GXO Logistics Inc. Q1 2023 Earnings Call

May 10, 2023

Welcome to the Jack So first quarter 2023 earnings conference call and webcast.

My name is Sherry and I will be your operator for today's call.

At this time all participants are in a listen only mode.

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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 measures and the company's guidance.

During this call the company will be making certain forward looking statements within the meaning of applicable securities laws.

Which by their nature involve a number of risks and 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.

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.

To the extent required by law.

The company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules during this call.

Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables are on its website.

Unless otherwise stated all results reported on this call are reported in United States dollars.

The company will also remind you that this guidance incorporates business trends to date and what it believes today to be appropriate assumptions. The company results are inherently unpredictable and may be 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 in its filings with the SEC. It.

It is not possible for the company to actually predict demand for its 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 of 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 operator, and good morning, everyone.

Thanks for joining us today for our first quarter 2023 earnings call.

With me in Greenwich Bearish Ora.

<unk> financial officer.

Frey Chief commercial officer on Monday.

Investments officer.

We started off 2023 in great shape.

<unk> delivered a strong quarter with progressing ahead of schedule on our integration of the business.

We've laid the foundations for delivering a strong 2027 targets.

Our revenue in the first quarter was $2 $3 billion growing 12% year over year.

Revenue growth was 7% at the midpoint of our full year guidance range.

Our adjusted EBITDA was $158 million in the quarter.

Year over year and ahead of our expectations.

As a result.

We are raising our full year adjusted EBITDA guidance by $15 million, bringing the midpoint of our range to $730 million.

It's been a great quarter, signing exciting new business and implementing automated solutions for our customers.

Through the end of April we secured more than $800 million worth of incremental revenue for 2023, signing new partnerships and expanding relationships across multiple verticals a market with a fantastic group of customers, including Google catalogs.

Unilever and lithium Westwood in particular want to highlight the new project, we announced in April with Sainsburys, a leading U K grocery retailer.

With a lifetime value of nearly $1 billion. This is the largest annual revenue contract awarded in <unk> history.

Bill will talk in more detail about this in just a moment.

These new business wins demonstrate our unique value proposition.

We bring our global scale deep expertise tech enabled solutions.

For our customers.

In the quarter, we again set a new record for the deployment of operational Tech, increasing total tech and automated solutions.

64% year over year.

Today operations utilizing automation.

<unk> medical nearly 40% of our revenue are known but that will only increase to meet the enormous demand going forward, both for new implementations and for retrofitting of existing operations.

We are also accelerating our deployment of machine learning and artificial intelligence, which boost productivity significantly on top of the benefits of the warehouse tech itself.

In short, we're seeing unprecedented demand from customers for solutions involving tech enablement and our leadership in this space continues to drive our growth and profitability.

Underpinning our confidence, but both our 2023 guidance and our 2027 targets.

To fully capitalize on the demand of our services in this area. We're also strengthening our teams to support significant growth in the U S to come.

We will have more news on these initiatives next quarter.

Also in the first quarter, we were pleased to announce that Jack So direct our should use a solution has gone global.

We've launched direct across the UK with the rollout into Continental Europe planned for later this year.

Expansion comes through the blending of the best of both the <unk> and legacy clipper capabilities and expertise to create a differentiated offering.

And finally.

Just two weeks ago, we published our second annual ESG report.

And then we've highlighted our progress on ESG from emissions reductions to the development and belonging initiatives for our team members worldwide.

We also outlined our new ESG goals, including safety targets.

ESG is important for our customers as we saw in the significant sainsburys win where our enablement of sustainability in the daily operations was a key factor in the decision to expand our business relationship.

We've had a great start to the.

We're raising our guidance and we're looking forward with confidence.

We've delivered strong wins, we have a robust sales pipeline and we set the foundation to achieve our 2027 targets.

With that I'll ask paresh to come in on the financials bearish over to you.

Thank you Mark and good morning, everyone.

We are proud of our results this quarter as they continued to showcase both the strength and predictability of our business.

And to deliver on our promise of robust growth and resilient margins.

As Mark mentioned for the first quarter of 2023 generated revenue of $2 3 billion and delivered 12% revenue growth.

Oh, which 7% was organic.

In particular, our reverse logistics business grew organically at nearly three times the rate of our group organic revenue growth.

Geographically our business in Europe has performed above our expectations.

And you've seen particular strength in the U S across technology.

And aerospace verticals now.

We've seen consumer demand.

Our adjusted EBITDA in the quarter was $158 million growing year over year, and reflecting the strength of our business model and our solid execution.

Our net income attributable to <unk> was $25 million.

Our adjusted diluted earnings per share for the quarter was 49.

And our free cash outflow was $43 million.

Normal seasonality.

We have accelerated our investments in initiatives to grow our adjusted EBITDA faster, particularly in the automated facilities.

At our Investor Day, we discussed the integration of <unk> and our central efficiencies program.

I am pleased to tell you that both are running ahead of plan.

First Cooper is performing strongly and contributing above our expectations.

The integration of the two organizations is progressing ahead of schedule driving higher than expected results in the first quarter.

The strength of <unk> business also gave US a foundation to launch <unk> in the UK.

Second we continue to execute our central efficiencies initiative.

These include making our organization leaner.

Zelle is optimizing our technology infrastructure supplier network and real estate.

We accelerated the benefits of these projects into the first quarter.

So far this year, we've won $1 $7 billion of lifetime contract value.

We maintain a rigorous controls or writing high quality contracts.

And our operating return on invested capital in the first quarter grew year over year and remained well above 30% target.

Bill will give you more visibility on our great sales performance so far in 2023 in just a moment.

We are reiterating our full year guidance for both organic revenue growth of 6% to 8% is if it is free cash flow conversion of approximately 30%.

We'll drive our net leverage level answer around one five times by the end of the year.

With respect to our balance sheet, we will continue to deploy our capital in the best interest of our shareholders, including continuous deleveraging buybacks and M&A.

We're also pleased to raise our full year guidance for EBITDA and EPS.

We are raising adjusted EBITDA by $15 million, bringing.

Bringing our full year range to $715 million to $745 million.

This is due to a combination of accelerated synergies from our integration of clipper.

Early delivery on our tangible efficiency initiatives and better than expected trading in the first half of the year.

We are also raising adjusted diluted earnings per share by 10%, reflecting an increase in our operating profitability.

Bringing our full year range to $2 40 to $2 60.

In summary, we delivered solid growth this quarter.

We made excellent progress on our long term targets and the secured major new business wins that will continue to propel our growth in the quarters and years ahead.

These results and our upgraded guidance reflect yet again, how resilient <unk> is through cycles.

This is a hallmark of our infrastructure like business serves.

Serving global Blue chip customers their prices are escalated in line with inflation.

And the benefit from tailings of automation outsourcing in E Commerce.

<unk>, enabling <unk> to deliver extraordinary returns.

And with that I'll hand, you over to Bill to talk about our wins to date and what we're hearing from our customers.

Thanks, Barry and good morning, everyone.

2023 is looking like a very exciting year for GSO.

In the first quarter, we did $162 million in new business wins.

And in April .

We want an additional $230 million of business.

Buying back nearly $400 million and year to date wins through April .

By the end of the first quarter.

We have secured $782 million of incremental 2023 revenue.

At the end of April this has increased to over $800 million.

This equals year over year revenue growth of 9% year to date.

On top of that.

We have a further $362 million of revenue locked in for 2024.

Which puts US 38% ahead of where we were at this stage last year.

Our pipeline of opportunities is to $3 billion as of the end of the first quarter.

And this has risen further through April .

Don't forget this increase and our pipeline is after the significant sainsburys way.

So as we look into our pipeline.

We are seeing a greater weighting towards first time outsourcing business.

Which makes up over a third of our opportunities.

And our record pre pipeline has doubled year over year, reflecting an increased demand from customers to invest in larger more holistic partnerships.

What our wins and opportunities speak to and what we're seeing on the ground.

Is that more and more customers around the world are recognizing that business as usual is no longer a viable strategy.

As a result the.

The growing number of large global companies coming to <unk> to help them redesign their supply chains lower costs and improve their service quality is accelerating.

Let me walk you through a couple of examples.

One of the worlds largest foodservice companies.

We started off asking for an operation on the West coast.

Has now progressed to asking how can we help them optimize their network across North America and Europe .

Now to other customers and E Commerce company and a consumer product company initially calls on us to bid on regional solutions and.

And based on our proposals realized the value of expanding the conversation to include a holistic review of their entire U S network.

What I'm trying to say.

Is that companies come to us with one solution in mind.

Now working with GSO on a much larger scale.

These are large transformative deals.

Or big bold changes as one of our customers recently called it.

As the scale of what we're being asked to do grows.

So does <unk> position as a trusted partner of choice.

In addition to strategic partnerships.

With new first time outsourcing customers.

We're also seeing continued expansion of our relationships with our existing long term customers around the world.

As Malcolm noted.

In April we announced a new project with Sainsburys.

This record setting when developed through a long term partnership that we've grown from running reverse logistics to now operating all of Sainsburys outsource fresh and frozen distribution centers.

We're partnering with them to drive in their own words.

One of their key competitive advantages for the future.

This value based partnership is now a cornerstone and cementing our status as a leader in the food and beverage logistics sector.

Building. These deep long term relationships is just in our DNA.

In the first quarter, we grew with a number of existing blue chip customers, including Kelloggs and Google.

We've also just won a ninth site with one of the world's largest consumer packaged good companies.

These are all great examples of the GSO difference inaction.

Finally, we are very excited about the expansion of GSO directly the U K.

To date, we have a network of about 30 direct sites in the UK, serving such brands as Asos L'oreal and marks <unk> Spencer.

Customers response to direct has been strong and we look forward to growing direct even further.

We will watch Continental Europe later this year this will expand our growth opportunities.

With that I'll turn you over to Marc.

Mark.

Thanks Bill.

Indeed, 2023 is off to a great start.

<unk> continues to take share through our global scale.

Tech leadership and the tremendous value that we create for our customers.

This is a business that combines predictability.

And growth at its bedrock.

First touching on our predictability.

Unlike the transportation industry, where transactional pricing is driven by short term supply and demand conditions.

Our holistic pricing structures are dictated by long term contractual agreements with minimum volume thresholds and inflation protection embedded within them.

And combined with our growing diversified pipeline and our record pre pipeline, which bill touched upon in his comments it shouldnt come as a surprise that we've already secured well over 95% revenue visibility for this year.

Secondly on the growth side.

As of the end of April we've won contracts with the equivalent of 9% gross revenue growth on our 2022 revenue base of $9 billion.

And if our pipeline is anything to go by we will inevitably secure additional wins in the coming months that will propel.

Our growth in 2023.

Even further.

Moreover for 2024, we've already secured $362 million of incremental revenue through April .

This puts US 38% ahead of where we were at this point last year and given our pipeline of $2 3 billion. We're confident that we'll see revenue growth accelerate next year.

Altogether.

Considering our low attrition rate in an inflationary environment you can see why as a team we're confident about our 6% to 8% organic growth range for this year and our.

Broader 8% to 12% CAGR through 2027.

We've delivered.

Seven quarters without missing a beat.

We're on track.

To hit our 2027 targets <unk>.

Our business is firing on all cylinders.

This is a management team that delivers on its promises.

With that we'll turn to Q&A.

Thank you and he would 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.

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Our first question is from Stefan <unk> with Jefferies. Please proceed.

Hi, good morning, and congrats on a good quarter.

My first one is for you Malcolm I'd love to hear what you're seeing just from a macro perspective in both the U S and Europe as well as across industry vertical and then that's kind of a second one and this one is probably best for you Bill what are you hearing from your customers and potential customers that give me so much comfort in that.

Full year guidance and really that's a rather strong pipeline can be converted and maybe not elongated on any kind of macro hesitation. Okay. Alright. Thanks, so much.

Hi, Good morning, Stephanie and let me, let me talk about the macro and I'll hand over to bill to explain what's going on on the ground as well.

So we've delivered good organic growth across every region in the last quarter.

All of our regions, we're seeing very strong verticals industrial was an example technology aerospace in particular these verticals are really doing very very well and the compensating for what we can see equally with some softer consumer related parts of our business nothing that we didn't.

I expect or in fact, nothing that we werent sharing back in January on our Investor Day, I do want to make a few mentions of a particular no bearish touched on it a moment ago, we've seen really strong performance from our European business.

Management teams talking with our customers what we're seeing what we're feeling is that those markets. We really saw probably the worst of the softer environment in the second half of last year 2023 is really shaping up very nicely for us on those markets.

In other areas of softer trading we shouldnt forget that a customer contract model, it's really protecting our profitability. So in this less certain macro environment that we're in right now actually will do pretty well.

Some of the topics of interest.

Wage inflation across every region that we operate is definitely moderating.

What we're seeing a solid mid single digits and the good news is wage inflation wages are actually catching up so that's broadly good news for the consumer.

And the final point I want to May.

<unk> really in the quarter and what we're seeing going forward is a standout on our sales pipeline.

<unk> record levels.

As we kind of expected very strong demand across first time I saw seeing drive to put more and more automation into new size into existing science retrofitting those existing sites. So overall, we're really feeling confident for 'twenty three because of the long runway of <unk>.

Visibility 24, we're feeling good about it but bill maybe you can touch on a bit more detail. Thank you Malika Hey, This is bill good morning.

So we've talked a lot about pipeline of pre pipeline actually as of today. The pipeline is $2 4 billion.

In the pre pipeline has doubled in the last few quarters.

Which is a great show for what we see coming forward.

Putting these two things the pipeline is very simple these are accounts where directly engage with we've given them a proposal all we've been shortlisted down to one or two.

Folks are in direct negotiations to sign a contract. So that's we call pipeline pre pipeline are accounts that we have analyzed we've looked at we've quantified and we're now working solutions for them. So it will be ready.

Pricing and they will move into the pipeline. So that's when we talk about those two.

Lately, it's a great wave breaking towards that because that's what we're very excited about.

And what we're seeing inside the pipeline is a few things the return of the 100 million dollar deals. So we have quite a few that are that large and it happens from what I said earlier, our customer comes to us to look at one thing.

And as they see the capabilities, we bring and the returns we bring around that first thing they asked us to expand that to U S Europe or the world.

And then the final thing I would tell you that makes me excited is we have spent a lot of time, improving our sales processes in the last year to really focus on making sure. Our 2027 targets are achievable and our team is ready.

And one of those things we focused on was going after non outsource customers. This is the two thirds of the industry that we don't we don't see as much as we do the ones that are already in the industry.

One third of our pipeline today comes from that group. So we are not monetizing the two thirds of the industry that hasnt been available in the market and we do this because same thing we go after them and takeover of site.

We think they're worth site, we approve it for them and when they see that result, they'll bring us two or three more sites and then we come with an answer of why don't we combine those into a new site and have give you one site, that's automated and set for the future. That's really what we're seeing in the market. That's why our customers comment that's really where the GSO difference comes to life.

Really helpful. Thank you.

Thank you.

Our next question is from Chris Wetherbee with Citigroup. Please proceed.

Hey, Thanks, good morning, guys.

Maybe wanted to hit on the clipper synergies in our central efficiencies that you guys are running I guess, that's in my opinion.

In summary, the key for the back half of the year and I guess that you've raised guidance, there's an expectation of margin improvement as we move through the rest of the year. So maybe you could talk to the progress you're making and maybe how we think about the cadence of delivery of some of those efficiencies through the rest of this year.

Hi, Chris its Barry here as I mentioned earlier, we have progressed faster on the two key initiatives that we planned ahead of expectation.

Driving part of our 23 83, EBITDA upgrades and also our confidence into our 2027 targets. Our teams have done a fantastic job of bringing <unk> into one and they are focusing on accelerating growth of our combined business.

We expect to deliver roughly $26 million benefit from in this year, which accelerates into next year from both of these initiatives.

Two thirds of the spend expected costs in 2020 is already spent one third is left.

<unk> spend will drop significantly in the coming quarters, our payback period for these initiatives is less than two years as you remember back in our Investor day, we were targeting about $135 million adjusted EBITDA of it too.

<unk> 387 from these programs do you review these processes post spin with Accenture to take advantage of our global scale and size and we're putting that interaction. So what is included in these efficiencies programs to remind you that includes procurement savings streamlining customers' infrastructure.

<unk> included hardware outsourcing non core activities to give you a sense of this program the already enacted on a large part of the efficiency program and reduce our non operational non customer facing head count.

540 people, 10% already and payback of this entire program is one to two years and gives us a lot of confidence looking into 2027.

Okay.

That's helpful color and I guess, maybe sort of leads into my next question, which is less about 'twenty three and more about 24. So I think we understand some of the dynamics that we're working through which do include FX and the numbers in 'twenty. Three 'twenty. Four is very interesting. Obviously you guys are building a book and Bill have talked about in terms of new revenue for next year. So when you think about the.

What the pipeline looks like and the delivery of that pipeline into revenue for 24, and then the opportunity to maybe sort of a higher run rate from the synergies and the central efficiencies.

Its early I know, but how do we think about sort of shaping up the potential growth on the EBITDA or EPS basis for 'twenty. Four I mean, you have to put a pretty big down payment to get towards those 2007 targets. How do we think conceptually about 24.

As far as the run rate for the efficiencies as we go from <unk> to 'twenty four we're going to be having a run rate around $40 million. So the benefit of the integration and.

The entire us efficiencies program really increase infiltrated three report Overtreated III as I highlighted is worth $26 million into management fee. That's one thing secondly, the.

Are going to see some positive tailwind coming from FX in 2004, the only see $1 million in Q1 of <unk>, but we as we go into trade, which we report that's going to be a tailwind around $10 million. So youll see the benefit of that is as you look into the top line, though we have about two three.

Topline as Mark mentioned is almost record top line at the end of Q1 and that pipeline turns roughly twice a year, sometimes more than that this gives us rfps or new business opportunities of $4 6 billion plus for us to go after as of today.

If we win our fair share, let's say quarter of that that gives us over $8 billion of new business opportunity into 2024, and that's what makes us feel so comfortable about our long term growth trajectory.

If we achieve roughly 11% CAGR from 24 to 27 in our top line in our revenue we are right on with our 2027 targets and EBITDA is going to come from the efficiencies technology deployment and all the other things that we're going through and we're going to be driving.

Higher margin.

Okay. That's helpful color I appreciate the time thank you.

Thank you.

Our next question is from Scott Schneeberger with Oppenheimer. Please proceed.

Thanks very much.

Great that.

I guess I wanted to start out asking about automation.

A lot of a lot of numbers thrown around and a lot of development. There I'm. Just curious is it did I hear Malcolm in your part that you are now 40% automated across your facilities I thought that was a 2027 targets. So maybe I misheard that.

And then I don't know how automated a win like sainsbury can be so could you delve in maybe on on what you won in the quarter on automation and how that's developed they just put some color around it relative to where you had been prior thanks.

Absolutely Scott.

It's Malcolm so.

You're quite right we are really accelerating.

Automation deployment I mean, we're I can say, we are inundated with demand from customers for this new projects that bill referred to high levels of automation requirement I think it's a combination of obviously over the past few years wage levels have increased is making automation <unk>.

So much more attractive right now, we're well on target for increasing the number of <unk>.

Highly automated side.

Increasingly what we're also seeing is where we're taking over in <unk> is lending itself very well to us placing a lot of tech enablement is not may be possible to fully automate aside because we're starting with an existing building. So really what we're capturing here is just the sheer.

<unk> all sites now are getting a really big deal of automation being incorporated into them and as I mentioned earlier one of the things that we're very mindful about is it's really with EBIT and ourselves are lethal surprise, just a sheer demand that we're seeing across our customer.

Base for automation. So we are strengthening our teams and I don't want to say too much about that but more to come on our quarter two earnings call, but definitely automation is a big play for us in quarter. One it will be a every quarter of this year and as I mentioned earlier, not just automation, where more and more.

Using cutting edge artificial intelligence.

It's remarkable what we're doing with it putting it into our existing automation is helping goes E coat, even greater efficiency than <unk>.

<unk> seen some great examples recently across our business so very very positive on the overall thing.

Sounds good sounds like a lot of business.

I wanted to touch on since it's quite relevant in the first quarter reverse logistics it sound like that went very well.

So if you could just talk about your development year over year in that area and and what you see going forward, particularly in the upcoming quarters for reverse logistics.

Which I guess wouldn't be as seasonally strong, but sounds like you're building a lot of that momentum. So one I'm curious how that's playing into maybe some of these new wins and what we should see over the balance of the year. Thanks.

A very good its bill here.

Couple of things customers come to us because of the automation that is definitely a key driver of that.

We mentioned this at capital markets day that we have our sites around the world are incubators, where we bring people to when they get to see that.

Not just the automation lines, but the returns the customers again isn't that automation.

Our reverse business is growing organically across our portfolio. It's also a significant percentage of our pipeline, 36% of our product pipeline is request for automation.

But you mentioned that you had the question about Sainsburys. So sainsbury is clearly a drive towards automation and Thats really why they wanted us to take the sites over that's what the the meeting with their board.

Showed was from the team that's been working with them a long time was our abilities in automation and what we could bring to the table and the resulting benefit that would bring in their costs and their performance. So.

That's just really.

Really a bellwether for us and I would say today, it's what people look at us for in the marketplace is that ability to automate and us having the sites to prove that makes a big difference.

Yeah.

Thanks very much.

Thank you.

Our next question is from Bascom majors with Susquehanna. Please proceed.

Earlier, you talked a bit about.

Some of the quantitative visibility that you have gained into 2024 I was hoping you could talk a little more qualitatively about that how does this rising pipeline and insignificant sales and visibility on the revenue growth change how you can manage the business into 2024, and 25 and ultimately deliver on the.

Top and bottom line goals, you've shared with your investors for the four year view. Thank you.

Thank you. This is bill again I'll give you.

Short answer and turn it over to virus.

What it does is having the size pipeline, we have and the size of <unk> pipeline. We have it really helps us make sure that we're hitting our <unk>.

ROIC all the returns we want to hit we're not we can be more selective in the accounts, we're bringing through the pipeline we understand the work in front of us. So we're making sure that everything we have is going to hit the returns we've committed to for 2007, and then I'll turn it over to Barbara can you talk about what it means to our bottom line.

Sure Art.

Business is growing quite robustly youre selling new business, our automated daily News for example, this quarter has increased 18% our organic revenue growth from the reverse which is also higher margin business was triple the rest of the business. So it's all going up from that angle. When you look into beyond our business. There are a number of things I have highlight.

Is it.

The run rate of at the end of this year youre going to be generating about $26 million of incremental benefits from this.

Integration and Central efficiencies program, you should take $40 million as we go into 'twenty three 'twenty four from those that our calculation right now that's going to benefit that's going to be incremental in 2024, and there is going to be somewhat around $10 million of tailwind coming from FX as well so that's going to further improve our margins.

Our mix is going to improve our margins, but also these initiatives will also help us improve our margins into 2024.

Thank you for your time.

Thank you.

Our next question is from Amit.

The router with Deutsche Bank. Please proceed.

Hi, Yes. This has been more on behalf of Amit at Deutsche Bank, focusing on the cost side to drive your margin expansion. What's your outlook on direct operating costs over the next few quarters and do you think you can hold the line there even bring it down and also what's your outlook on SG&A costs as you see the payback on your restructuring actions.

Thank you. This is Brian Shea our operating costs will go in line with the growth of our business.

That's what we expect in fact, we expect.

When you look into our Q1, excluding FX and patients are margins were steady.

As we look into Q2 Q3, and Q4, we expect somewhat of a margin expansion. Excluding these headwinds in the rest of year. So that's going to be reflected in our operating costs somewhat growing slower than the rest of the business. That's one on the SG&A side, when we took over clipper the SG&A as a percentage of.

Sales was much much higher than <unk>. So we took a lot of measures as I highlighted we have eliminated.

Nate at around 10% of our non customer facing non operational team to reduce our SG&A in Q1, and you'll see more of that benefit for the rest of the quarters.

323, so both sides should help us too.

<unk> improved our margins in the rest of this.

Great. Thanks, and on your Sainsbury contract that you won we're assuming its mostly open book given it's in the UK and can you talk about the return profile of all the new business from Sainsbury and if it is going to be accretive neutral or dilutive to margins.

Yes. It is open book that as a business, we have and then I'll turn it over to borrowers to give you the numbers on the okay. Sure. We're writing contracts for return on invested capital and we have high quality expectations for revenue cycle business as you see from our results our operating return on invested capital hedging.

3% year over year, and we will continue to write high quality contract and our book of business is reflecting that we are pretty picky and who we work with and how we create value for our shareholders.

Okay. Thanks, so much.

Thank you. Thank you.

Our next question is from Brian <unk> with Jpmorgan. Please proceed.

Hey, good morning, Thanks for taking the question.

No.

Now can I know you talked about some of the new initiatives that are coming perhaps in the next quarter wanted to see if you could just give us some broad sense of what those are in terms of perhaps headcount investments or strengthening the teams because one thing you obviously need to deliver on this pipeline of opportunities.

Our people in the field to execute program managers and designers, but like so maybe you can just give us some sense as to how that team looks like currently and just a broad view of what you are looking to add.

Yes, Brian Thanks.

Thanks for that question one of the things what we're doing at the moment, we have been redesigning.

Teams operate in the field and as Bill mentioned, we did not earlier in terms of our sales organization and we've been mirroring that across how we deploy technology and it's part of the learning our company and our approaching two years of age and we've learned along the way we had accenture.

Nearly honest bearish. Louis mentioned that has helped us greatly in terms of streamlining some of our back office areas.

It's all going into our 2027 plan and we're now just incorporating the same situation across our tech organization is evolution not a revolution. That's that's the most important thing to say.

The other important issue as you know.

It's still a tight market for high quality talent and from a <unk>.

Perspective, it's one of the benefits we again, we work hard at making this company a great place repeatable to be a part of I can say either when we open our doors to graduate programs. We are inundated with the best talent in the industry wanting to work with <unk>.

Is often we're hearing that.

People employees, new employees, they see us as the benchmark of the industry. So it's really we're just strengthening our business getting ready for what we actually increasingly seeing is a tidal wave of demand.

We just want to make sure that we can keep the good pace that we have with all of our customers.

It will help fuel all of our key metrics. It will it will get us to about 2027.

Okay as a follow up for pre bearish just on capital allocation.

This is a little bit surprised paying down some debt thing most of its fixed charity.

Investment grade so to give some context in that maybe more broadly speaking opportunities for capital deployment, how does M&A look like at this point, obviously, you just did one deal, but I'm sure there's others that might be of interest. So just some updated thoughts on that in light of the recent pay downs. Thanks.

Sure Brian .

Our short term priority is to generate free cash flow and maintain a strong investment grade balance sheet.

And we expect to return to net leverage around one five times by the end of 2023. This gives us a lot of financial flexibility to take advantage of the opportunities beyond this in the long term, we will continue to evaluate all opportunities to create value for our shareholders.

That includes accretive bolt on M&A, and we will take a look at potentially returning capital back to shareholders through a buyback we have to weigh them currently in the marketplace.

Private companies available for M&A are trading higher than where the public companies are trading yet therefore.

We have to make sure we create a lot of opportunities in our pipeline to grow these companies faster or takes a lot of cost to justify those.

It could be M&A it has to be accretive and we are keenly focused on creating shareholder value and we are balancing investing in our company through a share buyback or M&A and we will do whatever is in the best interest for our shareholders.

Okay. Thank you Barry.

Thank you.

Our next question is from Allison <unk> with Wells Fargo. Please proceed.

Hi, Good morning, just wanted to ask about Gx interact I think you had mentioned at 30, new sites in the U K and obviously rolling into Europe . Later this year any targets on the amount of sites that Youre looking to open for GE exited direct this year in those regions and any thoughts on how that any color really on the EBITDA contribution you're thinking of.

Thanks, Adam.

Hey, Allison, it's mark here.

You rightly say, we're very excited about the rollout if you remember back at the Investor Day, we talked about what your total addressable market of around $500 billion.

At the last quarter that it is a very attractive market from a margins perspective last year Youll note that we did about a 10, 8% margin. So it's a good business.

The pipeline in terms of number of names that are going to be working with us from <unk>, a direct perspective, and we're very excited about the growth going forwards in that business.

Great and then just going back to reverse logistics. If you look at your existing customer base that could utilize that service can you talk to the penetration of those accounts and what you think that target could be or where you are in terms of penetration by year end any color there. Thanks.

Yes. Thank you.

Where most of our customers, especially in the e-commerce side of the business.

Some form of returns that we're working with them on what I would tell you is that that on the newer customers. Obviously, we're bringing in the latest automation the latest processes or the existing customers. We get to go back and show them that and so we have a long pipeline of customers that we can we have already in house that we are bringing returns too.

And then finally on the on the on the for new customers coming on Board Thats really one of the main focus items they come through they want to grow revenue they want to hit the right EBITDA and they want to make sure. They manage their returns and this goes across all industries. So we have a huge opportunity in that area. It's why it's 36% of our pipeline and why it grows well each year, so very very excited.

About the benefits of returns of the learnings we've had over the years to be a leader in this.

Great. Thank you.

Our next question is from Ravi Shake narrow with Morgan Stanley . Please proceed.

Thanks, Good morning, everyone.

Can you give us a little more color on what the macro environment in Europe is like I know, there's a lot of focus on the U S consumer, but what do you think happens with the European consumer if you consult your trusty Crystal ball and also there's been some headlines on these retirement protest in France. I know you guys have a sizable operation. There. So can you tell us if there was any.

Impact on <unk> at all and kind of how you see that proceeding going forward.

Yes, Hi, Ravi its Malcolm.

So across Europe landscape as I mentioned.

What we're seeing is honestly a resurgence I think it's becoming clear to us and in fact our customers.

That what we saw in the second half of 2022 was probably the low point more softest part of the economy and I think what was playing into that across all of the different geography, while it's very high energy prices.

Uncertainty of the macro.

A lot of different dynamics, but it did have a cooling effect on the market now you saw in our business. Obviously again. This is a testament to our business model, our contracting model that our business was actually very resilient, but nevertheless that was the low point I think what we've seen steadily from the start of the.

Is actually a recovery in those markets.

Theyre doing very well.

We're partway now for quarter two so the trends are all established and we're really looking forward, so actually a pretty decent year across our European business, and I know that might be a little bit different than what we broadly fail or what we broadly see in the press, but that's what we're seeing on the ground sales pipe.

<unk> very strong water big transformational projects lots of huge customers choosing to make very strategic business changes and obviously we were we were so pleased.

To be working with Sainsburys on one of the very big transformational projects constantly.

Continental Europe UK, that's what we're seeing.

We signed here in North America is performing very very well for us.

Across all of our business, we've got some absolute staff sequels, we call some customers doing record business, but at the same time, we have to acknowledge that there is a.

Our consumer tightness and we have got some customers that are performing a bit softer than.

We would like them to be where they would like to be but it's all in alignment so where we thought our year was going to play out when we did our investor day, all the way back in January .

Remember that we did call out that we thought this year was going to be a little bit softer.

Than previous years.

When we speak to our customers what we're hearing universal as they expect that softness to start to dissipate.

As we approach the end of the.

I would say if we were on the golf course, we'd be right in the middle of the fairway now along the way to 2027.

Got it that's helpful color.

Clarify so it's a no quantifiable impact from the France protests, either in <unk> or beyond.

Yes, sorry, I didn't I didn't answer you all not quite but no no I mean.

And again, it's one of those things I lived in Paris for Lee Lee 10 years and.

Sometimes you get a very one view of what happens in Paris, we didn't see any impact whatsoever on our business coming from those and the good thing is I was in Paris recently, if my management team I can testify to the fact that all the trash is being collected it's a beautiful city.

And thirdly recommended to basketball.

Very good thanks, Malcolm between your two responses I really feel like going to Paris play golf right now, but maybe.

Thank you.

Yes.

Our next question is from David <unk> with Barclays. Please proceed.

Hey, Thanks for taking my question. So I Wonder if you could comment on the pipeline and specifically the composition of the pipeline be it kind of traditional omnichannel E comp reverse logistics, what are you seeing for that car.

Competition, and how does that compare to the existing book of business.

Yes. Thank you. This is bill thank you.

The pipeline right now if E com represents about 21%.

In the pipeline I mentioned, the reverse being the 36, but also as you can imagine in the industrial sector Aerospace is on fire right, that's growing very well.

See the amount of orders that are coming in there.

You also have the new customers coming in that weren't outsourced before the two thirds of the.

The addressable market, that's available and we've really made a big push on that our focus has been on showing the financial benefits to their business of outsourcing and what other customers are seeing and obviously, we have the we have the sites to take them too to show them in real action, what it looks like and once we get the first one of those on et cetera earlier, we call. It a takeover of <unk>.

We win there where site once we get that taken over I'll give you. An example of a tech.

Kind of a whole tech company, that's selling to the masses here.

We went with one of their products, we took over non automated site for them, we were able to run at 10% better than they were seeing it before and give them a great return and then we started and showed of automation. They are now building a two 2 million square foot site in Maryland that were going to combine all their brands into so that's kind of what we see and that's how that's how.

Why do we see the growths are exciting so the composition I would say is across all regions and it's across all verticals because the value of what we're bringing to the market is equally powerful to any company out there.

That's very helpful. Maybe just as a follow up for bill or Malcolm.

Whoever wants to take it.

I mentioned earlier.

Volume commitments as part of your contracts I think there was some commentary on a.

A little bit of softness in some of what Youre seeing I guess, how frequently is that minimum volume commitment coming into play are being executed and how does that compare to prior cycles.

Hi, This is Bruce here.

We are very well structured contract as you would recall about 45% of our business is open book business cost plus so whatever the cost escalation volumes, both moving matters youre charging get management fee on top of all of our costs.

We jumped off of that as well.

Half of our business is the hybrid closed loop card business. This is where we have inflation escalators higher margin potential to reap the benefits of productivity gains and also minimum volume requirements. The minimum volume requirements in our contract based on the customers that are some customers.

This is a double during the peak and go down to prior levels prior year levels and there are some customers that had very steady business. So we basically tailor them based on the demand and demand condition of that customer and we have not seen too many customers triggering those volume.

It had been.

Theres somewhat steady, but from time to time, they triggered that and we collected we are collecting those differences that gives us a lot of protection on the downside.

I guess could.

Could you compare that at all to what you had seen in prior cycles maybe.

<unk> 16 or.

More or less.

It is pretty similar when you look into our how our contracts have been structured.

This business is writing high quality contract as they spend a lot of time on it we have a lot of salespeople you have a separate pricing teams. We have separate solution teams. It comes to legal it comes to find it so that's really it.

This is like an infrastructure business and cost outside the core of this and we spent a lot of time on those.

Thanks Max.

Thank you.

Our next question is from Bruce Chan with Stifel. Please proceed.

Yeah.

Hey, good morning, everyone and thanks for the time here.

Nice result, this quarter.

Wanted to follow up a little bit on the macro but more specifically around inventory trends.

So it's something that we've been talking a lot about recently do you have a sense for whether we bottomed here on the Destocking and then as you think about inventories more structurally post pandemic.

Supply chain strategy in the near shoring and all that are you seeing a push from your customers for structurally higher inventory levels.

Hi, Bruce it's Malcolm so I think definitely with normalized inventory.

See our warehouses when we're in the field and we're in the field the beverage in Europe with Richard <unk>.

Paul Galvin or here in North America with Eduardo what we're saying is inventory levels across the majority of our houses with a majority of our customers they've normalized back to a normal level all the disruptive influencing all pandemic disruptions in the supply chain I think it's gone.

And we did have elevated inventory levels in the second half of 2022 with certain parts of our business. That's really all normalize, though I think the.

Learning that's come from the past three years or have largely been quite disruptive and environment is in.

Everybody is learning to access that that has become the more normal environment businesses customers, they're all planning around maybe the potential of further disruption or just the just to really business continuity to make sure that they're not caught as they were in the last few years.

And what we're seeing is <unk>.

Increases a near shoring.

Thats actively positive for us.

Can come in and just touch on it.

We're seeing customers moving manufacturing and a little bit closer to the consumer and we've seen also balancing off inventory levels were maybe in the past we've seen just in time well just in time. It doesn't always work if you don't have the inventory.

<unk> seen that with competitive normalizing, but right now I think we are in.

Very normal state and we would expect this environment to continue as we go through the rest of 2003 and into 'twenty four Bill I mean, you are actively involved in a few project right now on getting getting customer activity and manufacturing near it too.

And so maybe you can just talk in a bit of detail.

Yes, so what I would say is the first part of your question is that I don't I see less customers. If any of that are really dealing with the inventory problems of the past what they they may have some inventory they are still moving out but this is not.

It's not still coming into load up that's not an issue where customers are focused on and really the kind of the.

The thing Thats, triggering these $100 million in larger deals.

Is that if customers wanted to get the volumes more out to where the customers are they want to have it be the right level of inventory and they need a system that really provides the detailed information. So what that means is maybe think of it as three or 4% to five sites in the U S. On one network. Because then they have all the inventory available and then this is where AI comes in and having the.

The ability through automation, providing the data to be able to figure out what volume I need and how it can react correctly. Those are the things, we see happening to improve inventories and to make sure that the problems that happened in the past youre not having these fits and starts and we call. It the bull whip in the inventory.

You have to get more smooth process think of it as a more demand generated process than a push.

That's great color. Thank you. Thank you all very much.

Thank you.

Ladies and gentlemen that is all the time, we have for questions today I would like to hand, the call back over to Malcolm for any closing remarks.

Thank you Sherry and thanks again for hosting our call today, we all appreciate that.

Just a summary of our call we started 2023 and a really strong manner and the raising of our 2023 of adjusted EPS and EBITDA guidance and importantly, I think it's setting the.

Foundations for delivering on our 2027 targets, we're gaining market share.

Deploying more and more to technology across EMEA.

I was in different operating locations that we have.

We're seeing and we're winning record size customer contracts. That's what we've explained to everyone and we're also seeing a truly exciting sales pipeline of further growth opportunities.

I think we've all.

Complete now on more as being a benchmark deal and integration of the clicker business. This is a company that scope.

M&A, whether it's in our DNA, we can do it and we do it very well.

With focus on delivering great value for our shareholders and indeed, all of our stakeholders. So with that summary, I'd like to wish everybody a great rest of the day and thanks for joining us this morning.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.

Okay.

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Welcome to the Jack So first quarter 2023 earnings conference call and webcast. My name is Sherry and I will be your operator for today's call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note that this conference is being recorded.

Before the call begins let me read a brief statement on behalf of the company regarding forward looking statements the use of non-GAAP financial measures and the company's 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 and uncertainties and other factors that could cause actual results to differ materially from those projected in the forward looking statement.

A discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings.

The forward looking statements in the company's earnings release.

Or made on this call are made only as of today and the company has no obligation to update any of these forward looking statements.

To the extent required by law.

The company also may refer to certain non-GAAP financial measures as defined under applicable SEC rules during this call.

Reconciliations of such non-GAAP financial measures to the most comparable GAAP measures are contained in the company's earnings release and the related financial tables are on its web site.

Less otherwise stated all results reported on this call are reported in United States dollars.

<unk> and global economic conditions, and consumer demand and spending labor market and global supply chain constraints inflationary pressures and the various factors detailed in its filings with the SEC.

It is not possible for the company to actually predict demand for its 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 of the company's web site I.

I will now turn the call over to <unk>, Chief Executive Officer, Malcolm Wilson, Mr. Wilson, you may begin.

Thank you operator, and good morning, everyone.

Thanks for joining us today for our first quarter 2023 earnings call.

With me in Greenwich.

Rich oral Chief Financial Officer, Bill freight Chief commercial officer, and Marc Maun, Duke.

Keith investments officer.

We started off 2023 in great shape.

We've delivered a strong quarter with progressing ahead of schedule on our integration of the quick the business we've laid the foundations for delivering a strong 2027 targets.

Our revenue in the first quarter was $2 $3 billion growing 12% year over year.

Organic revenue growth was 7%.

Point of our full year guidance range.

Our adjusted EBITDA was $158 million in the quarter up year over year.

Head of our expectations.

As a result, we are raising our full year adjusted EBITDA guidance by $15 million, bringing the midpoint of our range to $730 million.

It's been a great quarter of signing exciting new business and implementing automated solutions for our customers.

Our logs Unilever and Vivienne Westwood in particular want to highlight the new project, we announced in April with Sainsburys, a leading UK grocery retailer.

With a lifetime value of nearly $1 billion. This is the largest annual revenue contract awarded in <unk> history.

Bill will talk in more detail about this in just a moment.

These new business wins demonstrate our unique value proposition.

As we bring our global scale deep expertise tech enabled solutions.

For our customers.

In the quarter, we again set a new record for the deployment of operational tech, increasing total Tac and automated solutions.

64% year over year.

Today operations utilizing automation all of that.

Tip Tech medical nearly 40% of our revenue are known but that will only increase to meet the enormous demand going forward, both for new implementations and for retrofitting of existing operations.

We are also accelerating our deployment of machine learning and artificial intelligence, which boost productivity significantly on top of the benefits of the warehouse tech itself.

In short, we're seeing unprecedented demand from customers for solutions involving tech enablement and our leadership in this space continues to drive our growth and profitability.

Underpinning our confidence, but both our 2023 guidance and our 2027 targets.

To fully capitalize on the demand of our services in this area. We're also strengthening our teams to support significant growth in the U S to come.

We will have more news on these initiatives next quarter.

Also in the first quarter, we were pleased to announce that Jack So direct our should use a solution has gone global.

We've launched direct across the UK with the rollout into Continental Europe plan later this year.

Expansion comes through the blending of the best of both the Jack So and legacy clipper capabilities and expertise to create a differentiated offering.

And finally.

Just two weeks ago, we published our second annual ESG report.

And then we highlighted our progress on ESG from emissions reductions to the development and belonging initiatives for our team members worldwide.

We also outlined our new ESG goals, including safety targets.

We've had a great start to the.

We're raising our guidance and we're looking forward with confidence.

We've delivered strong wins, we have a robust sales pipeline and we set the foundation to achieve our 2027 targets.

With that I'll ask bearish to co man on the financials bearish over to you.

Thank you Mark and good morning, everyone.

We are proud of our results this quarter as they continued to showcase both the strength and predictability of our business.

And to deliver on our promise of robust growth and resilient margins.

As Mark mentioned for the first quarter of 2023, we generated revenue of $2 3 billion and delivered 12% revenue growth overall.

All of which 7% was organic.

In particular, our reverse logistics business grew organically at nearly three times the rate of our group organic revenue growth.

Geographically our business in Europe has performed above our expectations.

And you've seen particular strength in the U S across technology and aerospace verticals balanced.

Balancing consumer demand.

Our adjusted EBITDA in the quarter was $158 million growing year over year, and reflecting the strength of our business model and our solid execution.

Our net income attributable to <unk> was $25 million.

Our adjusted diluted earnings per share for the quarter was 49.

And our free cash outflow was $43 million.

Reflecting normal seasonality.

We have accelerated our investments in initiatives to grow our adjusted EBITDA passengers.

Particularly in the automated facilities.

At our Investor Day, we discussed the integration of Cooper and our central efficiencies program.

I am pleased to tell you that both are running ahead of plan.

First clipper is performing strongly and contributing at all of our expectations.

The integration of the two organizations is progressing ahead of schedule and driving higher than expected results in the first quarter.

The strength of <unk> business also gave US a foundation to launch <unk> in the UK.

Second.

We continue to execute our central efficiencies initiative.

These include making our organization leaner.

Zelle is optimizing our technology infrastructure supplier network and real estate.

We accelerated the benefits of these projects into the first quarter.

So far this year, we've won $1 $7 billion of lifetime contract value.

We maintain a rigorous controls or writing high quality contracts.

Our operating return on invested capital in the first quarter grew year over year and remained well above 30% target.

Bill will give you more visibility on our great sales performance so far in 2023 in just a moment.

We are reiterating our full year guidance for both organic revenue growth of 6% to 8% is what it is.

Free cash flow conversion of approximately 30%.

This will drive our net leverage level answer around one five times by the end of the year.

With respect to our balance sheet, we will continue to deploy our capital in the best interest of our shareholders, including continuous deleveraging buybacks and M&A.

We are also pleased to raise our full year guidance for EBITDA and EPS.

We are raising adjusted EBITDA by $15 million.

Bringing our full year range to $715 million to $745 million.

This is due to a combination of accelerated synergies from our integration of clipper.

Early delivery on our tangible efficiency initiatives and better than expected trading in the first half of the year.

We are also raising adjusted diluted earnings per share by Tencent.

An increase in our operating profitability.

Bringing our full year range to $2 40 to $2 60.

In summary, we delivered solid growth this quarter.

We made excellent progress on our long term targets and we secured major new business wins that will continue to propel our growth in the quarters and years ahead.

These results and our upgraded guidance reflect yet again, how Brazilian Jake so is through cycles.

This is a hallmark of our infrastructure like business.

Serving global Blue chip customers their prices are escalated in line with inflation.

And the benefit from tailings of automation outsourcing in E Commerce.

All enabling <unk> to deliver extraordinary returns.

And with that I'll hand, you over to Bill to talk about our wins to date and what we're hearing from our customers.

Thanks, Barry and good morning, everyone.

2023 is looking like a very exciting year for GSO.

In the first quarter, we did $162 million in new business wins.

And in April .

We want an additional $230 million of business.

Buying back nearly $400 million and year to date wins through April .

By the end of the first quarter.

We have secured $782 million of incremental 2023 revenue.

At the end of April this has increased to over $800 million.

This equals year over year revenue growth of 9% year to date.

On top of that.

We have a further $362 million of revenue locked in for 2024.

Which puts US 38% ahead of where we were at this stage last year.

Our pipeline of opportunities is to $3 billion as of the end of the first quarter.

And this has risen further through April .

Don't forget this increase and our pipeline is after the significant Sainsburys web.

Now as we look into our pipeline.

We are seeing a greater weighting towards first time outsourcing business.

Which makes up over a third of our opportunities.

And our record pre pipeline has doubled year over year, reflecting an increased demand from customers to invest in larger more holistic partnerships.

What our wins and opportunities speak to and what we're seeing on the ground is that more and more customers around the world are recognizing that business as usual is no longer a viable strategy.

As a result the.

The growing number of large global companies coming to <unk> to help them redesign their supply chains lower costs and improve their service quality is accelerating.

Let me walk you through a couple of examples.

One of the worlds largest foodservice companies.

We started off asking for an operation on the West coast.

Has now progressed to asking how can we help them optimize their network across North America and Europe .

And two other customers and E Commerce company and a consumer product company initially called us to bid on regional solutions and.

And based on our proposals realized the value of expanding the conversation to include a holistic review of their entire U S network.

What I'm trying to say.

Is that companies come to us with one solution in mind.

Now working with GSO on a much larger scale.

These are large transformative deals.

Or big bold changes as one of our customers recently called them.

As the scale of what we're being asked to do grows.

So does <unk> position as a trusted partner of choice.

In addition to strategic partnerships.

With new first time outsourcing customers.

We're also seeing continued expansion of our relationships with our existing long term customers around the world.

As Malcolm noted.

In April we announced a new project with Sainsburys.

This record setting when developed through a long term partnership that we have grown from running reverse logistics to now operating all of Sainsburys outsource fresh and frozen distribution centers.