Q4 2021 GXO Logistics Inc Earnings Call
Welcome to <unk> fourth quarter and fiscal year 2021 earnings conference call and webcast. My name is Paul 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 anyone should require.
Operator assistance during the conference. Please press Star Zero on your telephone keypad. 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 and use of non-GAAP financial measures and company guidance. During this call. The company will be making forward 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 its forward looking statements.
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 May also refer to certain non-GAAP financial measures as defined under the applicable SEC rules bearing on this call reconciliations.
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 honest website, unless otherwise stated all results are reported on this call are reported in the United States dollar.
The company will also remind you that this guidance incorporates fitness 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 global exchange rate.
Changes in global economic conditions and consumer demand spending.
Labor market and global supply chain constraints inflationary pressures and the various factors detailed in its filing.
Filings with the SEC.
This guidance also reflects the company's estimates to date regarding the impact of the COVID-19 pandemic on this operation. It is not possible for the company to accurately predict demand for services and therefore actual results could differ materially from the guidance.
Can find the 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 website.
I will now turn the call over to <unk>, Chief Executive Officer, Malcolm Wilson, Mr. Wilson, you may begin.
Thank you Paul Good morning, and welcome to <unk> fourth quarter and full year 2021 earnings call.
With me here today.
Our Chief Financial Officer, and Mark <unk>, our Chief investment Officer.
In the fourth quarter, our operations again delivered the highest quarterly revenue and adjusted EBITDA in our history.
We delivered double digit organic revenue growth in every quarter of 2022 2021.
We finished the year with an accelerating trajectory growing at 19%. Moreover, we see great momentum as we have progressed into 'twenty two.
As a result, we are raising our 2022 guidance.
Yes.
We delivered a successful peak for Iqos mesh during the fourth quarter and we played our role in delivering holiday cheer for millions of consumers.
We manage the labor market exceptionally well, including recruiting over 20000, new team members.
We navigated and elongated peak period that ran from mid November too.
Late December .
We haven't touched close to most manage the ongoing e-commerce channel shift with online spend up double digits.
It's worth highlighting that through the Thanksgiving weekend, our overall e-commerce activity levels were a 100% from the start of the quarter and some of our size handled over half a million outbound e-commerce units per day.
<unk> continues to capitalize on the strong secular tailwind of e-commerce automation and outsourcing.
In 2021, we won contracts with an aggregate lifetime value of approximately $5 billion. This gives us a strong foundation to achieve our 2022 organic revenue growth target of 8% to 12% and this girl is on an already.
Our record 2021 year.
Recent notable customer wins and expansions include Abercrombie <unk> Fitch Asos BC.
Half for Paris, Kingfisher, Raytheon Saks Zelle landfill.
It's worth noting that two of our recent large U K technology weightings BT and carries a first time sourcing partnerships. These wins are a direct benefit of the new technology vertical that we gained through our 2021 acquisition in the UK.
Our sales pipeline at the end of the fourth quarter reached a new record level at $2 $5 billion and half of these opportunities.
The e-commerce sector.
Approximately 60% of our revenue comes from customer relationships that span multiple countries and over the course of the year, we were able to expand our operations with eight 2% of our top 20 customers.
So we believe that being a leader in logistics needs, making sure we take about partners people and the planet.
So is bringing significant environmental benefits to customers throughout pioneering work on ESG solutions that increase all the precision.
So my stock levels reduced packaging and streamlines the consumer returns process. For example, our reverse logistics revenues were up 28% year over year in the fourth quarter and this is indicative of a vital role in the circular economy as we help to reduce the.
Carbon footprint from the global supply chain.
We're looking forward to updating you on our progress towards achieving our industry, leading ESG targets that underpin our double a MSCI ESG rating when we will publish our inaugural sustainability report in the second quarter.
I'm extremely proud of our team's stellar performance in 2021 hour.
Our combination of World class people global scale and industry, leading technology is delivering increasing value for customers and shareholders.
Given our strong results and continued confidence in our growth will be providing long term expectations at our capital markets day later this year.
I will now hand, the call over to parish, who will take you through <unk> fourth quarter and full year financial performance.
Rich over to you.
Thank you welcome and good morning, everyone 2021 has been a euro records record revenue record EBITDA and record EPS.
In the fourth quarter, we generated revenue of $2 3 billion.
Net income of $56 million.
And adjusted EBITDA of $167 million.
Our organic revenue growth was an impressive 19% in the quarter.
The highest for any quarter last year.
Against our toughest quarterly comparison.
For the full year, we generated revenue of $7 $9 billion net.
Net income of $153 million.
And pro forma adjusted EBITDA of $633 million.
Our return on invested capital has surpassed 30%.
A level, we expect to exceed looking forwards.
Yeah.
This full year revenue represents a year over increase of 28% and is up <unk>.
10% on an organic basis.
M&A contributing 10%.
And FX contributing 3%.
Don't underestimate what we are achieving in terms of absolute growth.
In dollar terms that 28% increase is equivalent to the prior year sales of our largest European pure play competitors.
In 2021 revenue from our top 20 customers grew organically by approximately 22%.
Demonstrating the success of our land and expand strategy.
Then the largest brands in the world want to directly reach consumers E. Commerce <unk> is their partner of choice.
Moving to earnings.
39% growth in full year adjusted pro forma EBITDA reflects our strong revenue growth and our.
Our high quality contracts that enable us to pass through labor cost in an inflationary environment.
Our business is naturally a high inflation hedge.
Our full year adjusted pro forma EBIT growth was 73%.
Our cash flow from operations for the full year 'twenty to 'twenty one.
$455 million.
We spent $250 million in Capex.
Specifically these dedicated half of our total capex to automation technology.
So fish.
<unk> continues to lead the industry in tech implementation Digitization and robotics.
We generated free cash flow of $216 million for the full year, which converted about 30% of our adjusted EBITDA.
Our fourth quarter free cash flow was $137 million.
This reflects our rigorous cash collection processes.
Turning to the balance sheet, we are committed to maintaining our investment grade credit rating.
We finished 2021 with net debt of $628 million.
Our leverage ratio is one time.
Which is in line with our previously discussed net long term leverage range of one to one five times.
And for additional flexibility, we also have an available $800 million of.
Revolving credit facility.
Our balance sheet strength is very important to our customers and gives us great optionality for future growth initiatives.
I'll now turn the call over to Mark.
Thank you bearish.
We've talked before about the three mega trends of automation E Commerce and outsourcing.
And it's very clear from our fourth quarter results that these continue to propel us forward.
Never before has the case for automation been so compelling.
Automation provides reliability and massive operational benefits for our customers and also an improved working environment for our team members.
<unk> leads the market place and automated solutions and in 2021, we deployed more than 2000, new pieces of technology across our sites up nearly 100% year over year.
Our use of goods to person systems was up over 100% year over year and I'll use of cobalt.
Grew over 200%.
Now to give a real World example, in one of our recent expansions in the grocery vertical traditionally viewed by many as a low attack more manual environment.
We are deploying cobalts here that will drive a game changing 70% uplift in cases picked per hour.
And this is just one of many many examples of how we're using tech to drive efficiency.
And higher and higher return on invested capital.
Now the industry as a whole has yet to embrace technology to the same degree as Jack So we.
We really do have a first mover advantage, but we're not stopping there.
We're currently testing 200, new technologies from around 100, new suppliers.
We also have 1000 tech experts that specialize in bringing together best in class technologies.
The deployment of technology underpinned a record quarter and going forward. It is helping us drive more value added solutions across an increasing number of verticals.
And this in turn we believe will fuel many many years of future growth here at <unk>.
Now moving to <unk>.
In ecommerce we benefited in 2021.
Persistent strong secular growth versus tough year over year comparisons.
Our ecommerce revenue increased some 45% year over year in the quarter markedly accelerating.
The third quarter.
And we're also now seeing return volumes continue to rise into 2022.
Our e-commerce expertise is clearly well recognized as evidenced by our wins that Malcolm mentioned, including Abercrombie <unk> Fitch.
Where we are deploying a cutting edge goods to person robot solution.
And sex.
Band and growing customer for our <unk> direct flexible fulfillment solution.
Yes.
And then thirdly on outsourcing.
The runway here remains significant with a massive potential addressable market of $430 billion of which 300 billion.
Is yet to be outsourced.
In 2021, roughly 36% of our wins came from new outsourced contracts.
Which was a year over year increase of over 25%.
Now as Malcolm mentioned.
We are confident about our 8% to 12% organic revenue growth rate for 2022.
This range is the amalgamation of growth from existing customers.
And net new customer wins.
And on that latter point on net new customer wins.
What really gives us confidence here.
Is the fact that we secured contracts with approximately $830 million.
Brand, new gross revenue uplift for 2022.
This is basically the equivalent to a gross revenue growth rate of approximately 10% even before we consider the opportunity from further wins from our e-commerce heavy $2 $5 billion pipeline.
Any growth from existing customers.
And of course.
On top of those gross win announcements.
You should note that our revenue retention rate since the spin.
Has risen to the mid to high nineties.
And on a final note.
It's worth highlighting that the industry around us is clearly consolidating.
As technology and scale.
Drive natural selection.
In the last couple of years warehousing has been recognized as a critical piece of the value chain and the consumer experience.
And as a result.
We're seeing more and more M&A in our space.
Let's be clear, we are very well positioned to play a role in the consolidation of our industry and if you look back at our recent U K acquisition.
We've already realized over $13 million of synergies.
The equivalent to 5% of the target revenue.
And really speaks volumes to our ability to smoothly integrate acquisitions much to the benefit of our all important shareholders.
As we've said before.
<unk> is a rare breed of company.
Which combines high revenue growth.
High returns.
And high visibility.
We delivered compelling double digit revenue and adjusted EBITDA growth in 2021.
And this will be importantly, the basis for our North star that we're going to share with you at our capital markets Day later this year.
I'm now going to hand, the call back to Barrish to discuss our outlook for 2020 too bearish.
Thank you Mark.
Our strong 2300, <unk> performance and record pipeline gives us increased confidence for fiscal 2022.
In light of all these results and our visibility into the year.
We have upgraded our full year to penetrate into guidance.
We anticipate another year of strong revenue growth in this high return on invested capital business.
We are exceptionally busy in the first quarter as we implement new wins.
We are now forecasting 8% to 12% organic revenue growth alongside an adjusted EBITDA of $707 million to $742 million.
And adjusted EBITDA are off.
One five to $1 6 billion.
There are two positives that I would like to highlight with regard to our value creation.
First.
In 2021, the growth within the business skewed towards high return on invested capital open book contracts.
This helped us achieve our higher return on invested capital over 30% in 2021.
One benefit of having more open book contracts is that we see lower asset intensity across the business.
This resulted in a margin dynamic there.
Just the pro forma EBITDA margins increased by 60 basis points in 2021 versus 2020.
Adjusted pro forma EBIT margins increased by 120 basis points.
Do you intend to 'twenty, two we expect a similar dynamic between EBITDA and EBIT.
Second we had a strong working capital performance in Q4 of 2301.
This drove our robust free cash flow result.
With us converting more than 30% of our adjusted pro forma EBITDA.
This underscores the strength of our business model, which delivers high returns cash flow and growth at the same time.
Given these dynamics I'm pleased to announce that.
We will be targeting a return on invested capital.
So 30% on an ongoing basis for the business.
All in all the record fourth quarter that we have delivered two today is a precursor of more records to come.
We will now open the call up to Q&A.
Thank you we will now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue. You May press star two if he would like to remove your questions in the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the historically one moment. Please while we poll for questions.
Thank you. Our first question is from Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, Brian .
Yes.
Maybe I could start on the revenue guidance. So mark as you noted I think there's a pretty robust backlog that you guys have that accounts for some pretty significant growth already for 2022 booked through February . So you have a fairly robust line of sight I would imagine that the backlog isn't necessarily going to stop.
Here in the first quarter and probably will continue to grow. So can you talk about sort of the confidence interval around that 8% to 12% revenue growth target.
Can't you be at the upper end of that or maybe potentially better, particularly considering it sounds like the attrition of customers is really trending lower.
Yes, good shop, Chris It's Mark here. So a couple of things, let me talk about the 8% to 12% organic revenue growth rate as you mentioned in and why we've kept it from a percentage perspective. The way. It is the first point is really the base is higher so implicitly we're actually upgrading in absolute terms the revenue guidance range by nature of the fact that we've obviously got a percentage number on a higher base in <unk>.
2021 .
The second point is we've got great visibility in this business as you know.
We're sitting here in February obviously with e-commerce comps in the second half of the year getting markedly tougher now for a business like ours as you know we've done better as the comps got harder over the course of Q3 and Q4, but I don't think at this stage sitting here in February getting ahead of our skis. So early on in the year is necessary on the third point.
This confidence in regards to the 8% to 12%, let me give you a breakdown of it so we fully understand it.
The range here is the amalgamation of growth from two forces. One is you say existing customers, which is the 3% to 4%.
And two is the the.
New customer wins, the net new customer wins of 5% to 8%.
So within each of these buckets the three to four in the five to eight there are knowns and unknowns on the three to four we've been tracking modestly ahead of that in Q3 and slightly ahead of that as well in Q4, largely as a function of inflation. So the unknown is what's your view on inflation going through the course of 2022, but volume and inflation have both been tracking well so far against.
That 3% to 4% and like I said tracking slightly ahead of that range.
When it comes to the 5% to 8% from new customer wins, there's two things to keep in mind. One is the gross revenue uplift that we've had which is the $830 million.
Of gross revenue uplift.
That as you know translates to a gross revenue growth rates of some 10%, but the bits that that's the unknown is obviously this retention rate and as you know we've been improving that the revenue retention rate has improved since the spin to the mid to high Ninety's. That's the bit that's unknown within that calculation I think you made a really really good points in your question as well, which is there is <unk>.
<unk> to have further wins above and beyond the gross revenue growth rate, that's already bank to 10% through the course of this year I would view it as in the window between January and April where we'll still be able to get some revenue that hits in this year and if not it falls into 'twenty, three 'twenty, four which talks to the durability and visibility of this business, but you can see.
If you add all those numbers up you get very comfortably within the 8% to 12% range that underpins our confidence in that range and that's why we've reiterated the guidance today.
Okay.
Super helpful. I appreciate the color there and then and then maybe bearish a little maybe a little bit help on the margin outlook for 2022, so same revenue growth, but obviously off of a higher base of revenues are going up relative to what our expectation was a couple of months ago.
Adjusted EBITDA is also going up but arguably you had a little bit of a slower pace here and I know you mentioned some dynamics between EBIT margins and EBITDA margins could you talk a little bit about what you're seeing whether it be from an open book perspective around the cost profile of the new business wins and if there is anything changing there that we should be thinking about in terms of that.
Uh huh.
The EBITDA margin for 'twenty two.
Sure regardless of whether you are looking at EBITDA or EBITDA margins, you should expect the margin improvement year over year and penetrated.
We will have the organizational our acquisition as well as cost associated with being a stand alone enterprise and beyond these sectors will see underlying margin expansion driven by our improved mix related to higher margin automated contracts as far as the seasonality of the margins are concerned we are very busy you have a lot of <unk>.
First up right now and you will see the startup activities, particularly those from us in the first half of the year and the impact.
On that on revenue and EBITDA will be spread out throughout the year. So you should see this expansion throughout the year.
All of these drivers getting into accounts.
Sure I am clear that should be in the neighborhood of maybe 30 to 50 basis points of type of sort of full year EBITDA margin improvement or any any sort of parameters you can put around that.
If you take the midpoint of our guidance desktop Guy.
Guidance for <unk>, you should have a higher EBIT margin expansion compared to an EBITDA margin expansion.
Okay. That's helpful. Thanks for the time this morning I appreciate it.
Thank you.
Okay.
Thank you. Our next question is from Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thanks, very much good morning all.
I just wanted to delve in a little bit about the new contracts won and talk about automation you have this 30% company average you speak too.
In Europe I think its similar in North America, just curious how how.
The new contract wins, what type of mix is automated I assume much higher but if you could elaborate on that a little bit and where could that 30% go in time just to just to get perspective on how quickly that could move thank you.
Hi, Scott its Malcolm.
Overall pretty much in everything that we are implementing nowadays those the degree of automation and also you've got the dynamic with going back into historically less automated business.
Having new wood automation, so collaborative robots Costa person robotics robotic Tom's these are very easy to add back and they deliver very speedily improvements inefficient set improvements in productivity and going back to <unk> comment. That's one of the reasons why we have a confidence level was a march.
So overall, that's the environment that we're seeing we will see a steady increasing path for automation.
Not to lose sight of the fact that our business still has a large incumbent workforce hundreds thousand very valuable team members are very valuable in our business and so it really goes hand in hand, but overall youll see a steady increasing level of automation across the business.
And Scott was there a second part to your question about about recent contracts, we stood up and the benefits that we're applying to customers.
Yes.
Yeah, Mark yes.
Go ahead in that please I had a follow up too.
So we've done a number of different things on the customer side Scott.
Just to give you. An example, we obviously talked on the call about our grocery vertical where we're improving things where the technology that Malcolm talked about but there are multiple examples throughout 2021 and I'll give you one is a standout in a solution that we recently stood out for a well known e-commerce customer.
We have reduced the variable cost by 40% per unit viral technology, we've reduced the inventory stock units by some 40% and perhaps most importantly, we help them to deliver a 45% uplift in our net promoter scores. That's one of multiple examples of how we help our customers.
Why they come to the scale technologically proficient player in the space.
Excellent. Thanks, Martha it sounds like a great value proposition for the customer.
The I wanted to touch on reverse logistics as well since we're coming off peak season.
The growth there, 28% year over year very strong.
Just wanted to talk about how that's going to carry in the first quarter, what you're seeing and in the potential for that that growth remaining elevated thanks.
Yes, Scott reverse logistics is growing at a very fast pace youre right, 28% in the fourth quarter and Thats accelerating we're expecting similar high levels, even higher levels of growth through 2020. So what's happening is customers typically we're expanding the services that we have with <unk>.
Reverse logistics is a real typical service, where when we're operating for the first time with a new customer and remember of our business wages in 2021, we shouldn't be so different in 2022, you've got broadly around 36% coming from brand new outsourcing project.
And typically for any fulfillment customer for example, we start with the E fulfillment the outbound process. The stockholding and then we gravitate. They generally ask US to then take all the returns our activity our repair activity that they might be doing in house at present or alternative with another competitor.
So returns definitely is increasing exponential across the rest of the business. We're really good at it we've got great set that we deploy in it a super efficient is touching the customer. So it's really a very vital for our customers and we're very pleased that that part of our business is growing.
Well.
That's great. Thanks, I'll turn it over.
Thank you. Our next question comes from Amit Mehrotra with Deutsche Bank. Please proceed with your question.
Thanks, Operator, hi, everyone. Congrats on the results.
I guess I just wanted to come back to Chris's question on the profitability really quickly.
So I know you guys manage the business on a ROIC basis, not margins necessarily but.
You know at least from our perspective.
Helpful to understand how the EBITDA.
Growth compares to revenue growth over a sustainable period of time and I think that would be helpful to just get your philosophy around that because obviously youre putting together. This five year plan and I just want to understand is that the right assumption under this business model to assume kind of EBITDA growth that's consistent.
Or maybe even a little bit better than revenue growth because that's what the cases in 2022 with respect to the guidance I just want to understand philosophically, that's the right way to think about it.
Yes <unk>.
Guiding for an EBITDA margin expansion and on top of that.
Our.
<unk> EBIT margin expansion above the EBITDA margin expansion and as you rightly said our.
They are writing contracts for return on invested capital and we have surpassed 30% return on invested capital this quarter and that will be our minimum targets moving forward.
Okay I wanted to talk I'm going to get into I'm going to return or get into ROIC in a second but bars.
The <unk> acquisition I think they closed very early in 'twenty, one with obviously pretty dilutive to margins in 2021, what would the EBITDA margin been ex couldn't argue acquisition.
For the entire 2021, so we should get a little bit better of a better.
Compare and contrast versus 2020.
Sure.
Q4.
It has been.
Margin degradation coming from the impact of Juno now that acquisition had a 100 basis points.
Again for Q4, we saw exceptional growth in our open book contracts second point.
These things I'll say that higher.
EBIT margins, but lower EBITDA margins there are less cases.
And then you look at okay position itself overall.
We have been integrating quite as well.
Despite the Covid environment, we have been able to realize over $30 million of synergies.
Sure.
Acquisition, and you will see the full year impact of that into an adventure.
Right.
So what youre, saying is is that yes, I'm sorry go ahead, while I was just going to add too bearish comment Amit is Malcolm.
Imagine that deal.
Half of that business is operating already quite similar margins to the rest of our UK activity and in fact is growing like a rocket.
Two of those recent big old contracts, one with carries the very significant size.
Tech retailer in the UK a more lastly, just announced this week a British telecom 10 year deal, but also coming out of the technology vertical that K, we really won't hit that perfectly in our UK business.
Flip side of that is 50% of it deals with the hospitality industry and for sure. We're through 2020, walnut and even into quarter four that was a little bit down really primarily coming out of the pandemic painfully know.
Certainly in the U K market, we can see all the signs are all making really reducing government recently announcing the removal of most of the remaining.
Limitations, so we're really expecting that business to come go down fly during the rest of 2022 and somehow.
So now.
<unk> point about as we move out of the Qunar will annualized <unk> into 2022. This business is deserving of margin expansion, it's not how we white contracts naturally we've had that conversation before obviously, but returns is how we think about this business, but margins are the natural output of that and it's going to be margin expansion. Obviously as we continue to write great contracts. This.
Business, we'll see margin expansion largely because of automation automated contracts versus non age automated contracts have roughly 300 basis points better margins. Therefore is the flywheel that we're talking about here continues to wide great contracts at great returns and amazing free cash flow and amazing margins come out the other side.
Right.
That's very helpful.
Follow up.
The return on invested capital.
I appreciate the calculation you presented in the presentation I guess I think about being more on like an incremental return on incremental capital.
And what was interesting to me and I wanted to get your thoughts on those borrowers is that the invested capital base actually shrunk sequentially because of the cash that you're generating and obviously.
That's super interesting to me because I want to understand the trajectory of the invested capital base because.
It seems like it's shrinking while the earnings are growing which obviously allows you to grow the absolute like the incremental returns on capital are much higher than the absolute and could you just talk about that.
We are basically looking for three year cash on cash payback right contracts.
So I give $100 to my operated I expect about $30 back every year. So desktop rewriting the contract for on average about five year contract now coming back to your question around cash generation. It has been an extraordinary quarter of cash generation and we have performed very well in.
Crush collection process in Q4 and that has resulted in the accumulation of cash and no matter, who you are right that will reduce our net debt base moving forward is the generic further and further cash throughout the year.
Right. Okay. Thank you very much everybody appreciate your time.
Thank you.
Thank you. Our next question comes from Stefan anymore with tourists Securities. Please proceed with your question.
Hi, good morning.
Good morning.
I wanted to touch on our cash flow generation, just sitting here a nice cash balance.
A lot of recent contract wins are not requiring as much capital deployment as others, maybe just talk a little bit first about investments internally, whether it's a new technology or software and is there an opportunity to accelerate some of those investments here.
Given the cash balance as well as from an acquisition standpoint, obviously, you talked earlier, Mark you mentioned that.
Patient opportunity, but if you could take a little bit deeper this particular assets or geographies that you would be targeting.
Et cetera to expand Inorganically. Thank you.
Thank you.
Two and a half million dollar pipeline and generating over 30% of return on invested capital. Therefore, our organic growth is naturally our number one option.
And.
Our number two option is to continue to invest in our technology not only in our new business, but to improve the productivity of our existing businesses, where we have returns framework ranging from six months a couple of years.
And after that after these options are extinguished. We are also looking into inorganic growth opportunities that we buy.
<unk> companies expand them faster than they would have done on themselves cross sell additional value added services expertise.
<unk> is a new vertical just like we see in our acquisition in Spain.
Penetrated one through this combination we can scale them up and they can they can generate faster value accretion.
On top of this on our Tech we will continue to be a differentiator and we will have a larger base and the last option will be overtime, returning focusing capital returning capital back to shareholders that will be our bulk stocks.
Yeah.
Great. Thank you and then I think.
An excellent point in this business is just the visibility you haven't seen the out year revenue. So I think the visibility obviously in 2019 was quite high but could you talk a little bit about as you think to tie in 'twenty, three and 'twenty 'twenty four and the visibility you have just given the new contracts in place with all of this pipeline.
<unk>.
We will hold our capital market day later this year and during the capital market day, we will give you more midterm targets.
A public listed company for several months, but we have been generating return on invested capital available, 30% now and in this half.
The term business has been growing our revenue or 17% CAGR since two.
2002.
And we will formalize these targets and you will see targets around revenue operating profitability and cash flow in our capital markets day, we will be able to provide you further long term targets at that date.
Got it that's it for me thank you.
Thank you.
Thank you. Our next question comes from Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question.
So bearish maybe to follow up on the free cash flow you mentioned the strong cash collection in the fourth quarter.
Outperforming the guidance for the full year is that that 30%, which you still kept for 2022 given.
Given all the dynamics you talked about with the shifting contract structure.
Is there any is there any visibility to maybe outperforming that longer term basis. When you look at that 30% conversion.
The number that you just posted above in the fourth quarter is that sustainable just given how some of the contracts are changing going forward here.
Yes.
Overall free cash flow conversion in the quarter and our guidance is for the entire year around 30% as do you think thats achievable.
We had achieved really good cash collections.
Collection in Q4, and you'll continue to do that throughout the throughout the year.
Okay should we expect a drop off in the first quarter I know, there's normal seasonality and bonuses.
So I guess is that more timing or is that more structural.
The improvement in the fourth quarter.
You should expect 30% for the entire year, just like many companies in the U S. We pay our bonuses in the first quarter. Therefore, the first quarter cash flow generation will be impacted from that but the 30, 30% rule of thumb is valid for the anti <unk>.
Okay, and then just a quick follow up if you can just give us an update on <unk> direct.
Both in the U S and plans for potentially expanding into Europe , I would think thats.
Pretty well it always has been a pretty interesting offering but I imagine just given the strong demand you're seeing that there is probably even bigger pull from the market. So maybe an update on the size and growth potential in the U S and Europe .
Brian It's Malcolm and you're absolutely right is that with growth opportunities for us on gx or direct so 2021 numbers the win rate for customers with over 40% revenues were up 32% I mean, it's really a business that's super appealing to customers the opportunity for them.
To place inventory.
Close to the consumer is really exceptionally interesting and attractive for them. So we're growing at a great pace here in North America. So much. So that also we've got big the mountains now.
Showing in Europe , and we definitely have a plan and we're one of the things we'll talk about on the capital markets day, but we're planning to roll that system. The.
Software.
The process of how we manage where best to place the inventory for our consumer because our customers. We're rolling that out in Europe , and we've got really we expect it to grow just ask quickly across our European landscape. It's a real winner for <unk>. So we're very very excited about it and all of the customers that we support.
A replay of very excited.
Okay, great. Thank you Michael.
Thank you. Our next question comes from Hamzah <unk> with Jefferies. Please proceed with your question.
Hi, This is Mario <unk> filling in for Hamzah.
Really appreciate you guys laying out the drivers of that 8% to 12% and kind of how you get there with as retention being the biggest piece of the unknown.
I guess, what drives better retention going forward, but what has changed in your business over the past year.
What are the tweaks can you make over the following year to help drive that retention, even higher which obviously drives organic growth even higher.
Hi, its Malcolm here, let me comment on that I mean that really goes back to the old Heath ourselves. The spin it allows us to focus all of our retention on what happens in the warehouse on the customers that are in the warehouse. So what you are seeing that elevated level of retention.
It's really just that we're so focused laser focused on our customers.
The other aspects of our retention is customers are seeing that Jack so it's super reliable when we say we're going to implement we implement we implement on time, we're bringing.
Lots of Tech innovation enablement into the west and Thats driving efficiency is driving productivity improvements quality improvements accuracy and not least also safety in the warehouses. So all of those things when you put it together is improving our customers consumer <unk>.
So thats why customers are more towards the sticky to us wanting us to do more and more business.
30% of our new activity in 'twenty, one and I don't believe it will be any real difference in 'twenty. Two all the go forward is coming from expansion of services with our existing customers are asking to see more and more so that's I think a really strong indicator that our customers value gx. So we can all.
I'll say again, the pandemic serves to demonstrate to every one of us shelf style critical what happens in the warehouse is as soon as it's coming into the warehouse.
Last year, we had all those supply chain disruptions all of those are delays at the ports soon as it comes into the <unk> customers are just so needing in terms of our ability to turn that process around reliably and get those products to consumers, that's what's driving the high levels of rich.
<unk> I don't think it's going to change going forward and the merits of Malcolm's point.
What really strikes me, having been at this business for seven months and far more of a newbie Malcolm is the rigor of contract pricing that takes place with our customers. We just have the right customers on our books. These global Blue chip customers that we've talked about who understand our offering and within our diversified mix I would highlight that rigorous contracting translate.
The landing and expanding so our top 20 customers. If you look in Q4, we grew with them some 33% year over year and we've expanded operations with 16 of them. It's repeat business. Its an understanding of value added services, rather than Commoditized services, and it's that technological proficiency that drives repeat businesses in recycling and high retention.
That's why it's getting better.
Got it thank you guys.
For my follow up.
Obviously, 90% organic growth is fantastic.
I don't want you to think that my question is is that.
Downplay that but I guess is there any governor on your new your new customer growth.
Our retention just new customer growth I think you mentioned, 10% earlier is there any governor on that is there is there any structural reason why you can't grow that even more is it sales team size integration timeline access to robots wherever it might be or is it just simply a decision by you guys management team to enter.
The right contracts at the right time, just trying to gauge how much is self inflicted and how much is just a structural again governor on growth.
Yes.
Scale largest pure play contract logistics company in the world. Thus, ensuring that we don't have restrictions in terms of availability of equipment Rollouts deep seated automation.
Robotic arms with top of the queue with the manufacturers because windows aligns to win with witness people want their equipment working with <unk>. So it's a great combination and then also the people 20000 people we recruited in.
Tight labor market in the last part of 2021, and we did that because we work hard at ensuring that Jack So it's just a great place to work.
You were a manager whether you're a team leader web Euro all the picture, we work harder and ensuring that we make the company a great place to work.
So in those context no restrictions.
I would say, though and mark touched on it we are super disciplined about the kind of contracts that we write the kind of customers that we work with we.
We could grow much higher levels of percentage, but it might not be the same quality level of business that we really want and so I think when you put all of those things together.
Plus stores Mecca, <unk> more and more people are outsourcing E fulfillment growing topsy turvy.
More and more automation going to the west that's how you get to the kind of numbers that we're guiding to I think we're in a very enviable position as a company high class quality of customers.
Nothing to suggest that that will change going forward, but really that's the basis of where our guidance is coming from.
Thank you very much.
Okay.
Thank you. Our next question comes from Brandon <unk> with Barclays. Please proceed with your question.
Hey, guys. Thanks for taking the questions.
Maybe more of a macro question about your customers were having a lot of debate with investors about where aggregate levels of inventory said, especially on the retail side you know in North America and in Europe . So anything you can speak to there and some of the momentum that you saw in your business in the fourth quarter. How do you think about that carrying forward seasonally into <unk> here.
Brendan I think.
Quarter, four is always a peak environment.
That's a matter of fact with our E. Commerce business is the peak season, you've got Black Friday Christmas holiday seasons et cetera, So quarter four definitely is a bit but we've taken a lot of that strong momentum lot of new contracts being implemented as we speak in our quarter. One so we've taken all of that momentum.
Into the new year, Mark maybe you can comment further.
In many ways Brandon there's an element here of being a company for all seasons. If you think about how our contracts are structured as Malcolm mentioned, there's really a paper ceiling in our concrete floor in so many ways we benefit on the upside from some of the E Commerce trends that Malcolm mentioned, just now in the fourth quarter, but equally with a minimum volume requirements on the downside we're protected in a downturn as I'm sure you saw.
Without without prior entity of <unk> back in the 2008 and 2019 cycle. So the resiliency of our contracts the rigor with which we're watching these contracts really protects us in terms of Belgian prices in terms of what you are saying on the inventory side I like what youre, saying on the inventory side. It means more goods flowing through warehouses and Thats a good thing for us.
Well I guess could you speak to the inventory situation Mark in North America and Europe .
In terms of the inventories going getting up to the model, which is what you are saying in terms of building.
Are your customers at low or high relative inventory levels right now and has that been an issue that you have been dealing with.
Yes, Brandon I think I think what we can say is I mean really.
Really the supply chain disruptions that we saw in 2021, the huge volumes of vessels sitting offshore in long Beach, that's coming down I mean, I think there's lots of statistics to demonstrate that as coming down our customers the kind of customers that we work launch blue chips typically source from multiple.
Destinations on a global basis, so we're not seeing anything untoward in terms of inventory levels that we work with our plans. Obviously, we work with all of our customers in terms of long term planning, where you have to imagine we're working on projects now for 23 and 'twenty four we're building new warehouse.
Please.
We mentioned so a large percentage of our growth is coming from existing customers incremental services. So we're working with customers now on projects into the long term. So we're not really seeing any downscaling of inventory levels, but equally we're not seeing any upscaling of inventory levels were worried about where we were down.
We anticipate to be just after a very busy quarter for starting the planning for the various seasonal peaks that will happen through the course of 2022.
Okay appreciate that and if I can just sneak in one more on margins because I feel there's a lot of margins that we've got to look at in your business and I think Paris was talking about the difference between EBIT margins and EBITDA margins as well as potentially some startup impacts early in the year. So can you speak to I guess one.
Maybe a little bit longer discussion on the difference between the depreciation on non open contracts and then you open contracts.
Seasonality of those startups. Thank you.
Sure.
In Q4 generally.
A lot of our operations are focused in delivering peak.
We have both Christmas and Black Friday and throughout the rest of the year. We are very busy with implementing new with especially Q1 is very busy and implementing new ways.
And as we mentioned in our call earlier, we have seen a higher growth in our open book contracts in 2021 versus the other the other contracts we have the open open book contracts we had.
They are not as capital intensive asset light compared to the causal contracts.
In a way.
There is sizable upfront capex is taken over by the customers. Therefore, the depreciation charge from related to those contracts is lower compared to the closed loop contracts.
Therefore, we have seen margin expansion year over year or 120 basis points.
EBIT margins versus 60 basis points in EBITDA margin and Youre guiding for an EBITDA margin expansion for 2022, and a higher EBIT margin expansion portrait of Trinity.
Thank you. Thank you.
Thank you. Our next question comes from basketball and majors with Susquehanna. Please proceed with your question.
Can you talk a little bit about the specific timing of the capital markets day, and if you have some thoughts on that.
We will hold a capital markets day later in this year the timing will be set soon.
And we will be providing number of targets, including revenue operating profit and cash flow. We have been growing this business over 17% CAGR since two integrated too and also the guidance we provided for 2022 on.
<unk> gross 8% to 12%.
We would note that this is a normal year for us 8% to 12% is a normal year for this business, we will get back to you with more days.
<unk>.
Alright, thank you.
Yeah.
Thank you. Our next question comes from Jeff Kauffman with vertical Research partners. Please proceed with your question.
Good morning, gentlemen.
Thoughts on capital deployment, you had mentioned you will play in the consolidation game, but I think thats more of a long term comment, but the balance sheets kind of where you want it to be youre still going to be throwing off 200 million plus in free cash next year.
Can you just kind of walk us through I know the priority is grow the business but.
Where do you need to be before you start considering return of capital to shareholders.
All our options as you would recall number one is organic growth our option number one number two is continue to invest in our technology to improve productivity not only in the new business line in the existing business.
And after that number three looking at inorganic growth opportunities.
As shown in <unk>.
In the cabinet acquisition, we were able to expect $30 million of synergies roughly 5% of it is tied to sales.
<unk> as we add more benefits that will accrue illustrated through <unk>.
And then lastly, returning capital back to shareholders is our option number four.
D R.
We're looking to have multiple options as far as allocating our capital and they will be.
Continue to provide.
Organic growth.
It is.
Priority number one followed by tech and inorganic growth.
This earnings capital back to shareholders over time will be powered all the options, but it will take some time before we do that AZ are very excited about over 30% growth.
Over 30% of determining our organic growth options here.
It makes sense. Thank you for your answer and Thats all I have.
Thank you Paul I think Thats, where we close the call I think we are at the full hour know people, who have very busy diaries.
Operator close today's conference you may disconnect your lines at this time and thank you for your participation.
Oh, okay.
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