Conference Transcript - GXO 2026-09-09

Stephanie Moore, Analyst — Jefferies

All right. Good morning, everybody. Welcome all of you to Jeffree's 2026 Industrial Conference. My name is Stephanie Moore, Jeffree's Transportation and Logistics Analyst. We're very pleased to have the team from GXO today. We have CEO Patrick Helleher and Chief Strategy Officer Christine Kabaki. Thank you guys both for being here.

Patrick Kelleher, CEO

Thank you for having us.

Stephanie Moore, Analyst — Jefferies

Format is just simple fireside chat. I'll kick it off with a bunch of questions and we can go from there. okay maybe starting with some maybe kind of near-term focus just because you know we did come off of the second quarter results and I do think you know I certainly have received a lot of questions on just the organic growth performance on the quarter so you know on the specifics 2Q organic growth of 3.4% moderated slightly from the first quarter we got a lot of questions around that you know but I do think that on two-year stack it actually accelerated but there's a lot of nuances there. So maybe just starting with that, can you just talk through maybe some of the nuances, 1Q to 2Q, how we should think about the timing of contract startups and maybe what drove any kind of deceleration?

Patrick Kelleher, CEO

Sure. So I joined GXO one year ago. Prior to joining, GXO has been on the decelerating path of organic growth. We were mid-teams organic growth when we spent out of xpo in 2021 uh forecasting 45 percent uh organic growth this year it's been a lot of working effort in in the last year to reinvigorate organic growth in the business i think that evidenced by uh or q2 new business signings at 412 million which i believe is about 35 percent increase over prior year i signaled on the call in august that the third quarter would look similar in terms of new contract signings in comparison to last year on a percentage basis. And so we feel good about the trajectory that we're on from an organic growth perspective and reinvigorating that agenda. In Q2, we saw the 3.4% organic growth. It takes about three to six months to start up a new contract in the contract logistics business. The difference between 3.4% and 4%, which I think everybody was expecting, is $17 million. That represents about a two-week slip in startup timing. Nothing that I was concerned about, and I was quite frankly surprised how concerned everybody else was. But we reaffirmed RunPath this year for the achievement of our 4% to 5% organic growth guidance. And that still holds. and we will share our organic growth trajectory in our Investor Day, November 16th.

Speaker 2

Stephanie, I would just add also is that our incremental revenue for this year at the end of the quarter came up to over a billion dollars and that was a record for us and it was up about 29% year on year. So I think as we look ahead, we already have the visibility secured in that incremental revenue in the second half of this year.

Stephanie Moore, Analyst — Jefferies

I think that's really helpful. I mean, we get at the question quite a bit is just, is there any change in underlying customer demand? But maybe emphasize what you're seeing there, but also just, I think, the visibility that you do have. That gives you the confidence in the second half outlook.

Patrick Kelleher, CEO

Yeah, so in terms of customer demand, and we talked about this August 5th, current customer volumes in the aggregate have been relatively flat, plus minus 1% really. We've seen softer volumes on the e-commerce retail side in Europe, but substantially higher volumes on our B2B industry verticals of aerospace defense, technology, industrial, and life sciences. Those all really netting out to pretty stable volume and revenue for us. We talked about marginal improvement in pricing. in terms of year-on-year pricing improvement. And the balance of the organic growth is really coming from retention of existing business, not losing business, and adding new business to say you can do contracts that you're selling.

Stephanie Moore, Analyst — Jefferies

Maybe just starting on that sales pipeline and a lot of the work that you've put in over the last year. So I think you called out that the sales pipeline is at a record $2.7 billion. You know, what's driving this pipeline growth? Just a blanket statement there.

Patrick Kelleher, CEO

Yeah, it is the strategic focus that we put on North America and the strategic B2B verticals I've talked about really leaning more into the capabilities, competencies that we have in aerospace defense, life sciences, technology. to become on industrial verticals as something I feel like we have not done in the past yet. So 70% of our business today is consumer, CPG, retail, e-commerce, business. 40% of our new business wins so far this year have been in North America, or less than 30% of our revenue is in North America. So I think that strategy is coming to light. 41% or 2% of our new business wins have been in the B-to-B verticals. We talked about where we're putting additional emphasis. I shared in the investor call on August that I'm particularly excited about the products we're making there because we really haven't got it started yet. Fairmobers come on as chief commercial officer on in January. We are standing up digital marketing that did not exist in the past. that will be a huge catalyst to building additional pipeline for us. We are adding to our sales teams, particularly on the VV verticals. Most people are just coming in, coming up to speed. So I really feel like the teams and our people have done a phenomenal job. Turning focus here is that we present the greatest growth opportunity. We're delivering, we're emerging against that. And we see additional companies and investments that we make on purpose.

Stephanie Moore, Analyst — Jefferies

I definitely want to touch on some of those investments in a little bit because I think there's a lot there and a lot of opportunity. But on that $2.7 billion pipeline, can you help us think about how we should think about conversion of that pipeline over the next 12 months?

Patrick Kelleher, CEO

Yeah, we lag approximately a 28% conversion rate on that pipeline rolling. The pipeline turns 1.5 times a year, so that's not the total volume of business we will chase in a year. And I think very exciting was we signed 412 million of new business in the second quarter. The pipeline at the end of the quarter dropped to 2.3, 2.4, I think, 2.3 billion.

Stephanie Moore, Analyst — Jefferies

It sprung back to 2.7 before the investor fell. so there continues to be great marketplace opportunity out there and it's really about demonstrating great pipeline to start with choosing the right opportunities to go after everyone I guess maybe thinking about the building blocks to your organic growth opportunity and to your point that the 4-5% expected for the full year so you've already, based on my math, is it locked in is it 9% for this year in terms of new wins so then after that it really you're kind of talking through the volume the pricing then the other piece is certainly churn or attrition um i think that's been really steady

Patrick Kelleher, CEO

over time is there a potential change where over the long term that churn or attrition rate could look different than what it has over the last couple years yeah we we have an opportunity to improve there so we're 95 churn rate uh today we have an opportunity to be hired there we have taken a couple steps towards that we implemented a global customer success model which is a global account management model coming on to the organization that is very focused both on customer retention and also growing with our largest customers around the world so between the two we think that's going to be a big turn to organic growth by compressing

Stephanie Moore, Analyst — Jefferies

maybe getting into some of the actions over the last year um in the second quarter you did announce what i think was a record deal for the quarter but it was with a large hyperscaler which obviously gets us all very excited um and maybe a customer that we didn't historically think would be in the gxo wheelhouse so first can you just talk a little bit about what you are doing for that customer and then help us understand the life cycle of how data centers or hyperscalers can ultimately be as customers for GXL.

Patrick Kelleher, CEO

Sure. We're doing business with multiple hyperscalers across the regions that we operate in, so not only in North America, but also in Europe. I think everybody's excited about the build-out of data centers. There's lots of activity going on there. we participate from a supply chain perspective in supporting the build out we have individuals who work in our warehouses who build the racks who do the wiring who deliver a completed rack to the data center just has to be plugged in by our customers start working that is far more efficient than doing that work in the data center if you fit in the data center it's quite a lot of efficiency to that process but what I'm even more excited about is we provide all of the maintenance and sustainable parts to the data centers and that is where we see longevity in the solutions that we're providing with knowledge to say that there'll be some sort But I'm more excited about the services that we're providing around maintenance and sustainment. So if the server goes down, the part goes down, fan breaks, and so forth, we're providing those parts to the technician for the repair. We're handling the returns of that product coming out, and that has lots of longevity. and then just to follow up how are these contracts maybe different or in line with your company average in terms of tenure of the contracts contract structure anything that would be helpful I think they're pretty similar those solutions in contrast to some that we implement are lower capex solutions they are in line with the average contract length that we have right now which is five years the margins on that is good and creative to our current margins so that they are great contributors to our growth.

Stephanie Moore, Analyst — Jefferies

So touching on maybe some of the commercial success that you've seen thus far, and especially calling out those key end verticals, I think there's a lot to unpack there because to your point, you're only one year in, and a lot of the team's not exactly, you know, probably ramping at full capacity either. what's the what do you think has driven the initial success in some of these key verticals because there's probably a lot of factors at play I mean you have Wincanton which certainly was a bit more industrial focused or defensive focused you have your own personal background so maybe if you could bifurcate what's driven this initial success and then what kind of success we should expect maybe over the next couple years sure I think you know sort of reflecting on my first

Patrick Kelleher, CEO

Last year, I've had the question of what did I see at GXO when I arrived. There's been a lot of focus over the last five years before I arrived on M&A. I think that M&A has contributed to competencies that we have on the B2B verticals especially, but I don't think the GXO organization did a good enough job of leveraging those capabilities for organic growth. I think there was a lot of focus on driving synergies out of acquisition and looking for So when I arrived, I went around 70 different warehouses in one of the countries, 12, 13 countries, and the capabilities that I saw 32 years in the industry were phenomenal. I visited one of our aerospace defense operations in Atlanta, where we support both commercial and defense activity for a large aerospace customer, and it is second to none in terms of our capability. And frankly, I was a little stunned that there hadn't been more effort put into growing that. So I think some of the success that we're seeing there is simply coming from focus, getting the message out to key customers around the capabilities that we have there, winning. We have great people operating in these businesses, lots of credibility with customers. So it's getting them in front of customers. And we've taken additional steps, such as in the U.S., we established the Defense Advisory Board. And we've got a half dozen folks who are retired, very senior military, with strong supply chain acumen, helping us formulate the right services and approaching the right people in the industry to win. And that's been a big catalyst. We formed the Taurus Consortium in the U.K., ourselves, Mayor of Scott, Accenture, pursuing large opportunities with the U.K. government, U.K. military, and that is Philly Days, but we're seeing a good pipeline coming from that. So we're bringing in experts and really being open-minded and listening to what customers need, what are the issues in the industry, making sure that we're solving neural problems, and that is the best opportunity to solve new solutions. On the hyperscale side, we had the opportunity to start very small with one, and we built a phenomenal capability there, and that really has exploded for us. The people that we have, the expertise that we have, our ability to move quickly, which is absolutely paramount there, has made the real difference. And so it really has not been any sort of transformation or reinvention of anything. It has been about focus, unleashing people to focus on organic growth, leveraging the great expertise that we have within the organization to get that customer facing and win.

Stephanie Moore, Analyst — Jefferies

Thank you. Okay, so one follow-up on this. We've obviously touched a lot about some of these high growth, maybe higher value add verticals and you called out a lot of them you know aerospace and defense having a key one here but there is still the you know maybe the core e-commerce side of things so the core retail core consumer so two-part question what are you seeing from the general overall health of that you know i think you called out the consumer e-commerce bucket of your portfolio and at the same time you know does growth in one area maybe come at the expense of the other Yeah, I don't think it has to come at the expense of the other, and I also see that when we think about geographies, and I'll come back to that.

Patrick Kelleher, CEO

We're still seeing the steady growth that we expect from e-commerce and CBG industries, and we expect that to continue. We'll outline that more specifically on November 16th on Investor Day. When you think about 40% of our new business this year has been in the B2B vertical, 60% has been e-commerce and CBG-facing businesses. So that business continues to run very healthy. We're seeing larger, more complex projects come on the e-commerce front, a lot more automation, a lot more robotics, and expectation of AI in the operations. And I think that continues to evolve quickly, maybe even more so than on the B2B side. and I think we're really advantaged there with the investments we've made and the expertise that we have in automation with.

Speaker 2

Stephanie, I would just add in the second quarter by just a hair, our second largest win was an e-commerce win in continental Europe. And to all the things that Patrick's been talking about, the complexity with tariffs, with trade, that's just lending our solutions to help our customers, so that's not going away and that's only increasing.

Stephanie Moore, Analyst — Jefferies

I think one area that we've talked about for years is that the demand for gxo services you really do come in as kind of an essential partner and it doesn't really matter what the the problem is at the time whether it's tariffs or labor or you know covet i mean there's always you know there's always a struggle from a supply chain standpoint it seems like um do you think that the success going forward is just making sure all that you can provide is just simply known by customers or potential customers is it as simple as that?

Patrick Kelleher, CEO

I think it is. I think our success has to be built on a foundation of excellent service to our customers and their customers. That is where I am most passionate. We want to and strive to continue to be a great place to work. We want to create amazing associate experiences. So it really is a combination of having great people recruiting, retaining, developing, and retiring the very best people in the industry, I would say. And those people providing excellent service to customers allows us to grow the core business, and we have the opportunity then to move into different services for customers. So it's not uncommon that we'll start a warehousing operation for a customer and we'll introduce packaging operation within the warehouse and so for us got the opportunity to increase your wallet with current customers as well as bringing the customers services but as you said it is about getting the message out customers understanding what it is that we can do for them the value proposition that we bring which is a great value proposition is evidenced by the new business that we're signing i think our digital

Stephanie Moore, Analyst — Jefferies

marketing capability that we're standing up is going to be a part of getting that word out in a much bigger way than what we do today so we can expect more pipeline coming from that and then it is about making sure that we're implementing what we win successfully maybe jumping to margin improvement operating execution which I think is a whole section of questions that I don't think I would have ever asked the GXO team up until you getting here so this is I think an exciting area that I think investors understand but maybe are looking to see what this could the future can hold in this area so Patrick you know when you first joined I think one of your first initiatives was to transition away from a you know regional operating model to

Patrick Kelleher, CEO

more kind of globalized platform maybe just talk to us about that process in the last year and we can start there and certainly we have other follow-ups to that short there yeah when it comes to more margin performance cash flow convert free cash flow conversion organic growth since I joined especially after my first 70 warehouse I've been very vocal GXO is underperforming from a margin perspective, particularly when you compare us to our peers. We're at 3.5% of the business. Our peers, our good peers, are 6% or better. We have a joint with less than 30% of the free cash flow conversion. Our best peers, I think, ensure 50% or better. Our organic growth, we flag our peers there. We have to be better. I've been very vocal about that internally. Talked about that in my first town hall. That's the one thing I didn't like when I arrived. but i knew what i was stepping into um and that is an area where we have to be even more better so to close the gap on those margins and to be a true market leader not only from a supply chain execution perspective but from a financial performance perspective our approach is multiple one is and you referenced we are a 13 billion organization which up until a year ago has been managed in a very regional silo basis while we integrated acquisitions some of those even entities managed on their own we are shifting to a 1gxo leveraging the global scale of the business when i arrived i used the example there was no global procurement function you can imagine if you've ever met a sophisticated procurement person who could look at a 13 billion enterprise they would find significant savings opportunities of these engaging strategic suppliers on a global basis rather than regional basis. So that is in motion. Leveraging our global scale presents a great opportunity for sharing best practice across our 1,200 operations, which we have not done, I think, effectively enough in the past. We have our operational excellence agenda, which is about improving productivity cost out, sharing value with customers, but capturing more of the value for ourselves than what that we have in the past to improve the margin performance of the contracts that we have with customers. That is all about investing in robotics, automation, AI, labor management systems in order to improve productivity, reduce cost. And then on the other side is making sure that the new business that we're bringing on is accreted to the margins that we deliver today. So pursuing those more strategic B2B sectors that are more complex solutions come with higher risk of execution and therefore are rewarded with higher margins. That is part of the strategy to improve margins. Focus on North America where we have been underway to our competitors in growing North America. North America is our smallest region, less than 30% of our revenue. That should not be. We're putting a lot of focus on growing North America, which is structurally a higher margin market. And And then we look at the TAM that's available to us, we're very small in Asia, less than 1% of our revenue we're in Thailand, Singapore, and Malaysia, executing very well, but there's a huge, huge opportunity for us to grow Asia, we're really going to step into that in 2027, and Asia is a very healthy margin region, and so it was a combination of actions to close the gap on the margin true margin performance we're passionately on the free cash flow side we're guiding this year 30 40 percent from the less than 30 percent can be passed and we'll talk about on November 16 the path to being a better than 50 percent free cash flow conversion business that comes not only from improving working capital which we have really good opportunities to do particularly with the global procurement function and also looking more creatively how we're financing and implementing robotics and automation.

Stephanie Moore, Analyst — Jefferies

I do want to touch on that a little bit. I know you launched the GXO way which is your kind of standardized productivity if I'm describing it right the standardized productivity playbook. Given labor is two-thirds of your costs obviously we understand the pass-through nature and what that means but it's still a pretty large labor-intensive aspect of the business. What site-level tools or what productivity initiatives can you deploy specifically on the labor side?

Patrick Kelleher, CEO

That is such a great question and so thematic to what we're doing. As I did the warehouse tours, foundational to great warehouse execution in modern-day times is labor management and labor management systems that support that execution. It is measuring productivity at an individual activity level, coaching performance, and removing quiet time in the warehouse where people are standing and may not have work to do because it hasn't arrived at their station, for example. As I toured, I found 58 different labor management systems at GXO, but I probably only found 60 sites where those had been deployed. So we have a very large initiative to deploy. we're moving to two labor management systems for the enterprise as part of one GXO that way our leaders and sites can move from site to site they'll be using largely the same tools we can implement AI and get scale benefit around improvement in labor management and those systems rather than having to deploy improvement across 58 different systems and typically from labor management system implementation at a site level we expect a 5 to 15 percent improvement in productivity we will share some of that benefit with our customers some of that benefit will occur to gxo we'll share more details on the glide path in terms of specific numbers of driving

Stephanie Moore, Analyst — Jefferies

boards there but you can imagine with two-thirds of our cost being labor that has to be a substantial and then maybe just one follow-up and you certainly touched on the different contract mixes and and especially how that is different even from a geographic standpoint. So as we think about the open book versus closed book mix, how should we expect that to maybe change over time and then help us think about how you, you know, with the focus on margins, but at the same time, you know, return on invested capital is a key aspect as well too. How do you manage the mix in contracts?

Patrick Kelleher, CEO

Sure. I'm not so caught up in fixed variable versus cost plus. what what i am passionate about is to make sure that our cost plus contracts where our customers are reimbursing us for the cost we spend plus a margin include a shared savings component and that is very typical in open book contracts i think that has not been as typical enough because it should have been in the past for gxos and that is something that we're very focused on we're happy to be transparent with costs with customers or we're happy to be fixed variable and provide the customer the certainty in cost which is the big difference in both cases we want to have the mechanism where we're investing in robotics automation AI and those things that enhance productivity and we're sharing in the benefit of that investment so that we're getting the right return on capital and we want to position ourselves in a way particularly for the cost plus contracts where we can be taking those actions and not burdening the customer with a mutual decision that we are going to make investment in the business and automation or robotics which many times is a constraint and the industry has been a typical expectation is if you invest a million dollars in the customer's operation you want the customer to guarantee that you get the million dollars back i know what we can deliver through the robotics and automation solutions that we have i'd rather go ahead and make the investment um and share in the value that we create for customers, renew customers, because I'm providing a great service and cost. So we have specific initiatives driving towards that.

Stephanie Moore, Analyst — Jefferies

Maybe sticking on the topic of automation, I think you've conducted, I think, a few dozen tests with some humanoids.

Patrick Kelleher, CEO

Soon to be 46 humanoid tests.

Stephanie Moore, Analyst — Jefferies

What are some of the early learnings here?

Patrick Kelleher, CEO

Hand dexterity matters. I think I was quoted recently in an article where I said we don't need Olympic-level humanoids. We all saw the Olympics in China with the humanoids and so forth. We don't need Olympic-level humanoids in the warehouse. We need great hand dexterity. That has been the biggest challenge, and I think the industry has surpassed this year solving that. And hand dexterity used to be this, and now hand dexterity is this. And it's amazing how much more you can do when you can move your fingers like this instead of just like that. The second piece is the processing speed or the speed of the humanoids in performing individual tasks. So I have videos on my phone I'm happy to share with people afterwards. It's painful to watch a humanoid take a lipstick. Because it's so slow. It's speeding up. But we've got to get the productivity of those motions up to what a human can perform to really get to the ROI that we need. On ROI, a humanoid industrial, I think right now is about $70,000. I think in two years we'll be down sub-40. Operating cost today is $15 an hour, I think. In two years we'll be down sub-10. Again, we don't know the appreciation curve on a humanoid, but if we do two years, three years, you can figure a fully loaded operating cost of $15, $16 an hour compared to fully loaded on an associate is twice that.

Stephanie Moore, Analyst — Jefferies

So there are a lot of tasks in the warehouse environment that we see application for humanoid, which is why we are and have been so aggressive in piloting and working with multiple partners. any other areas within the auto because that's all very exciting but any other areas from an automation standpoint we should think about or also you know gxo iq which is an area that i think you've adopted just leveraging ai capabilities too so maybe just talk about broad ai machine learning other automation and your quest for obviously driving you know efficiencies and productivity sure there's so much innovation going on in the just the robotics uh and automation space, the great work that organizations like Autostore, Locus, and others are doing to

Patrick Kelleher, CEO

advance the technologies there. There is ROI on those technologies today, and innovation continues to come. So we continue to fill our innovation funnel with those new technologies, really testing efficacy and looking for opportunities to deploy at scale. We're super excited about GXOIQ, which is our middleware solution for the deployment. AI in our operations. We'll have about 60 of our warehouses integrated to GXOIQ this year on a path to get all 1,200 integrated over the next couple years. What that allows us to do is to embed both our proprietary developed AI tools as well as off-the-shelf AI tools in a single system connected connected to our single data lake, which is very, very important, and for each of our operations to then leverage on a menu basis the AI tools they want to use for their individual operations. So that allows us to execute globally and execute at scale globally, but customize our solutions locally for the things that individual operations need, and so we're very excited as that's rolling out. I think AI is going to make a big difference in our business.

Stephanie Moore, Analyst — Jefferies

All right. Well, last topic, but certainly not the least. There's always a lot of conversation, it seems like, about Amazon supply chain solutions. Unfortunately, it does seem like whenever they put out any kind of press release, your stock tends to move on the announcement. So for those in the room here today, what would be, and there's more to dig in here, But what's your one or two line of response for we see this Amazon supply chain solution announcement revert back to this thought on GXO?

Patrick Kelleher, CEO

Amazon's not a competitor to GXO. It's a real treat first year as a public company CEO to have the news come out May 4th and the stock dropped 19% on what I label as fake news. And we have a lot of that these days. But Amazon is very clear in their strategy in terms of how they're going to market. They want to market the capacity they have in their warehouses, in their planes, and in their trucks, their last mile delivery, to help absorb fixed costs, where I think they've overbuilt in some cases. We don't compete with Amazon on a fulfillment basis. The customer looking for a standardized Amazon solution is not the customer calling us, looking for our GXO Direct e-commerce solution, for example. So we have never, that I'm aware of, lost a piece of new business to Amazon. We've never lost a piece of existing business to Amazon. We don't see Amazon as a competitor in our $2.7 billion pipeline. We have a great relationship with Amazon. I think they're a fantastic company. I do think for those of my competitors that compete in the parcel space And in last mile delivery, I think Amazon is a real threat, and I think they will drive price reduction in those particular services. But for us in contract logistics, we are client-aligned solutions, so we develop our solutions that are very specific for what our customers need, and we're not about the standardized cookie cutter solutions so we simply don't see them swimming in our product and then maybe also if you just want to touch on you know as being an independent partner well that also can mean in terms of customers meaning you don't also have a potential conflict of interest sure um i i think customers have been you know even even when you look at maybe cpg manufacturers or others who are looking to leverage the Amazon website and their fulfillment capabilities and so forth for the e-commerce offerings. I think there is something to be said for protection of customers' data, which we're very good at. We don't share data across customers. We have no desire to become one of our customers and to compete with them in their own space. And so we provide that independence and objectivity, which I think is really important, especially when you're providing client-aligned solutions. our client-aligned solutions have to be about helping our customers achieve their business objectives, not just shipping a box. So our customers have many different business objectives depending on where they are in their business cycle. Some of it is achieving the lowest cost, some of it is achieving the best service, some of it you have to achieve both when you're shipping life-saving parts, for example, for MRI machines. Our solutions are client-aligned to deliver at the right service at the right cost and that's why our customers are calling us all right well we'll leave it at that thank you both for your time thank you appreciate it