Q3 2022 GXO Logistics Inc Earnings Call
Welcome to the G X, though third quarter 2022 earnings conference call and webcast. My name is Doug and I'll be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If anyone should require operator assistance during the conference. Please press star.
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Please note that this conference is being recorded before the call begins let me read a brief statement on behalf of the company regarding forward looking statements.
The use of non-GAAP financial measure and company guidance.
During this call the company will be making certain forward looking statements within the meaning of the applicable securities laws, which by their nature involve a number of risks uncertainties and other factors that could cause actual results to differ materially from those projected in the forward looking statements.
A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings.
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 applicable SEC rules. During this call reconciliations of non <unk>.
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 reported on this call are reported in the United States dollar and.
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 results are inherently unpredictable and maybe materially affected by many factors including fluctuations.
Foreign exchange rates.
Interest in global economic conditions, and consumer demand and labor.
Labor markets and global supply chain constraints inflationary pressures and the various factors detailed in our filings with the SEC.
It is not possible for the company to predict demand for services and therefore actual results could differ materially from guidance.
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 Investor section on the company's website.
I will now turn the call over to <unk>, Chief Executive Officer, Malcolm Wilson, Mr. Wilson, you may begin.
Thank you, Doug and good morning, everyone.
Thank you for joining us today.
With me in Greenwich Today Irish Orin.
<unk> financial Officer Bill refrain.
Our chief commercial officer, and Marc Maun, Duke.
Chief investment officer.
Jumping right to the.
The third quarter of 2022, which they know the outstanding quarter for Jack So.
We posted strong operating and financial results.
Grew our relationships with several of our large global customers and I think many of us.
<unk>.
In October we received final regulatory approval from the U K competition markets authority for our acquisition of click the logistics.
In the third quarter I'm proud to report that we delivered our highest ever quarter of revenue $2 $3 billion. Despite foreign exchange impacts from the softening euro and pound against the U S dollar.
This result was driven by strong organic revenue growth, 16% combined with a high level of customer retention.
We also delivered record adjusted EBIT da in the quarter, which was up 19% year over year driving sequential margin expansion as.
We completed the outsized volume of operational start ups that we were implementing in the early moments of the AR.
As bearish will discuss in a moment. We've also delivered strong results on free cash flow and adjusted earnings per share.
This quarter.
We continued to gain market share.
Domestic loop.
<unk> more business in order to improve service and reduce costs.
It's very clear that many new and existing customers are reassessing supply chains post COVID-19.
We signed new contracts with both existing and first time outsourcing customers as we continue to grow our market share with international brands.
We signed new contracts with Boeing.
L P M H Nike Samsung.
Sky T V Syngenta to name just a few.
Yeah.
Half of our wins in the quarter came from new sites with largely existing customers and half were from market share gains from our peers and first time I was sourcing customers.
I also want to take a moment to touch upon the clipper acquisition.
This is a fantastic company that we've acquired.
Clipper is a true diamond.
They've got an impressive customer base expertise in a diverse range of high value added service offerings and most importantly stellar people.
Additionally, clipper helps bolster our already industry, leading ESG credentials with the focus on reverse logistics and with us.
Is helping to do great business for customers in a manner that is good for the environment for.
For example, clipper repaired around 1.5 million pieces of consumer electronics last year.
Reducing C O two emissions and enabling the circular economy.
The majority of Rfps across the market no reference ESG credentials and core values.
And our leadership position here is a real competitive advantage.
As you May recall, we closed the clipper deal back in May.
They say enabled us to ensure continuity and stability for quite this customers and top talent.
At that time, we were also able to put in place favorable borrowing arrangements.
Which Barry will touch upon shortly.
With regulatory approval now secured we're moving forward with the integration and I'm pleased to note that we anticipate delivering the lion's share of the planned 36 million pounds of cost synergies in 'twenty three 'twenty four.
We will be able to discuss that progress in more detail at our investor day schedule for the 12th of January .
Looking at the fourth quarter for the group, we expect continued top line and margin growth.
Based on the early indications of peak and I wrote dated forecast, we're reiterating our full year guidance.
Yeah.
We are anticipating a smooth peak holiday season in 2022.
Last year, the whole market experience fibrotic supply chain disruptions as well as scarcity of inventory and labor.
This year most of our customers have good levels of inventory and labor is much more readily available.
Looking beyond peak with confident on 2023.
Based on our wins to date, we've already secured nearly half a billion dollars of incremental revenue for next year strengthening our visibility about 'twenty two 'twenty three and beyond.
Our global sales pipeline has remained strong.
Conversion is healthy.
Tech demand as you can expect is continuing to accelerate.
Well I would say sourcing continues to grow as exemplified by our $2 billion sales pipeline, even after announcing significant wins.
We've seen in the past that this demand for our services and solutions will accelerate during a period of economic uncertainty as customers look to reduce costs, while improving the consumer experience.
We are an enabler of productivity through technology and customers are increasingly seeking goes out to drive efficiencies in the business.
We're differentiated in the industry as the Tech leader.
This quarter, we deployed the most technology in our history.
Deployments in North America, and Europe are over 50% higher in 2022 done in.
2021.
So.
In closing.
While we recognize the more dynamic macro environment, when we look at our customer base, our strategic relationships. The projects, we're implementing in the coming quarters and the high degree of visibility <unk> contractual business model affords us with continuing to.
Confident about our growth and performance in 2023.
Bill will speak more on our commercial outlook and what we're hearing from customers but for us.
You opened to bearish to walk through the financials.
Barrish over to you.
Maybe you think small come and good morning, everyone. We're pleased with our excellent third quarter results.
We delivered a record quarter for revenue and adjusted EBITDA, along with strong free cash flow.
This is our seventh consecutive quarter of double digit organic revenue growth and all time records.
This result was driven by 16% organic growth.
Underpinned by implementations and our mid to high nineties revenue retention rates.
Our organic growth was strong across all verticals and geographies and we are maintaining our revenue retention rate by delivering consistent high quality service.
It is important to note that you are seeing organic growth across our diverse vertical base.
With particular strength recently coming from consumer packaged goods technology and industrials.
Which in aggregate are similar in size to our largest vertical omnichannel retail.
This is a balanced business.
Net income attributable to shareholders. This quarter was $63 million and Bluetooth earnings per share was <unk> 53 cents.
Adjusted diluted earnings per share was <unk> 75 cents.
34% year over years.
Adjusted EBITDA growth and the continued lower cost of financing.
The Secretary I could you said this quarter was our adjusted EBITDA reached <unk> hundred $92 million was up 19% year over year.
And our return on invested capital is well above our 30% target as we maintain our holistic governance on new contracts.
Turning to cash flow, we had strong working capital management in the third quarter.
Delivering operating cash level of $160 million compared to $105 million in the same period last year.
And our free cash flow for the quarter was $47 million, putting us on track to deliver 30% adjusted EBITDA conversion fortyish.
We anticipate strong free cash flows in the fourth quarter.
We took the opportunity to begin Delevering from Cooper acquisition.
At the end of the third quarter, our leverage levels stand at 2.1 times trailing 12 month adjusted EBITDA down from two three times at the end of second quarter.
We plan to maintain our deleveraging trajectory and we expect that our leverage will be around one and a half times by the end of next year.
Opening the door for further shareholder accretive capital location.
Our balance sheet is rock solid and investment grade and we continue to generate solid cash flow.
Looking ahead at the full year 'twenty to 'twenty two.
Our current internal forecast is showing mid to high single digit organic revenue growth for the fourth quarter.
As Michael mentioned, there were a few transient factors related to last year's peak season <unk>.
Including the timing of startups extraordinary volumes and the tight labor market, which we don't expect to record this year.
On this last point, it's worth noting that across our business. We are no longer finding it necessary to pay holiday season incentives to attract and retain our team members.
Beyond Q4.
Looking into 'twenty to 'twenty three we are currently projecting at least high single digits organic revenue growth.
This has been by our long term contractual relationships.
Our continued high revenue retention rates and the nearly half a billion dollar of incremental revenue already secured.
We will provide full financial targets for next year on our fourth quarter call.
We are laser focused on continuously improving our business between.
23, 83 D V a euro balancing productivity and growth.
The benefits of operating as a stand alone company four one years, we have kicked off a number of internal studies assisted by Accenture.
Further detail on the productivity initiatives, we are implementing during our Investor day.
Like most global companies, we are experiencing headwinds due to ethics and rising interest rates and we have taken measures to manage our downside risks.
<unk> to monitor the markets closely.
Moving from the macro markers to Gx salt.
That are significant tailwind to being a pure play contract logistics provider, especially in this environment.
The vast majority of our business operations or inside the four walls of the warehouse.
And do you have contractual relationships that include inflation pass throughs and minimum volume guarantees.
This is a low risk business model with long term contracts that are not exposed to short term rate fluctuations in the shipping all transportation markets.
The current market backdrop gives us an opportunity to showcase the resiliency of our contractual business model.
And we have strong outlook driven by balanced growth in all geographies and verticals.
With that I'll turn it over to Bill who will give you more detail on just what we're doing for and hearing from our customers.
Over to Bill.
Thank you Barry.
Our growth opportunity is best exemplified by our sales pipeline, which remains strong.
At $2 billion.
The exciting thing is that our pipeline is diversifying.
The mix of our current pipeline is skewing more heavily to industrial technology and food and beverage.
<unk> balanced growth in our verticals.
At the same time, our retail and E Commerce partners.
Looking to <unk> to help them expand footprint and geography.
We're also seeing a pre pipeline filled with more transformational customer projects as companies strive for higher levels of both customer service and productivity.
These types of projects are right in <unk> wheelhouse.
Well, we did see some customer decisions delayed in the third quarter.
This was primarily related to expansion.
As customers took a pause to reassess their strategy in this changing environment.
Most of these projects are now moving forward.
This is a sort of environment, where our supply chain partner can really deliver exceptional value to its customers.
<unk> is doing just that.
Over the past three weeks I have met in person with 15 of our top customers around the world.
They are all looking for ways to deliver structural cost savings in their supply chain.
And the number one topic of the conversation is technology.
They're asking us.
How can we use technology to reduce the impact of inventory build in their supply chains.
How can we use technology to deliver a better consumer experience.
And finally.
How can we use technology to reduce costs by driving warehouse productivity improvements.
This is where <unk> steps in with innovation innovative solutions for our customers.
As Malcolm mentioned we.
We have deployed a record amount of technology across our business.
Recently, we went live with two highly automated sites.
First our new flagship site in the U S well.
Well, we will drive a 250% improvement in productivity, so there's technology customer.
While reducing space by 40%.
Second.
A high profile E Commerce site in Europe , with a capacity to deliver a massive 25 million units a year.
Over 150000 per day during peak.
This is a huge increase in capacity and efficiency for this customer in this important market.
Technology like this is a key lever for us.
Margin growth going forward.
In today's macro.
Customers choose <unk>, because they need a confident battle tested partner to help design and implement future strategy.
I'll turn it over to Mark all yours Mark.
Thanks Bill.
So it was delivered strong growth throughout 2022, taking.
Taking share through tech leadership and through the tremendous value, we deliver to our customers.
We expect to deliver robust growth next year, so let's break that down.
Firstly on the revenue side to.
To date, we've won contracts with 6% of gross revenue growth for 2023.
And for context from this point last year through to today.
We've won an additional 5% of revenue growth for 2022.
And as Bill explained.
We're particularly excited about our current pipeline.
Unlike a transactional business model, where pricing is driven by short term supply and demand conditions.
Our pricing is driven by long term contracts with inflation protection embedded within them.
So overall on the revenue you can see why we're confident about or at least high single digit growth targets for next year.
Secondly, moving to margins.
In the last two quarters, we said that our margins will improve throughout the year as we work through the flood of startups that we were implementing.
That margin expansion is now well underway and in Q4, our margins will be up at least 50 basis points year over year.
And for 2023, we expect our core margins to improve due to maturing contracts more automation.
And as Barry highlighted.
Increased focus on productivity.
So in summary.
We believe that we've just scratched the surface of the huge opportunity ahead of us.
And we look forward to giving you more granularity.
Our long term targets at our Investor days in January .
And with that well open up the call to Q&A.
Thank you we will now be conducting a question and answer session.
Like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the third.
One moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Scott Schneeberger with Oppenheimer. Please proceed with your question.
Thank you very much good morning, everyone.
A few questions now.
Now from the peak.
Peak season, presumably shaping up to be a bit lighter year over year for for many of the multi channel retailers and then presumably bunch here you have customers using environment.
So extreme where we might be triggering minimum volume requirements are broadly and more importantly, how is that how's gx hell approaching this a potentially lower volume environment and.
In an operationally and in maintaining its economic profile. Thanks.
Thanks Scott.
So well we're in peak we're already in peak season, No. You know we've already got our way through October that's going in alignment with our planning what we expected. So what we're seeing directly only growing from our customers across all our businesses. So all of our regions you know our Europe business U K business North America.
It's really a what are you expecting actually a buoyant and so the.
And.
What I mean by that is are.
The business is actually really doing very well in that context, but he is going to be different than a year ago. So let me let me just give some picture on that.
If I go back to quarter four in 2021, we were all coming out of the pandemic our product availability was actually quite good. So I remember visiting several of our warehouses and we weren't full with products and everything was commingled them from the Polish remember all of those delays at la.
Long Beach have you seen was called me getting right on the last moment. So it meant the peaks peak season was really very very heavy workload for our company. There was you know all the remnants of all the different supply chain disruptions.
Labor availability at that time also which was really a challenge and that was a consequent solved there was still a lot of people out of the labor market. Following the pandemic. This year, it's very different so our warehouses generally have good levels of inventory in them and importantly labor.
Is readily available in a good way to look at that as Paresh mentioned is the fact that last year, we were having to pay you know quite extensive labor incentive ization programs to get our the peak resorts. He thought we need this year, that's not the case and in fact, right now where it makes.
Recruiting around 20000 U T members not all of those are for peak.
As Bill mentioned Newwave had robust growth fund will be setting up new sites in January and those people are being brought in for training, but a good deal of them are actually in activation for our peak season. So in summary, you know I think we're going to have a very volume peak, but it is going to be a smooth hold.
D season than what we experienced in 2021 and probably if you if I wish to speak to all of our operational teams. They probably say, we're very pleased that it was a it was an exceptional tool yeah last year to deliver the holiday season. This year I think our business is going to be much more smoothed out.
Okay, great. Thanks, I appreciate that yeah. The the the margin in the third quarter expanded 20 basis points year over year and with the addition of clipper predominantly up in bulk contracts I imagine that may prevent you to an initial integration headwind. So I was hoping did you. Please.
Elaborate upon primary drivers of margin expansion in the third quarter.
Sure.
You have highlighted clipper was a headwind as it has.
High EBITDA margins and has been trading well, but because of the lower kept them carefully intensity has lower EBITDA margin than the entire group.
When you look into year over years, the vast majority of the improvement came from operational efficiency driven by our investment into technology retrofitting, our existing operations with advanced automation and some productivity initiatives you already rolled out.
And did you just just following up on that on an automation Oh Clipper comes in I believe it's a little bit less automation mix than than Gx always and then you you noted a there's still 30% of revenue, which is automation, but a lot of these prepared remarks and commentary.
Are you about increasing automation. So just wanted to get a sense of are you will you be existing operations equipment would that get increasingly converted or is that going to be left alone and more of the automation plus you're just going to be on the go forward wins and end and when might we see that automation.
All mixed Starkville list.
Going forward. Thank you.
Yeah, Scott its smoke and let me come in on that so I mean generally automation, it's rolling out more and more across our business.
Last quarter. It was just an incredible quarter for that we were up significantly in the amount of tech enablement that we pushed out into the warehouses.
One of the things we were really attracted to about clipper was that you know, it's a great company great customers, but actually when it comes to tech enablement automation. So when you visit a typical Jack suicide youre going to see lots of preparation rowboats goods to person robots robotic arms.
In fact, when you visit a clip aside you don't actually see that it's broadly a more manual based business. So one of the things we saw when we were making the deal was a big opportunity to.
Automate a lot of the operations and obviously following the regulatory approval our teams have been able to be in that together working together and we're already planning on that so the answer to your question is definitely yes, we will be rolling out more and more tech into the clipper.
And then broadly I think what we're going to see on the go forward. You know we are aiming a more challenging macro environment. In 2023, you know whenever we refer to technical recessions I don't think we're in a recession our business isn't behaving as if it's seen a recession the consumers.
Not behaving as they bring in a concession, but what we are seeing is lots and lots of early signs of opportunities coming along into our pipeline pre pipeline of customers that need to transform the business and they invariably when you say transform your business you have to do things differently.
More efficiently you have to pull costs out and the only way you can do that is leveraging automation and bill mentioned about two big flagships that we've just set up in the last months.
We're going to see more and more of that you know the tide of tech rollout for us it's going to accelerate as we going forward. So I think it's going to be a super exciting period for us and we're going to go into an even more high tech deployment environment as we move forward, but that's partly driven by the more challenge of the Max.
So environment is going to make automation, all the more appealing to customers and on the retrofit side as well.
Alright, it sounds good thanks, Michael Thanks, Eric.
Thank you. Our next question is from Chris Wetherbee with Citi. Please proceed with your question.
Hey, Thanks, good morning, guys.
Maybe we could start on the revenue pipeline that you're building for 2023. So I think you have $500 million roughly speaking built out already for 'twenty, three and I think there. She said high single digits at least growth on the top line for next year.
How are you thinking about some of the other variables. We didn't know that number one we saw new business wins in the third quarter, maybe decelerate a little bit versus the run rate. We had seen in the first half of the year and then there's the potential for churn or customer retention as we go into next year. So as you start to kind of think about high single digits or better.
How do you sort of deconstruct that is there more business that youre likely to win in the fourth quarter that can add to that pipeline and just sort of how certain are you around that high single digit run rate.
Hi, Chris This is bill.
And so to answer the questions. You were asking is one our pipeline is very strong we mentioned $2 billion at the end of quarter. Three it's now actually $2 2 billion. So it's growing.
The pre pipeline, which is what we really focus on where we are hunting for new business.
It's very strong and growing rapidly we're adding accounts that are coming in as we mentioned from industrial from from food and beverage and from and from technology.
The benefit of these new contracts coming in as they're looking at the economy today and they're looking for ways to get cost out.
So while they still want to expand and grow they want to make sure they're they're viable it'll give you. A quick example of one so we work with a customer in the U S.
And do a lot of work for them in the northeast.
We run a site that they would tell you is the top site in their network. So they have seven or eight other sites that they run they have another couple of with some other kind of other providers.
They've asked us to come in now and look at their sites and they want us to take over in place we call. It takeover in place the sites that they have and move them to <unk> to help them get the same efficiency in cost savings. They have in the in the current one with US today. This might have been something they wouldn't have done before the economy economic change, but today, it's critical for them to do this so that's one.
Growth opportunity that's happening around the globe.
The second one is we I mentioned that we had we're always working deals and a lot of our deals are very large and long term with our customers.
Going into the third quarter, we had customers who were looking to expand their business from Europe into the U S and some from U S into Europe , and they wanted to pause and just take a look and make sure that strategy was the right strategy in today's environment, we work with them on this and I'll give you. An example of one.
Where they were planning on three sites. They had a three site plan for the next year and a half they would start developing what we worked on as we're going to have we're going to work on one site in the northeast, we're gonna put that side up for them and that will be there their flagship starting location and we will use <unk> direct them to cover them in L. A cover them in Chicago cover them in Dallas and that gives.
The flexibility to move at a better pace and if if they decided they may not that they want to put a bespoke side on the west coast and we will do that for them. They may stay with just direction director of it that way. So those are the changes we're seeing is cost out focused on technology and looking at ways, where they can be flexible in the market until they really understand what's going on in 'twenty.
Three.
Okay. Okay.
That's very helpful color and I guess, maybe as you're thinking about 'twenty. Three you know Mark I think you mentioned margins core margins next year I was wondering if you could help us kind of deconstruct that in terms of you have.
Clipper in there, which is probably a headwind to margins you had FX, which I think you were less hedged next year than you are this year. So can you sort of walk through some of the dynamics that will allow those margins to expand as at the factory.
That's sort of new business broadly speaking to decelerate to something less than what it was this is a very rapid pace. This year or is that part of it can you just walk and walk us through that please.
Sure. Chris This is Barry shared the anticipate core margin expansion in next year's and main drivers for 'twenty to 'twenty three is going to be first our continued investment in technology, including the retrofitting our existing facility as we talked about with advanced automation remember about 50% of our Capex in the last 12 months was <unk>.
On tech.
And secondly, our productivity initiatives, which we have highlighted the Nicole we will highlight more during our investor day in January but those imply and what the impact will be and last one is the module attach ratio from the huge startups. We have implemented in 2022 generally it takes about two to three quarters for an operation.
To reach full margin maturity and our margins are expanding which will progressively you will see that more visibly in Q4 and into next year all of those combined will drive our core margin expansion into 2023.
Okay got it and just one point of clarification Malcolm earlier to a question you said that.
Business activity was buoyant, what we're hearing from everywhere else in the supply chain that peak season is it sort of less than what was expected I just want to get a sense do we do we know what the volume number is for existing facilities or existing customers within facilities for the third quarter.
Yeah, we've seen a we've seen we've seen some normalization post pandemic, obviously through the course of the we saw brick and mortar returning that's a good thing but on top of the core activity.
Obviously as Barry just mentioned you know, Italy in the quarter one quarter, two we really out of an outsized amount of new business going game. So we're really benefiting from that in the quarter also so that's why I'm kind of giving you the view that I think we're very buoyant.
You know clearly you know in the current environment, we've seen certain customers have exhibiting elements of a bit of softer environment, but overall you know all the customers I think we're seeing very good volumes both in a more smooth.
Easier to deploy way and to be Frank that suits us Frank I. Yeah, you know I think our all of our operational teams went through a huge challenge last year. It was an exceptional last quarter really we have a lot of volume channeling fruit that really ought to have been handled more smooth.
But it was impossible to do that because of all of those disruptions and just disruptions getting old of a product. So this year I. It's a smooth last part to the that's that's why we called out it's going to be a slightly.
Lower level of growth than what we've been exhibiting through the first three quarters, it's really more about how extreme quarter. Four in 2021 was rather than any any any change of emphasis in in quarter. Four this year. If that is that kind of if you want to start.
Oh man.
Yeah, No that's very helpful. Thanks for the clarification I appreciate it.
Thank you.
Thank you. Our next question is from Stephanie Moore with Jefferies. Please proceed with your question.
Hi, good morning.
Yeah.
Good morning, everyone.
Good morning, I appreciate that the initial color on 2023, and certainly from an organic growth standpoint, clearly there are numerous.
Numerous tailwind that'd be about 'twenty 'twenty three with the new contract win right thing I think taking it even a step further you know clipper is going to be contributing to total growth, obviously not organic but I was hoping maybe you could talk about potential headwinds to the business. As you think to 2023, you know maybe talk through the FX headwind.
Expectations around maybe you know volume performance just given it is a weaker macro just trying to get a sense I know, it's hard for all of us to know, but you know what what what are those offsets that we should be prepared for or we should be monitoring.
Thanks, Stephanie let me take the FX, one and all Mark to come in on the volume side like all global companies, we are experiencing FX headwinds and our FX exposure is purely translational both our revenues and our costs are in local currencies, where we operate.
As you May recall, we didn't provide a view on what the FX impact would be a different exchanges in our prior earnings call and if you take the current spot rates, it's par for euro and won't 14, four pounds the year over year, EBIT EBITDA headwinds hypothetically could increase to $60 million for two minutes.
Industry.
As you'll recall, we hedge in 'twenty to 'twenty, 280% of our EBITDA exposure has been hedged and it's valid for Q4. So what I've explained is better for 2023 EBITDA.
And going into 'twenty, two and three we decided to de risk some of our exposure by taking certain hedges for the entire year.
Parish I'll take the <unk>.
<unk> on revenue growth for next year, Hey, Steph, it's okay. So for next year as Malcolm and Bill were leading to where we're very confident about our ability to deliver high single digit organic revenue growth there's.
There's a few things driving that clearly you bought this inflationary backdrop, which is remaining systems, you've got maturing contracts from the prior year, you've got more tech as Malcolm was alluding to.
Upscaling services from <unk>.
Contracts in the last 12 months and you've got those new wins coming through which is already some 6% and obviously as I mentioned in the earlier comments there is more to come there as well and then think about it as well and the fact that we've got high levels of retention rates as you know so all of those forces bring an element of counter cyclicality to our growth if you break down the <unk>.
New wins, we've got roughly we won in the quarter around $158 million in Q3, that's gonna full broadly $20 million in 2022, and another 120 million into 2023. So that takes you in total for 2023 of some $497 million you can see on slide eight.
The slide deck, so that's that 6% growth rate, that's coming through already and then on top of that you've got another roughly $130 million for 2024. So all of this is Malcolm was saying all of this points towards multi year visibility it points towards resiliency through the cycle and it's that strong growth that we've been talking about.
Great No I appreciate it and then just talking through.
You know what in terms of your strong organic growth performance you saw during the quarter as well as your pipeline could you maybe kind of break out the exposure and drivers between North America and Europe for those grants.
Okay.
Stephanie Hi, sorry, sure when you're looking to our growth in the quarter. It was quite balanced in geographies and verticals. So it was pretty broad and quite dispersed we've seen growth all across all verticals and geographies and do you expect that growth to continue venue.
Right.
Breakdown, our growth into our net new business wins.
And also our existing operation that was almost evenly balanced in Q3, and we expect that balance to grow into Q4 as well, we expect contributions almost as much as our increase in our existing operations in Q4 as well.
So balanced across the board, it's a quite a balanced business from a vertical perspective as well as geographies perspective.
Thank you so much.
Thank you.
Thank you. Our next question is from Allison Pollinia with Wells Fargo. Please proceed with your question.
Hi, good morning.
Could you talk a little bit about potentially the opportunity set with existing customers, where all are certainly worried about you know a decline in volumes next year is there an opportunity for you to capture increased volume with existing customers as they may be kind of reset there their infrastructure and shut down maybe the non gx they'll kind of facilities and consolidate.
<unk> just any thoughts there is it impactful isn't an opportunity if we go into a more significant downturn next year. Thanks.
Alison Hi, its Malcolm.
There's no doubt I think the change of the environment, you know whenever we say a downturn or a slightly softer market that change of environment actually is going to play to the benefit of <unk>. So you know what it's driving as we've mentioned we can see already set.
And customers coming to us because they need so they need to improve their own efficiency, maybe they're doing by themselves today, maybe they're doing by one of our competitors today, who are not able to deliver the kind of the enhancements and initiatives that Jack so can do but we can see already.
That kind of business activity starting to grow in a pre pipelines. That's the that's the kind of measure that we use for inbound inquiries before we actually finalize qualify and start making bids and then it drops into the pipeline and that's one of the reasons, we're very confident about the same.
It was growth for next year. We are we are for sure. What you know cautious about next year and that's the very reason why we are calling out a more moderated.
<unk> growth through 2023, and as Paresh mentioned, that's giving us a window as well to focus in with delay on some initiatives to improve our own efficiency. I mean, we're 12 months old as a company. You know we are only 12 months old holding in Ghana spend so there's a lot of things internally that we can do also.
Our cells, which will be very positive in terms of viral margins et cetera, but overall for next year. We're no. We're not seeing any signs of customers walking their own numbers by significantly we are cautious on with calling out. The fact that they will have a little bit more softer.
On a core activity, but more than compensated by the sheer growth of.
Basically it's already signed its already in process of being planned for implementation leases assigned with buildings, you know contracts a place with automate automation providers and on top of that the environment that we're going into I think will be very good for our new business growth for new business growth.
From companies, who may be in the past would have.
No salt sauce, but whenever there's a challenging macro it pushes people to have to do things differently than how they've done in the past and that's right in our wheelhouse it would be a good environment for us in 2023.
Great and then that's helpful. And then in terms of the pipeline I know you talked a little bit about some of the conversion of that pipeline kind of lagging a little bit is that something we should expect in terms of maybe a softer period or people kind of revisiting things does that conversion part of that pipeline start to slow a little bit I'm not that it goes away.
Just maybe kind of a longer tail to sort of execute here any thoughts there.
Yes, Hi, this is bill what I would what I would tell you is that the pipeline evolves.
And different markets and what's happening now as we talked about earlier about.
Customers needing to have us take over sites. They currently run we call there's takeover in place. So we come into a site we take over the team. That's there in the operation up there and then we improve it through the benefits of <unk>. So those are growing dramatically and we will be where we've already closed some we're gaining more and we're getting more of that so that volume will be added into.
Our pipeline and the pipeline is growing extremely well right.
Right now at the same time.
We deal with a lot of Blue chip customers is still moving forward and growth and so they want us to continue to build out their supply chains for the future. We talked about the technology technology gains of 250% improvement in our 40% less footprint. So those are the things customers are looking for how do they get cost out and finally, the last thing is we're all hearing.
[noise] about stock in the industry supply coming in where are in the middle of all that and we're helping our customers get that into what I would say as a.
Pick up both shippable shippable standpoint, so it comes into US we put it into our site and we have it ready to go now to be sold in the marketplace. We also have a lot of value added services, we perform on that which again raises our revenue, but the pipeline is strong it's grown a couple of hundred million dollars, which is a normal thing between the end of the quarter to today and is diversified across industry. So whether it's <unk>.
Aerospace automotive or food and beverage, we're growing in those areas too and they're not slowing down and they're not short term thinkers.
Perfect. Thank you.
Yeah.
Thank you. Our next question is from Brian Austin back with J P. Morgan. Please proceed with your question.
Hey, good morning, Thanks for taking the question.
So maybe another one for bill if you can just elaborate on this diversification trend that youre seeing in the pipeline and historically, we've seen the big ecommerce Amit.
Channel of E Commerce sales. So it was that an intentional if it is it just the way the market shaping out with some of these customers as you mentioned now perhaps needing to think a little bit differently. Maybe you can just kind of.
Talk through some of the nuances within that shift and if this is typical where something intentional.
That you've been pursuing.
Yeah, I'd say, it's a bit of both so we're very intentional in how we try to grow our pipeline and our customer base.
Balanced across verticals.
Now obviously, when you think of the aerospace market.
The aerospace market is in the last year is coming back into business Theyre, producing airframes, there really ginning up and continuing to grow and we're in the middle of that we're one of the top providers that especially in North America. So we're in the middle of that so those those accounts, where we're bringing on board and as you're hearing we're closing as we go forward at the same time with E.
Commerce, Yeah, we went through the boom of Covid, where everybody was looking to build a site and be online people still want to do that but now it's in a more measured approach as Mount as Malcolm mentioned, some peak last year more measured approach and so where we're working with those customers because we had such a great presence in e-commerce during Covid, we <unk>.
Have a great recognition in name right now for that so all other customers are coming to us and when we talk about E. Commerce is not just <unk>.
Retail in.
The normally calm in aerospace does he call in automotive does E com food and beverage does E. Com. So we're expanding into that and finally, we talk about reverse a lot.
<unk> has been still a third of our sales in the third quarter will reverse so we're adding a lot of reverse because again, we have a great reputation in that area and that's growing and people are coming for that that's really become a norm and I'll just say one last thing. The addition of Clipper we've talked about is just fantastic.
They brought we've already sold three accounts.
And we're working very closely alerting their services. They have some very very slick return services that are things that we can almost like a plug and play for our customer. So we're very excited about these and teams are meeting right now and in the U K to work through some of these and how we expand this across Europe and then after that how we got to the U S.
Alright, great maybe one quick follow up on that would just be the competitive dynamic you mentioned taking share it looks like it actually stepped up quite a bit if we look at where the new business is coming from.
Maybe you can expand on that I think you gave some examples but is there any change in the competition landscape anything margin pressure and then also just from the health of the customer we saw I guess, a little while ago.
Big Big size right off from one of your peers.
Anything that you're watching or worried about from a controls perspective as it comes to credit risk, especially in some of these areas that have seen pretty decent size shifts in terms of their fundamentals.
Yeah, I'll start and I'll hand, it over to bearish, but what I would tell you is we always have competitors are always in the market.
We tried to do is we focus on what our customers' needs are and we make sure we bring the right services and products. So we are growing we are taking share no question.
And.
I see that continuing.
Again, the takeover in place when I talk about those as not just internal business that customers are taking from their own business. It's also competitors that aren't able to generate the returns we're generating so they bring that to us also but I'll, let barry talk more into it.
Sure our largest customers you have the vast majority of our total receivables are really high quality Blue chip names with limited to zero credit risk and as you would recall our largest customer makes up roughly around 4% of our revenue.
We manage credit risk very robust, we have very rigorous credit controls such as solvency metrics and we monitor this on a constant basis not only they only take on new contracts booked through the life of the contract we ask for parent guarantees bank guarantees and if they don't.
Those expectations, we're not shying away from walking away from these customers and we have done in the past and we will continue to do that in the future. So we have a very robust process and we have a stick approach on.
Credit application for our customer base.
Okay. Thanks for the time I appreciate it.
Thank you.
Thank you. Our next question is from Ari Rosa with Credit Suisse. Please proceed with your question.
Hey, good morning, congratulations on the strong quarter here, so I'm curious to hear you.
You're talking about the strong pipeline.
Customers coming to you and asking for more services, obviously, we're seeing some challenges in the marketplace from a macro standpoint.
Where maybe your service gets valued maybe a little bit more of a premium. So I'm wondering do you see an opportunity to rethink how youre going about pricing your business or pricing. Your service is there an opportunity to maybe be a little bit more aggressive in terms of.
How how you approach customers, how you differentiate yourselves from competitors on a pricing front given the levels of demand that you're seeing and kind of the strength of the pipeline and the value add of the service that you're that you're bringing kind of can we see a step up from a pricing standpoint versus where you've been historically.
Yeah. Thank you already I appreciate that.
So when we write pricing for our customers, we're thinking of the long term nature of our contracts not just in the first five years, but what continues after that as our renewal rates continue to rise.
So we always want our first developed a price that covers our costs gets us the return we promised the market and we make sure we deliver each time, we look at the extent of you know.
Well the all the capital that goes into the site. So pricing I think is very sound. What we do it's a I would say it is it is a deep focus for us, but it is less of a focus between the customer with us on the deal what they're really looking for is the throughput the throughput that we gave them and the opportunity we gave them outweighs bye.
Leaps and bounds any amount of money, they're giving us. So we don't let that become the reason why we're not we're not getting that.
And and and.
So the level of technology, we implement any size also drives how we look at price and how we develop price for our customers.
And then finally, what I would say is that the thing we have done it really in the last couple of years is we've made sure we've solidified our pricing for all environments. So we make sure that we're contractually set whether its limits about whether it's energy costs, whatever we extra all pass through that we have to get those into our contracts and I'll turn it over to Byron yes.
And context for our return on invested capital and what Youre seeing is our inlet piece of technology.
<unk>, our customers are willing to share the burden as well and that keeps our returns at the higher level and also we have a quite balanced.
Of course book hybrid contracts, which makes about 55% of the business and 45% is coming from cost plus open book of business, which is absolutely mechanism.
Quite limited kept all play from our perspective, which helps our returns in the long term.
Yeah.
Got it understood and then you mentioned I'm sorry, I didn't know if you were finished there is that yes.
Yeah go ahead, yeah, okay, great. So just I wanted to ask you mentioned labor availability has gotten a little bit better how do you think about what the limiting factors are on your ability to grow for 2023 or 2024, given kind of the level of demand that you're seeing which seems like it continues to be pretty robust are there any limiting factors on on your ability to.
With the rate at which you can expand.
We can grow faster if the right further contracts, but do you have a certain governance mechanism as you highlighted the risk in this business is not writing high quality contract. We're very careful about it we are writing high quality contracts and you're seeking a high return expectation as well as defense.
Creating with our customers that's the limiting that's the law.
Limiting factor, but we will continue to focus on writing high quality contract and delivering to our shareholders.
Got it okay. That's great color. Thanks for the time guys.
Thank you.
Thank you. Our next question is from Casey Deak with Stifel. Please proceed with your question.
Hey, Thanks, gentlemen.
Hello, everyone.
Hey.
Really my questions would be on the information I know you've talked about the 30%.
Through the automated sites up revenue is there something that we are driving to is there a number you guys were going to share.
And the percentage of revenue that we'd like to have coming through those sites or in the near term near term view of that.
And can I say smoking, but let me let me let me take that question. So I think first and foremost we measure automation across our business. So you hear us talk.
Oh extensively around 30%, 32% the way we measure what we're putting into the science is when it's basically that measure you strike driven from where we upsize broadly very highly automated automation is really driving the site. It's fundamentally it's the core of the site.
On top of that we've got a huge rollout, where we are deploying technology, but retrofitting technology across all of the other locations that we operate and that could be just as simple as our continuous improvement teams going into aside witnessing maybe a pallet loading.
So we load goods onto onto a pilot before its dispatch to could be a brick and mortar or it could be possible. So they're going to go into a parcel network I think could be our continuous improvement team just simply saying well look we can replace <unk>.
Plenty people by putting a robotic Amit.
So all that's taking place all the time and I mean, there was a question earlier about the clip the logistics business.
Great example, you know so we told.
Simply about cost synergies you know that says doing things more smarter, it's leveraging all of our buying power. It's leveraging all of our support teams we talked a lot about top line synergies, but in fact, we've been a little bit quiet about all of the in operation synergies that are going to flow on that deal.
It's no different than what we're doing across all of our business now we've got our.
Investor Day coming up in January and we're really looking forward to that because that's that's a window for us to share.
A lot about the business about where we think our verticals will drive in the future the different geographies our strategies in terms of the best use of our capital and one of the aspects youll probably hear on that and you'll have access to some of our superb technology experts and in fact youll be seeing some diamond.
<unk> as well and I know, we've got a super site visit plans as well, but you'll get a much better appreciation for the evolution of that that it would be easy for us to give a big headline number but the reality of it is it's something that's growing year. After year. You know there is no doubt a third.
The 2% eventually will be faulty eventually be 50, but its a gradual process.
Doing and brand new sites Nowadays just as Bill mentioned very very highly automated so the new science here in North America. The big flagship site for a technology I mean that is going to have a wow factor in the market. When we are fully implemented and we're able to start to show.
People that is going to have a big wildfire.
And similarly in Europe . So these kinds of things that that's what's driving our business and it's what's helping us win market share because I think we're pretty unique organization and our ability and the testimonials that youll hear from customers, but our ability to deliver these things on time and when they need it.
That's great. Thank you mouth on my I really appreciate it would be the follow up I'd have to there.
So yes, there are like the new sites are very automated totally automated like are there constraints right now to roll.
To roll that full automation throughout the network.
Is it on is there anything slowing it down from sourcing that capacity from technological manufacturers is customer adoption, where you have to.
Assume that the customer adoption is.
Relatively easier than actually getting it in there because you can get it didn't improve or you have a lot of case studies, where you can improve the economics.
Putting the automation and any comments you could have around that.
Sure Yeah. So I mean, the most fundamental point is labor inflation means it's much more simpler to justify from a cost point of view, we're putting a big automated sites and that in itself will drive a stronger demand for automation as we go forward it keeps driving a stronger demand for automation.
But if we look back over 2021 and this year to date, we've had high levels of inflation. So it's driving companies to need to be more efficient, but it's also a byproduct is actually it means it seems likes to justify putting a lot of automation. The paybacks are much easier for customers.
So they're much more open minded to do that it's a kind of a double whammy of benefit not customers. They get it in terms of our ability to deploy.
Clearly.
A lot of this equipment is lead time, driven that's really what I do say that Jack so it's not a huge benefit.
Number one we're the largest pure play a contract logistics company in the World, We outstripped our peer groups by.
Big Big Ah.
In terms of volume of automation that we actually deploy so frankly manufacturers want to work with us where the kind of go to organization that they want to work they want to have the pieces of equipment showcased in our facilities, it's big kudos for them. So so far we have no C.
Any difficulty in actually acquiring the right amounts of equipment those very strong relationships on the tech teams have developed very strong relationships with the manufacturers of that automation. So we've not seen any big impacts.
So far and I think actually we've been through the worst theory adult chip sure C. J I my feeling is that that's going to get a little bit easier as we go forward. So so far we've not seen any impact we're not anticipating to see any impact on the go forward either.
Right well I will pass it back I know we're past the hour. So thank you Michael and thanks for the color there.
Thanks for that.
Ladies and gentlemen that is all the time, we have for questions today I'd like to hand, the call back to Malcolm Wilson for any closing remarks.
Okay, Thanks, Doug and listen thanks for managing the coal so while they appreciate that and we've got some great questions. This morning, I just wanted to say a few words before we close this is our fifth earnings call and.
In every call that we've delivered.
Talked about and we delivered strong performance.
Probably are already pointing right now because we're in a very changing macro environment, we're going into a new environment.
And.
As you're seeing no difference for Jack So we're delivering very strong numbers. This is a super resilient business and let's hope we don't go into any big downturn next year, but if we do our company is ready for it with rock solid investment grade and.
The demand for our service I think we will skyrocket, if we really end up in that situation, but let's hope we all don't end up in that scenario.
You'll have seen today that everybody, who you speak to on this call. We are a sleeves rolled out management team Ive said that before but it's important that management forecasts.
Being a pure play contract logistics, we're only focused on what happens in the four walls of the warehouse and that's helping us navigate the company to success.
We're strong across all of our regions Paresh just mentioned, there's no real difference to say between what was happening in our continental European business.
<unk> business, North American business, we're really doing well across each region and each vertical in its own right, a strong and doing well and has very good prospects for the yard had to move talk more about that in January when we're able to share with you in our Investor day, we're really looking forward.
So seeing many of you on that day I hope you'll be able to join so with that I just want to say finally, thanks, everybody for your support for Jack So.
You know and we're looking forward to having further contracts in the future.
Got it.
We will close the call. Thank you.
Okay.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation you may disconnect. Your lines at this time have a wonderful day.