Q2 2022 GXO Logistics Inc Earnings Call
Welcome to the G X O Q2, 2022 earnings conference call and webcast.
My name is Doug and I'll be your operator for today's call.
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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 cause actual results to differ materially is contained in the company's S. E. C filings. The forward looking statements in the company's earnings release or made on this call are made only as of today and the company has no obligation to update any of these forward looking statements except to the extent required by.
Law.
The company also may refer to certain non-GAAP financial measures as defined under applicable S. E C roles. During this call.
Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release, and the related financial tables or on its website.
Unless otherwise stated all results reported on this call are reported in the United States dollars.
The company will also remind you that it's guidance incorporates business trends to date and what 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 and the various factors detailed.
And its filings with the SEC.
It is not possible for the company to actually predict demand for it services and therefore actual results could differ materially from guidance.
You can find a copy of the company's earnings release, which contains additional important information regarding forward looking statements and non-GAAP financial measures in the investors section on the company's website.
I would now I'll turn the call over to <unk>, Chief Investment Officer, Mark Mendonca, Mr. <unk> you may begin.
Thank you operator.
Good morning, everyone and welcome to <unk> second quarter 2022 earnings call.
Joining me today in Greenwich are Malcolm Wilson, our Chief Executive Officer.
Paresh Owen our Chief Financial Officer.
And bill frame, our chief commercial officer.
Tim is a newcomer to our earnings call and he can speak in depth about our exciting growth opportunities and our deep customer relationships.
I'll first turn the call over to Malcolm over to you Malcolm.
Thank you Mark and good morning, everyone.
I want to start by acknowledging that Jack So became a publicly traded company only one year ago. After completing a successful spin.
We celebrated its one year anniversary yesterday by ringing the opening bell at the New York stock exchange to get with operators from across our business.
We've had a truly remarkable first year as a public company.
We posted consistently excellent operating results, achieving or beating expectations for each quarter. We've completed our first acquisition puts the logistics.
We've published our first ESG report progressed meaningfully towards a best in class ESG targets, we seen team member satisfaction levels rise quarter over quarter.
The benefits of being a standalone pure play contract logistics company self evident.
G. XO has quickly established itself as a globally recognized brand.
We've been named to the Fortune 500, and recently, we were particularly gratified to be named supplier of the by Boeing in the support and services category.
Jack So it was one of only nine business partners out of nearly 11000 tacos suppliers to receive this award.
Since our spin we have opened over 90, new size and 15 million square feet of new space.
We've also signed more than 400, new customer contracts year to date come down more than 15000 team members with Clipper. We've gained an additional 57 size 10 billion square feet.
<unk> thousand team members in high growth markets and exciting new verticals.
I'd like to thank our employees customers and the broader investment community for making this a tremendous first 12 months as a standalone company.
Now turning to the second quarter.
I'm pleased to report that we set two quarterly records for us.
Our highest ever level of new business wins $475 million.
These weight in this have a lifetime value of over $2 billion.
Second we delivered revenue of $2.2 billion, driven by our highest ever organic revenue growth of 20%.
This is split in roughly equal measures between net new business wins and the like for like existing operations growth.
As Barry will discuss in a moment. We've also delivered exceptional adjusted EBITDA adjusted earnings per share and free cash flow.
We continue to win new business with major international brands and Omnichannel retailers that are looking to give the consumers a best in class experience.
These customers include Dolce and Gabbana JD sports like cost L'oreal, Pepsico restoration hardware and Spanx.
We also had significant wins across the industrial sector, particularly in North America.
Our record sales performance combined with the increasing demand for sourcing we're seeing in the market underpinning our confidence in the long term strength and attractiveness of our business.
Across global markets and industries, continuing supply chain complexities elevated inventory levels and high inflation, making seamless logistics management mission critical for more and more companies.
They sold place to the strength subject. So it's no doubt helping to drive a significant organic growth market share gains.
On the one hand, we've seen some returned to brick and mortar by the consumer on the other hand watch.
Large companies are still continuing to expand the online product offering.
<unk> is well positioned to capture outsized gains from both these trends we see evidence of this in our Omnichannel growth, which grew 4% faster than the G. XO group as a whole.
Our blue chip customers continue to invest for the future. This is reflected in the amount of new activity, we've won with both existing and new customers, which contributed 54% of our new wins year to date, our diversified vertical mix.
Our agility.
And our long standing deep partnerships with customers all add to the stability and predictability of our business.
As a result, and taking into account the clipboard acquisition. We are pleased to be raising our guidance for both organic revenue and adjusted EBITDA for the full year.
Paresh will now take you through the details.
Over to you.
Thanks, Mark and good morning, everyone.
We're thrilled with our results for the second quarter as we again delivered strong revenue and earnings growth.
The numbers in our presentation include four weeks off consolidated results from Clipper is it calls the acquisition at the end of May.
Our guidance reflects clipper ex synergies current FX rates and the deconsolidation of our Russian JV.
As Mark mentioned this quarter, we delivered an all time record of 20% organic revenue growth.
Reflecting expansion in our existing business as well as new wins.
This is the sixth consecutive quarter in which we have grown organic revenue by double digits.
From a profitability perspective, adjusted EBITDA grew $276 million up from <unk> hundred $61 million on a pro forma basis, a year ago, reflecting the execution of our new startups Israel is a continued inflation pass through in our business.
Yes.
Net income attributable to shareholders was $51 million up from $11 million last year.
Adjusted diluted EPS was <unk> 68 cents from 44 cents.
55% increase year over year.
And by our growth and capital efficiency.
Our return on invested capital was once again stellar at over 30% as we continued to write high quality contracts.
We see great opportunities to continue to reinvest in our business it is returns or higher creating a snowball effect.
Turning to cash flow you saw excellent collection performance this quarter driving operating cash flow of Honda that $54 million compared to $99 million in the same quarter last year.
Our free cash flow for the quarter was $68 million delta above our guidance of 30% adjusted EBITDA to free cash flow conversion.
We remain confident of our cash conversion guidance for 'twenty to 'twenty two.
You raise our full year organic revenue growth guidance, we now expect a range of 12% to 16% up from previous range of 11% to 15%, reflecting our performance in the first half and our record sales wins.
We also upgraded our adjusted EBITDA guidance previously $707 million to $742 million is now $715 million to $750 million.
<unk> has performed phenomenally through the second quarter and given the predictability and the resilience of our contractual business model. We are very confident in our upgraded will give a forecast and it's stacey.
Our investment grade balance sheet remains robust after financing for clipper with leverage levels at just over two times expected adjusted EBITDA for full year two into 'twenty two.
The majority of our debt is fixed and has been swapped into European currencies, So as to match our geographic exposure.
GSO also has an unused $800 million revolving credit facility available on top of the bonds issued to date.
Given our strong adjusted EBITDA growth and free cash flow generation, our focus over the next 12 months there'll be integrating Cooper as soon as possible.
Existing revenue and cost synergies and delivering to within our targeted range.
Beyond our cashes it is full of them in the Cooper acquisition, our contract mix is even more balanced.
About half of them book cost plus higher return contracts, we believe our company is even more resilient moving forwards.
Now I'll pass the mic over to Bill frame, our Chief commercial officer, Bill has decades of industry expertise, starting with 23 years at Fedex that he grew from a frontline material handler, who head of sales.
He joined the business in 2011 and has driven strategic sales in contract logistics ever since.
Over to you Bill.
Thanks Barbara.
This quarter as Malcolm noted, we want an all time record $475 million in new business.
And we continue to gain share in all our markets.
<unk> business is about problem solving for our customers and their suppliers now more so than ever in the current environment of high inflation and disrupted supply chains.
<unk> is great for customers, who have high growth needs as we've seen in e-commerce.
And it is equally powerful during an economic downturn when customers are dealing with issues like increased inflation and the need to reduce operating costs.
Today's reality.
Is that customers still need to move products closer to consumers.
While at the same time, they need to increase efficiency all of this plays right into <unk> wheelhouse.
Let me give you some current examples of what we're seeing on the ground.
E Commerce is growing rapidly for GSO as.
There's more big global brands continue to put more of their products online to catch up with consumer behavior.
E Commerce generates higher product returns.
And managing these returns is a problem for most customers.
That is why they come to GSO.
With G X O involved our customers get product back into the market faster.
With up to 96% of products, we sold to consumers.
This is significantly better than the industry as a whole we're 25% of the return products are never resold.
And remember approximately 40% of our customer wins in the second quarter included reverse logistics.
We see significant growth opportunity here for <unk>.
Retail inventory levels in the U S are 26% above pre pandemic levels.
And we're helping customers.
This problem also.
For example, we've helped some customers to optimize sites.
<unk> <unk> suite of software and inventory management systems.
Which reduces inventory per SKU.
In some cases upwards of 50%.
Our customers are also facing rising costs in this inflationary environment.
They need <unk> cost out expertise.
Along with the increased efficiency and precision we can drive with automation continuous improvement and inventory reconciliation.
As I mentioned earlier, 60% of our wins in the second quarter with a highly automated sites, which can deliver enormous efficiency increases and reduce costs for our customers.
Customers come to <unk>, because they know that we are better at delivering highly automated solutions that also bring further benefits through the life of the contract.
And as we're solving these problems for our customers. We're also building our pipeline.
At the end of the quarter stood at over $2 billion.
This pipeline is solid in all geographies and is comprised of strategic projects across industrial technology and consumer verticals with GSO aims to win.
Importantly, this pipeline turnover is high and has accelerated reflecting the fastest speed with which we are winning new business, while simultaneously, adding new opportunities with existing customers.
In my career I.
I have never seen such demand from first time, outsourcers and existing customers for reverse logistics and automation.
This is a great environment for GSO and.
And we are gaining share.
I'm now going to hand over to Mark.
All yours Mark.
Thanks Bill.
This is clearly been another quarter of records.
We've heard today about all durable business model, which at its core has predictable revenue and earnings compounding high returns and robust cash generation.
Coupled with this enviable durability, Jack so is about growth.
We've won over $475 million of revenues in the second quarter and this means three things.
Firstly for 2022.
We expect over $1 $1 billion in incremental revenue from our wins to date, implying a 14% gross revenue growth rate.
Secondly for 2023.
We've already secured around $500 million of new business wins through the second quarter.
And that gives us a clear line of sight for solid revenue growth into next year.
And thirdly.
We signed approximately $200 million for 2024.
Given our high customer retention rate, which rose again in the second quarter to remain firmly in the mid to high nineties. This gives us great confidence in our long term growth.
Irrespective of the macroeconomic backdrop, we expect our growth to continue into 2023 and 2024.
Well now open up the call to Q&A.
Thank you Larry.
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Our first question comes from the line of Chris Wetherbee with Citi. Please proceed with your question.
Yeah, Hey, thanks, good morning, guys.
Maybe I'd like to start with a couple of quick questions on the guidance so from a revenue standpoint.
The increased organic revenue growth.
Does it assume a bit of a deceleration in the back half given how strong. The first half has been so first off I want to understand how you guys are thinking about the pace of current activity it sounds like business wins and new business generation during the quarter was quite good so I make sure I understand the difference between that and maybe a bit of a deceleration in the revenue growth rate, that's implied by the guidance and the.
Half of the year, and then kind of similarly on the EBITDA side, we're seeing organic revenue go up again I'm I think this is.
Time, you've raised it this year, but we're not seeing organic EBITDA growth kind of follow that so want to understand the dynamics of startup costs within that as well. Thank you.
Hey, Chris It's Mark I'll take that thank you for the question.
I'll take the first portion on the revenue side, and then Bash will pick up on the EBITDA side and then what we'll do just a color on the revenue question will get bill to come in and talk about what he's saying on the ground in terms of its pipeline.
So firstly, Chris I think to your question, we're optimistic as a business. We just had a quarter, where we've done 20% organic growth. So that's what that's a good sign and that's something to think about.
If we look to the second half, particularly.
For Q3, and Q4, there are two elements to consider firstly existing customers secondly, new customers.
For existing customers. This is going to be the first full year, where we're coming out of a pandemic and therefore Q4 will be the first more normalized comp for this business.
And given the unknowns, obviously in the macro economy I would highlight that we're a young company with an experienced management team. So we want to be sensible with this guy was trying to say to you is it's a conservative message for the second half of this year secondly on the new customers and this is a very important point. If you look at our new customer wins, what we have is we roughly got another 69.
10 million that we want in the second quarter of the year that takes you to roughly $1 $1 billion of extra revenue in the hopper for this year, that's 14% gross revenue growth signed and new wins for 2022, and if you couple that Chris would be mid to high 90% retention rate that is an overall positive and confident state.
And then for all business about its durability and also the desire for from our customers for all services.
So your longer term point rolling the clock forward about this idea of a visibility in this business and Bill will talk to this as well.
This is a business that obviously has $475 million of announced wins in the second quarter of the year, we've got roughly $240 million of that Additionally, falling in 2023 that takes your number next year to 457. So that gives you a very clear line of sight already even though where there's probably going to be more wins in Q3 and.
Q4, and Q1 gives you a very clear line of sight for growth of next year and on top of that you've got those new wins that I mentioned in the opening statements for 2024 all of this talks to visibility and strength of our business by I shouldn't talk about the EBITDA side sure.
The margin Delta is starting to ease from the startup in the in the in this quarter. It is clearly visible from our numbers and in the third and fourth quarters. We expect to see further margin maturity of course, the nature of the peak season will have an impact on the size of that maturity net net we forecast year over year occur.
<unk> for the second half of the year on the margin side, which will be a lot more prevalent in the fourth quarter.
Yeah and to add to that this is bill.
Our pipeline as I mentioned was 2 billion at the end of the second quarter. Its now two three so it is growing and continuing to grow it's growing across all verticals and all geographies and it's growing with some really strong strong customers in the last thing I'd say on this as we mentioned in the second quarter, 40% had reverse Senate.
With the growth in E com and when I say a car that's across all verticals. It's not just e-commerce, we say clothing or our omni channel. It is aerospace at his decade as other industrials.
We obviously take them through our large return centers and show them, what we're able to do and how we're able to capitalize on getting 96% of products back into the market, which is critical to their throughput. So these things are making a big difference and it's why I'm very confident that our growth in our selling will continue to be at the same levels.
Okay. That's very helpful. Bill maybe sticking with you as you think about what you're seeing from customers I don't know if you want to break it down geographically or otherwise as you know verticals.
How how does the activity look now versus maybe what you guys have seen through previous cycles I want to get a sense, particularly in Europe .
Any sort of stress on the on the consumer there being reflected in activity or new business wins or maybe interest coming into you guys for four new facilities that I just want to get a sense of sort of the macro dynamics, particularly in Europe , how they're impacting your customers.
Yeah, I'll give you I'll give you. One example is in Europe , three weeks ago, I met with one of our larger customers.
Very strong growth across Europe with us over the past year and Theyre growing continual sites there, but they're also they're big focus right now is North America. So what they want to do is they want to work with us at the beginning of the year coming up on two really two things one putting in what I would say as a central facility for them, but what we focus with.
That was GSO direct so I point is you can put it in one core facility and then use GSO direct to <unk>.
Distributed out to other markets, which is very exciting for them because it allows us flexibility and allows them I really are much quicker response time to their to their needs but.
That's just one example, but thats so were seeing it and I can say the same thing and from the U S to Europe , having the exact same questions. We just had a customer who joined US this year with two sites they were going to open they've now.
We opened three they are opening a fourth they decided for this month in Dallas and then moving to Europe .
Do you want to add more sure let me give some color from the number of sites, we have delivered 20% organic growth a record percentage of organic growth and when you look into the components of this phenomenal organic revenue growth. The first half is coming from net new business wins and driven by starts obviously you discussed last quarter in the second half.
That comes from our increase in our organic operations, our existing operations similar to like for like growth in our core business now stepping back going back to the organic wins, new business wins. When you look into the details of those the level of activity is almost evenly divided between North America.
In Europe . So we are growing in both continents, they're growing in multiple geographies right now the numbers are showing us that.
Okay. Thanks for the time I appreciate it.
Thank you.
Yeah.
Our next question comes from the line of Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thank you very much good morning, and congratulations on your first year as a standalone public company.
I think that was a good a good.
Good overview with regard to the strength of the of the the organic growth in the business I'm curious, though I saw in the slide deck on slide two.
14, it bridges the guidance.
The changes in guidance could we go into that a little bit more in depth with regard to clipper contribution maybe in second quarter, how that contributed what youre thinking about its contribution for the rest of the year and maybe a run rate for going forward.
From 'twenty three or lifestyle.
Sure Scott Thank you.
The acquisition as you recall on June .
So in the fourth of May and Cooper made a single to mid to low single digit EBITDA contribution for the four weeks that you have been operating the company. That's included in our consolidated results.
It had $80 million of revenue and $1 million of net income.
And for the future expectation.
The historic EBITDA margin for the company has been in U S. GAAP basis has been roughly 5% to 6%. So you can take that as the basis for your modeling we cannot provide specific guidance on the remainder of the clipper and what we have included in our guidance is basically reflecting.
What we have included in our acquisition models now there you would see in the EBITDA bridge, there's a net M&A.
Net M&A means clipper minus the deconsolidation of Russia impact and the remainder is the FX component.
We have hedged last year for 2022, roughly 20, 80% of our EBITA.
And to shield, our shareholders from volatility on the exchange rate.
<unk> has not been haste and 10 million Delta is directly coming that's coming from that 20% non test and those are the components on the EBITDA bridge.
Great. Thanks, I appreciate that fair and could you speak to the deconsolidation of the 50% owned joint venture and how that works into your consideration for guidance for the rest of the year, what that is and what type of timing impact that may have thanks.
Yes. It has happened in the first half as you recall from our last discussion and what else. We are updating the guidance for the entire year. There are larger components, including clipper that had been included in the EBITDA guidance upgrade as well as FX FX has moved a lot. So we had to include all components to upgrade and update our guidance for the full year.
Yes.
Okay. Thank you.
Our next question comes from the line of Jason Seidl with Cowen. Please proceed with your question.
Hey, Thank you operator, gentlemen, good morning, and congrats on the quarter I.
Wanted to go back to.
Some of the last comments you made during your prepared remarks I believe you guys said that you were going to grow in 'twenty, three and 'twenty four irrespective of the economic backdrop.
Just want to clarify is that revenue or is that revenue and EBITDA.
Yes, Jason let me come in on that.
Malcolm here.
I know with with fully expecting growth through 'twenty, three and 'twenty four.
Why with confidence on that and with confidence on it because you know many of the contracts that we're writing right now in fact, there are only coming into implementation through the next year twenty-three uneven in so many things is 24.
It's a good good good memory jogger in fact, I mean, if you remember back right to the middle of last year, we were not seeing huge customer wins and much of that you know you are seeing in our organic growth right now and just as Bill mentioned a good deal of that just under half a billion dollars of new contract wins are going to.
Be implemented not really in this year, because there's a lead time of preparing the warehouse and getting all the automation in place, but actually a lot of it will go into next year and in fact, the Iraq.
On the margins I think it's an important point more and more of what business. We are signing a I.
I mean, it's really increasing at a pace is really containing a law all tech enablement, you know, whether it's a robotic arms or because the person robots collaborative robots.
Honestly I mean, it's a it's like a huge shopping menu now that our solutions teams.
Forward into our size and the reality is these big automated centers, whilst they take a little bit of time to reach efficiency you can imagine it's like starting a huge warehouse, we have a lot of machinery and software in it and even allowing for that it's creating a lot of employment. These big <unk>.
<unk> is still actually employ you know 356 700 people. So it's understandable that you know these big centers. They do take between six and 12 months to reach margin maturity. So all of that all of that put together, we're very confident on 'twenty three and 'twenty four.
I mean, that's what we can see we don't see any fundamentals as to why that kind of continue for us in the future.
Okay I appreciate the color on that and then.
You mentioned I believe you said, 60% of the new contracts that you wouldn't have some tech enabled in it what.
What percentage of the contracts that you're bidding on.
Have some sort of tech enabled components.
Maybe you can talk to that.
This is bill yeah, it's in the same range and what we're finding is that.
Labor, obviously has been a main concern and our customers.
In the last year and a half and so what's happening is it's driving the need and the willingness to automate. The other side of that is we want to we want to create a great employment environment for our employees and automation helps that any site, we have automation and I can tell you our employees like working with it they find it it's more.
Happier workplace for them at a better place to work. So those two things are driving it one the benefits the savings the throughput for the customer and then the labor advantage. Both in terms of how much labor, we need but also the lifestyle of the labor thats, they're enjoying it more means we get more sticky labor and Thats, what Matt was relating to.
On the productivity it grows faster with labor.
Thank you for your time as always gentlemen.
Thank you.
Our next question comes from the line of Amit Malhotra with Deutsche Bank. Please proceed with your question.
Thanks, Hey, Bill just a follow.
Follow up to that last question, the 60% of the of the new wins, you didn't or you said it was highly automated not some automation, that's a little bit of a nuance point because I.
I don't know if that percentage has changed a little bit because they know obviously.
Theres more fixed charge.
Associated with higher automation, whether it's software depreciation or amortization or or automation charges. So obviously those businesses up higher.
A little bit better and higher margins do it is that 60% of change in terms of a highly automated versus what you were doing last year. If you could just quantify that change for us because I picked up on that wording and I just want to make sure I'm, not making too big a deal out of it.
Thanks, Amit I would say this that.
As as in the in the years as we've gained success with automation and again as I mentioned we tour.
Potential customers through our site so when they see the automation, we have and they see the results we game for our customers that they get very excited about going down at automation path. When we talk about 60%, it's the processes on the site.
Becoming automated so as you'd imagine a big portion of the processes and our site involved picky. So when you have either co bots or you have.
A goods to person youre, taking a bulk of the processes and the sites and you're automating those when we say highly automated that's what we mean.
You're finding more and more of the labor in this in the building and the processes are becoming automated because that allows for what I've said before it's more efficient and it's also better for the employees, it's a better work life because employees.
Our able to choose more what they where they want to work and they like to work in automated sites that offer them less stress on the body and more enjoyment working with the automation.
Yeah, Yeah, but I just want to make sure. So on a on a like for like basis is there a more EBIT dollars attached to that type of contract that maybe are less automated contract because you're charging a margin off of a higher fixed cost base is that the right way to think about it.
I mean, that's the right way to think about it clearly.
Have sizable automated contract itself come with sizable fixed revenue and EBITDA through the life of the contract.
And remember we are writing these contracts are for a return on invested capital of over 30% and we have fantastic returns as you clearly see from our financial statements and that's <unk> and track record is continuing writing high quality contracts, whether they're automated or less automated.
Okay. That's helpful. And then just have a couple more here so.
<unk>.
The revenue disclosures around new business wins for next year, I mean, obviously, there's at least $500 million of incremental revenue, probably $7 million to $800 million.
New business, if you incorporate the back half of this year.
$400 million of additional clipper revenue next year as that cycles through Theres, maybe some FX headwind some churn, but then there's existing new business. So I mean, it looks like we were talking about $800 billion to $1 billion of incremental revenue next year on a reported basis.
Could you just talk about that and then I wanted to know what the contribution margin associated with that incremental revenue on it because you know clipper.
Slippers, starting off of a low margin, but then maybe you have opportunity for synergies next year.
I wonder if the new business that you're winning is coming more from open book, which is lower margin bahar or higher ROIC seasonal.
Would you expect whatever reported revenue growth is in terms of dollar basis next year or is that coming on at group margins grew contribution margin did a little bit of dilutive can you got some FX headwinds talk to us about like the margin profile and the incremental margin profile on the new business next year.
Sure remember clipper has historically been about 5% to 6% EBITDA margin in U S GAAP basis and very limited.
Depreciation therefore slightly higher than <unk>.
So margins in EBITDA, so a better bottom line contribution from a top line perspective.
We will have the full year effect of that the business is trending quite healthy and clipper and continuing to grow but because of the hold separate arrangements. We cannot provide further details on that once the hold separate that Asia is completed we will provide further details when you're thinking about next year of course unit to unit to have.
A component of FX impact on EBITDA, but there will be clipper synergies impact as well as the maturity of our contracts. We have started this year. We have started quite a lot of contracts this year compared to the years before and you will see the full year maturity impact all those Furthermore, as management, we have decided to.
Extra effort on continuous improvement efforts in our existing facilities to improve productivity for our customers and improve the EBITDA margins for the entire organization. So we do expect to see impactful that through the rest of the quarters as illustrated swiftly so multiple things will be in effect for next year.
So just just to tie a bow on that so whenever revenue growth you have next year it'll be what it'll be.
I guess, the bogey would be EBITDA growth on a percentage basis equal to or greater than revenue growth is that a fair way to think about you know the relationship to EBITDA versus revenue in 2023.
There will be a couple of pieces that she needs to be balanced there is an FX component there is the productivity component.
There's the synergies components, if youre looking at the nominal EBITDA and theres going to be the clipper and.
Slippery impact that's going to be balancing those out so the balance of those four will determine how our margins will evolve in 2023.
Okay. Okay I tried to ask that question, but I appreciate it. Thank you guys take care.
Our next question comes from the line of Allison <unk> with Wells Fargo. Please proceed with your question.
Hi, Good morning, just in line with the automation side of it Ah any concern of your robotics partners and you didn't just given the level of them from that that you've had in your contract their ability to keep up with somebody that's implementation any rest of that and then if you can.
I have a contract with fixed wayfarers, there could you maybe explain sort of what they're providing you that's a bit unique that would justify that just any thoughts there.
Alison Hi, it's Malcolm here, let me, let me give you some background on that so so really we don't have any concerns every got too.
Our availability if you like automation reason for that is.
When we do a design for a customer.
Solutions teams that really designing games some of them. So we don't have for example, one facility that just house warm manufacturers' automation running again at its normally comprising of multiple different manufacturing.
Poland, So typically our goods to person robots coming from wall manufacturer, a robotic arms coming from another manufacturer.
Our collaborative robot could be coming from a different manufacturer and what we do we're working with all of the manufacturers we have a forward plan.
We talk a lot about our sales pipeline, but what we just mentioned you know we're implementing no basis that was worn broadly.
Hope to a year ago. So we've got long lead times for these implementations they know processes, where you just win a piece of business and then typically implemented within three months for a highly automated center so working with the partners.
A membrane that from a <unk> perspective, we are the largest pure play contract logistics company in the World you know that scale gives us huge buying power when it comes to equipment like automation.
Not to mention you know real estate I mean lots of things other than kind of quiet tight demand I have to say as a business with finding a good process with those manufacturers and providers simply because I mean, they value as a company you know, we're a big player all of them and in automation where kind of.
The benchmark people want to have their automation in a G X.
Operation It sets them apart from their own peers. So we're really not experiencing difficulties that are creating any environment.
Our lead times for implementation or any different than what they historically be you know for these big kind of sensors. So I hope that gives you a bit of a bit of flavor on it.
Yeah, that's great and just any color on like what is what is it providing you that's a bit unique in the in the in the automation space today any color.
Well I know I know Bill I mean, Bill last week was in a sense of where we were running a little huge amount collaborative robots. So maybe you can just comment on that.
Yes.
So we've been involved with <unk> for a few years now and the benefit. It brings is really a few but what brings US is it brings a much faster efficiencies in the sites. When you have six where it was in place.
Here's a quick example, when what's the first thing you do with employer when you bring them in a site as you teach them the layout of the site and that can take for them to get good at that can take weeks.
And they usually working alongside a seasoned employees. So they slow down the season employee a little bit with a co bought when you bring an employee in they can.
Much in half a day get to very close to top efficiencies and the reason is the robot already knows the site that knows exactly where its going it knows where all the product is and so when you put an order into a cobalt it will take them around the site and it will point out the product. It will then show a picture of the product the employee scans. It and then it shows that it goes in.
Defects go away efficiency goes up and our relationship with six river is such that we have favorable position.
Position with them as Malcolm mentioned, we get the product when we need it and and and and they also like it because they get to say that they're dealing with the largest pure play logistics company in the world for their product, which helps them sell their products. So it's just a great relationship all around.
Great and then just lastly on that pipeline.
I know you touched on it it's still a mix of expansion versus new customers anything shifting that you're seeing in the diversity of that pipeline or just even the balance between new customers and existing expansion.
I spend a lot of my time as you can imagine on the road.
So I'll give you an existing customer and a new customer existing customers, what they're looking for always in what we deliver always there's continuous improvement how do we lower cost how do we improve efficiencies how do we how do they get to do more with what they purchase from us So the site that they have.
And so we're constantly working those with them and that is our plan that we start at the beginning of the year and then we put targets together when we worked through it's why we're sticky with our customers.
On the new customers.
We have one that tech customer that just came on with us and they were working with a competitor and they are storing with US is that we were amazed at how easy it is to collaborate and work with your teams one we're very seasoned and our leadership teams from the site live a lot up and then number two is is that the ease of implementation.
Patient we go through because he is a very planned out we do as you can imagine with a lot of selling a lot of implementations.
These are very planned out we have a very specific implementation process. We follow that we have a team that monitors that we have project managers at moderate I sit on that so does the senior executives of both Europe and in Americas. So we're in this all the time together and they just they are very impressed with that so that would be what I would tell you is the view of a cusp.
Whether you're with US long term or you with this brand new what they see from GSO.
Great. Thank you.
<unk>.
Yeah.
Our next question comes from the line of Brian <unk> with Jpmorgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question maybe another one for for Bill you mentioned I think about 40% of the new wins have some sort of reverse logistics of returns in there is that helping you.
<unk> market share as well and do you think that can actually accelerate when you get to the full integration of clipper underway because they believe they have a pretty good products you might even be able to bring.
Some shape or form back to the U S. And then maybe you can just wrap it up with the size of the returns business because I think they havent really heard an update on that overall size in a little while.
Yeah, let.
Let me, let me start with the with the returns because it's a great question.
So <unk>.
Back about four years ago, we started with a large sports company on returns and really my opinion is we changed the way returns are now operate in the marketplace. So returns had always been get a ticket back get me to get my money back and buy another product and then deal with the product that was coming back when we started with was how do we get.
Yeah.
Most of these in season product back into use almost immediately that was really our focus so they would graded as a b and C. So our focus was more a in the market.
And that's what we've been able to do so we've been able we've been able to.
Get more product back into the market quicker when we get a truck to the door, it's usually five days to listen a ready spot to go back out.
And we do that by looking at demand planning, we look at the return authorizations, the airasia as they call them and we know coming in out of 300 trucks, what trucks have what we need right away. We then processor that met in that manner. The second thing. We did is we built an E Comm center out of the back of the site. So instead of having it and they put it on a truck and ship it to our store we're selling there.
Product right out of the back of the site for the customer and during Covid. We were their number one distribution center. So I'm using that as an example, because we take that example, we show it to new customers and what's happening is it used to be they would talk to us about their business and then they would look at returns later, we're talking about them. Both at the same time and that's why you see <unk>.
40% and the last thing I'll say on that is that is a very margin rich environment to be in when you're dealing with returns there's a lot of value for our customer there. So there's a there's a lot of ability for us to make money and to grow that.
I'll, let I'll let.
Now I'll talk to the percentage yeah, well in fact, I was just going to comment on cliffs topics cause I think Brian mentioned, if I flip.
In Europe , the impact is seen as a leader on the reverse logistics returns management in fact, it's quite a reasonable percentage of the business and it was one of the things that really attracted us because it's not just the processes that we cannot do that but they have a number of suites of software that really assist them.
And we're looking forward to potentially making some synergy on that and bringing that across all of our base and it's not just the U K, but across all of Europe , I mean in fact across where it's where it's appropriate actually bringing it back into our North American business.
Returns is a really important and growing part of our business on the margin side.
Maybe mark you can you can just cover off on that thanks, and I'll come on Brian on your question about percentage splits on returns, it's slightly less than 10% of our business.
Alright, great. Thanks for all that and then maybe a follow up for for bearish with the FX not completely hedged getting larger in Europe with the acquisition can you give us some sensitivities I'm assuming thank you disclose the current guidance humans.
Flat FX rates from here do you have some sensitivities that you could share in terms of what that might mean to EBITDA. If we see some continued FX volatility in the market.
Yes.
For next year's roughly if you're taking this average.
Rates FX rates for this year roughly one four to 105 Euro dollar and 124 homes, which we do have as much pawn businesses.
Zero business the impact year over year will be roughly $30 million and that's going to be.
It's going to be balanced with the net new business wins continuous improvement opportunities as well as cliff.
Clipper, EBITA and Cooper cost synergies and.
When you look into the sensitivity around that for next year roughly every 1%.
Makes about $2 million to $3 million of impact for each currency.
For euro and pound separately, but they're not too far away from those levels as we look into it right now and as we look into this year. Our forecast are built for roughly the current rates.
For the rest of the year and the impact is much less is about 80% of our exposure is hedged for the entire year.
Okay, and just to clarify if things stay as they are now there would be a $30 million headwind from currency next year is that on is that on EBITDA and then you would have some offsets from as you mentioned from corporate and other cost synergies is that is that the takeaway.
That is correct and thirdly moodle headwind if currencies are staying around one or one 5% for the average of the year for Euro dollar and 124 or pone dollars and that's going to be offset by clipper clipper synergies maturity of our contracts and the continuous improvement opportunities.
Okay. Thanks for those details I appreciate it.
Thank you.
Our next question comes from the line of Ari Rosa with Credit Suisse. Please proceed with your question.
Hi, good morning.
No.
As you mentioned document the start.
<unk> is obviously relatively new business as a standalone entity, but you guys have been in this industry for a long time.
Maybe as people think about a slowdown in the macro environment.
Maybe you could give some some context on how this business has performed.
In past downturns and how the broader industry is performed in past downturns and specifically I'm thinking.
First time outsourcing.
Seemed to decline.
26% of new business from 44% last quarter and with the understanding that that number is likely to be lumpy lumpy I'm wondering if that.
That that trend on first time outsourcing, maybe indicative of some hesitancy on the part of customers to kind of change their business model around as as we're entering a potential slowdown.
Yeah, Thanks for that.
Let me, let me answer that in two ways, let me address the lots of parts of your question first in fact, I wouldn't read anything into that sort of quarterly statistics I mean, the reality is our sales pipeline moves around.
We closed the quarter just over 2 billion I think this week as backup but numbers like $2 3 billion, it's really a moving environment and it's the same situation in terms of the mix of business coming from existing customers all brand new customers, what I'm, saying I mean bell.
So those are all over the point.
Because that's that's.
It's a line of focus what I'm, saying is in fact sales pipeline really is populated by a good healthy contingent or first time outsourcing project. They are still growing we're seeing continuation of big companies deciding to outsource and it's no wonder when you can say that just.
Higher mortgage technology, and Knowhow and experience he's needed nowadays to create a highly efficient.
Environment.
The pandemic I guess as proven lots of people to want to rely less so I guess on people are more on automation. So I wouldn't read anything into just the quality of the statistics. So theres nothing to say on that it's more just that's how we landed in the quarter next quarter will be a different number again.
Then coming to your question about well how does our business behaves in a in a more subdued market.
Going to the nature of our contracts means that all the pass through costs et cetera are very resilient.
Resilient.
Our contracts are all stroke with a strong governance, so everything goes through to the customer from a cost base point of view, but the reality is if we were in a more subdued market you know with the economy really slowed well you would find I'm sure is a maybe a topline would slow a little bit.
But our bottom line in fact would be very resilient and that's just the function of the split solve fixed cost that goes to customers. The way, we recover our management fees and <unk>.
Right.
I'm, a member of an age and an experience where I do remember being through this in the one of the European basically says in fact came from the.
Former Xbo acquisition of Norbert I remember that very vividly in 2008, and 2000 Tonight and that's exactly what I'm describing is what we saw we saw topline stabilized become a big star.
And then even a little bit lower.
Bottom line actually was very very resilient.
Corresponding effects of that mean that in fact.
You stand less brand new project scope.
Your free cash flow through the roof.
The management that you have focused intensely on the existing basically so you tend to find a surge in margins.
So it's kind of really a mixed by nobody wants a slower market you know, but I you know we're.
We are working in our organization, which is well equipped to deal with if that was to happen I think I think we're in a very resilient.
And that's why we talk so much about resilience predictability say listen we all hope that we don't have a slowdown, but if we work. So I think you would see them.
Dynamic in this complaint.
Really is quite unique and maybe not so much even it's an industry thing because I think we do a particularly good job on the governance of our contracts.
On our contracting process.
I hope that gives you a bit about driving already sorry for the length of the answer.
No no that was terrific and really helpful historical context.
So second question I just wanted to ask.
The Clipper acquisition closed in May.
Just wanted to get your early read obviously, it's a little bit different kind of when you're when you're looking at a business from arm's length versus.
You know after buying.
After closing the acquisition just wanted to get initial impressions since acquiring the business as it kind of met expectations has there been anything that surprised you has there been anything maybe that's been a little bit divergent from what you expected.
Yeah, I'll, let me come back in on that because.
Obviously.
I know this company very well being sort of on the deal together with the rest of the team at bearish and myself, we are at the heart of it.
So.
We closed the deal in May we are in what we technically called and there are a whole separate so that's where the.
CMA regulatory authority to do a review that's going very well.
No no big issues on that at all at the moment and we're expecting to have full clearance on that hopefully end of September we would have hoped for a little bit sooner.
It's a government regulatory body and in Europe August is no.
Nobody's about so their Illinois. So unfortunately I suspect is going to be end of September but we are able to do though is as paresh mentioned, we can see the numbers.
We're also able to have.
It's in our minds.
A discussion with a click of management. So what we've done is we've got to know all of the senior management team Theyre, all stay engaged and all of that.
We're in the process of organizing long term deals for everybody, but they're all very committed they're all absolutely came forward to the integration process that will start one thing to call out.
Bearish mentioned I think when he was doing the bridge he called out.
The net of synergies that said this year ratio and that's a management issue. That's a management decision. If you lie kind of holds and waste my bike in a smart Chaz, we're cognizant that it's that CMA clearance Hayes happening again. This September just like G I saw where it peaks.
Season Peak peak peak season is when all of our customers make the best of the AR and Clipper is no different so we've purposely no see big synergies in.
And that last part of that we don't want to disrupt anything about busy period for <unk> teams or clipper customers. So, but overall no. Our impression is very very very good where we're really looking forward to getting.
Getting the process going and synergies youll start to see those commencing from the beginning of January going forward hope that gives you some color on it.
Yes, absolutely that that's terrific. Thanks, so much for the time.
Our next question comes from the line of Bruce Chan with Stifel. Please proceed with your question.
Okay.
Bruce Chan your line is live.
Yes, sorry about that just on mute here, but good morning, everyone and thanks for the time just wanted to follow up on Clipper you gave us some good color on the integration timeline as far as commencement, but maybe you could offer a little bit of detail on what kind of the first steps might be in that process next year and then maybe just a follow up on the <unk>.
Geez I'm not looking for a number here, but can you highlight what you're seeing as far as the big opportunity buckets for those synergies in terms of margin improvement.
Yes, sure Bruce Oh, unless bearish to talk to the synergies, it's a financial point of view.
He can give you a lot of detail, but what I would say I mean, we're not when I say that we will commence the synergies from January one.
One thing very important I mean synergies will start to integrate the business right from the get go I mean cyber security all the very very important things.
Business continuity there'll be often running you know immediately.
Synergy aspect is where we're really starting to put both management teams together I'm with identifying best in class service best in class process and also of course buying power in buying scale and that covers all aspects from kind of database management.
Right the way through straightforward procurement synergies you know I mean, we are putting two very successful.
Basically it is together, they're already doing a great job, but when you put the sum of the two together you will get a very very.
Very good result.
Management has already engaged but as I say, it's really from January where we will start the process and you'll start to see those numbers kicking into our results you'll start to see in quarter. One may be bearish, you can just talk a little bit to the color of the values of the synergies I know, we kind of called them out as part of.
The deal, but maybe you can give a bit more flavor I'm not sure.
We anticipate roughly $48 million of cost synergies by the end of the first three years of integrating Cooper as you highlighted these are including data center consolidation procurement and further vertical synergies. This does not include revenue synergies that you will be looking into the company has life Sciences.
Repair and refurbishment and sizable presence presence in Germany, which will help us grow much faster.
And clipper is trading well and winning new business, but due to hold separate requirements. We are unable to get into the greater level of detail.
The timing of the synergies on the cost synergies side historically the majority of the acquisition synergies later to costs are realized in the first 18 months of the year hopefully that will help your modeling.
Okay.
That's terrific very helpful. And then just a quick follow up here as you think about M&A through this process are you still fully in the market are you putting that on hold a bit and if not are there any verticals or service lines that you're.
Particularly focused on thank you.
Bruce It's Malcolm here.
Clearly clipper represents is it's a big acquisition for <unk>. So it's a second first one was Uh huh.
Our management teams are already I mean, they will integrate this business very smoothly and very successfully but nevertheless.
We need to digest that in <unk>.
Terms of M&A market M&A marketplace as a whole.
We're in a consolidating industry. We are a growth company. We've always said great use of our capital is put it back into our own business, where we're enjoying immense return on capital invested well as you've seen in this last quarter. This is a company that throws off a ton of free cash so.
No doubt.
We will look again in the M&A market.
North America I have to say is probably our favorite market lots of opportunities.
I'll be very diligent.
Basically really breaking a benefit into what we do today, we don't need scale as you can see we were not a business that needs to buy an extra extra turn over we're growing a great pace organically signing great customer contract.
Businesses can bring new verticals new services these will be super attractive to us on the go forward.
Okay.
That's very helpful. Thanks, everyone. Thank you.
That is all the time, we have for questions I'd like to hand, the call back over to Michael Wilson for closing remarks.
Okay, Thanks, Doug and thanks for managing the call so well appreciate that and thanks for all the very great questions from all of that.
People asking questions. This morning, we've really enjoyed the call went a bit over time not so much we've enjoyed it but it's been a great call I just wanted to say a few words from my side.
On behalf of myself and all my colleagues and I know way I'm kind of speaking for the whole 120000 people that work in this business.
First and foremost you might have detected on this call. This is a company is managed really with hands on approach everybody who's on the call today is sleeves rolled all management.
In the business, we were all present recently in our North American High point headquarters I think really it celebrates everyday.
Congratulation on Athene is a business approach, we're very in the business.
The company in all of these regions across all of these verticals is doing really well, we're very very proud of that this quarter, marking our fourth earnings release of strong performance.
That's including record organic growth.
Cord amount of new business wins, as well as consecutively, increasing our EBITDA and cash flow every quarter.
Year over year.
After our first year, we're just getting into our stride.
So thanks, everybody for joining the call. Thank you for the support that you're giving to <unk>, so and with that we'll close the call. Thank you again.
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.
Okay.
Okay.