When GXO spun off from parent company XPO in August, its new management team faced a task that was perhaps the most important of all: introducing itself to the investment community and answering the question of who this company was and what it was doing.
Members of the company’s management team took a more public step in that direction on Tuesday during an online forum hosted by Amit Mehrotra, the head of Deutsche Bank’s transportation research team. They argued that GXO’s contract logistics business (NYSE: GXO) is more than just a storekeeper.
The forum took place a day before GXO announced plans to hire 9,000 seasonal workers in the United States and Canada ahead of the holiday season.
As Mehrotra noted in his 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 a credit rating of superior quality. With the XPO spin-off (NYSE:XPO) which will take place in August, GXO has not yet released its first quarterly results. He will do so on November 1, with his first conference call with analysts a day later.
It was recently hired Mark Manduca, the firm’s chief investment officer, who took the helm of the forum in explaining the argument that GXO will try to make: that it’s not just about manually moving boxes in a warehouse, but rather more and more about technology as a “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 over 500 meetings to discuss the GXO message since the spinoff.
He conceded from the outset: “It’s a difficult case to understand. There is no company 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 this, Manduca said, it could take a few years before investors are “comfortable” with what he described as a company with scalable technology, which has mastered the adoption of new technologies and has a strong balance sheet.
Manduca said GXO receives many questions from investors who assume the business it is in — which basically manages a company’s logistics exposure, including warehouse operations — has a low barrier to exposure. entry because the obstacles to developing and managing a warehouse are not huge. Many investors, he said, think “what we’re doing is pushing boxes by hand through a warehouse.”
But many of the investors who see the company that way haven’t walked into a warehouse in a long time, Manduca said. “It’s our job over the next five years to prove that contract logistics has evolved from a cost element to a revenue element,” he said.
Mehrotra noted that GXO was unusual in that it had already released forecasts for its financial performance in 2022, much earlier than the other companies it tracks. Manduca responded that GXO’s ability to release guidance this early is a function of the business model.
“There’s nothing transactional about our business,” Manduca said, referring to the fact that the vast majority of contracts the company signs are long-term. “We sign contracts in the 2030s.”
Manduca said he ran into the idea that GXO’s economics might 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 age-old growth drivers.” long-term”.
These drivers are backed up by numbers that Manduca rolled out more than once in his remarks. The supply chain is only about 5% automated and e-commerce represents “barely” 20% of sales.
Manduca’s remarks were sometimes more general than specific, as he talked about GXO’s abilities and his “magical dust”.
Twenty years ago, in contract logistics, Manduca said, the business was “commoditized.” Saving money was difficult: “It would take you six months to save 30 basis points on the 3.5% of your logistics costs,” he described. Switching to another logistics provider, or simply keeping the business in-house, was easy to justify under 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.
Given this, there is an opening for a contract logistics company to come in and take over…like GXO.
The company markets itself “like a McKinsey-type consultancy,” Manduca said, and “sprinkles magic dust in your warehouse and we turn good into great.”
“Business is really about magic dust,” he added.
GXO does this through three types of contracts: an open book, a closed book and a hybrid contract.
Manduca briefly describes the differences between open and closed contracts. The open contract is relatively simple. The company operates a warehouse and takes management fees 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 are taking on more inherent risk,” GXO tapping into its own extensive 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 achieve when it comes to pick rates,” Manduca said — “pick rates” being the term for a warehouse’s speed and efficiency for the entry and exit of goods.
Once this model is built, “the books are closed”, giving the term its name. If pick 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 are always part of GXO’s marketing campaign. Neil Shelton, chief strategy officer, said the company doesn’t make a sales pitch to a potential customer “unless it applies a high degree of automation and technology.”
When GXO steps in to manage warehouse operations, there is the issue of labor. Former parent company XPO has a long history of contentious labor relations, particularly with the Teamsters,
Mehrotra described GXO’s reviews on job-review site GlassDoor as “awful”.
Shelton said GXO was “obsessed” with these reviews. Manduca ticked off a series of benefits the company uses to retain talent, such as bonuses and tuition reimbursement.
“Our goal is simply to win this battle by hiring the best talent, and that’s what we’re really focused on,” he said. He added that the company is seeing “really high demand” from candidates wanting to work at GXO.
In keeping with GXO executives’ focus on automation and technology at the forum, the seasonal hire announcement says the company “will continue to expand its use of advanced automation to increase productivity. , strengthen security and improve the employee experience”.
The 9,000 jobs include salaried, hourly and contract positions. Part-time and full-time positions are available.
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