Q3 2023 GXO Logistics Inc Earnings Call
Welcome to the <unk> third quarter 2023 earnings conference call and webcast.
My name is darrel and I'll be your operator for today's call.
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Before the call begins let me read a brief statement on behalf of the company regarding forward looking statements the use of non-GAAP financial measures and the company's guidance. During this call the company will be making certain forward looking statements within the meaning of applicable securities law, which by their nature involve a number of risks uncertainties and other factors that could cause.
<unk> actual results to differ materially from those projected in the forward looking statements.
Discussion of factors that could cause actual results to differ materially is contained in the company's SEC filings.
The forward looking statements in the company's earnings release or made on this call are made only as of today and the company has no obligation to update any of these forward looking statements except to the extent required by law.
The company Awesome I 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 the United States dollars.
The company will also remind you that it's guidance incorporates business trends to date and what it believes today to be appropriate assumptions. The company results are inherently unpredictable and maybe materially affected by many factors, including fluctuations in foreign exchange rates changes in global economic conditions and consumer demand.
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 accurately predict demand for our 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 Daryl and good morning, everyone.
With me in Greenwich Today, a bearish Loughran, Chief financial Officer, and Adrian stock.
Newly appointed Chief Automation officer, a thirst for <unk>. So.
We're excited to have him update you on our automation strategy and how we will lead to further growth and higher returns the gx. So.
Turning directly to the third quarter. We are pleased to report that we delivered record revenue of $2.5 billion growing 8% year over year of which 3% was organic growth.
Yeah.
We've talked to you many times about the resilience of our business model and we're demonstrating just how beneficial that is proving to be this quarter.
While the macro environment is uncertain with performing strongly in those areas, where we do have control new business wins profits and free cash flow.
Barry will give you more detail on our updated full year guidance in just a moment.
Our adjusted EBITDA grew to $200 million and our adjusted diluted earnings per share was 69 cents all coming in above expectations on top of that a few weeks ago, we closed the acquisition of PFS sweat.
And the incremental benefit during the last part of the allows us to raise both our adjusted EBITDA and adjusted diluted earnings per share guidance for the third time this year.
The results this quarter demonstrate two key strengths of our business.
First it illustrates that our model is working exactly as it is designed to.
We're effectively managing all aspects of our long term contractual business to deliver consistent margins and drive adjusted EBITDA growth.
Second it shows an acceleration of the structural trends that are driving our growth.
Customers are coming to us more than ever and our value proposition for them is only growing stronger as they look to us to drive improved productivity optimize their working capital.
Improve their services to the ever more demanding and consumers.
This is clear from our new sales wins in our pipeline, we closed over $180 million of new sales wins in the third quarter nearly half of which came from companies I saw seen their operations for the first time.
These fantastic customers included Carlsberg Dai Qing Farfetch soda stream and Versace.
And in October we began an exciting new partnership with a quality group a great win for us in Germany.
These customers join the exceptional blue chip brands that continue to rely on <unk>, so for the logistics needs.
Also in the last couple of weeks, we've entered into a significant new long term contract for fully automated warehouse project with a leading global sporting Brown.
We are thrilled to partner with this brand to enable their long term growth ambitions across both e-commerce and retail we are positioning the brand to optimize their inventory and costs by leveraging <unk> industry, leading expertise and technologies.
Adrian will provide more detail on exactly how we do this for our customers in just a moment.
It's exactly why we've created this new role of Chief Automation Officer.
We're not only proud of results this quarter, but also excited by what's ahead with secured more than a half a billion dollars of new business for 2020 for tracking ahead of where we were this point last year.
Our average contract length remained strong got around five years, Jack So is winning market share from our competitors.
Our so called new contract wins in the quarter are up 15% year over year, even after a record setting second quarter.
Our pipeline remains solid at around $2 billion is distributed evenly across our operating geographies.
It's well diversified across both consumer and industrial verticals.
We're excited by the opportunities to continue to grow our market share.
I mentioned earlier that one of the key milestones. This quarter is the acquisition of PFS Sweat a premier e-commerce fulfillment provider based here in the U S.
PFS serves over 100 of the world's most iconic brands, including L'oreal, Pandora, Procter and Gamble, if some or all.
And the U S men's.
He does a great track record of profitable growth from its premium service offerings.
We believe the combination of Jack So PFS strengthens our book of business by bringing get exposure to key growth verticals, including health and beauty jewelry.
Luxury goods.
<unk> continues to deliver robust growth and he's winning great new contracts with brands like gloss yeah.
We will build on this momentum and we'll leverage PFS vertical expertise to complement our existing business and grow into the massive addressable market on a global basis, even faster.
We celebrated closing the transaction with the PFS team in Dallas, the week before last and the level of excitement was palpable on a personal note I'm delighted to be working with this team.
Well hi, Jack So it's clear that the high caliber of the people is why PFS as being able to build such an incredible business.
And lastly on the notes if people were proud to have won numerous awards for employee satisfaction on inclusion this quarter I'm very pleased that our constant efforts to create the best possible workplace for our people and to make Jack So the employer of choice in our industry are being recognized.
Yes.
In summary, we're confident that we're positioned to capitalize on the immense growth potential within our industry and the continuing tail winds of automation sourcing and e-commerce.
No I landed or if it's a bearish to walk you through the numbers and our updated guidance bearish over to you.
Many thanks, Marc and good morning, everyone.
This quarter, we delivered a strong set of results, including great new sales wins.
Resilience adjusted EBITDA, and finally outstanding free cash flow conversion.
As Mark mentioned, we delivered a record $2 $5 billion of revenue in the quarter.
This represents 8% year over year growth about 3% of which was organic.
Our top line performance clearly reflects the impact of near term macro headwinds on customer volumes and as you highlighted in prior quarters.
All other areas of the income statements reflect the incredible stability of our business and our continued strong management execution.
Our operating income was up 25% year over year in the third quarters.
We delivered adjusted EBITDA of $200 million.
They are delivering consistent adjusted EBITDA margins as a result of our resilient business model.
Despite the headwind of 90 basis points from pension and FX hedges.
And they have improved 20 basis points sequentially since the second quarter, while these headwinds have increased.
This margin strength is driven by our continued focus on cost discipline, specifically productivity as you're driving in our site level operations and in our central efficiencies initiatives.
We also delivered net income attributable to shareholders of $66 million and adjusted diluted earnings per share of 69 cents.
Our return on invested capital was once again robust at well above 30%.
Our accelerating new business wins year over year highlight the ample opportunity for our business to continue to reinvest and generate these levels of returns in the future.
I would like to particularly highlight our free cash flow, which was a record $191 million, Florida third quarter helped by strong cash collections and methodical deployment of capital.
We are on track to deliver our free cash flow conversion target of approximately 30% of adjusted EBITDA for the full year.
We reduced our net leverage to one six times as of September 30th.
You have no debt repayments due in 2024.
Our balance sheet remains rock solid and investment grade also our acquisition of PFS Sweat and we expect to end the year with net leverage of around one seven times.
On PFS I'd like to take a moment to welcome our new colleagues.
The strength of talent of this team is just phenomenal.
We are thrilled to have completed this deal.
Plans to accelerate our growth together are already underway and as Malcolm mentioned, we believe this is positioning <unk> for continued and accelerated growth.
Our acquisition of PFS exemplifies our approach to M&A.
We're highly selective in our choice, you'll sizes and we established a track record of pursuing companies that bring opportunities to expand our presence in key markets and further enhance our offerings for new and existing customers.
In PFS, he bought a double digit growth trajectory.
Very attractive valuation.
Going forward, we will continue to deploy our excess cash in the best interest of our shareholders, which includes either share buybacks or accretive M&A.
Turning to full year, you'll see that we are revising our full year 2023 organic revenue guidance from 6% to 8% two 2% to 4%.
For this holiday season, we are seeing lower customer volume growth than anticipated.
Particularly in consumer focused sectors in many cases and in contrast with last year. The global brands. We are serving are prioritizing pricing over volume.
This is resulting in a more uncertain peak.
In addition, some seasonal Christmas pop up projects will not recur this year because of lower customer volumes.
This is a one off impact in the fourth quarters.
Our organic growth to be solved.
Our adjusted EBITDA and free cash flow remained robust uses a structure and predictability of our customer contracts, which helps to insulate our financial performance from volume swings.
The incremental benefits from our acquisition of PFS gives us the confidence to upgrade our full year.
Adjusted EBITDA guidance to $730 million to $755 million.
We are also pleased to upgrade our guidance for adjusted visit earnings per share to $2 55 to.
The $2 65.
And finally, following our free cash flow results. This quarter, we are reiterating our full year free cash flow conversion target of approximately 30%.
As soon as our return on invested capital target of about 30%.
Looking ahead, our long term growth is underpinned by our continued new business wins this.
This reflects the value of the services that we're providing to our customers helping them to manage their businesses more efficiently indicated environments.
The one $841 million of new business year to date.
<unk> got $520 million of incremental revenue booked for 2024, and nearly $200 million of incremental revenue booked for 2025.
In the third quarter.
Almost half of our new business wins, they're all sourcing, they're making more headway into our half trillion dollar total addressable markets.
At the same time, we continue to produce profits and cash flows throughout the cycle.
Our margins are resilient and our free cash flow conversion is rock solid.
We will continue to manage <unk> with a rigorous focus on contract governance cost discipline and careful location.
To serve the interests of both our customers as well as our shareholders.
And now I'll pass the mic over to Adrian who was named as our first Chief Automation Officer in July.
He will brief you on one of our most important levers for growth and value creation, our automation strategy.
Oh to Aegean.
Thanks, Paresh good morning, everyone.
<unk> so for over two years and I've been working in supply chain and operations for more than three decades.
I moved into my role as Chief Automation Officer last quarter.
Had the pleasure of meeting some of you doing site visits while I was in my previous role as head of our North American Consumer Division.
Today, I'd like to put some texture around our automation and AI differentiation.
As well as how we're going to accelerate our existing strategy.
By unifying our global technology agenda will shape, the future of the industry drive better outcomes for our customers and improve our employees' experience.
<unk> is already the market leader in supply chain automation.
Today about 30% of our revenue comes from automated operations versus the industry average of less than 10%.
Additionally, we've accelerated our deployment of post go live adaptive tick and this has increased the proportion of our revenue from these sites from 5% a year ago to 11% today.
The overall amount of take actively deployed across our footprint has increased by almost 70% year over year.
At every site, where we deploy this technology, we provide outsized benefits to our customers.
As a result, we grow foster increase our market share and deliver margins of 200 basis points higher than the group average.
We are at a critical inflection point in the automation of warehouse operations.
Up until now the focus has been on automating tasks that are repetitive laborious and require heavy lifting.
Because significant advancements have been made today, we have multiple finely tuned solutions that can address this problem.
The vision of what's ahead is what is truly exciting.
The next phase of automation includes seamless integration of existing discrete solutions combined with AI to solve significantly more complex problems.
Merely replacing manual tasks.
This will enable operations to be performed faster and more reliably and free up work is to focus on the value added services that are critical to our customers dynamic and complex supply chain needs.
Let's bring this to life.
In my previous role we conducted a major site retrofit for a household name apparel retailer, where we implemented several additional technologies that transformed the warehouse into a completely integrated into inflow.
This increased productivity reduced cycle time.
Improved our safety performance, which is already well above industry average and drove an overall reduction in cost per unit of 18%.
It was a game changer for the customer and without question deepened our partnership.
While the consumer team led the specific example, there are myriad other successes just like this across our organization.
Part of my mission is to unify our efforts and deploy technology that optimizes each of the core warehouse process pause.
We will create global standards, and best practices, which will accelerate deployment and ultimately lead to better margin performance.
This is the embodiment of continuous improvement that has been the cornerstone of my operations experience and now I'll bring this philosophy of Ci to automation.
In tandem with partnering with innovators across the globe to guide and validate their solutions in multiple sites within the consumer Division, we successfully deployed AI combined with the goods to person robotic solution to increase the number of ball coach traveled by around 5% ex the bus stop.
This increased productivity tremendously, resulting in significant value creation for the customer and a huge step up in ROI.
The opportunities that AI unlocks for warehouse automation are staggering and we are partnering with hardware and software vendors alike to identify the most suitable platforms to meet our customers' needs.
In addition, we have been the first to adapt mature solutions from other sectors into the logistics industry four.
For example, we implemented a high volume high precision storage and retrieval solution that was originally developed for the pharmaceutical industry and depth in it for a specific customers needs and consumer electronics.
The financial benefit of everything I've, just described is extremely compelling.
There is a multiplier effect from the results. We drive that also includes cycle times improved quality reliability agility and workforce safety.
This intersection of taken operations is the secret sauce that makes us the partner that our customers tend to.
And they are doing so on an increasingly global basis.
My role in all of this is to identify prove and accelerate the right technologies to address our customers' needs in turn we will grow at 2% market share in this half a trillion dollar industry.
I look forward to updating you all on our progress.
And with that I'll hand, you back to Malcolm.
Okay.
Thanks Adrian.
We're pleased with our performance this quarter against a softer macro our teams have delivered substantial contract wins as well as strong and predictable adjusted EBITDA and free cash flow with.
We've closed another great acquisition.
As a result, we've raised our profit guidance for the third time this year.
Our mission remains to enable our customers to run their businesses more efficiently and cost effectively.
We are succeeding.
We're also growing our market share.
Our heightened focus on automation will help fuel our growth and bolster our resiliency and we will continue to optimize our operating model drive high returns and allocate our capital in the best interests of our shareholders.
With that we'll hand, the mic back to Daryl and transition to Q&A.
Yeah.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for your questions.
Our first questions come from the line of Stephanie more with Jefferies. Please proceed with your questions.
Hi, good morning, Thank you.
Good morning, Alex.
Good morning, I was hoping you could just help us understand what about the macro change since the last boat to drive kind of such a material cut in our organic growth guidance for the year or have you been seeing some of these kind of moderating our temporary trends really since the first quarter love to hear your thoughts there. Thanks.
Hi, Good morning, Stephanie it's Malcolm here.
Let me give you first the big picture and then more more detail. So when we look at the regions that Jack So it's working game.
Continental European business, so the big countries, France, Netherlands, Spain, and Italy.
But actually doing okay, we've seen a we've seen a slight recovery.
<unk> going well our U K business, we think that's probably at about the bottom and actually some early signs of green shoots and here in North America. We think we're quite close to the bottom. So that's the kind of macro picture that we're seeing.
For the first quarter, it's interesting we've delivered organic growth across every single region and that's despite this clearly softening in the consumer macro environment.
We can see in some of the verticals that we work in technology Aerospace food services actually very a good trajectory theyre doing quite well.
That's countered by definitely I saw a softer consumer related business.
If we think about Q.
Q4, what we expect to see looking ahead.
Well no no to expecting to see many of the seasonal pop type of short term warehousing activities that we've seen in previous years. We think that's a consequence, so inventory levels generally normalizing I'm actually how many of our customers our approach.
Watching the holiday season, we have seen that several of our customers are choosing to focus on holding price visit they are kind of volume type of environment. We're also hearing that evidence that the consumer themselves.
Putting golf.
Holiday shopping the lukin later into the season fall, maybe bargains and so on.
We should contrast that against that.
Very strong sales quarter three are very.
Very strong sales $181 million.
That's up 15% year over year and as we mentioned in the call quarter forward, it's off to a great start with a new very long term a fully automated contract, but it's life of contracts with around $1 billion. So we're very very pleased about that.
In all the areas, where we do see softer trading is also worth to remember that the contract model that we have you know we've often talked about the resiliency of our contract pass through of inflationary pressures.
That's protecting us, allowing our profitability to remain very good and you see that in fact in the in the guidance that we've just been talking about.
This almost certain macro it's kind of an environment, where Jack so thrive. It really helps says two back to demonstrate to our existing costs. The most importantly, new customers remember that 180 million roughly half of that was <unk>.
<unk> from New first time, I saw seen customers and benefiting from working with Jack So the benefiting from how we help them improve productivity improve their services with transforming operations for them and technology's playing such a big part of that and I'm. So pleased that we have Adrian.
<unk> mission and I hope you'll hear from him later in the call.
And then the last thing I would say just a couple of interesting points, but nevertheless, it's a summary of the environment wage inflation. It's really moderated we were seeing that wage is pretty much half call spoke to the broader inflation, that's helping the consumer and the last point I'd say, we see.
And equally in the real estate environment, it's really kind of moderated we know in the difficulty as we would've been six months ago of having to look long and hard to find real estate, it's a much easier market.
So all of that as we see the picture right now as we will be exiting Q4, a lot of these kind of one off type of impacts that we're seeing right. Now we think will recede and we should go back to a growth environment in the first half of next year.
Got it no very I really appreciate all the incremental color just as a quick follow up on any kind of touched on this a little bit I'm trying to understand that the raise in the EBITDA guidance for the year and kind of the puts and takes you know despite the cutting organic growth because it sounds like FX was a.
A little bit worse, so that's likely but that's likely being offset by the PFS acquisition. So maybe just talk about you know what we're kind of the underlying drivers to still be able to raise the low end of that EBITDA guidance on this core business Stephanie.
Stephanie let me ask bearish to comment on that.
Sure Mark them are in Q4, our margin will continue to expand excluding FX and pension headwinds as you will recall.
These were roughly about $15 million per quarter.
We expect to continues moderate margin expansion, excluding FX and pension in Q4 and.
This company is delivering on our promises as we highlighted many times in the past.
Even when the volume comes down we continue to generate profits and cash flows due to our strong contract governance.
Furthermore people have.
Oh single digit contribution millions of dollars from PFS in Q4.
We have been getting a lot of headway into our integration and restructuring benefits and they will contribute even more into Q4 and getting into a $40 million.
At the end of the year as we start into next year, that's going to be helping our next year operating profitability. The impact of those in Q4 will be roughly about $10 million incremental versus the prior year. So all in all contracts are working well productivity benefits are due.
Leveraging its promises.
And even in this volume environment, we will continue to deliver strong results.
Great. Thank you.
Thank you.
Thank you our next questions come from the line of Chris Wetherbee with Citigroup. Please proceed with your questions.
Hey, Thanks, good morning, guys.
Maybe picking up on that last question, particularly around the fourth quarter and the EBITDA guidance I think normal seasonality. The last couple of years as EBITDA accelerate from <unk> to <unk> I know, there's a range here I think there's a lot of factors at play, but the rain book in the third quarter, both up and on the downside. So can you talk a little bit.
About how you think this might play out and what sort of would be even factors potentially offsetting that normal seasonal uplift that you have I think you've talked a little bit about some of the seasonal activity, maybe not being quite as good but a little bit of a finer point on that that'd be great.
Yes, hi.
Hi, Chris This is Barry shared.
I mean first is the organic revenue growth as you've seen we are now seeing the organic revenue growth guidance of 2% to 4%.
<unk> delivered 3% in Q3, but heading into Q4 did you see headwinds coming from these reduced pulp activities slower ramp up of new facilities and more importantly, or a reduced volume from existing facilities. All of this is balanced by with our business wins and inflation and <unk>.
Pricing pressure that's on the top line on the margin side, we continued to deliver steady EBITDA margins and as I highlighted you're going to be providing a slight uptick in our margin excluding FX in patients and that's expected to be a headwind of $15 million into Q4.
And do you see roughly $10 million benefit is coming from the productivity projects, we had integration benefits and restructuring that we have done as you recall, we took a number of them.
The initiatives this year, including on procurement side, all sourcing of noncore activities eliminated roughly 10% of our non operational non customer service staff.
Reduced.
Layers in our organization increase the span of control basically meeting more people, who report to a person. That's the definition of span of control. So all of these are delivering results in Q4 and helping US go through this lower volume environment, but at the core of this is our contract structure just like we told you about a year ago how are <unk>.
<unk> will operate with perform in a down cycle, you will see that in the operation.
Okay. That's helpful. I appreciate that incremental color and then maybe stepping back a little bit. It's beginning to think about 2024, obviously organic revenue growth is decelerating, but it does appear that the pipeline of new business opportunities remains relatively stable. So as we think out to 2024 are you seeing any decelerate.
In terms of interest from incoming interest from the customers about signing up new business and we expect the pace of new contract awards to be roughly the same as we start to turn the corner into 2014 that accelerator or is it going to be some economic pressure on that.
Chris It's Malcolm here, let me, let me give you some some color on that question. So in fact, as we mentioned in earlier in the call pipelines remains around 2 billion.
What we are seeing is a pre pipeline is actually increasing so pre pipeline for rosie's, where we're receiving project sale.
Can be from existing customers it can be from brand new customers new brands.
So actually increasing so that's a good sign.
Bodes well I think for the year ahead and also what we're seeing is our ability to convert from the pipeline into closed one new business is actually also improving.
That's a function of the different works that we have underway within our sales organization to actually improve our actual process with customers. A couple of quarters ago, We did actually say, a momentary kind of hesitation from customers about making decisions.
As to remember that in fact.
Our quarter two it was actually a record of new business signings. So it was kind of a little bit disguised but we definitely our sales teams were reporting two it's just a little bit of hesitation. That's gone you know, we're not seeing that at all and our pipeline I think it's a very healthy pipeline good.
A portion of very long term big projects Big automation projects as we mentioned this.
This 1 billion dollar deal that we've just signed I'm sorry, we can't show the customer name, but I hope we will do on our next call.
So this is a healthy proportion of those kind of deals and.
No need of deals fall short of 24, so it's a good.
Good pipeline as we see it right now and nothing that we're seeing from our customer base. All the market is giving us any feel that that's going to change as we progress forward.
Okay, great. Thanks for the time appreciate it.
Thanks, Chris.
Thank you our next questions come from the line of Scott Schneeberger with Oppenheimer and company. Please proceed with your questions.
Thank you very much good morning, everyone I'm going to focus a bit on on acquisitions now.
Nothing could you could you please discuss are for.
For for PFS Web Yep, that's the.
Attributes that really drew you to the business are there any synergy opportunities that you see what type of integration duration or are you anticipating for this and what's you know what's the combination of them in the portfolio going to look like with for you. Thanks.
Sure Scott well listen I mean, it's a great customer base organization, and we've acquired a Super company and at a very attractive valuation. So it's going to allow us to accelerate the PFS business itself will be able to leverage our own scale.
Into the company and he is also going to allow us to leverage all of the very specialized blue chip customer relationships that they have on a more global business PFS web is a double digit.
Growth business.
I think it shows very well the strategy that we've had where we've been very selective from an M&A perspective, we've always talked about.
What is a good M&A for Jack so well, it's a company with really strong good management good market position.
<unk> are allowing us to enter into a new geographic geographic area are allowing us to enter into new verticals. So this business.
Our fleet around.
220 million service equivalent of revenues $20 million of adjusted EBIT da.
Fourth quarter, we have this business since late October so it's a limited impact in 2023, but really combing with a number of specialized high torch fulfillment type services in really very attractive vertical so health and beauty.
Alright, and collectibles prestige kind of luxury goods and some of the customers I mean, Wow Theyre, just incredible Chanel L'oreal shale.
Tiffany Pandora I mean, I get excited every time I read the customers and the last thing I'd say is it's a really super Cool company, Great management myself bearish in several of the management team, we were down in North Carolina, having one of our own business meetings with our own teams.
Several of the P. F. S team joined the other way. We then also joined Danone in Dallas are met the entire team.
I'm really still ever so excited about what's lying ahead and the top line synergy and just the absolute opportunity of US growing this business on the North American footprint, which is really the core of the business, even though they do have small activities outside of North America, we're very excited so great.
Deal.
Great. Thanks, and then.
What is or maybe Barry how are you thinking about that.
Or how should we think about the M&A pipeline right now is there a lot that's right should we see more of this similar size may be over the coming 12 months or is there going to be a digestion period on this and you said that as a side question on that any update on on clipper.
<unk> progress.
That's quantifiable you'd like to share thanks.
Yeah.
Scott, Let me hand, you over to bearish to cover on those topics.
Sure.
It required a great business growing at double digit rates with fantastic customers in great proposition to the cost to the end consumer I mean said and all of this is an attractive valuation. So Scott. This is more of the type of M&A, but we'd like to do we have a strong pipe of M&A right now in a different range of where to close and geography.
Yes.
If you're interested in Germany, North America are quite interesting you'll be looking into growing in these locations.
But at the core of this is creating value for our shareholders. We will always weighs against investing in our own company through a buyback. So valuation is important for us opportunities for growing these enterprises faster under Gx Salt is a very important for us in fact with PFS after.
The acquisition the OLED started working on number of ways, we can even accelerate the growth of PFS into new geographies, we're very excited.
And Scott just to finish off on the clipper aspect I mean for us to be Frank It's broadly completed the integration has been a big success.
You know, we're very pleased in the context of how does that basically six moving forward and if you remember we used cliffs as a as a foothold in the German market, where <unk>. So we're incredibly really where small and when we put our business together with cliff burrows that really gave us for the first time.
Footprint and we're now capitalizing on that you know we've recently opened a state of the art facility at all Mike When we talked earlier on the call quality group in Germany. It's one of the first big wins, that's going into that site. We've got all the facilities in the plan and we've just launched our <unk> service.
Business in Germany. So really that also you know it's been a very successful M&A.
M&A for us and we've all M&A, we should never lose sight of the fact that the secret of success is a good deal, but also great management execution on the integration and I'm sure that combined with the PFS team equally that will be a very successful.
Integration as we move over the next few months.
That's good thank you both.
Yes.
Thank you our next questions come from the line of Ravi Shanker with Morgan Stanley. Please proceed with your questions.
Hey, Good morning. This is Christine Mccarthy on for Ravi.
Thanks for taking my question.
Switching gears, a little bit here, maybe and are on a decided they really the evolution of besides yeah. As we look forward and I think the first one on this one maybe for Adrienne I. Appreciate your comments at the start of the call, but just digging in a little bit more I was hoping you could parse out how you see the role of automation and jokes aside.
As we look forward over the next couple of years and how that's deferred you know maybe from them.
The history here and if you could talk a little bit about how much of the focus do you think is really on no revenue or customer acquisition versus cost from automation and robotics et cetera.
Christine its Malcolm here, let me just say say, a sharp point before I hand, it over to Adrian So Adrian mentioned or at least they are business. A couple of years is being really at the forefront when one of our key leaders in our North American business over that period of time and in the window is delivered.
Consistent improvement for our customers in terms of efficiency productivity and importantly, <unk> results. That's very important because he brings a practical way of figuring out what is the right automation to us in the right solution. So we're we're very pleased.
He stepped into this new mission.
Really his role.
To remember back to January when we own the two carrier Investor day. He's role is absolutely a reinforcement of our strategy about accelerating the tech deployment across our business good for margins good for customer retention.
It continues to allow us to be leader of the environment. When it comes to automating the way I've seen space. So very pleased swap agent in the role Adrian <unk>.
Over to you. Thank you for the kind words, Malcolm and thank you Christine for the question before I address the strategy part of it I just want to share about my philosophy. When it comes to how approach the question of automation.
Don't look at the automation opportunity through the lens of the robust per se.
Operational perspective is focused on how to solve complex problems and design the best solutions that bring value to our customers and deliver ROI and so that gets me to specifically answer your question Christine as it is the automation agenda or is it about is it about revenues at about.
Is it about customer acquisition. The answer is all of the above what we've seen in Q3, even with the macro and the headwinds is that the <unk> thesis on our automation differentiation is proving to be.
It is proving to be positive and thoughts in my previous role in multiple times with the positive impact of not only launching sites that are highly automated but then using our adaptive tick we'd be going after a site is already live and implement additional technologies to further integrate and bring efficiencies.
So it is it is our differentiation and it is in the interests of all three of the items you mentioned.
Great. Thank you that's very helpful. Thank you both.
Maybe if I could just ask one to round out some of the M&A conversation, but thing on kind of a strategic focus as you look forward.
I think the pace of acquisitions that we've seen from you are in the last couple of years post spin is kind of what we should expect from.
From Jack so going forward or do you feel like it's just been a function of.
The opportunities that you've seen do you think they could pick up the pace just curious you know.
More broadly how you think of M&A, it's fitting into besides do going forward and the pace at which you think you might operate on a go forward basis.
Sure. This is Moshe let me take that it basically depends on the cash generation, we have how much room you have if you didn't staying within the investment grade balance sheet. That's first secondly, the opportunity set and third well how does it compare to investing in our own stock those will determine the pace and the.
Size of M&A execution of the company, but today with the environment. We are looking into is more like bite-size.
Capability enhancing geography enhancing M&A.
M&A transaction instead of transformational M&A transaction and we are always mindful that our stock is missing in our stock is an option for us.
Great. Thanks, guys.
Thank you.
Thank you our next questions come from the line of Brian <unk> with J P. Morgan. Please proceed with your questions.
Hey, Thanks, good morning.
So wanted to ask bearish, if you can just come back and follow up on the reasons for the EBITDA update and upgrade here it sounded like PFS, maybe you had a bigger.
Bigger impact, but I think in some of the commentary it sounds like it was fairly small so just wanted to see if that was a driving factor for the EBITDA increase here and then maybe for Adrian.
You think about the 200 basis points margin upside for automation and you touched on it briefly just now but do you see that going higher over time, you should get better value added services or do you think that actually accelerates the growth and helps.
It helps to have the addressable market, maybe a little bit faster.
Hi, Brian This is Bruce here on the EBITDA upgrades.
<unk> contribution was low single digits millions of dollars.
It basically shows the resiliency of our business model and despite volume headwinds and FX and pension headwinds. This business is delivering steady slightly improving margin expectation in Q4, excluding FX and pension so theyre looking into proving yet again, how strong this business model this but those are.
The components are operating profit increase in Q3, and operating productivity projects number one PFS small contribution number two against volume headwinds and FX and pension headwinds, but all all put together with the resiliency of our contract structure.
Hey, Brian This is Adrian thanks for the question. So in terms of the 200 basis points and do I see further opportunity I do both from a growth acceleration perspective, but also in terms of margin improvement I'll give a specific example, so we recently piloted and we're still in the pilot phase, but seeing.
<unk> significant benefits from an AI program on being more predictive with respect to labor planning and the sites, where we've been able to be more precise about sexual plus two 5% and so the reason why I'm very optimistic on the ability for automation and AI to help improve our margins and our efficiencies.
Just because when we have a <unk>.
Successful pilots and as many of these just as one example that I mentioned that we have the opportunity to then standardize and take it to.
Our global sites, plus 2000, <unk>. So so absolutely I do see it both as a growth lever and a margin improvement of liver.
Okay.
Thanks, Adrian maybe one more for you.
Of the <unk>.
Site level operations I think there has been an area of improved performance here and a softer backdrop. So you mentioned some of the post go live implementations, maybe give a little bit more color in terms of how that's progressing is this more of a an opportunity to fill in some of the growth. It was pretty fast over the last couple of years and so this is a.
A an outsized opportunity you're collecting on now or is this sort of what we should think about more so going in the future when a.
St ramps up you can actually go back in and potentially add more margin uplift after effects.
Yeah. It is it is a significant opportunity Brian and we've been very active on this program that we call adaptive taken in the in the deck actually on slide Slide 11. It describes how we increase the number of technology units by 67% year.
Over a year and this is predominantly been through our depths of Tic program and so some examples in this space are wearable tech.
Collaborative robots.
Vision technology.
The sites it doesn't really matter, whether the sites as manual partially automated highly automated there is always opportunity for continuous improvement through the adaptive take program and part of my remit is to formalize and standardize our best practices and where we've seen ROI and.
Existing implementations is to take those to other sites. So I see this opportunity as very compelling and extremely significant.
Okay. Thanks, very much Adrian.
Thank you our next questions come from the line of Amit Mehrotra with Deutsche Bank. Please proceed with your questions.
Thanks, Hey, guys.
I guess my first question I wanted to double click on that organic growth discussion at the beginning of the call. So Malcolm I want to understand a little bit better.
<unk>.
The organic growth is basically going to be zero in the fourth quarter.
But you won a bunch of contracts, including the <unk> contract, which I think was your highest whenever that is being realized right. Now. So so so the cross currents are obviously the base business is declining significantly either because of volume or churn.
And so I'm just trying to understand is it <unk>.
Turn going up you would intuitively makes sense to me that churn would go up in the environment that we're in but I don't know if that's true or not if you can just help us think about what I'm trying to get in the minds of the customer a little bit.
The context of churn.
Yeah, I mean, it's.
It's an outcome so.
It's mainly a volume issue. So if you think about churn churn is pretty consistent with previous quarters.
But definitely what were seeing is on our consumer related businesses and it's not universal on every single customer.
A broad brush weakens out consumer related business is those two facets of a lot of our customers are choosing to not discount. So maybe we can say inventory levels over the past few quarters, our normalized <unk>.
Inventories being elevated probably over the past couple of years fruit, starting with the pandemic starting with supply chain disruption.
Starting with different aspects of manufacturing problems.
No we can say inventory levels generally normalized stout.
As part of a result of that is basically the customers I know necessarily choosing to discount the choosing to sell at a better price for that in that scope you see in the numbers of many of the organizations, we work and they're actually firming well.
But obviously in our business is more of a volume aspect that travels through our warehouses. So that's probably the most significant point that you are seeing in our quarter four numbers and it's compounded the liquid by traditionally quarter. Four is always a very important quarter for our customers is this.
Water quota for it's going to be a very important we're all focused on it but again because of the volume typically historically, we might be implementing several.
Small overflow warehouse, it's just to cope with those extra volumes are happening in the last quarter. This time around we're not seeing any evidence of that and I guess the last thing I mentioned earlier I think there's definitely signs that the consumer themselves, they're putting off starting the holiday season shopping they're putting it off till later.
In the.
Closer to the end of the year basically in the hope that maybe some of that discounting will will occur. So that so that's the kind of backdrop that we're seeing maybe I can ask bearish to commenting on the fine detail on the numbers for you Amit because he is really important.
If I could just ask a question.
I'm Gonna loop Allergan, because I wanted to ask you about growth for next year, because it seems like there is it's a cyclical issue, which which worries me less than a churn issue. So that's fine, but as we think about you guys have done a lot of business for next year I think it all tallies up to like 78% both.
Assuming underlying volume and churn is kind of flat. So can we can we get back to organic growth in the mid to high single digits next year, just given the new business that you won in this dynamic that we're kind of at the bottom right now is that a fair assumption.
I'm, a new basis as I mentioned earlier, it's been incredibly strong you know if you just look at this year 840 million of new business signed this year 525 of that is landing in 2024 as I know it was 200 of that 800 going to be landing in 'twenty five and just in the last.
Quarter $180 million and the good very nice stats on that is probably 50% of that is coming from first time I saw say so all of US rolling forward, you're absolutely right in your observation I guess, when we think about next year, where we are right. Now you know literally this last week we've had.
Lots of the management team present, and meetings where stop saying.
Purchasing cycle and not purchasing cycle it will take us through to the end of the.
In with collecting all of the information from customers all of the forecast for next year.
The plans for expansion the plans for changing products a briefing goes into that is a true.
Awesome.
<unk> then allow users to bring games to replace you know our guide for the year ahead is a bit soon right now for us to be thinking about that.
Business. We're just all focused on this last couple of months so critical for our for our customers.
Yeah, That's fair and then one sneaky one if I could I know I'm over my allotment, but I wanted to talk to Adrian.
Around the automation so Adrian everything you said was really compelling and you know.
There were a lot of.
No.
Those words in there in terms of automation and AI I think the problem that we've had on the analytical side, it's kind of converting that into what it actually means for the model and so you take on this new position of Chief Automation Officer, what are the Kpis for you that kind of allow you to move to <unk>, because there's a lot of.
Anecdotal evidence of automation, but the.
The problem I have had this is the company still has a huge amount of direct labor costs and I'm trying to balance those two so as you think about this new role like every quarter every month wherever it is how are you. How are you judging the success for me keep your eye perspective that we could maybe follow up too.
Hey, Amit Thanks for the question, so I'm going to answer it in two different categories. The first is around operational tactical matrix and the second is more strategic and financial so from an operational perspective, we're going to look at the amount of adaptive take that we are redeploying as our success measure because of course the.
More we're able to establish those best practices best case scenario, and then roll them out to other sites and when we get the leverage of that from a global perspective.
So the extent all the depths of Tic expansion secondly of course will measure very tactically the execution against our plans in terms of what each of the regions will be targeting with respect to implementations and so from a from a tactical perspective, but I think what's more relevant for this audience is around the more.
And financial indicators, which will be focused on the revenue derived from automation and the margin that we get from the automated operations those would be the two primary.
<unk> financial metrics that we'll be talking about.
Okay. Thank you very much guys I appreciate it.
Thank you thanks Amit.
Thank you. Our next question is come from the line of Jason Seidl with TD Cowen. Please proceed with your questions.
Thank you operator, Malcolm embarrass Adrian good morning wanted.
I wanted to touch a little bit about.
Your outlook for 'twenty four I think before you mentioned that you saw maybe a turnaround coming in.
One have you know how should we assume that runs throughout your geographies. Since you mentioned green shoots in Europe should that'd be hitting Europe first and then maybe North America in the second half of the year. How are you looking at.
Yes.
Thank you for the question, let me walk you through some of the elements of Q4, because it impacts 2024 as well.
We are.
They're seeing right now, 2% to 4% growth for 'twenty to 'twenty, three which at the middle range implies that growth for Q4, we delivered 3% organic growth in Q3, but heading into Q4, we're seeing more volume headwinds and when you put them into three components. The first is you see seasonal one.
Impact from reduced pop up activities is our Christmas related warehouses, we had been operating it's about 1% to 2% impact slower ramp up of new facilities, they're not immune from the current volume environment about 1% to 2% impact and thus the number three is reduced volume from us.
Existing facilities, which is about 5% impact all of this is roughly making 8% to 9% headwind is balanced with our business wins and pricing pass throughs inflation pass throughs that we have in our business that comes to your it comes through our flattish growth in Q4 now looking into.
324, our business has already bank $525 million of incremental revenues from contract with <unk>.
The awards that you won a large contract win with the U S. Sporting goods, a 15 year contract due to start and finish 'twenty five.
And but then you look into the environment, you will probably see gradually increase over time customers volumes will remain likely subdued at the start of the year and improving throughout the years and we expect to get back into revenue growth in the first half and even.
Acceleration on that in Q4 and during this time, we expect our margins to hold steady and we will continue to get support from productivity initiatives. You highlighted this is going to give us about a $40 million run rate into 'twenty three before remember we're ending this year at about 25 26.
Millions dollars a bed.
So a lot of new wins supporting next year improvement into first half more into the second half as some of these headwinds.
Headwinds you're talking about in Q4 are seasonally in nature.
Okay.
That's good color.
Let me turn it over a little bit here to Adrian.
Wanted to talk a little bit about <unk>.
Yeah.
La was discussed and in our interest in previous questions, but when I look at the pre pipeline conversion rates you know they've mentioned sales as a part of it how much is AI had an impact on those.
Conversion rates on the pipeline and how much do you think it could have in the future do you think your pre pipeline conversion rates could actually improve with the increased use of AI in the increase.
Sort of marketing to the customers on it.
Yes, I definitely think that there is.
Compelling reason for us to believe in what AI can do to differentiate.
Our pursuits with with the with customers in the pre pipe in the pipeline.
<unk> did I gave one example of where AI has been able to make us more precise in our labor planning, but there's other myriad examples across our enterprise, where we've used AI to improve robotic travel times and wait times is another Fantastic example, we've used AI to <unk>.
Optimize transportation routing, which not only has financial benefit, but what's very important to our customers around the ESG metrics that they're also looking for so yes, I do believe that in our in our <unk>.
Use cases and in our discussions with customers in the pursuits sharing these success stories and what it can mean to customers is going to be a very big part of it.
So moving forward you would expect the conversion rates of the pre pipeline to increase.
But that is the hope and intention yes.
Fantastic gentlemen, appreciate the time.
Thank you.
Thank you ladies and gentlemen that is all the time, we have for questions today I'd like to hand, the call back over to Mr. Wilson for any closing remarks.
Thank you Daryl and thanks for hosting our call today, we really appreciate that.
We delivered a robust third quarter, we've upgraded our 2023 adjusted diluted earnings per share and adjusted EBITDA guidance every quarter and no taking into account our strong operating results and the incremental benefit.
From our recent acquisition of PFS, we're very pleased to be raising this guidance again.
That's against a softer macro we continues to deliver strong new business wins profitability.
And free cash flows underlying the resilience of our business model the deep expertise of the team and a secular growth story.
With that I'd like to wish everybody a great rest of the day and thank you for your attendance will bring the call to Annette. Thank you.
Ladies and gentlemen, this does conclude today's teleconference.
You for your participation you may disconnect your lines at this time.
Have a wonderful day.
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