GXO Logistics, Inc. (GXO) Earnings Call Transcript & Summary

Stephanie, I would just add in the second quarter by just a hair, our second largest win was an e-commerce win in Continental Europe. So into all the things that Patrick has been talking I mean, the complexity with tariffs will trade, that's just lending our solutions to help our customers, and so that's not going away, and that's only increasing.

I think one area that we've talked about for years is the demand for GXO services, you really do come in as kind of an essential partner and it doesn't really matter what the problem is at the time, whether it's tariffs or labor or [indiscernible]. I mean there's always a struggle from a supply chain standpoint. It seems like do you think that the success going forward is just making sure all you can provide is just simply known by customers? Is it as simple as that?

I think it is. I think our success has to be built on a foundation of excellent service to our customers and their that is where I am most passionate. We want to and strive to continue to be a great place to work. We want to create amazing associate experiences. So it really is a combination of having great people, recruiting, retaining, developing and retiring the very best people in the industry, I always say. And those people providing excellence to customers allows us to grow the core business, and we have the opportunity then to move into different services for customers. So it's not uncommon that we'll start a warehousing operation customer, we'll introduce a packaging operation within the warehouse for that customer doing consumer packaging, creating multipacks and so forth for customers on the B2B side, moving into kidding, subassembly and so forth. Those are [indiscernible] we can grow in. And so for us, we've got the opportunity to increase share of wallet with current customers as well as bring new customers in with these services. But as you said, it is about getting the message out customers understand what it is that we can do for them, the value proposition that we bring, which is a great value proposition as evidenced by the new business that we're signing. I think our digital marketing capabilities that we're standing up, it's going to be a big part that [indiscernible] in a much bigger way than what we do today. So we can expect more pipeline coming from that. And then it is about making sure that we're implementing what we win successfully providing the great service...

Maybe jumping to margin improvement, operating execution, which I think is a whole section of questions that I don't think I would have ever asked the GXO up until you're getting here. So this is, I think, an exciting area that I think investors understand but maybe are looking to see what this could -- the future can hold in this area. So Patrick, when you first joined, I think one of your first initiatives was to transition away from a regional operating model to a more kind of globalized platform. Maybe just talk to us about that process in the last year, and we can start there. And certainly, we have other follow-ups to that. You can start there.

Yes. When it comes to margin performance, cash flow -- free cash flow conversion, organic growth since I joined especially after my first warehouse visit, I've been very vocal. GXO is underperforming from a margin perspective, particularly when you compare us to our peers. We're a 3.5% of the business, good peers are 6% or better. We -- at the time I joined was at 30% of free cash flow conversion, our best peers in the industry of 50% or better time on organic growth, lagged peers there, we have to be better. I've been very vocal about that internally. I talked about that in my first town hall. That's the one thing I didn't like when I arrived, but I knew what I was stepping into -- and that is an area where we have to be even more and better. So to close the gap on those margins and to be a true market leader, not only from a supply chain execution, but from a financial performance perspective, our approach is multifold. One is, and you referenced, we are a $13 billion organization, which up until a year ago, has been managed in a very regional silo basis. While we've integrated acquisitions, some of those entities managed on their own we are shifting to a One GXO, leveraging the global scale of the business. When I arrived, I used the example, there was no global procurement function. You can imagine after over that a sophisticated procurement person, who could look at the $13 billion enterprise, they would find significant savings opportunities, engaging strategic suppliers on a global basis rather than a regional basis. So that is in motion, leveraging our global scale presents a great opportunity sharing best practice across our 1,200 operations, which we have not done, I think, effectively enough in the past. We have our operational excellence agenda, which is about improving productivity, cost out, sharing value with customers, we're capturing more for ourselves and what we have in the past to improve the margin performance of the contracts that we have with customers that is all about investing in robotics automation labor management systems in order to improve productivity, reduce cost. And then on the other side is making sure that the new business that we're bringing on is accretive to the margins that we deliver today. So pursuable more strategic B2B sectors that are more complex solutions come with higher risk of execution and therefore, are rewarded with higher margins. That is part of the strategy to improve margins, focus on North America, where we have been underweight to our competitors in the growing North America. North America is our smallest region, less than 30% of our revenue. That should not be putting a lot of focus on growing North America was structurally a higher-margin market. And then we look at the TAM that's available to us, we're very small in Asia, less than 1% of our revenue, Thailand, Singapore and Malaysia, executing very well, but there's a huge, huge opportunity for us to grow Asia. We're really going to step into that in earnest in 2027. And Asia is very healthy margin region. And so it's a combination of actions to close the gap on the margin, grow margin performance. We're passionately going on the free cash flow side this year, 30% to 40%, up from less than 30% in the past. And we'll talk about on November 16 about being a better than 50% free cash flow conversion business. That comes not only from working capital, which we have really good opportunities to do, particularly with the global procurement function and also looking more creatively how we are financing and implementing robotics and automation.

I do want to touch on that a little bit. I know you launched the GXO way, which is your kind of standardized productivity if I'm scribing right, the [indiscernible] productivity playbook. Given labor is of your costs. Obviously, we understand the pass-through nature of what that means, but it's still a major -- it's still a pretty large labor-intensive aspect of the business. What site level tools or what productivity initiatives can you deploy specifically on the labor side.

That is such a great question. And so thematic to what we're doing. As I did the warehouse tours, foundational to a great warehouse execution and in later day times is labor management and labor management systems that support that execution. It is measuring productivity at an individual activity level, coaching performance and removing quiet time in the warehouse where people are standing and may not have work to do because it hasn't around [indiscernible], for example. As I toured, I found 58 different labor management systems at GXO, but I probably only found 60 sites where those had been deployed. So we have a very large initiative to deploy. We're moving to 2 labor management systems for the enterprise as part of One GXO. That way, our leaders have sites can move from site to site. They'll be using largely the same tools. We can implement AI and get scale benefit around improvement in labor management and those systems rather than having to deploy improvement across 58 different systems. And typically, from a labor management system implementation at a site level, we expect a 5% to 15% improvement in productivity. We will share some of that benefit with our customers, some of benefit will accrue to GXO. We'll share more details on the glide path in terms of specific numbers that are driving forward there, but you can imagine with 2/3 of our cost being labor that has to be [indiscernible].

And then maybe just one follow-up, and you certainly touched on the different contracts and especially how that is different even from a geographic standpoint. So as we think about the open book versus closed book mix, how should we expect that to maybe change over time? And then help us think about how you with the focus on margins. But at the same time, return on invested capital is a key aspect as well, too. So how do you manage the mix in contracts?

Sure. I'm not so caught up in fixed variable versus cost plus. What I am passionate about is to make sure that our cost plus contracts where our customers are reimbursing us for the cost we spend plus the margin include a shared savings component. And that is a very typical in open book contracts. I think that has not been as typical enough as it should have been in the past for GXO, so that is something that we're very focused on. We're happy to be transparent with costs with customers or we happen to be fixed variable providing the customer the certainty in cost, which is the big difference. In both cases, we want to have the mechanism where we're investing in robotics automation, AI and those things that enhance productivity and sharing in the benefit of that investment so that we're getting the right return on capital. And we want to position ourselves in a way, particularly for the cost-plus contracts, where we can be taking those actions and not burdening the customer with a mutual decision that we are going to make investment in the business in automation and robotics, which many times is a constraint, and the industry has been a typical expectation is, if you invest $1 million in the customers' operation we want the customer to guarantee that you get the $1 million back. I know what we can deliver through the robotics and automation solutions that we have. I'd rather go ahead and make the investment. And share in the value that we create for customers, we knew customers because I'm providing a great service at great cost. So we have specific initiatives drive towards that.

Maybe sticking on the topic of automation. I think you've conducted, I think a few does in test with some humanoid?

45. Soon they're going to be 46 humanoid tests.

What are some of the early learnings here?

Hand dexterity matters. I think I was quoted recently in an article where I said we don't need Olympic level Humanoids. We all saw the Olympics in China with the humanoids and so forth. We don't need Olympic level of humanoids in the warehouse. We need great hand dexterity. That has been the biggest challenge. And I think the industry has surpassed this year solving that and hand dexterity used to be this now hand dexterity is this. And it's amazing how much more you can do when you can move your fingers like this and just like that. The second piece is the processing speed or the speed of the humanoid and performing [indiscernible] tasks. There's videos on my phone, I'm happy to share with people afterwards. It's painful to watch in humanoid [indiscernible]. Yes. Because it's so slow, it's speeding up. But we've got the -- got to get the productivity of those motions up to what a human can perform it to really get to the ROI that -- on ROI, humanoid industrial, I think right now, it's about $70,000. I think in 2 years, we'll be down sub-$40,000. Operating cost as $15 an hour. I think in 2 years, we'll be down to sub-$10. We don't know the depreciation curve on a humanoid, but maybe if we do 2 years, 3 years, you can figure fully loaded operating cost of $15, $16 an hour, compared to fully loaded an associate is twice that. So there are a lot of tasks in the warehouse environment that we see application for humanoid, which is why we are and have been so aggressive in piloting and working with multiple partners.

Any other areas within the -- because that's all very exciting, but any other areas from an automation standpoint we should think about? Or also GXO IQ, which is an area that I think you've adopted just leveraging AI capabilities, too. So maybe just talk about broad AI, machine learning, other automation and your quest for obviously driving efficiencies and productivity.

Sure. There's so much innovation going on in the -- just the robotics in automation space, the great work that organizations like AutoStore, Locus and others are doing to advance the technologies there. There is ROI on those technologies today. And innovation continues [indiscernible]. So we continue to fill our innovation funnel with those new technologies, really testing efficacy and looking for opportunities to deploy at scale. We're super excited about XL, which is our middleware solution for the deployment of AI in our operations. We'll have about 60 of our warehouses integrated to GXO IQ this year on a path to get all [indiscernible], integrated over the next couple of years. What that allows us to do is to embed both our proprietary developed AI tools as well as off-the-shelf AI tools in a single system connected to our single data lake, which is very, very important. And for each of our operations to then leverage on a menu basis, the AI tools they want to use for their operations. So that allows us to execute globally and execute at scale globally but customize our solutions locally for the things that individual operations. And so we're very excited as that's rolling out. I think AI going to make a big difference in our business.

All right. Well, last topic, but certainly not the least, there's always a lot of conversation it seems like about Amazon Supply Chain Solutions. Unfortunately, it does seem like whenever they put out any kind of press release, your stock tends to move on the announcement.

Dramatically. Some how. Yes.

So for those in the room here today, what would be -- I just want to dig in here, but what's your or line of response for, we see this Amazon Supply Chain Solution announcement, revert back to this thought on GXO.

Amazon is not a competitor to GXO. I a real treat first year as a public company CEO to have the news come out May 4 and the stock dropped 19% on what I label as [ fake ] news, and we have a lot of that these states. But Amazon is very clear in their strategy in terms of how they're going to market. They want to market capacity they have in their warehouses, in their planes and in their trucks, the last mile delivery, to help absorbed fixed costs where I think they've overbuilt in some cases. We don't compete with Amazon on a fulfillment basis. The customer looking for a standardized Amazon solution is not the customer calling us, looking for RDX Direct e-commerce solution for example. So we have never, that I'm aware of, lost a piece of new business to Amazon. We've never lost a piece of the existing business to Amazon. We don't see Amazon as a competitor in our $2.7 billion pipeline. We have a great relationship with Amazon. I think they're a fantastic company. I do think for those of my competitors that compete in the parcel space and last-mile delivery. I think Amazon is a real threat. And I think they will drive price reduction in those particular services. But for us in contract logistics, we are client-aligned solutions. So we develop our solutions that are very specific for what our customers need. And we're not about the standardized solutions. So we simply don't see them swimming in our pool.

And then maybe also if you just want to touch on as being an independent partner well that also can mean in terms of customer meaning you don't also have a potential conflict of interest.

Sure. I think customers have been even when you look at maybe manufacturers or others who are looking to leverage the Amazon website and their fulfillment capabilities and so forth for the e-commerce offerings. I think there is something to be said for protection of customers' data, which we're very good at. We don't share data across customers. We have no desire to become one of our customers and to compete with them in their own space. And so we provide that independent which and objectivity, which I think is really important, especially when you're providing client aligned solutions. Our client aligned solutions have to be about helping our customers achieve their business objectives, not just shipping a box. So customers have many different business objectives depending on where are in their business cycle. Some of it is achieving the lowest cost. Some of it is achieving the best service. Some of it you have to achieve both when you're shipping life-saving parts, for example, for MRI machines, our solutions client aligned to deliver at the right service at the right cost. And that's why our customers are [indiscernible].

All right. Well, we'll leave it at that. Thank you both for your time.