When GXO was spun off of parent company XPO in August, its new management team faced a task that was possibly the biggest of all: introduce itself to the investment community and answer the question of just who this company was and what it did.
Members of the company’s management team took a more public step in that direction Tuesday during an online forum hosted by Amit Mehrotra, the head of the Deutsche Bank transportation research team. They made the case that the contract logistics business of GXO (NYSE: GXO) is far more than simply that of a warehouse operator.
The forum came a day before GXO announced plans to hire 9,000 seasonal workers in the U.S. and Canada leading up to the end-of-year holiday period.
As Mehrotra noted in his opening remarks, GXO is a company with roughly $7 billion in revenue, about $700 million in earnings before interest, taxes, depreciation and amortization, more than 90,000 employees, and an investment-grade credit rating. With the spinoff from XPO (NYSE: XPO) taking place in August, GXO has yet to release its initial quarterly earnings. It will do so Nov. 1, with its first conference call with analysts a day later.
It was recently hired Mark Manduca, the company’s chief investment officer, who took the lead on the forum in spelling out the argument that GXO is going to try to make: that it is not just about moving boxes manually around a warehouse but instead is increasingly about the technology as the “backbone” — a term used frequently on the forum — of turning a client’s logistics into a revenue source rather than a cost. Additionally, it will get a customer better prepared to participate in e-commerce.
Manduca said he has participated in more than 500 meetings to discuss the GXO message since the spinoff.
He conceded right up front: “This is a hard business to wrap your head around. There is no company out there that is scalable contract logistics.”
And a problem, he said, is that a lot of investors “don’t really understand how to model it.” Given that, Manduca said, it could take a few years before investors are “comfortable” with what he described as a company with scalable technology, one that is proficient in the adoption of new technology and has a strong balance sheet.
Manduca said GXO gets many questions from investors who assume the business it is in — which fundamentally is managing a company’s logistics exposure, including warehouse activities — has a low barrier to entry because the hurdles to develop and run a warehouse are not enormous. Many investors, he said, think that “what we’re doing is pushing boxes around a warehouse by hand.”
But many of the investors who see the company that way haven’t been inside a warehouse in a long time, Manduca said. “It’s our job over the next five years to prove that contract logistics has gone from a cost line item to a revenue item,” he said.
Mehrotra noted that GXO was unusual in that it already has issued guidance for its financial performance in 2022, far earlier than other companies he tracks. Manduca replied that the ability of GXO to release guidance that early was a function of the company’s model.
“There is nothing transactional about our business,” Manduca said, referring to the fact that the vast majority of contracts the company signs are of lengthy duration. “We are signing contracts into the 2030s.”
Manduca said he has run into the view that the economics of GXO might be similar to that of a trucking company. But he added that the company barely has any trucking activity, has no airfreight business, and is more influenced by what he called “long-term visibility and long-term secular growth drivers.”
Those drivers are backed by numbers Manduca rolled out more than once in his remarks. The supply chain is only about 5% automated and e-commerce is “barely” 20% of sales.
Manduca’s remarks at times were more broad-brush than specific, as he talked about the capabilities of GXO and its “magic dust.”
Twenty years ago in the contract logistics field, Manduca said, the business was “commoditized.” Squeezing out savings was difficult: “You would spend six months to save 30 basis points of the 3.5% of your costs that were logistics” is the way he described it. Switching to another logistics provider, or just keeping the activity in-house, was easy to justify under those circumstances.
But with the rise of technology and the demands of e-commerce, “this industry is at the point where everything you could have done on your own is viewed as a direct operating expense,” Manduca said.
Given that, there is an opening for a contract logistics business to come in and take over … like GXO.
The company comes in “like a McKinsey-type consultancy,” Manduca said, and “sprinkles magic dust into your warehouse and we turn good into great.”
“The business is really 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 runs 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 specific, in part because of its nature. In a closed book, Manduca said, “we take more inherent risk,” with GXO drawing from its own vast database of customers on how it can bring about improvements.
“[The customer] leverages our expertise to drive efficiency and assumptions in [its] business model on what the customers think it can achieve in regard to pick rates,” Manduca said — “pick rates” being the term for a warehouse’s speed and efficiency at moving goods in and out.
After that model is built, “the books are closed,” giving the term its name. If pick rates outperform the targets through the use of GXO, “then that is the margin.” If they underperform, that’s also a margin, though not a positive one.
“The customer controls its 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 the GXO marketing push. Neil Shelton, chief strategy officer, said the company does not make a sales pitch to a potential client “unless it has a high degree of automation and technology applied to it.”
When GXO goes in to manage warehouse operations, there is the issue of labor. Former parent XPO has a long history of contentious labor relations, particularly with the Teamsters,
Mehrotra described the reviews of GXO on the GlassDoor job review site as “horrendous.”
Shelton said GXO is “obsessed” with those reviews. Manduca ticked off a series of benefits that the company is using to retain talent, such as bonuses and tuition reimbursement.
“Our goal is very simply to win this battle by hiring the best talent, and that is what we are really focused on,” he said. He added that the company is seeing “really strong demand” from applicants seeking to work at GXO.
In line with the GXO executives’ emphasis on automation and technology during the forum, the announcement of the seasonal hiring said the company “will continue to expand its use of advanced automation to boost productivity, enhance safety and improve the employee experience.”
The 9,000 jobs include salaried, hourly and contractor roles. Both part-time and full-time positions are available.