Good morning, everybody. Welcome all of you to Jefferies 2026 Industrial Conference. My name is Stephanie Moore, Jefferies Transportation Logistics analyst. We're very pleased to have the team from GXO today. We have Chief Executive Officer Patrick Kelleher and Chief Strategy Officer Kristine Kubacki . Thank you guys both for being here.
Thank you for having us.
Thank you.
Format is just simple fireside chat. I'll kick it off with a bunch of questions, and we can go from there.
All right.
Maybe starting with some maybe kind of near term focus just because we did come off of the second quarter results. I do think I certainly have received a lot of questions on just the organic growth performance on the quarter. On the specifics, 2Q organic growth of 3.4%, moderated slightly from the first quarter. We got a lot of questions around that. I do think that on two-year stack it actually accelerated, but there's a lot of nuances there. Maybe just starting with that, can you just talk through maybe some of the nuances, 1Q to 2Q, how we should think about the timing of contract startups and maybe what drove any kind of deceleration?
Sure. I joined GXO one year ago. Prior to joining, GXO's been on a decelerating path of organic growth. We were mid-teens organic growth when we spun out of XPO in 2021. Forecasting 4%- 5% organic growth this year. It's been a lot of work and effort in the last year to reinvigorate organic growth in the business. I think that evidenced by our Q2 new business signings at $412 million, which I believe is about 35% increase over prior year. I signaled on the call in August that the third quarter would look similar, in terms of new contract signings, in comparison to last year on a percentage basis. We feel good about the trajectory that we're on from an organic growth perspective and reinvigorating that agenda. In Q2, we saw the 3.4% organic growth.
Takes about three to six months to start up a new contract in the contract logistics business. The difference between 3.4% and 4%, which I think everybody was expecting, is $17 million. That represents about a two-week slip in startup timing. Nothing that I was concerned about. I was quite frankly surprised how concerned everybody else was. We reaffirmed run path this year for the achievement of our 4%- 5% organic growth guidance. That still holds. We will share our organic growth trajectory in our investor day, November 16th.
Stephanie, I would just add also is that our incremental revenue for this year at the end of the quarter came up to over $1 billion, and that was a record for us. And it was up about 29% year-on-year. So I think as we look ahead, we already have the visibility secured in that incremental revenue in the second half of this year.
I think that's really helpful. We get the question quite a bit is just, is there any change in underlying customer demand? But maybe emphasize what you're seeing there, but also just, I think the visibility that you do have that gives you the confidence in the second half outlook.
Yeah. So, in terms of customer demand, and we talked about this August 5th, current customer volumes in the aggregate have been relatively flat, ± 1 or 2. ± 1%, really. We've seen softer volumes on the commerce retail side in Europe, but substantially higher volumes on our B2B industry verticals of aerospace and defense, technology, industrial, and life sciences. Those all really netting out to pretty stable volume and revenue for us. Talked about marginal improvement in pricing in terms of year-on-year pricing improvement, and the balance of the organic growth is really coming from retention of existing business, not losing business, and adding new business in with the new contracts that we're starting.
Maybe just starting on that sales pipeline and a lot of the work that you've put in over the last year. So I think you called out that the sales pipeline is at a record $2.7 billion. What's driving this pipeline growth? Just blanket statement there.
Yeah. It is the strategic focus that we put on North America and the strategic B2B verticals I have talked about, really leaning more into the capabilities, competencies that we have in aerospace, defense, life sciences, technology, and our industrial verticals. That is something I feel like we have not done in the past as GXO. 70% of our business today is consumer CPG, retail, e-commerce business. 40% of our new business wins so far this year have been North America. We are less than 30% of our revenue is in North America, so I think that strategy is coming to life. 41% or 42% of our new business wins have been in the B2B verticals. We have talked about where we are putting additional emphasis. I shared in the investor call on August 5th that I am particularly excited about the progress we are making there because we really have not gotten started yet.
Karen Bomber has come on as Chief Commercial Officer in January. We are standing up a digital marketing capability that did not exist in the past. That will be a huge catalyst to building additional pipeline for us. We are adding to our sales teams, particularly on the B2B verticals. Those people are just coming in, coming up to speed. So I really feel like the teams and our people have done a phenomenal job turning focus to the areas that present the greatest growth opportunity, and delivering and converting against that. We see additional coming with the investments that we are making on the growth side.
I definitely want to touch on some of those investments in a little bit, because I think there is a lot there and a lot of opportunity. But on that $2.7 billion pipeline, can you help us think about how we should think about conversion of that pipeline over the next 12 months?
Yeah. We flagged approximately a 28% conversion rate. Do I have that right? Ish. 28%-ish conversion rate on that pipeline rolling. The pipeline turns about 1.5 times a year, so that does not The total volume of business we will chase in a year, and I think very exciting was we signed $412 million of new business in the second quarter. The pipeline at the end of the quarter dropped to $2.3 billion, $2.4 billion.
$2.3 billion .
$2.3 billion , and sprung back to $2.7 billion before the investor call. There continues to be great marketplace opportunity out there. It's really about demonstrating great pipeline discernment, choosing the right opportunities to go after and win business.
I guess maybe thinking about the building blocks to your organic growth opportunity and to your point that the 4%-5% expected for the full year, so you've already, based on my math, is it locked in? Is it 9% for this year in terms of new wins? After that, really you're talking through is the volume, the pricing. The other piece is certainly churn or attrition. I think that's been really steady over time. Is there a potential change where over the long term, that churn or attrition rate could look different than what it has over the last couple of years?
Yeah. We have an opportunity to improve there. We're at 95% churn rate today. We have an opportunity to be higher there. We have taken a couple steps towards that. We implemented a global customer success model, which is a global account management model. Edgar is coming on to the organization leading that. That is very focused both on customer retention, and also growing with our largest customers around the world. Between the two, we think that's going to be a big contributor to organic growth by compressing, improving retention even beyond the 95% and driving additional sales.
Maybe getting into some of the actions over the last year. In the second quarter, you did announce what I think was a record deal for the quarter, but it was with a large hyperscaler, which obviously gets us all very excited. Maybe a customer that we didn't historically think would be in the GXO wheelhouse. First, can you just talk a little bit about what you are doing for that customer, and then help us understand the life cycle of how data centers or hyperscalers can ultimately be as customers for GXO.
Sure. We are doing business with multiple hyperscalers across the regions that we operate in. Not only in North America, but also in Europe. I think everybody is excited about the build-out of data centers. There is lots of activity going on there. We participate from a supply chain perspective in supporting the build-out. We have individuals who work in our warehouses, who build the racks, who do the wiring, who deliver a completed rack to the data center. It just has to be plugged in by our customer to start working. That is far more efficient than doing that work in the data center. If you have been in the data center, it is quite cramped. It is not easy to work in the data center if you are building racks. We have brought a lot of efficiency to that process.
But what I am even more excited about is we provide all of the maintenance and sustainment parts to the data centers, and that is where we see longevity in the solutions that we are providing. We can all anticipate that there will be some sort of peak. We might be in it now in terms of data center build-out. We want to participate there. But I am more excited about the services that we are providing around maintenance and sustainment. So if a server goes down, part goes down, fan breaks, so forth, we are providing those parts to the technician for the repair. We are handling the returns of that product coming out. And that has lots of longevity for us.
And then just as a follow-up, how are these contracts maybe different or in line with your company average in terms of tenure of the contracts, contract structure? Anything there would be helpful.
Yeah. I think they are pretty similar. Those solutions, in contrast to some that we implement, are lower CapEx solutions. They are in line with the average contract length that we have right now, which is five years. The margins on that is good, accretive to our current margins, so that they are great contributors to our growth on all dimensions.
Touching on maybe some of the commercial success that you've seen thus far, and especially calling out those key end verticals. I think there's a lot to unpack there because, to your point, you're only one year in, and a lot of the team's not exactly probably ramping at full capacity either.
They'd better be. That's good.
What do you think has driven the initial success in some of these key verticals? Because there's probably a lot of factors at play. You have Wincanton, which certainly was a bit more industrial focused or defensive focused. You have your own personal background. So maybe if you could bifurcate what's driven this initial success, and then what kind of success we should expect maybe over the next couple of years.
Sure. I think, sort of reflecting on my first year, I've had the question of what did I see at GXO when I arrived? There's been a lot of focus over the last five years before I arrived on M&A. I think that M&A has contributed to competencies that we have on the B2B verticals especially. But I don't think the GXO organization did a good enough job of leveraging those capabilities for organic growth. I think there was a lot of focus on driving synergies out of acquisition and looking for the next acquisition. When I arrived, I went around 70 different warehouses I don't even know how many countries, 12, 13 countries. The capabilities that I saw, 32 years in the industry, were phenomenal.
I visited one of our aerospace defense operations in Atlanta, where we support both commercial and defense activity for a large aerospace customer, and it is second to none in terms of our capability. Frankly, I was a little stunned that there hadn't been more effort put into growing that. I think some of the success that we're seeing there is simply coming from focus, getting the message out to key customers around the capabilities that we have there, winning. We have great people operating in these businesses, lots of credibility with customers. It's getting them in front of customers and winning. We've taken additional steps, such as in the U.S., we established the Defense Advisory Board.
We've about a half dozen folks who are retired, very senior military with strong supply chain acumen, helping us formulate the right services and approaching the right people in the industry to win, and that's been a big catalyst. We formed the Taurus Consortium in the U.K., ourselves, Maersk and Accenture pursuing large opportunities with the U.K. government, U.K. military, and that is early days, but we're seeing good pipeline coming from that. We're bringing in experts and really being open-minded and listening to what customers need, what are the issues in the industry, making sure that we're solving real problems, and that is the best opportunity to sell new solutions. On the hyperscaler side, we had the opportunity to start very small with one, and we built phenomenal capability there, and that really has exploded for us.
With the people that we have, the expertise that we have, our ability to move quickly, which is absolutely paramount there, has made the real difference. And so it really has not been any sort of transformation or reinvention of anything. It has been about focus, unleashing people to focus on organic growth, leveraging the great expertise that we have within the organization and get that customer facing, and win.
Thank you. Okay, one follow-up on this. We've obviously touched a lot about some of these high growth, maybe higher value add verticals, and you called out a lot of them.
Aerospace and defense being a key one here. But there is still maybe the core e-commerce side of things or the core retail, core consumer. So two-part question. What are you seeing from a general overall health of that, I think you called out the consumer e-commerce bucket of your portfolio. And at the same time, does growth in one area maybe come at the expense of the other?
Yeah, I don't think it has to come at the expense of the other, and I also see that when we think about geographies, and I'll come back to that. We're still seeing the steady growth that we expect from e-commerce and CPG industries. And we expect that to continue. We'll outline that more specifically on November 16th on Investor Day. When you think about 40% of our new business this year has been in the B2B vertical, 60% has been in e-commerce and CPG facing businesses. That business continues to run very healthy. We're seeing larger, more complex projects come on the e-commerce front, a lot more automation, a lot more robotics, and expectation of AI in the operations. I think that continues to evolve quickly, maybe even more so than on the B2B side.
I think we're really advantaged there with the investments we've made and the expertise that we have in automation and robotics.
Yeah, Stephanie and I would just add in the second quarter by just a hair, our second largest win was an e-commerce win in continental Europe. To all the things that Patrick's been talking about, the complexity with tariffs, with trade, that's just lending our solutions to help our customers. That's not going away, and that's only increasing.
I think one area that we've talked about for years is that 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 COVID. 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 that you can provide is just simply known by customers or potential 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 customers. 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. It really is a combination of having great people, recruiting, retaining, developing and retiring the very best people in the industry, I always say. Those people providing excellent service to customers allows us to grow the core business, and we have the opportunity then to move into different services for customers. It is not uncommon that we'll start a warehousing operation for a customer, and then we'll introduce a packaging operation within the warehouse for that customer, doing consumer packaging, creating multi-packs and so forth for customers.
On the B2B side, moving into kitting, sub-assembly and so forth. Those are avenues that we can grow in. 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 understanding 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 capability that we're standing up is going to be a big part of getting that word out in a much bigger way than what we do today. We can expect more pipeline coming from that. It is about making sure that we're implementing what we win successfully and providing that 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've ever asked the GXO team up until you getting here.
This is, I think, an exciting area that I think investors understand, but maybe are looking to see what the future can hold in this area. 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-
Yep
In the last year, and we can start there. certainly, we have other follow-ups to that, but-
Sure, yeah
Let's start there.
Yeah. When it comes to margin performance, cash flow convert, free cash flow conversion, organic growth, since I joined, and especially after my first 70 warehouse site visits, 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% EBIT business. Our good peers are 6% or better. We, at the time I joined, were less than 30% free cash flow conversion. Our best peers in the industry are 50% or better. Talked about organic growth. We lag our peers there. We have to be better. I've been very vocal about that internally. 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. That is an area where we have to be even better.
To close the gap on those margins and to be a true market leader, not only from a supply chain execution perspective, 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. We've integrated acquisitions, some of those even 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 if you've ever met a sophisticated procurement person, who could look at a $13 billion enterprise, they would find significant savings opportunities engaging strategic suppliers on a global basis rather than regional basis. That is in motion.
Leveraging our global scale presents a great opportunity for 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, but capturing more of the value for ourselves than 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, AI, labor management systems, in order to improve productivity, reduce cost. 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. Pursuing those 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. A focus on North America, where we have been underweight to our competitors, in growing North America. North America's our smallest region, less than 30% of our revenue. That should not be. We're putting a lot of focus on growing North America, which is structurally a higher margin market. Then we look at the TAM that's available to us. We're very small in Asia, less than 1% of our revenue. We're in Thailand, Singapore, and Malaysia, executing very well. There's a huge opportunity for us to grow Asia. We're really going to step into that in earnest in 2027. Asia is a very healthy margin region. This combination of actions to close the gap on the margin, improve margin performance. We're passionately going out.
On the free cash flow side, we're guiding this year 30%- 40%, up from the less than 30% in the past. We'll talk about on November 16th, our path to being a better than 50% free cash flow conversion business. That comes not only from improving working capital, which we have really good opportunities to do, particularly with the global procurement function, and also looking more creatively how we're 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 describing it right-
The standardized productivity playbook. Given labor is two-thirds of your costs, obviously we understand the pass-through nature and what that means, but it's still a pretty large labor intensive aspect of the business.
Yes.
What site level tools or what productivity initiatives can you deploy specifically on the labor side?
That is such a great question. Thematic to what we're doing. As I did the warehouse tours, foundational to great warehouse execution in modern 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 arrived at their station, 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 two labor management systems for the enterprise as part of one GXO. That way, our leaders at 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. Typically from a labor management system implementation at a site level, we expect a 5%-15% improvement in productivity. We will share some of that benefit with our customers. Some of that benefit will accrue to GXO. We'll share more details on the glide path in terms of specific numbers we're driving towards there, but you can imagine with two-thirds of our cost being labor, that has to be a substantial return.
Maybe just one follow-up, and you certainly touched on the different contract mixes, and especially how that is different even from a geographic standpoint. As we think about the open book versus closed book mix, how should we expect that to maybe change over time? 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.
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 a margin, include a shared savings component, and that is very typical in open book contracts. I think that has not been as typical enough as it should've 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're happy to be fixed variable and provide 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 can enhance productivity, and we're sharing in the benefit of that investment so that we're getting the right return on capital. 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 or robotics, which many times is a constraint, and in the industry has been a typical expectation is if you invest $1 million in a customer's operation, you 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, renew customers, because I'm providing a great service and cost. We have specific initiatives driving towards that.
Maybe sticking on the topic of automation, I think you've conducted a few dozen tests with some humanoids.
45.
Okay.
Soon 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.
Yes.
The Olympics in China with the humanoids and so forth. We don't need Olympic level 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. Hand dexterity used to be this, and now hand dexterity is this. It's amazing how much more you can do when you can move your fingers like this instead of just like that. The second piece is the processing speed or the speed of the humanoids in performing individual tasks. I have videos on my phone I'm happy to share with people afterwards. It's painful to watch a humanoid pick a lipstick. It's so slow. It's speeding up, but we've got to get the productivity of those motions up to what a human can perform to really get to the ROI that we need.
On ROI, a humanoid industrial, I think right now is about $70,000. I think in two years we'll be down sub 40. Operating cost today is $15 an hour. I think in two years we'll be down to sub 10. We don't know the depreciation curve on a humanoid, but even if we do two years, three years, you can figure fully loaded operating cost of $15, $16 an hour compared to fully loaded on an associate is twice that. There are a lot of tasks in the warehouse environment that we see application for the humanoid, which is why we are and have been so aggressive in piloting and working with multiple partners through technology programs.
Any other areas within the auto-- that's all very exciting. 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 for just leveraging AI capabilities, too. 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 just the robotics and automation space, the great work that organizations like AutoStore and Locus and others are doing to advance the technologies there. There is ROI on those technologies today, and innovation continues to come. 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 GXO IQ, 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 1,200 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.
For each of our operations to then leverage on a menu basis the AI tools they want to use for their individual operations. That allows us to execute globally and execute at scale globally, but customize our solutions locally for the things that individual operations need. We're very excited as that's rolling out. I think AI is 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 Services. Unfortunately, it does seem like whenever they put out any kind of press release, your stock tends to move on the announcement.
Dramatically.
Dramatically.
Somehow. Yeah.
For those in the room here today, what would be, and there's more to dig in here, but what's your one or two-liner response for, we see this Amazon Supply Chain Services announcement, revert back to this thought on GXO.
Amazon's not a competitor to GXO. It was a real treat first year as a public company Chief Executive Officer to have the news come out May 4th and the stock drop 19% on what I labeled as fake news. We have a lot of that these days. 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 for last mile delivery, to help absorb 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 our GXO Direct e-commerce solution, for example. We have never, that I'm aware of, lost a piece of new business to Amazon.
We've never lost a piece of 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 in last mile delivery, I think Amazon is a real threat. I think they will drive price reduction in those particular services. For us in contract logistics, we are client aligned solutions. We develop our solutions that are very specific for what our customers need. We're not about the standardized cookie cutter solutions, so we simply don't see them swimming in our pond.
Maybe also, if you just want to touch on, as being an independent partner, what that also can mean in terms of customers. Meaning, you don't also have a potential conflict of interest.
Sure. I think customers have been, even when you look at maybe CPG 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. We provide that independence 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. Our customers have many different business objectives depending on where they 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 are client aligned to deliver at the right service, at the right cost. That's why our customers are calling us every day.
All right. Well, we'll leave it at that. Thank you both for your time.
Thank you.
Appreciate it.
Appreciate it