GXO’s new management stops at an online forum to tell their story

When GXO was split from parent company XPO in August, its new management team was faced with what was perhaps the most important task of all: presenting itself to the investment community and answering the question of who was this company and what it was doing.

Members of the company’s management team took a more public step in that direction on Tuesday at an online forum hosted by Amit Mehrotra, head of Deutsche Bank’s transport research team. They argued that the contractual logistics activity of GXO (NYSE: GXO) is more than just a warehouse operator.

The forum took place a day before GXO announced plans to hire 9,000 seasonal workers in the United States and Canada before the year-end vacation period.

As Mehrotra noted in her opening remarks, GXO is a company with approximately $ 7 billion in revenue, approximately $ 700 million in earnings before interest, taxes, depreciation and amortization, over 90,000 employees. and an investment grade credit rating. With the fallout from XPO (NYSE: XPO) taking place in August, GXO has yet to release its first quarterly results. It will do so on November 1, with its first conference call with analysts a day later.

He was recently hired by Mark Manduca, the company’s chief investment officer, who took the lead of the forum explaining the point GXO will try to make: it’s not just about manually moving boxes. in a warehouse, but it’s about technology as the “backbone” – a term frequently used on the forum – to turn a customer’s logistics into a source of revenue rather than a cost. In addition, the customer will be better prepared to participate in e-commerce.

Manduca said he has attended more than 500 meetings to discuss GXO’s message since the spin-off.

He conceded at the outset: “It’s a difficult business to understand. There is no company out there that offers scalable contract logistics.”

And one problem, he said, is that a lot of investors “don’t really understand how to model it.” Given that, Manduca said, it could be a few years before investors are “comfortable” with what he described as a company with scalable technology, proficient in adopting. new technologies and with a solid balance sheet.

Manduca said GXO receives a lot of questions from investors who assume that the company it is in – which is basically managing a company’s logistics exposure, including warehouse activities – has a low barrier. at the entrance because of the obstacles to develop and manage a warehouse are not huge. Many investors, he said, think “what we’re doing is pushing boxes by hand through a warehouse.”

But many investors who see the business this way haven’t walked into a warehouse for a long time, Manduca said. “It’s our job over the next five years to prove that contract logistics have moved from a cost item to an income item,” he said.

Mehrotra noted that GXO was unusual in that it has already released guidance for its financial performance in 2022, well ahead of other companies it follows. Manduca responded that GXO’s ability to issue guidance so early was a function of the business model.

“There is nothing transactional about our business,” Manduca said, referring to the fact that the vast majority of contracts signed by the company are long term. “We are signing contracts in the 2030s.”

Manduca said he realized that GXO’s economy could be similar to that of a trucking company. But he added that the company has virtually no trucking business, has no air freight business, and is more influenced by what he called “long-term visibility and secular growth engines at. long term”.

These pilots are supported by numbers that Manduca has deployed more than once in his remarks. The supply chain is only about 5% automated, and e-commerce accounts for “just” 20% of sales.

Manduca’s remarks were at times more general than specific, as he spoke of GXO’s abilities and his “magic dust”.

Twenty years ago, in contract logistics, Manduca said, the business was “commodified”. Saving money was tough: “It would take you six months to save 30 basis points on the 3.5% of your logistics costs,” he described it. Switching to another logistics provider, or simply keeping the activity in-house, was easy to justify in these circumstances.

But with the rise of technology and the demands of e-commerce, “this industry is at the point where anything you could have done on your own is considered a direct operating expense,” Manduca said.

In view of this, there is a possibility for a contract logistics company to take over … like GXO.

The company promotes itself “as a McKinsey-style consulting firm,” Manduca said, and “sucks magic dust from your warehouse and we turn good into great.”

“The business is really all about the magic dust,” he added.

GXO does this through three types of contracts: an open book, a closed book and a hybrid.

Manduca briefly described the differences between open and closed contracts. The open contract is relatively straightforward. The company operates a warehouse and takes a management fee for doing so, with incentives to produce improved operations that are shared by both GXO and the contracting company.

His description of the closed contract was less precise, in part because of its nature. In a closed book, Manduca said, “We’re taking more inherent risk,” GXO leveraging its own large database of customers on how it can make improvements.

“[The customer] leverages our expertise to drive efficiency and assumptions in [its] business model on what customers think it can accomplish in terms of pick rates, “Manduca said -” pick rates “being the term for the speed and efficiency of a warehouse for the entry and exit of goods.

Once this model is built, “the books are closed”, giving the term its name. If selection rates exceed targets through the use of GXO, “then that’s the margin.” If they underperform, that’s also a margin, but not a positive one.

“The client controls their own destiny based on the assumptions at the start of the contract,” Manduca said.

Regardless of the particular contract, technology and automation is always a part of GXO’s marketing push. Neil Shelton, chief strategy officer, said the company doesn’t make a sales pitch to a potential customer “unless it has a high degree of automation and technology.”

When GXO embarks on managing warehouse operations, there is the problem of manpower. The former parent company XPO has a long history of contentious working relationships, especially with the Teamsters,

Mehrotra described the reviews of GXO on job site GlassDoor as “horrible.”

Shelton said GXO was “obsessed” with these criticisms. Manduca ticked off a series of perks the company uses to retain talent, such as bonuses and tuition reimbursement.

“Our goal is very simply to win this battle by recruiting the best talent, and that’s what we’re really focused on,” he said. He added that the company sees “very high demand” from applicants looking to work at GXO.

In line with GXO executives’ focus on automation and technology at the forum, the seasonal hiring announcement said the company “will continue to expand its use of advanced automation to increase productivity. productivity, enhance safety and improve the employee experience “.

The 9,000 jobs include salaried, hourly and contractual roles. Part-time and full-time positions are available.

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