Choptank Transport, Inc. (HUBG) Earnings Call Transcript & Summary

Good morning, and welcome to the confidential announcement. My name is Brandon, and I'll be your operator for today. [Operator Instructions] I will now turn the call over to Phillip Yeager, and you may begin, sir.

Thank you for joining us today. Today, we announced the purchase of Choptank Transport for $130 million in cash, which represents another important step in our plan to grow our company to $5.5 billion to $6.5 billion in revenue by 2025. Through this acquisition, we are adding a scale and culturally aligned brokerage that expands our reach, add a new refrigerated capability and brings on a great management team and technology platform that will help us continue our growth. Choptank is a leading truck brokerage firm with over $450 million of annual revenue and a specialization in refrigerated freight. Over the last 20 years, the company has built a stellar reputation for service, working with many leading consumer products and retail shippers and has been recognized as a top logistics provider by numerous industry sources, including food logistics. Choptank will be combined with Hub's existing truck brokerage operation as the 2 businesses complement each other very well with limited customer and carrier overlap. The combined brokerage will exceed $1 billion in annual revenue and have an attractive mix of dry van, refrigerated and LTL offerings as well as a balance across transactional and committed freight. Refrigerated over-the-road transportation is a new capability for Hub that will offer substantial cross-selling opportunities with our existing customer base. In addition, we look forward to adding Choptank's market expertise to our growing refrigerated intermodal fleet, which we will be growing to 1,000 containers in 2022. Choptank has developed an impressive set of technology tools, combining off-the-shelf software with enhancements that deliver value to customers, carriers and employees. We are very impressed with Choptank's technology platform and intend to leverage it within our own brokerage business. We have long had 5 key criteria for acquisitions: diversify our service offerings, great cultural fit, a strong management team, solid operational process and discipline and immediate accretion to our earnings. The Choptank organization is very impressive, meets all these criteria, and we expect the transaction will be accretive to our earnings in 2022. We are pleased that the management team will continue to lead the business and have established a compensation program that will incentivize the team to deliver value and growth. Lastly, I would like to personally welcome the company's 400 employees to the Hub family. And with that, I'd like to turn the call over to the operator for any questions.

[Operator Instructions] And on the line from Evercore ISI, we have Jon Chappell.

Two quick questions on the comment about accretive to EPS in 2022. So you've noted that $450 million of 2021 revenue. What's the expectations for growth in 2022 full year integration? And then can you give us any commentary on the margins that Choptank was generating and how we should think about the accretion level from an EPS perspective in the first full year?

Sure. And Jon, this is Geoff DeMartino. I can take that, and Phillip can add color, if needed. Yes. So 2021 revenue, about $470 million, the company historically has grown at about a 10% revenue growth rate organically. So we would expect that plus our cross-selling to get us up to kind of the mid- to high-teens growth rate for next year. On an LTM basis, the company does around $14 million of EBITDA. We do have around $5 million of intangible amortization as well as about $4 million annually of restricted stock expense. And so Phil referred to this in his remarks, but an important feature here is keeping company's management team engaged and incentivized, and we put a package of incentives in place that will be kind of running through the P&L as well.

Yes, and this is Phil. I would just highlight, I think the cross-selling opportunity is significant. Also as there is very little customer overlap, which I think is great, we also think there's opportunities on making more efficient use of their really strong sales force from a pricing perspective, taking some of the bid opportunity pricing off of their sales folks and automating more of that. So we think that's going to be a great opportunity. And then obviously, within the business, there's some shared service synergies that we'll be able to attain as well. And I think -- but all in all, we feel like there's opportunities for margin enhancement, but also significant revenue growth at the same time.

Great. And the 450 -- yes, 450 refrigerated units you plan on now investing for next year, is there any estimate to what the capital outlay would be associated with that?

Sure. For those specific units, that's around $30 million or so of spend. So we would be growing from our current base of 450, adding 550, and so that additional 550 is around $30 million. We are going through our 2022 budgeting process right now, including capital expenditures. So we'll probably have a little bit more to say on that on our call next week.

No, I think by also allowing the Choptank sales force to sell into this fleet now, they haven't had assets in the past to sell, we're going to be able to actually balance the reefer fleet even more effectively, getting the boxes out to the West Coast loaded and bring the margins up even above what is some really great returns we're generating on those reefer containers to begin with.

Yes. That's great. And just finally, is it closed today? Or does it close at some point in the fourth quarter?

It closed this morning.

From Stephens, we have Justin Long.

Congrats on the deal. So Geoff, just to follow up on your comment about 10% organic growth historically. Would you be willing to share what the organic growth or what it's expected to be in 2021? And then on the EBITDA contribution of $14 million, how much of that is D&A? I'm assuming that's a small number, but I just wanted to clarify that.

Sure. Yes. Historically, they've kind of over the last 5 or 6 years been a 10% to 11% grower on the top line. So again, we can expect that to continue, but also then benefit from the cross-sell that we think is pretty substantial. With our -- most of our customers being retail and CPG, there's a lot of opportunity. This is a new line of service, a new capability for us. So as I think I said on the earlier question, mid- to upper-teens revenue growth rate for next year based on both organic and the cross-sell wins that we're going to bring to bear. And then the EBITDA of around $14 million, that's on a trailing basis, pretty minimal depreciation. This is a people business, but we do have a pretty -- about a $5 million intangible amortization that will come from the transaction itself.

Okay. And when you say it's grown 10% to 11% historically on an organic basis, has there been an inorganic growth story historically for the company as well?

No, it's -- they've not done an acquisition. I was just highlighting that kind of going forward. That's what we'd expect from the organically plus what we're going to bring through our customer base.

No, I think one thing they have done really well from an organic perspective as well as open additional locations. Obviously, the headquarters out here in Eastern Maryland, but they've really done a nice job expanding the footprint and leveraging their talent to go out and really get new offices opened, and those are growing very quickly and do it very well. So we're excited about that.

Okay. Got it. And maybe lastly, on the contingent compensation, any more color you can provide on exactly how that's structured and what some of the targets are in order for the incentives to pay out?

Sure. It's around $20 million in total. It's a mix of our restricted stock, which is a 5-year vest as well as bonus opportunities tied to the company's EBITDA. So it's a bonus, not an earnout. But a large chunk of that is going to go to the ownership, and he's committed to staying on and continue to lead the business. So we're very excited to have him and the team engaged and incentivized to continue to grow.

And would you be willing to share what those EBITDA targets are?

I don't think we're going to share those. But they're going to be kind of consistent with what we just talked about for the growth for next year.

From KeyBanc Capital, we have Todd Fowler.

Can you guys provide maybe just a little bit more detail. It looks like that Choptank provides in addition to truck brokerage some LTLs, some intermodals. So of the -- and I think I've heard 2 different numbers, the $450 million or the $470 million of revenue. Can you provide just kind of a rough idea of where the revenue is concentrated?

Sure. So the $450 million figure is trailing 12. We're expecting around $470 million for the full year of 2021. The vast majority is over the road. And of that, about 70% is refrigerated, which is our key motivation here. But we do see some opportunities with both the LTL and the intermodal that they are providing. And largely on the intermodal side, it's the ability to really sell into our asset-based fleet as well as opportunities, we think, for modal conversion, both our customers and their customers moving reefer either over the road and intermodally now having the opportunity to kind of optimize the best of both worlds.

Yes. So Geoff, that makes a lot of sense, and that's actually what I wanted to ask for a follow-up. So strategically, as we think about this, is the opportunity here that this is a end market that you don't have a lot of overlap. And so temperature-controlled is kind of a market that you don't have a big presence in and then there's an opportunity to sell this or cross-sell this against the existing franchise. Is that the way to think about why this transaction makes sense?

Absolutely, and this is really consistent with our long-term targets that we talked about at the end of H2, adding that new line of service that has a lot of cross-sell potential with our customer base. And really, it goes kind of both ways, too. I mean there are over 1,500 customers at Choptank that have not had the ability to offer kind of managed transportation services. That's something we'll obviously bring to bear as well.

I think a really good cost structure on some of the ancillary services they're selling, they do have intermodal freight, they do have LTL freight that we can bring, I think, a better purchasing and cost structure to allow them to be more competitive, deepen their engagement with their clients. And so to Geoff's point, I really think it does cut both ways that their aggressive sales force is going to get a bunch of benefits and our team is going to have a new solution to really bring to market.

That makes sense. And then just my last one. Were you doing a lot with Choptank already? Is there any overlap or revenue elimination that we're going to see as a result of this? Or is this all kind of unique or differentiated revenue?

No, it's going to be all new revenue.

Okay. Great. Congratulations.

Thanks, Todd. Thanks, again.

From UBS, we have Tom Wadewitz.

Yes. And I'd say congratulations on the deal. I think Choptank is a really high-quality company. It seems like a great fit for you guys.

Thank you.

Wanted to get your sense, Phil, on how we would think about integration. You mentioned you had some positive comments on their technology. Their business and your brokerage business, is there integration that's done and with respect to technology or kind of how does that work? And how much, I guess, complexity is there to that? And then I also wanted to ask you a follow-up a little bit on -- more on the cross-sell.

Yes. So it's a great question. We do plan to migrate to their system. We think that they've done a great job, but we think that we can bring additional resources and investment to take what is, I think, a really strong platform that drives a lot of efficiency and make it even better. So we're really excited about it. We needed to make an upgrade on our back-end system anyways. And we've actually built, I think, some really neat customer-facing tools that they're going to be able to leverage. And we'll be leveraging more of their carrier solution and bringing that together into a really integrated platform. So it's exciting for us from a technological perspective. I think -- and they have a great team that we plan to really grow and leverage. So it's exciting.

Do you think the way that the brokerage business is managed overall will change?

Yes. So I think we'll have some really strong platforms in place. Our legacy business is majority dry van, obviously heavier contract. We have a strong LTL business. And then this adds a really strong refrigerated capability. I think where this allows us to pivot to is more of a much stronger inside sales organization, a little bit heavier of a spot mix. And I think more of a traditional sort of brokerage model versus being so heavily contract rate. I think we can still maintain that and grow that portion of the business very strongly over time. But this gives us more of that strong traditional brokerage model that will, I think, have longer-term growth.

Yes. It seems like it could juice up the growth potential in the business. Maybe one last one, I guess, not so much on the cross-sell, but on the impact of scale. I mean this does get you over $1 billion as you highlight. And I'm not sure if this makes you top 10 or top 15 broker, but it elevates your scale. How do you think about the impact of that? Is that significant in how you present to customers or what you can do in the market just in terms of the scale impact?

Yes. No, for sure. I think that's a great point and something we plan to leverage. Our sales team is already making calls on that exact point. And I think we traditionally haven't been seen as large a player. I think we've done a lot of great work to improve our brokerage and get it to be in a great position. So now that we've done this, I think the cross-sell is going to be really a phenomenal opportunity, and we've got a model that works now across the board. So yes, I'm really excited about it actually. And I think our synergy -- sales synergy targets are going to be very strong, and I feel very good about our ability to achieve those, so...

From JPMorgan, we have Brian Ossenbeck.

Congratulations on the deal. Have you quantified or could you share just some rough math in terms of what you're thinking about the cost synergies, quantify the revenue opportunity through the cross-selling? It sounds like there is some scale benefits you're just talking about, but also something on the back office services. Do you think that that's going to be a material driver of this business? Or is this more characterized as growth?

Yes, this is much more of a growth-driven story for us, so that new capability that we can cross-sell. And then operationally, kind of optimize and reduce costs, both operational, kind of best practices, but also modal conversions filling those empty backhaul legs. There are some back office really reducing spend with third parties and kind of leveraging fixed costs where we can, but much more of a commercial and a cross-selling driven story. On a full run rate basis, our estimate on the synergy number is around $5 million to $6 million annually once we're kind of fully engaged and fully achieving some of the benefits across, so...

Okay. That's helpful. And then can you just give us a sense as to how this deal came together? I mean I got my guess on it, but it always helps to hear the back story. How long you've known the company? What was the kind of the trigger event to get this deal done here?

Yes. So Geoff and I -- Geoff Turner and I had met a few years ago and built a relationship and really got to know one another. We felt like we'd always stayed in touch and felt like the timing was right for us to partner. And I think he did not run a process or anything and just engaged with Hub to find a great solution. Because he thinks -- and I agree with him that we're a great home for his company for the long term and that he wants to be a part of the growth that we're going to go after. So it really was out of that, which is always easier.

Right. Yes, I think that's the model you guys have followed the last few of them as well. So no real surprise there. I guess the last one I want to ask about, and I'm sure we'll see this more over time, but can you just talk about the -- some of the benefits that you mentioned filling up the empties, but I guess we haven't really seen too much of a refrigerated container business growing with a -- now a platform on the brokerage side. So I know there's a lot going on within those different spheres and then now crossing over. Maybe you can just elaborate a bit on why that is, why that's powerful, what type of gaps that fills either in the market or from your perspective going to market.

Yes. So the refrigerated space is very disaggregated. Similar to dry van, there's just a lot of carriers, but many even smaller carriers. And the -- as Geoff mentioned, the equipment is capital-intensive. It's -- and so you need to generate a high profitability. We found that there is a great desire by our customers to work with asset and nonasset-based companies in the refrigerated space that they need solutions given how capital-intensive the business is. We think the food and fresh space is going to continue to grow as you just look at consumer trends. And therefore, the demand for transportation is going to be there. We're doing very well in the space right now filling the smaller fleet that we have right now but have very strong returns. But we think that by having this improved balance, it's going to allow us to invest at an even faster clip, generate a higher return while servicing our customers and really filling a need that we think is being underserved right now in the marketplace. So we're excited about it. And the Choptank team has developed some great relationships with carriers. But we also plan to participate with our own equipment, which we think will just be beneficial for our clients.

Then lastly, on this part, you talked about the capital spend. But clearly, there's been supply chain challenges getting any sort of equipment on time. Is that the same for the reefer containers? Do you feel like you've got good line of sight to getting those on time? Maybe you can just elaborate on the equipment side, if that's a constraint to growth here.

No, we've actually received all of our refrigerated containers for this year already. So very excited about that, and those are being utilized right now. And then for -- we placed our 2022 order and plan to receive those early next year. So feeling very confident in our ability to execute on that.

From Susquehanna, we have Bascome Majors.

Yes. A few questions. On the trailing EBITDA, is that pro forma for the amortization of $5 million you talked about? Or is that before that and the stock expense impact?

It's before both. So 15 -- 14 rather of EBITDA trailing and then you'd have $4 million of restricted stock and about $5 million of intangibles.

Okay. And a comment on accretion of the deal, is that after burdening for those items next year? Or would that be pro forma for amortization and adjusted EPS?

So that would be after those expenses, which is how we've traditionally reported EPS.

Yes. And you talked about closing this morning. You got another deal done. Can you talk about the pipeline looking forward? I mean is this one of a few balls in the air that has a high probability of landing? Or are we kind of starting over and working on integrating this one and then we'll talk about the next deal in 1 to 2 years? Just curious where that stands.

No. This is Phil. I'd highlight we have maintained a really strong pipeline, and we feel very good about our ability to integrate this while working on other opportunities.

Great. Last piece you talked about a 5-year commitment in some of the in synergy provided management. Does that include a commitment to keep headquarters in Maryland? Or would there be some integration of parts of that?

We don't plan to -- I think they've built a great team here. And we plan to maintain the headquarters for Choptank here and continue to grow that footprint. They've actually invested in a new expansion of their current footprint here. And it's a great beautiful space that we think is going to continue to attract great talent. We also think there's great opportunity to expand the other offices that they have across the country and think that, that's a great opportunity as well. So I would tell you it will be both. And we anticipate with a partnership with Hub, an ability to continue to attract really good talent and grow. So we're looking forward to that.

Okay. And actual last one here. I mean you talked about this really strengthening your overall value proposition for refrigerated shippers. Can you talk about where you sit versus the other 2 large domestic intermodal players today and your perception of your service of that market? And where this puts you if you get where you think you're going to go with new containers in this new truck offering later next year?

Yes. I think we've got -- so we're obviously investing in brand new equipment, and that is a huge advantage. One of our competitors is doing the same. The industry from a legacy perspective has been somewhat starved for capital. So we think that there is opportunity with investment in new equipment and a great service from our rail partners to be able to grow the Intermodal segment at a fast clip in refrigerated. So we're excited about it. Our rail partners are committed to it. The service levels -- despite what's going on really across the network, the service levels have been stronger than typical freight. And that obviously helps in reducing claims and all those important issues. But no, we feel like there is a huge amount of demand out there and that, that will continue. And that with players like us focusing on the space and putting capital to work that we -- and with our existing drayage network that we can perform very well.

From Cowen, we have Jason Seidl.

Congratulations.

Thank you.

Two quick questions. One, do these guys have any significant customer concentrations like somebody over, like, say, 10%, 15% of their business? And then I have a follow-up after that.

No, I can take that. It's pretty -- it is not a very consolidated customer base. There's nobody over 10%. It has a very long tail, too. So we think that's one of the things that we really liked was the lack of customer concentration. I don't know, Geoff, if you want to add anything to that?

No. I'd just say, yes, I think it's over 1,500 customers they're actively working with, and no significant concentration.

Okay. Perfect. And after you guys sort of get them under your wing for a little bit, I mean, do you think you're going to continue to try to grow this refrigerated offering via further acquisitions? Is this something we should look forward to, I guess, in the coming years?

No, I think this is a space where we're going to try to grow the refrigerated space organically, what we may add is additional solutions within the refrigerated space to really be able to control the full chain and bring our customers a deeper solution that really ties them to Hub for the long term. So I doubt in the brokerage space, but in ancillary kind of cold chain service offerings, I could see us really trying to pursue that more aggressively.

From Barclays, we have Brandon Oglenski.

So it sounds like you guys are going to keep this a separate operation for a while. Is that correct? Or am I hearing that wrong? And then as a follow-up, I'll just ask them all now. Your path to $6 billion by 2025, with this acquisition, what other verticals would you guys say you're subscale, but would like to have a larger presence going forward? Appreciate it.

Sure. So I think we do plan to integrate the offerings, actually run this as a combined brokerage. We want to do that thoughtfully and methodically. It is a people business. But we found that Geoff and his team are very open and willing to adjust and make changes. And vice versa, we're learning a lot as well. So I think there's opportunities to take best practices and bring it together. We don't -- as much as you want to integrate, you want to make sure that what's great about the company is maintained as well. So we want to strike that appropriate balance. From a scale perspective, I don't think that there's an area that we're necessarily subscale. I would say there's areas where we don't have offerings that we want to fill in. Obviously, intermodal, we have scale, and we utilize that very well. I think in our transportation management segments, we do as well. But final mile would be an area where we're interested in continuing to grow our offerings. We're very interested in other non-asset logistics segments, whether it's in the brokerage space continuing to grow our offerings beyond just reefer driving and LTL. Potentially adding some LTL scale might be kind of interesting. And then an area that we've continued to study and continue to look at is the international space where I think that's something we want to make sure we do right and appropriately. But obviously, given the upheaval in the global supply chain, it's something that I think our customers are looking to leaders like Hub to support in more aggressively. So those are all areas of consideration to build out our platform. And -- but we are very focused on finding the right businesses with the right culture that help us fill that full suite of services, help us achieve that scale and continue to win. So Geoff, I don't know if that -- if you would add anything to that.

Yes. No, I agree. I think brokerage is the one that we -- area that we're currently in that we thought could benefit from more scale. But to Phil's point, I think going forward, it's really going to be around adding those new lines of service that have similar -- I think you saw this with CaseStack, with Nonstop, and now with Choptank is adding those new lines of service that have a lot of cross-sell potential.

And at this time, we have no further questions.

Great. Well, I just wanted to thank everybody for joining our call today. We're very excited about this acquisition and what it does for Hub Group and for our customers. But as always, Geoff and I are available for any further questions that you might have. But thank you so much, and hope you have a great day.

Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.