to come around inflation, which we took about 2% to 3%; and the remainder is coming in line with inflation. As far as business model is concerned, we are working on central efficiency programs, which we highlighted last year. In our financials this year, you see we are implementing more and more efficiencies. That will give us further margin uplift, taking costs out from our central costs and support cost structure. Remember, Ben, this is a contractual business model. We have high variable costs, low fixed costs, and limited operating leverage in our business model. That has always been the case for the last three years. The operating leverage is primarily going to come from the central costs, the site-level costs of SG&A, and other items; we have been working on those and taking structural costs out.

Our next question comes from the line of Bascome Majors with Susquehanna.

I know we're a long way from 2025, but can you talk to any of the items that you do have visibility into for next year? Give a debt pay down or incremental contribution, or just the timing of some of the Wincanton synergies as we think about how you expect the business to perform out of this sort of cyclical drag you saw late last year into the early part of this year? And secondarily, just DHL Supply Chain made some management changes. Do you read anything into that as a strategic change or opportunity for you guys? I just wanted to get your thoughts on that.

Let me take the initial part as far as Wincanton's contribution to our numbers in 2025, beyond other items and mostly through comments on the competitive environment. As I mentioned, Wincanton has about a top line of around GBP 1.4 billion, or $1.8 billion, of which $1.1 billion is going to be this year. Therefore, you should expect another $0.5 to roughly $0.7 billion next year. On the EBITDA side, the full year EBITDA is around $80 million; $45 million will be this year, and the remainder will be next year. Of course, we'll provide cost synergy items in our guidance, followed by our guidance into 2025. As we highlighted, we do see an accelerated environment embedded in our organic growth guidance of the 2027 targets.

Yes. Thank you, Baris. Regarding the competitive environment, I'll touch on DHL as well. I mean DHL is a great company with a fantastic team. It's a company we know well, and we like them. In terms of the competitive environment, the industry is consolidating. Wincanton is a good example of that. You can see that in all of the major territories. Larger companies are getting larger, which reflects what customers are doing in one regard. Customers want to be supported by well-organized, financially strong companies. Large automated solutions that Richard has mentioned are not easy for smaller companies to deploy. The very nature of our market, with more and more automation and AI, is something that is best accomplished by large-scale businesses. That's why we see a strong demand for our services; that's why we’ve been experiencing double-digit new business type numbers over this entire period.

Our next question comes from the line of Brian Ossenbeck with JPMorgan.

Just the first one, maybe two quick follow-ups on Wincanton. Baris, how are you thinking about FX hedging? Is that in the guidance right now? Are you still deciding if that will even be a big impact in your view? And then maybe, Malcolm, following up on Bascome's question on the synergy timing. Is this a sort of a multiyear timeline before you would get something to show up here, kind of like what we're seeing in Germany with Clipper? Or are there some synergies that potentially could come faster on the revenue side?

Sure, Brian. Let me cover the Wincanton point first, and I'll hand you over to Baris on the other point. So regarding Wincanton synergies, our experience has been not to expect much in the way of synergies during the course of '24. We anticipate the review process to take place, probably concluding before the end of the year, but we'll be in the busiest time of the year for our own business in the U.K. and indeed for the Wincanton business. So synergies will predominantly flow through during '25 and I would say the first half of '26. When we acquired Clipper, we talked about a three-year plan. We actually delivered the synergy plan in around two years. I don't see the Wincanton environment being much different. Regarding the synergies, we have high confidence in the values and have already identified the different areas; very durable synergies, but we shouldn't really expect to see any significant impact from that until '25 and probably the first half of '26. I'll hand you over to Baris for the second part of your question, Brian.

Brian, on the FX side, as you know, we have sensitivity to the euro and pound. A roughly 1% move is moving our numbers by about $2 million in euros and another £2 million in pounds, a 1% move on each currency. So far, we have undertaken decent moving hedging, with around three-quarters completed for 2024, but we have not hedged the Wincanton deal yet. We will take a look at that during the next couple of weeks. Our guidance today is primarily based on average exchange rates, roughly EUR 1.08 and £1.34. We'll be looking into locking those so that we can derisk the P&L for our shareholders.

Our next question comes from the line of Richard Cawston with Susquehanna.

Thank you, Camilla. The first-time outsourcing is a secular tailwind. Our customers face complex challenges. In this continued inflationary environment, they need us to help save money, and automation really is the only way we can deliver a competitive advantage. You need to provide it like GXO, which has a vast catalog and resources to deploy those quickly in an organized and integrated way. In terms of speed to market and the velocity we're seeing, that's really important because if you think about our business model and our potential opportunities, it's both the magnitude and how quickly it refreshes. That refreshment of the pipeline, which has almost doubled from the trailing 12 months, is showing that customers are making decisions and feeling more confident about the outlook. We have business coming to outsourcing, where we can really help them with our takeover-and-play strategy. Customers are making decisions faster and all of that points to a really great year, where we expect to outperform our $1 billion in 2023, in 2024.

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

Thanks, Camilla, and thanks for hosting the call with us today. We really appreciate it. We've seen our growth inflect positively in quarter one and believe that we'll see that continue sequentially, improving throughout 2024 as consumer spending for goods starts to recover. We're driving great service and efficiency benefits for both new and our existing customer base, which is reflected in the 55% uplift in first quarter wins and in that growing sales pipeline that Richard's commented on. We're investing to capture a greater share of a strengthening market, which continues to be driven by organizations looking to our expertise in the deployment of warehouse automation and technologies, AI. As a company, we'll continue to deliver great shareholder value, and we look forward to showing the benefits of our acquisition of Wincanton to you during the balance of 2024 and beyond. With that, I'd like to wish everybody a great rest of the day. Thanks for joining us today, and we appreciate all of your attendance. Thank you.

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