Q3 2021 GXO Logistics Inc Earnings Call
Welcome to the <unk>, So Q3, 2021 earnings conference call and webcast.
My name is Doug and I'll 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.
If you have a question please dial star one on your telephone keypad. Please.
Please note that this conference is being recorded.
Before the call begins let me read a brief statement on behalf of the company regarding forward looking statements the use of non-GAAP financial measures and company guidance.
During this call the company will be making certain forward looking statements within the meaning of applicable securities law, 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 use actual results to differ materially is contained in the company's S. E T 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 except to extent required by law.
The company also may refer to certain non-GAAP financial measures as defined under the applicable S. E. T 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 there.
Related financial tables.
Or on its website.
Unless otherwise stated all results reported on this call are reported in United States dollars.
The.
He will also remind you that it's guidance incorporates business trends to date and.
Well it believes today to be appropriate assumptions.
The company's results are inherently unpredictable and maybe 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 the pressures and the various factors detailed in its filings with the SEC.
This guidance also reflects the company's estimates to date regarding the impact of the COVID-19 pandemic on its operation.
It is not possible for the company to actually predict demand for services and therefore, it's actual results could differ materially from the guidance.
You can find a copy of the company's earnings release, which contains additional important information regarding forward looking statements and non-GAAP financial measures in the investors section of the company's website.
I'll now turn the call over to Malcolm Wilson, Mr. Wilson, you may begin.
Thank you operator, good morning, and welcome to <unk> third quarter earnings call.
With me today <unk> ratio around our Chief Financial Officer, and Marc Maun, Duca, our Chief investment Officer.
This is our first quarterly update following a successful spin off in early August.
In accordance with our can do culture Gx also listing was completed in only eight months.
They switched thanks to the collective hard work and dedication of our 95 five is an exceptional team members the support of our loyal customers and our shareholders.
We are extremely excited for the journey ahead, as we pursue our secular growth opportunities.
In the third quarter, our operations delivered the highest quarterly revenue and adjusted EBIT da in the history.
Not only did we beat market expectations, we surpassed a stellar second quarter.
This was the third consecutive quarter of double digit organic revenue growth.
As a result, we are raising the midpoint of our full year revenue guidance to $7 7 billion and raising our midpoint of our pro forma adjusted EBIT guidance to $622 million.
In the third quarter, we won contracts with an aggregate life time value of over 1 billion, taking the value of our total wins year to date to $4 3 billion.
[noise] wins in this quarter included global Blue chip customers, such as Raytheon Global Aerospace manufacturer Ross stores, a large chain of department stores here in the U S.
<unk>, one of Europe's largest e-commerce companies and Zara Global Omnichannel fashion retailer.
We also won business with a leading U S semiconductor company.
These contracts have an average duration of five years, we also implemented solutions in the quarter with Abercrombie and Fitch Apple Currys, formerly Dixons Carphone and we.
New customer wins to have a $700 million lift to our 2022 revenue underpinning our growth for next year.
To date, approximately 50% of our revenue now comes from customer relationships that span more than one contract. The massive tail winds of automation e-commerce and outsourcing remain unabated and our blue chip customers rely upon us for our best in class solutions.
As a standalone technology proficient warehouses with speed reliability and scale on a global basis.
I will land and expand strategy underpinned by our global scale and technology leadership is a key differentiator as evidenced with customers like asos, Disney and H N N U S. Today, we've expanded our operations with 16 of our top 20 customers across 'twenty.
Two new locations on average we now operate in three countries for each of our top 20 customers.
As we navigate global supply chain disruptions and a tight labor market, we believe that being an employer of choice is critical.
We continually higher throughout the year not just the peak, but to meet our growth needs and we strive to ensure our employee value proposition is compelling.
As a company, we pride ourselves on creating a workplace where safety is paramount diversity and inclusion are valued and competitive compensation and benefits programs are offered.
Against this backdrop, we are working hard to meet our warehouse recruiting needs.
At the same time, we are increasing the deployment of automation.
<unk> got best in class software and leveraging our E Commerce and warehouse solutions Knowhow.
We have found that the use of technology boost productivity improve safety and enhances our employee experience overall.
After spending a few weeks visiting our teams in distribution centers across the U S. I've seen firsthand that the good balance of Gx all team members and technology makes for a winning combination.
I'm also pleased to know that the quarter saw numerous awards granted to Jack saw highlighting our leadership in technology and diversity.
The institutes of innovation and knowledge exchange recognized Jack saw for two decades of innovation with Virgin Media and we were also recognized by the human rights campaign on the corporate equality index for LGBTQ plus inclusion.
I would also like to take this opportunity to welcome our new Vice presidents of diverse diversity inclusion and belonging with tissue James.
Diversity and inclusion are at the core.
Core of <unk> values.
Earlier this year, we jointly held the diversity and inclusion strategy workshop with one of our largest omnichannel retail customers to find ways to make our distribution centers more inclusive recruit from a diverse talent pool and serve the community as a strong corporate citizen we.
Launched a joint diversity and inclusion advisory board that tracks Unmeasured as progress on our diversity goals. All of this enables to be an employer of choice and a great place to work as our partnership expands.
Finally, it gives me great pleasure to announce that we have been awarded a doable a ESG rating from MSCI, placing gx saw the highest ranked among its largest industry peers. This racing recognizes the importance that our company places on environmental.
Social and governance.
It also acknowledges the clear target that we have presented in recent months, including a firm goal to be carbon neutral by 2040.
As a business we want to set the benchmark for ESG across the supply chain.
And we are already making good progress on our targets set out at our Investor day.
We feel confident about our future as a newly formed entity.
We are excited to deliver on our fast growth potential as the largest global pure play a contract logistics company.
I will now pass you over to Barrish.
Through our financial performance bearish over to you.
Thank you Malcolm and good morning, everyone.
Today I'd like to walk you through our third quarter financials as well as our upgraded guidance for 2021.
In the third quarter, we generated revenue of 2 billion net income of $7 2 million, including $42 million of one time tax items and adjusted EBIT of $163 million.
This revenue represents a year over year increase of 24, 6% and is up 12% on an organic basis with FX contributing 2% and M&A contributing 10%.
The 12% organic growth is notable in the context of eight to 12 organic growth rate for next year.
We are reconfirming today.
Year to date revenues from top 20 customers have grown approximately 37% demonstrating the success of our land and expand strategy.
Quite simply we view ourselves as a scaled third party logistics partner of choice for global brands.
One of the great benefits of our model is its visibility and as we stand here in early November we have a strong view on the revenue trends of our business heading into 2022 and even 2023.
Moreover, looking back we would like to note that from 2016 through the end of the third quarter. We have delivered an organic revenue growth CAGR of seven 3%, reflecting the high growth nature of our business even through a pandemic.
Moving to earnings.
The growth in our adjusted EBITDA reflects the robust revenue growth, we have delivered via a combination of new customer wins and existing customer expansion.
As well as efficiency gains.
We had particularly strong open book contract wins.
Our contracts are structured to provide resiliency with pass through cost mechanisms.
And in an inflationary environment, our third quarter results reflect this.
We recorded a positive tax adjustment of approximately $42 million in the third quarter.
This is a one time P&L item, resulting from the spin off.
Separately in the fourth quarter, we expect a negative impact of less than $20 million in cash tax effects related to spin.
Our cash flow from operations in the third quarter was $105 million.
We spent $55 million in Capex.
Specifically, we spent approximately 50% of our total capex built on automation technology and software.
The method for our high growth future with an associated increase in working capital due to new starts and our recent acquisition.
Overall, we generated free cash flow of $50 million.
This represents over 30% of our adjusted EBITDA.
Turning to the balance sheet.
We had a net debt of $757 million at the quarter end.
Included roughly $800 million of notes.
And about $180 million financed leases.
Our leverage ratio is one three times trailing 12 months reported adjusted EBITDA.
This is well within the previously discussed net leverage range of one to one five times.
They also have an available 800 million revolving credit facility at our disposal and are committed to our investment grade credit rating.
I'll now turn the call over to Mark.
Thank you Barak as Malcolm embarrassed.
This is a rare breed of company.
One that combines high growth with resiliency and dependability.
I'm going to expand on the secular themes of now from a bash highlights.
Our position.
As the largest global pure play contract logistics company.
The forefront of the growing demand for technology, driven logistics solutions.
This is due to three secular mega trends now can match.
Automation E Commerce and.
Outsourcing.
These three tailwind continue to drive double digit revenue and adjusted EBITDA growth.
Firstly.
Automation and technology are key differentiators for <unk> in the marketplace.
Helping boost efficiency and productivity of our solutions and.
And resulting in revenue and margin uplift for our customers.
In the third quarter.
We increased our technological leadership by the deployment of more than 1000 units of technology improvements across our solutions.
Total technology and automated systems across our warehouse footprint grew 139% year over year third quarter and within that.
Total goods to person systems grew a 135% year over year.
We're also currently testing over 100, new technologies in our sites.
Some of this technology has the ability to transform our solutions, bringing further benefits to existing customers and inevitably speeding our cadence of outsourcing.
There are multiple technologies across our network to generate value for our team members customers and also gx side.
For example, we recently trials and will be implementing a new autonomous collaborative ruble capable of Trump's transporting heavy weights.
It improved safety.
Reduces mining costs.
And increases picking efficiency by 70%.
This technology brings a cash payback of significantly less than three years and offers a very high return on invested capital.
Secondly on e-commerce.
We continue to benefit in the quarter from.
From strong secular and persistent growth.
Our outbound e-commerce, Omnichannel retail and technology aggregated revenue increased by 22% year over year in the third quarter.
And our reverse logistics revenue increased by 21% year over year.
Looking forward, we expect our customers will increasingly use e-commerce channels to get products into consumers' hands as fast as possible.
And finally on outsourcing.
The runway remains significant.
<unk> potential addressable market of $430 billion.
Of which 300 billion.
<unk> yet to be outsourced.
Year to date.
Our wins would come roughly 40% from new outsourcing contracts.
31% from existing customers, who are expanding their scope.
At 29% won from competitors.
Our rental and sales pipeline indicates continued growth opportunities from negative before outsource contracts.
Now, let's now convention, we secured contracts with almost $700 million brand new revenue uplift from 2022.
This is the equivalent to a gross revenue growth rate of 9% even before we consider the opportunity for further wins from our strong pipeline in the fourth quarter and in 2022.
In conjunction with our gross win announcements.
We met with our 12 months trailing revenue retention rate has also improved since our investor day.
And our pipeline.
At the moment.
As of the third quarter.
These valued at approximately $2 $3 billion.
Now given our leadership in this particular won't come as a surprise to know that more than 50% of our wins year to date, our fall borrowing saying e-commerce, omnichannel retail and technology.
I'll now hand, the call back to Barak to discuss the outlook.
Thank you Mark.
At our Investor Day in July we highlighted that the majority of our revenue growth comes from net customer wins and our strong performance year to date gives us confidence for the fourth quarter of 2021 and into fiscal 2022.
As a business, we have good visibility, giving our long duration contracts with blue chip customers.
We look forward to our fourth quarter with strong growth.
Two <unk> two being another year of double digit revenue growth at the midpoint of our range in this high return on invested capital business.
We continue to monitor supply chain assumptions closely Andrew.
And remain focused on mitigating the impact of any deterioration in the macro environment, including input shortages of components and labor.
We upgraded our full year 2021 guidance in light of our strong third quarter results and the visibility we have.
We are seeing an increased demand for solutions that tackle direct to consumer e-commerce fulfillment inventory optimization faster speed to market and ability to reuse returned products.
We are delivering tremendous value to our customers at this challenging time.
I expect that we will generate $7 6 billion to $7 8 billion of revenue in 2021.
$607 million to $637 million of pro forma adjusted EBITDA.
Meanwhile, our expected tax rate has been lowered to 25% to 387%.
We also updated our capex guidance to $235 million to $250 million.
Our 2022 financial targets are unchanged.
These are 8% to 12% organic revenue growth alongside 705 million to $740 million.
Adjusted EBITDA.
In the present tough supply chain environment, we are incredibly pleased with our progress and remain vigilant.
We demonstrated strong growth, while maintaining our high return on invested capital.
Grew our sales pipeline to a record level and build a world class team and enviable platform to set to deliver long term sustainable shareholder value.
We will now open the call up to Q&A.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
To ask a question you May press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thanks, very much and good morning, everyone.
I'm curious about the ramp up timing of announcing a new win and when we might see in results and also the margin profile of initial new wins and how long those margins take to ramp to optimal margins.
Thanks.
Thanks, Scott, It's Malcolm Wilson here I'll cover the first part of that question and then I'll hand over to Barry to talk about the margin profile. So new contracts I mean, they come in all shapes and all sizes chip.
Typically.
Today, because we in plants a lot of automation in our facilities are normal startup period can range between three months and nine months, depending upon the level of automation that is going into the facility.
Due to our scale clearly, we're seeing a relatively good availability of warehouses, we're working with all of the large industrial landlords. So we're not hampered in anything other than just the working with our customer of the detailed planning the work to get better in terms of the connection of.
Our software to optimize the flow of goods through the warehouse.
Three to nine months six normal it could be a little longer if we're doing a very detailed design unveiled facility, where we're actually starting with a blank canvas and it's going to be a very very highly automated warehouse in those circumstances typically the buildings physically designed to suit the level of <unk>.
Summation, but.
I hope that gives you a flavor of the situation regarding the margins bearish, maybe you cannot sure drew Markham.
Hi, Scott.
When we spoke to your operation depending on the size the scale and technology enrollment. It takes roughly six months to a year for us to ramp it up to a full scale and to have the margins at a certain level and remember that the more technology, we employ in our facility, which is increasing these days a lot of automation in tech.
<unk> is being employed the margins tend to be higher on average, we see 200 basis points to 400 basis points higher margin in higher technology employed facilities that we operate.
And Scott as you know, adding to parishes points about our business. This is a contractual business model is more of a transactional business model, we have great visibility when we write those contracted parish and often talked about and we all our contracts at the moment, we aspire to be profitable on day, one as five to have cash paybacks.
Less than three years on any capex or working capital deployed and project level returns of more than 33%.
Great. Thanks, I appreciate that and then as a follow up a bit of.
Kind of a current event question, but.
Just curious at various you touched on it briefly but if we can go a little bit more in depth.
Are you doing with regard to labor labor availability and then if you could speak to how how wage inflation may be covered in your contracts from a from a total company perspective. Thank you.
Yes, Scott it's Malcolm here, let me cover that and in fact, I mean, an ideal place I've literally just come back from traveling around our U S business.
On a visit who huge number of locations what we're seeing is.
It is key that we provide competitive compensation and benefit solutions in the way. We do that is we annualize on the ground right down to the ZIP code level, we have our HR organization very heavily involved in that and we work hand in hand with our customers.
To figure out what is the best solution for each specific location customers actually come to us checking to make sure that we're aligned with the market because everybody realizes that such a valuable resolve is in fact, our <unk> members is super.
Important to keep those team members in place.
Clearly in the current environment of tight labor, it's imperative that we make sure that we're abreast of all of the latest compensation and benefits needs and we're doing that.
As.
As an overview the last thing I've got to mention is we do work hard to make <unk>.
Great place for people to work the combination of lots of technology.
We are really encouraging people to come into the business and they like to be a part of an organization. That's working with both our technologies. So those factors combined give us the good solution and of course, the robust boiler play environment that we have in terms of our contracting with customers ensures that dose.
Costs go fully back to our customers.
It's a pretty seamless and environment works very very well.
Has really put us in good stead as you've just seen in Q3.
Earnings.
Great. Thanks, I'll turn it over congratulations on a good start.
Thank you.
Our next question comes from the line of Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, guys. Good morning, Thanks for taking the question.
I just wanted to ask you about 2022, you talked about these large amounts of new contract wins, especially ones that are going to roll forward.
Next year, which as Mark mentioned and I think there's a gross wins rather so.
It looks like you've got about almost 10% of revenue growth already underpinned.
If you could talk a little bit more about that why not raise the guide at this point, especially when it sounds like you've got some revenue retention rates that are also.
Increasing throughout the year.
It's tough Brian Thanks for the question, it's Mark here. So a couple of good points that you've raised.
First of all the $700 million, but as you know we've won year to date and as of the end of last year. If you accumulate that or can you put that into next year's revenue growth you will see as you mentioned, 9% gross wins coming for growth next year. So that's the first point the other thing to combined with that is obviously to go from gross to net you clearly need the.
Retention rate and you'll be pleased to know that since the investor day that revenue retention rate has improved the.
The second part of the growth algorithm for the 8% to 12% as you know.
Already or in the scoring zoned with that 9% growth rate, but you need to think about not just new customer wins, but also existing customer growth and there's good stuff going on there as well two things to think about we talked about 3% to 4%. If you remember for existing customer wins, while we're running actual slightly above that run rate at the moment as of the third quarter given.
What's going on in regards to our price escalators in an inflationary environment as Malcolm talked about so we've got good confidence going into next year for 8% to 12% I'll hand over to <unk> to talk about the inputs of the guidance.
Thank you Mark remember, we are writing our contracts with an expectation of three year cash on cash returns, 33% return on invested capital. We can clearly grow faster, but we are careful to grow with the right vertical right customer with the right credit rating and also write potential we want to grow with the customers.
We make a difference our solutions can make a difference and we get a good return on invested capital basis.
Alright, Thanks, guys I think the other one I wanted to ask how is just the incremental margins here in the quarter and then out to next year specifically for for <unk> didn't look like we got a tremendous amount of dropdown into profitability from from the topline. So maybe with some of the startup costs you mentioned it earlier, but.
If you can.
Clarify that and how that's trending into the fourth quarter that'd be helpful.
Along with just the building blocks for for 2022, because even if the guidance is unchanged right now underpinned by the growth you just talked about we are still looking at a pretty decent pick up in margin expansion into next year.
Thank you.
So margin expansion organically in Q3, and our guidance at the midpoint also chosen.
Margin expansion on an organic basis.
Q3 is generally overall, a lower margin compared to the prior quarter is the fulfillment business. Generally Q4 is the peak period, where we have black Friday, and where we have Christmas. Therefore, we generally have lower margins compared to Q3, but on a year over year.
<unk> our margins are up both for Q3 and Q4 on an organic basis and looking into 2022, clearly we have a lot of confidence in our growth in our pipeline in our model overall and our guidance is reflecting that with our margin expansion.
And just to add to <unk> excellent point, Brian If you look at that midpoint of the range for the full year. So implicitly we're taking seven 7 billion at the midpoint for revenue and 622 at the midpoint for EBITDA to help you with this mats I will give you some numbers. So you can get a sense.
8% organic growth is what thats, implying for Q4, so clearly underwriting to a certain degree what we're talking about for next year and then for Q4 EBITDA. If you take that 622 at the full year. The implied Q4 midpoint would be $155 million as Barry said the business had Q3 margins up.
Organically or ex acquisitions margins were up in the third quarter. The same is true for the fourth quarter at the midpoint of the range. So we're confident.
Alright, guys. Thanks for your time.
Our next question comes from the line of Stephanie more Wood Truest. Please proceed with your question.
Hi, good morning.
Good morning.
I was hoping you could discuss maybe your current new customer customer demand environment as well.
<unk> balanced profitable growth.
Just on the ladder, how the returns that Youre, maybe recently one contract compare to your current return profile and where you think that could go over time, given the investments that are being made.
Sure.
Writing contracts on average around 33% return and that is still continuing and destock.
With the start with with a growing company what we see recently there is a lot more technology involved automation involved in it as we are helping our customers resolve our challenges that they currently have in their supply chain supply chain.
Processes. So do you see margin expansion, especially in high Tech solutions that we provide the more automation will provide the higher margins we get.
Mentioned earlier that softness 200 basis points to about 400 basis points higher compared to a manual solution. So overall return on invested capital D. C. On the contracts Youre, writing is roughly 33% at the project level.
And to <unk> point staff.
It's all about technology at the moment there isn't a single contract that we're looking at we'll have written in the quarter that doesn't have some element of automation technology within it.
Barrish says that's a positive for returns for our business. That's a positive for margins for our business. If you think about the way the contracts are going there is a flywheel effect, that's taking place in the industry right now as you know and it's all coalescing around full forces one contracts are moving towards the scale players in this space two contracts are moving towards <unk>.
Global <unk> have a multinational footprint three.
Three big balance sheet, a good counterparty matters, a lot and as buyer said, it's all about technology advancement for number four that really spells out those four tenants spell out gx site.
Great. Thank you and then one in the near term that we are seeing a lot of headlines and commentary from other large companies about how supply chain disruptions, whether its production or is there a lack of supply there impacting production of availability how does that impact your business, even just in the near term it simply.
They're just taking longer to get to the kind of their end destination and certainly in your warehouse.
Yes, it's Malcolm here.
Let me give you some overview on that obviously, you've just had Q3. Good results Q4, I think is very positive what we're seeing on the ground is clearly manufacturing disruptions on a global basis.
In North America, we've seen that.
Channel into port disruption port congestion, but actually a lot of that cargo a lot of those products now are channeling into our warehouses and that's where <unk> can make a difference for all of our customers.
We have been actively doing over the past moments is working with our customers to ensure that we prioritize the right goods that they can be very efficiently process through.
Moved across to the consumer to do that we've been as Mark mentioned, we've been layering in incremental technology across our business a lot more robotics.
Implemented.
And also we've been recruiting not just for the pain.
We've mentioned the business Thats coming along during 2022 that gives us a good head start so the fundamentals are all unchanged the issues that we're seeing right now we believe very much temporary we're anticipating to continue to see them probably into Q1, maybe even into Q.
So, but definitely it's a temporary issue it will abate.
Again, just to reiterate we are incurring incremental costs to solve problems for our customers.
Contractual arrangements really allow us hospitals cost sufficiently fruit to our customers who are really working with us as a true partnership to ensure that all of the different aspects that go for a successful.
Peak season are achieved.
Great. Thank you so much.
Thank you.
Our next question comes from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.
Hey, Thanks, Hi, everyone.
So I just wanted to come back to the margin question, maybe just a slightly different way. If you look at your guidance. This year of 'twenty. One you raised it by $100 million on revenue, but only $2 million on EBITDA.
Can you just talk about that because obviously that implies very very little drop through and.
This is relatively obviously as a new Standalone company and so what I'm just trying to understand is that it could be obviously related to startup costs, which could be a very good thing because your growth is very impressive and I know you write your contracts ROIC, but your guide posts of our EBITDA. So I think it's it would be helpful to just understand kind of Peel back the onion for us.
And that revenue versus EBITDA.
Move on this year's guidance and just talk about why maybe there's some near term kind of headwinds associated with that drop through.
I mean.
We have seen in margin expansion in Q3 organically and Youre seeing looking to another margin expansion in Q4 year over year basis, but this is a fulfillment industry and Q4 margins should not be compared to Q3 margins as there are a number of things thats happening in Q4 that are not <unk>.
Only happening in Q3, those are related to the peak or how BP Harvey scale up our business and <unk>.
Vivek.
There is a lot of startups, yes, that's true, but despite the fact that we have a lot of startups and phenomenal growth there.
We are solving.
Further margin expansion in Q4 on a year over year basis, and we are confident.
In 2020 to margin expansion as well.
Yes, I get that I just.
<unk>, though the margin of the business for this year entirety of 2021 is lower than.
And then it was two days ago right. Because you raised revenue of 100 million Bucks and you raise EBITDA guidance of $2 million and so.
I think the question I'm just asking is is that what changed is it just you're growing so quickly and so there are startup costs or what.
What changed in terms of implicitly lowering the margin for this year.
That makes sense.
Yes, you have sizable growth elements embedded in as we discussed earlier.
The initial period of.
The first couple of quarters of a startup is not as profitable as the maturity stage clearly there is some impact associated with that and also the integration of acquisition is taking its time.
We're guessing quite well, but still is not margin wise, it's not improving our margins as diluting our module right now ex acquisitions ex Ken and our margins are better compared to the year before got it. Okay. That's very helpful. And then just a quick follow up if I could.
Malcolm.
You made this comment in the release about remaining vigilant given the tough environment.
I wanted to see if you could provide a little bit more color on that Malcolm what specifically are you referring to and.
I don't know if this is a general comment and how GSO serves as the solution provider to this or does this vigilant given the tough environment comment mean, theres, maybe a little bit more risk to the 2022 guidance. So maybe you contemplated six months ago or something like that if you can just give us a little bit more color on that yes.
Yes for sure Amit what I'm, referring to is that we are having to challenge somehow the norm. This year. So all of the supply chain disruptions is really created an unusual year. So in the past, where we would be quite satisfactory to review wage levels in <unk>.
Incentive plans may be on a six monthly basis, what we found this year is pretty essential to do it every other month and some of our locations people are raising huge demand.
Lead times for equipment are extending and we're having to leverage all of the buying power all of the scale cloud. We can say that <unk> has so it's meaning that we are more vigilant than ever in terms of these key issues.
To ensure that we're not Cogs certainly.
In a in a local market condition.
The norm from a wage perspective, we have not been quick to recognize a change and suddenly we're losing some of those valuable results is so we've been we've had to stand up a whole new ways of working.
So on the on the deck because they were on the floor down any exact core.
Our customers have been Super supportive. This is an environment, where I have never seen more an environment, where our customers.
Jack So stand together and accounted common environment common difficult. They all labor availability has been really very pleasing to say, but that's really what we mean by vigilant.
Environment, where we have to really be very watchful laser focus as we are.
I think youre seeing that in the results that we are providing today and in the outlook in the in the outlook that we're giving you for Q4 and for the future, but it does it does it make it harder to achieve your guidance in that in that context or does it make it easier or does it have no effect because of the way your contracts are structured.
In terms of the way our contracts are structured it has no effect I mean, our contracts we mentioned.
Number of occasions, we've really got a very robust environment, what I would say is it makes it easier in a way it's much easier to have a discussion with people to recognize these inflationary pressures when does so visible and so well report it but at the same time, we're having to work in slightly different way.
Just to ensure that we keep that laser focused attention on these key metrics. So contractually we are working with <unk> no real difference both in terms of internally, how we're working we're happy to be even more focused on.
Maybe last year on certain areas of the business a metric, but I think the results demonstrate we're doing a pretty good job of that Amit.
And then just going back to its mark here, just going back to the point that I made earlier with Brian in terms of the midpoint of the range. If you were to take the top end of the range that we've obviously updated today in terms of revenue for the full year and what to work back to Q4, we're in especially at the top end of the range, implying 14% organic growth rate.
And I wouldn't.
We don't have to remind you of the fact that the comp has become significantly harder between Q2, and Q3 and Q4 over those three quarters. So.
There is vigilance cautiously optimistic with fighting on the ground, but at the same time, we've put out guidance today that obviously is a constant move in the right direction and bring it back to the pipeline as well Amit the $2 3 billion pipeline. This is a business that has exceptional visibility.
Congrats guys Malcolm.
Okay.
As a reminder, ladies and gentlemen, it is star one to ask your question. Our next question comes from the line of <unk>.
<unk> with Jefferies. Please proceed with your question.
Good morning. Thank you I think you had mentioned you know our retention rates.
Proved since the Investor day, and maybe just a little more color as to what they are trending.
Is there do you have a target around retention and as part of that I know you mentioned, 29% of wins from competitors.
Maybe just talk about the other side a little.
You mentioned contracts are going to scale players in tech leaders.
Third instances do you sort of lose two competitors.
I'll take the first portion of that question, you'll remember what we said at the Investor Day Hamzah in regards to 193%. What we've said since then is that revenue retention rates have improved modestly that is all the tenants obviously have a healthy business as I mentioned in terms of that flywheel effect in terms of your points in regards to.
The mix of business, we've talked specifically about the fact that within our year to date contract wins, new outsourced contracts accumulate to around 40%. So thats, obviously extremely healthy first time business coming to market choosing to come to us expansion.
Expansion of scope and existing customer increasing their warehouse footprint that same store sales footprint going up is around 31% and wins from competitors. As you rightly say is 29% what I would echo is to the point earlier in that these contracts are gravitating towards scale players customers to.
Stephanie's question that have an e-commerce backbone he can get direct to the consumer not having to go VI brick and mortar, which takes an extra 2% to six weeks getting that consumer product into the hands of the consumers quickly having an e-commerce backbone as we do in this <unk> is a big big advantage and that's why we're winning that very healthy.
Mix of business that we're talking about now is there anything that you want to say in terms of customer mix.
Just to really round off the answer because I think there was a question of well when we do Miss out on a new piece of business, what's the real reason well.
Most of the customers that we work with Big Global organization.
Some of the statistics that we saw in the call.
The expansion that we've had with our top customers. The number of countries that we're working with the really pleasing for us because that's really.
Dry but of course in every country, where we work there's always going to be lower.
Lower cost operator, some local type of company and as rich mentioned we.
Ticket, we're picky and choosy, if we can be in that situation because we're in a very strong place as an organization. So we want we want to contract deals really gave those very high levels of return, we're not going to follow our price.
And that's typically the environment, where we might find that eventually we choose not to progress book those kind of customers tend to be more local type of customers.
Big International brands.
Is really the bedrock of our business.
They really prefer as Mark mentioned to work with big scale players, where they can be satisfied on all of the metrics. The ESG rating that we announced as really important big international companies.
They love to work with companies that have the same values that they happen coming out of the gate with that highest rating from MSA in amongst all of our largest industrial payers after less than 100 days of being a public company, while not as just amazed.
<unk> for us and we were so pleased to receive that so it tends to be very local environment. When we when we ultimately don't don't move forward with a customer.
Okay got it and just my follow up question I'll turn it over just any any thoughts on how to think about free cash flow conversion sort of going forward.
As you think about next year.
And then just any comments on the M&A pipeline.
That you have today. Thank you.
Yes on the free cash flow conversion, we have provided over 30% conversion from EBITDA to free cash flow in in the third quarter and on a year to date basis, excluding $50 million of one off items related to spin our free cash flow.
Conversion rate was also 30%.
Looking into fourth quarters.
There are two one off items that we should be mindful of.
There are local country taxes related to spin, which will be paid in Q4 amounting to about $20 million.
The payment deferred while U S Cares act, which is about another $20 million will be paid in Q4.
Those should be taken into account when we are looking forward to our free cash flow in the fourth quarter of 2301.
<unk> communicated to you can use the benchmark or rule of thumb, we have provided 30% EBIT Delta free cash flow conversion rate, that's going to come on top of a very high.
Rate of organic growth funding, our organic growth and delivering free cash flow on top of that.
Yeah.
Got it thank you.
Our next question comes from the line of Bascom majors with Susquehanna. Please proceed with your question.
Yes, good morning, and thanks for taking my questions and we spent a lot of time on 22, I wanted to talk a little bit about the pipeline and what it looks like for implementations in 'twenty three and beyond.
I mean, what type of Rfps are you bidding on today that would start to drive organic growth beyond 'twenty. Two any problems you are being asked to solve and how they are different than what youre doing this year and next as far as new business. Thank you.
And so let me jump in on that its Malcolm and so as we've mentioned pipeline is incredibly strong.
<unk>, we have a whole range of different.
Opportunities.
Cross the broad spectrum of the difference.
Nicholas that gx always working.
A lot of that is E fulfillment related that represents around 50% of our overall business. So no surprise on that and a lot of that an increasing amount of that.
Is encompassing a high level of automation and I think thats just a response to.
Relatively recently, the tightness of the labor more people one automation in our facilities, but its also response.
Generally automation, becoming much more available and more usable and a direct application. So mark mentioned earlier about a new goods to person robot is capable of carrying very heavy way.
That might not seem a lot, but actually that's a real innovation for us and it opens the door for use in a lot of different customers typically the projects that we're signing today.
<unk> implemented in the first half of 2020 to put some of those projects go longer and some even into 2023 and that's the kind of normal profile that we see I think the long these projects at the moment, we've got visibility on even stretches towards the end of 'twenty three and that's why.
As Paresh mentioned this very long visibility a long runway of visibility on what's happening in terms of the top line and how that will crystallize on cascade down through our numbers. So overall, we're in a very good position very strong pipeline.
As Mark already mentioned was that pipeline forming from in terms of the mix I think I think we're in a very enviable position.
One thing I would like to add to that molecule as we go through contract by contract I see a lot of examples of our global brands switching subjects to consumers. Therefore, our capabilities of serving them on the E Commerce side and returns management side reverse logistics side is becoming more and more.
And I see a lot of.
Proposals on contracts coming with high automation and lodge facilities across the world I mean in Europe and U S. Elsewhere, that's a trend that youre seeing.
Listen just to finish the point is milk in the year ago I'm glad bearish came in on that and the fact is explaining what is say I just want to make the point. This is a business that has incredibly strong governance. All of these deals that we settle with customers. They go for a rigorous vetting process. That's why we talk about being.
<unk> focus in terms of our financial returns everything alternately.
He signed off by our Finance organization, Barry certainly everything comes to myself also so at least a very rigorous process that we have we are not making very good levels of financial results by accident.
Detailed effort that goes into this.
Thank you.
And naturally bridge that I don't know if you want to comment, but I mean, how.
How do we think I mean, clearly the visibility is huge but how do we think about the longer term sort of revenue and EBIT.
Trajectory through the cycle when we're through some of this exceptionalism that we've seen in 'twenty, one and 'twenty two.
As far as the growth is concerned.
E Commerce is only 30% penetrated is sometimes bullish so theres a lot of room for growth on that side automation, our industry's only 5% automated.
All sourcing as long as 30% currently of $430 billion total addressable market. So all these three five years are driving us forward and do you see phenomenal growth opportunities moving forward.
<unk> earlier do you see more and more technology being used a lot more automation being used.
Even though our EBIT.
New or existing contracts you have to put more automation more technology. So you should see a margin expansion.
And then more technology software and hardware into our facilities.
And you'll know obviously basket, it's mark here over the last 20 years. This business is roughly down the revenue CAGR of around 16% and if you were to look back into the SaaS time and compare that against the 8% to 12% organic growth that we're talking for next year logically I think one could conclude it wouldn't be crazy to conclude that the 8% to 12% just based on history.
Alone is one could describe as a normal year for this business.
Thank you everyone.
Thank you.
Okay.
Okay.
Okay.
Our next question comes from the line of Ravi Shanker with Morgan Stanley. Please proceed with your question.
Thanks, Good morning, everyone.
So just a couple of follow ups here.
Maybe a short term one kick it off.
You guys have elaborated quite a bit on how you are.
Fighting on the ground to make.
Make the best of the current environment.
But what about your customers kind of do you see risks to volumes if your customers are struggling too.
The manufacturer or procure products I mean, obviously apple made very clear that they're struggling with semiconductors. I mean, they are a customer of yours, how do you see that as a potential risk for the next couple of quarters and also your own ability to automate.
And kind of procure robots kind of are you seeing any of that being impacted because of the semiconductor charge.
Hey, Ravi it's Malcolm here so in.
The first part of your question no we're not seeing any significant risk in regards to our own.
Operating model. So we've seen some some of our customers are very basic almost unaffected by the current supply chain difficulties. So we can see clearly they have been waiting for product I would describe it that this USP is kind of feeling like it's going to be a longer peak season.
And it probably in the end more condensed from probably middle of November through to the end of the year and that MSA that because what we are seeing now is some alleviation of the port congestion I mean, it's going to go on for months, but we're definitely seeing some alleviation of that we're seeing lots of containers traffic's coming in.
Through our facilities and that's why I mentioned, it's really important now that we are working so closely with our customers to identify those priority goods and get them out to the to the consumer so in that regard I think I think we're in a good shape and as I mentioned.
The incremental costs that we might incur in that.
Our contractual model pushing that back.
Back into the customer.
And Ravi in regards to in regards to the good shape that Malcolm talked about remember, we've given guidance last night reiterating it because we believe it but confidence.
And the question, which is a very timely question by the way it sounds very much like a typical RFP process when you're asking you provide us with a problem and GSO offers you a solution that's why customers come to us they want to have that problem solved.
The other part of your question was about the availability of materials, I think youre, referring to kind of what we need in the warehouse and that's really again I want to really make a strong point.
We are the largest source contract logistics company in the World keeps us coal also buying power one of the top 10 warehouse real estate rental renters basically so we have a big power with the industrial on law SaaS enabled this already this year alone to set top over 60.
You warehouses move the 15 planned between now and the end of the.
And we were very collaborative very closely with all of the big automation organizations, we're not reliant on any single individual company, but by having these strong relationships they see us as a <unk>.
Big partner.
As buying a lot of material from them, we're always at the front of the queue. When it comes to getting what we need to standup pouch facilities in a timely manner and again, just really encourage as more and more customers to want to work with <unk>, because they see that that builds into the reliability proposition that we get.
Got it and Mark if I can just touch on you said earlier that would be the new business wins have tremendous visibility obviously, that's a key tenet of the business here.
As we head into 2022 any chance, we might get longer term guidance from you guys. Given the visibility you guys have in the business.
For a business such as ours, the capability of being able to give long term guidance is definitely there in terms of your question in regards to our ability to see outcomes. We're looking glass, we fully got around 98% visibility this year and roughly 80% to 85% revenue visibility for next year to give you a sense Ravi.
Great. Thank you.
Okay.
Ladies and gentlemen that is all the time, we have for questions today I'd like to hand, the call back to management for closing remarks.
Thank you. Thank you operator, well I just want to reconfirm very strong third quarter for our business.
Very successfully spun off company. It has been achieved in a relatively revpar time, and we've done it very well. This is a strong organization that is set for a very.
Good future, we're going to benefit from all of those strong secular trends that we've talking about more and more organizations outsourcing more.
More of our customers and many customers moving the business more towards the fulfillment model and of course automation is becoming a huge play in the in the environment that we're in we've reported in this quarter.
12% of organic 14% growth.
EBITDA margins in core business, all expanding year over year very strongly so we're very satisfied with the results.
We're very pleased that you were able to join with US on this call today and I'd just like to thank you for all of your support thank you very much.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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