Lineage, Inc. (LINE) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining the Lineage NAREIT session. My name is Ki Bin Kim, senior REIT equity analyst and managing director at Truist. And to my right, we have the Lineage management team: Greg Lehmkuhl, President and CEO; and to his right, Rob Crisci, CFO. We'll start off with some opening remarks before turning to Q&A. Greg, the floor is yours.

Good morning, everybody. As introduced, Greg Lehmkuhl, President and CEO of Lineage, have been with the company about 10 years. Just a quick overview of Lineage for those that aren't familiar with us. We are the largest temperature-controlled logistics company in the world, about twice as large as our next largest competitor in what is still a very fragmented industry. We have almost 500 facilities across 19 countries around the world, over 13,000 customers, 27,000 team members. We're known for being the world's leader in cold storage automation with 80 automated facilities around the world.

Great. So maybe we'll start off with some news this week. Rob, you're retiring already?

Yes. Thank you. I am, yes. So I think we announced yesterday, planning to retire. I think importantly, no change in the short term in the seat here for probably quite a while as we're looking for replacement. So the good part about putting out a public announcement, as I'm sure a lot of people will reach out to us. It's a great seat. It's a wonderful company. I'm approaching 50 earnings calls throughout my career and ready to do something different.

Great. So it hasn't been that long since earnings. How about an update since last month on the quarter and how business is going overall?

Yes. It's just -- again, it's just been a month, but we are reaffirming our guidance of $3.40 to $3.60 AFFO per share. We did guide to Q2 being very similar to Q1 in our results. Q2 is normally the seasonal low in the cold storage business. We are seeing our new business strengthen as the quarter has developed here in Q2, and that gives us confidence in a strong second half guide where we guided that we've returned to growth again. We also will talk about a lot of cost savings and productivity initiatives that we're working on that are continuing to bear fruit through the second quarter.

And pricing in the market has been a topic that's been coming up lately. You must have a lot of insight given your scale and platform and your customer base. What are you seeing around pricing conversations with your customers? And what are you seeing in regards to price more broadly in the market?

So if you look at the last 4 years of pricing in our industry, it's been growing slowly. In the last couple of years, there's been a little bit more pressure on price as some new supplies entered the market. We've largely worked through the majority of that new supply. And in our contract negotiations that we did in the first quarter, we negotiated about 55% of our contracts on an annual basis. As we sit here today, we've worked through 77% of those contracts that we'll negotiate this year, and we saw a net price increase of 2.5% on those contracts.

And I think you mentioned that a lot of these contracts are priced in the first quarter more so. Do you still believe that we've hit that low point in pricing and -- as you start to improve here on out?

I do, yes. I think stable to upward pricing moving forward.

Okay. And we've talked about...

On a sequential basis.

Yes, that's right. And we've talked about seasonality in the cold storage sector. It's not something we have seen much in recent years. We've obviously had a great couple of years stretched in COVID before giving it back. What gives you confidence that there will be a return to seasonality? And what could that look like?

Yes. So I think it's one of the toughest things for investors. We haven't had a normal year in food since 2019. And our only other public competitor, Mericle, that was their only full year that they were a public company. And so when investors look back at comps for the last several years, there just hasn't been a normal year because early on in COVID, no one could produce, store shelves looked like Swiss cheese. And then as COVID kind of lifted, people got their workers back in the plants, they overproduced. And the whole cold storage industry was really overfull and had excess levels of inventory as those manufacturers overproduced. Starting in 2023, the -- our customers started to destock that excess inventory that they developed post COVID. And that -- and we really resumed a normal seasonal pattern starting in the second half of last year. And food is the normal seasonal pattern kind of pre-2020 was very reliable year-to-year, and it's just driven by the harvest of proteins and fruits and vegetables in the late summer and then producers stocking for the holidays when everyone buys more food. So again, if you look prior to '20, that normal seasonal pattern was very predictable, and we saw that more predictable pattern resume in the second half of last year and that continued through our April data. And that gives us confidence that the second half occupancy and inventories would see a lift versus the first half, which supports our guidance.

And your customers who are the biggest food producers in the world look at the end consumer as an indicator for how much inventory they will need. What are you seeing from the consumer? And where are we in the cycle for demand for frozen food?

Yes, I'd say overall, our segment is very stable. We've seen -- over the past several years, you see low single-digit growth as consumer preference has slanted toward fresh and frozen with the consumer being a little bit more under pressure. With the food inflation we've seen in the last couple of years, you've seen pretty much flat demand.

And I think it's an important part of it. Some of the unclarity in the market is that we've had a couple of good years followed by a tough year. Some of it -- most of it due to comps. One question I get frequently is what is the new normal? And how do -- and are you sure we can get back to some growth rate? How would you answer that?

Yes. I think we're preparing the company to win in a flattish environment. I mean, I think as food inflation gets closer to wage growth, I think you will see demand inflect. All of the customers that I meet with -- I meet with the CEOs of the largest food companies in the world, and they're doing everything they can to get volume moving again through discounting and coupons and everything else. But I think the -- our message to investors is that we think we can win in a flattish environment because we have the scale, the advantages, the technology, the automation to gain share over time and continue to be our customers' preferred partner.

And are there any signs that you're looking for, for healthier end consumer?

Yes, for sure. Yes. So let me just add on to that. So our long-term growth flywheel, we've always said mid-single-digit same-store NOI. And we think we can do that without any improvement to the consumer, without any real changes to the market. And to your point, if you go back 2 years ago, we were up in the high teens from same-store NOI standpoint. And now we were flattish last year and we're pretty much flattish this year based on our guide. So the good news is now we're back to, in the second half, a normal market environment and all the things that Greg said. So that flywheel that allows it to start to accelerate and then the consumer getting better, we think we're continuing to win in the market, to gain share. All that just accelerates that mid-single-digit same-store NOI flywheel. The LinOS, which I'm sure we'll talk about, these are all things that were within our control to make sure we can deliver because it is hard to predict economically what's going to happen in any given year. So we're really focused on what we can control, making sure we continue to grow the business.

And I think a sticky customer base is one of the key aspects of your company. So maybe you could just help educate us, what is the typical churn rate for your customer base in a given year?

Yes. Just 3% customer churn a year. It is a very sticky industry.

And could you discuss the impact of tariffs on your business? And also the Trump administration has frequently highlighted trade imbalances and one of the ways to fix it is perhaps urging other countries to buy more U.S. agriculture. Do you see that as a tangible net benefit to your business?

Yes. I mean it's obviously yet to be seen what will happen with tariffs. We're in 250 port locations around the world. Food flows like water around the world. If we're not going to export to China, we'll export that product in Brazil or Vietnam or Africa or wherever else. And we're well positioned to support our customers kind of no matter where food flows. As the year progresses, we get more confidence that there'll be less disruption this year given that very little has happened in the actual movement of food, which we move or store about 1/3 of the tech-controlled food in the United States at about 10% of the world's food. And we've seen very, very little impact of the tariffs so far. And generally, any major disruption helps us because we partner with our customers. They'll stockpile inventory in one location. We'll help them figure out how to move their food differently through our network, and that ends up being a net positive to us. Like we won during Brexit, we won during the port strikes on the West Coast. And if you look at any of the major disruptions, we fared fairly well.

Let me pause here for a second. Any questions from the audience? Okay. We've talked about -- a little bit about Lineage's scale and density in the market and how that shapes your visibility into what's happening. What other factors are you -- do you use on approaching a customer? And when a customer is looking out for new space, how do they end up choosing Lineage over some peers?

Yes. I mean just being the market leader helps. I mean we have the best locations in our industry with 480 locations in the most prime markets. And location is the #1 thing that they select cold storage providers based on. And then we just have senior-level relationships. We have over 200 salespeople around the world. We're regularly meeting with the CEOs of our clients, big and small. And we're a critical part of their path to market. And so they're looking at technology, automation, scale, location, relationship, trust. With most of our customers, we have literally multigenerational relationships, and that's why you see the sub-3% churn. And so we're extremely well positioned for all those reasons. We also don't just do cold storage warehousing. We have about $1.5 billion global integrated solutions business, which is transportation, freight forwarding, we provide railcars. There's just a myriad of other services that we provide to support their end-to-end cold chain.

And maybe we can just touch on that topic a little further. What is the upside you see in GIS? And I'm sure that's tied to your technology stack. So how do you approach a customer and how do you end up selling the key aspects of this?

We're getting better at it. I mean we grew through acquisition. We've done over 120 acquisitions. Through the COVID period, we did an acquisition every 8 days for like 18 months in 10 new countries. And a lot of the companies we bought were cold storage companies and over the last couple of years we've kind of refocused our sales force to sell the end-to-end cold chain. And about 80% of our customers' supply chain expense is on the transportation side and 20% is on the warehousing side. And so we see significant opportunity in our global integrated solutions segment. We guided to double-digit growth this year, and we expect to deliver that. We're getting better and better momentum in our new sales each quarter.

Yes. And I'll just add that those services are really valuable for our customers, and they do help drive more business into the warehousing segment. So it's really a win-win. I mean we love our TRS. We love our GIS business. But it's designed to drive more business and to be that global solution provider for our customers, and it definitely benefits the REIT as well.

Yes. For example, if a customer in a port location, they want us to do the dray and move their containers to and from the port. So it's a one-stop shop. Just things like that make us more sticky and more valuable.

As a public company, there must be parts of the business that you look at differently. What are some of the newer initiatives that you are undertaking since going public?

So REIT -- NAREIT conference, that's a new one. I wouldn't say we're doing much different, honestly, as a public company. I think there's certainly more certainty into our quarterly results, of course. But many -- most of the initiatives that we're embarking on now started years ago. We're currently centralizing our customer service using AI. We have a myriad of productivity initiatives. Our #1 controllable cost with 27,000 team members is labor. And we've seen really good progression in our lean productivity initiatives over a number of years. Those continue to accelerate. We're doing global procurement initiatives. For example, we just did an insurance bid where we'll save multimillions of dollars. We're just leveraging our scale and attacking cost at really every tier in the company from frontline operations to our C-suite and getting leaner and more productive in everything we do.

Yes. I just -- I think, obviously, on -- in my side of the business, finance, I came to the company with a decade of senior finance leadership at a large public company, 6 years as CFO. And I've really been focusing on over the last 2-plus years is building that talent of people who know public company. We've got a wonderful Chief Accounting Officer. We've got just wonderful people who have a ton of public company experience. And I think that really, again, getting back to sort of the transition with me, allows it to be a very easy transition because we've really put a lot of people in place who understand SOC, who understand controls, the things that big public companies need to do and they just need to be automatic. And I think we're in a really great place there. So otherwise, though, to Greg's point, we're here to grow this company over the long term. And the fact that we're public or private, it really doesn't matter in terms of what matters to us, which is being a great company that treats our people well, treats our customers well, and that's what we do.

And maybe we can speak a little bit more about LinOS. There are a couple of things I was impressed with when I met with you guys in the IPO process, LinOS, technology stack and obviously, the people and the bench you have. This is an initiative we've talked about frequently. Where did that LinOS project come from? How long it has been in the works? You're starting to test the software now in some of your conventional facilities. So you're rolling out beyond just automatically. So maybe you can provide some update.

For sure. So we have a 30-plus team of data scientists in Silicon Valley that work on kind of all things cold chain and optimizing really everything we do in the company. And one of the things we focused on started 6 years ago was we were building automated facilities, cold storage warehouses. And there was third-party automated -- automation software that was available in the market. And we just didn't see -- we didn't see that, that technology was as good as it could be. And so we wrote a lot of proprietary algorithms that optimize the actual machines and automation in our facilities, and we deployed that software 3 or 4 years ago. And basically, what it does is optimize every movement in the automated buildings. And then we said, "If we can optimize and control the automation, why can't we use that same set of algorithms to be more with our actual -- with our people?" And so we took that same concept and started to develop this technology, which sits on top of our warehouse management system, to optimize every flow of material or what people do within our physical warehouses that don't have automation. And so it effectively operates as the air traffic control within a cold storage warehouse from where a product is going to be put away. So for example, if hot dogs -- frozen hot dogs are coming in the building a month before 4th of July, it's going to tell the operator to put those at the bottom at the front of the warehouse because that's likely going to go out soon.

That's now, by the way.

That's now, right, exactly. But if a turkey comes in, in January, it's going to put it at the top of the back. It's also going to optimize every movement in that facility. For example, in our conventional warehouse traditionally an operator, say, Sally will take a frozen pallet off a truck, move that into the freezer, put that into a pallet position into the rack and then drive back empty and get the next pallet off of that truck. What LinOS does is interleave the tasks and make sure that our people are productive at every aspect of what they do. And so we've now rolled this out at a handful of conventional buildings, and we're seeing double-digit total labor improvement in those pilots. We will provide guidance for the -- for our investor base later this year on what that means over the next several years and when that will hit the financials. We do spend about $2 billion on labor. So this is a very real opportunity. And we think that over time, we can be the low-cost provider in this space driven by this technology. Before starting to develop it, we looked everywhere in the world for software that already did this, and we determined that it was not available. And now it's doing everything we thought it would do. So super excited about it. We think it just deepens our moat versus our competition. We already have scale, we already have the best technology, we already have the best customer reach, we already have the broadest scope of services. And now with the material impact on our cost structure rolling out over the next several years, we think we'll just deepen our moat against the competition and allow us to grow faster.

Let's stick with that point, if you can maybe take a step back and bifurcate the portfolio, like how much penetration is there with LinOS? And if you split the portfolio between automated and manual, what does that pie chart look like?

Yes. There's about 400 buildings that are manual. And we think over the next -- we'll provide guidance later, but next 2 to 4 years, maybe 80% of those will have LinOS installed. There's some where the -- you might have 6 or 10 people in a warehouse and it wouldn't make sense to install the software. But in all the major facilities, we look to get it rolled out.

Yes. And importantly, LinOS is running our big automated facilities, right? So it works. It's amazing. And so it's really just getting the processes in place to put it into our conventional facilities. So it really has been tested and we know it works. And so we're very confident that we'll drive significant benefits. It's about the timing, right? We're going to be very careful rolling something out. Again, we're a long-term-focused company so we don't want to have to rush something out and then cause issues in the short term. But this is a very meaningful driver on everything from operations to financials. It's a really big deal. I know we talked about it a lot and everyone's like, "You guys keep talking about this. When is it coming?" Like we're getting close. It's very exciting, and we'll hopefully be able to quantify more later this year.

It also hits the revenue line as well because it helps us densify within the buildings. It will -- for example, it knows how big every pallet is that's coming in and knows how big our rack openings are. So if there's a 30-inch pallet and a 70-inch opening, the technology is going to tell the next 30-inch pallet to go in that same opening and put more product in the same building. It will also signal and look across facilities around the world and identify potential revenue-capture opportunities with the frontline operators. So for example, if you're that same pallet of frozen hot dogs that came in, if -- in another building, we had to re-shrink wrap that pallet coming in, which we would have a accessorial charge for to our customer, it will signal the operator to say, "Hey, did you have to re-shrink wrap that pallet?" They hit the button, they say, "Yes, I did," and that gets automatically charged to the customer. And so lots of reasons on the top and bottom line where this will have a significant impact.

So does the benefit ultimately end up being better margins for the company? Or is it also split between savings to the customer? And when you're actually kind of fight for our customer, how important is that LinOS?

Yes. I think it will -- definitely -- first of all, it also improves our customer service because it optimizes every task in the building based on the customer needs. So the next truck, it has to go out with product on it. It's going to prioritize those movements and make sure that we get that truck out on time, which is what our customers care about most. As far as kind of how we'll split the benefits of this with customers, it will probably be split. We think we can operate at a lower price point than our competition long term, and we think that will drive growth. And incremental margins in this business, depending on the commodity, are 60% to 80%. And so if we can offer a competitive price, expand our margins and grow, we think that's a winning formula.

And you announced an exciting acquisition and development deal recently. Could you provide any updates there with the Tyson's deal and what led to this transaction? What exactly do they want to get out of it? And are there potentially similar opportunities out there with other customers?

Yes. This is a really exciting deal. I mean in my experience, this is by far the largest deal in cold storage history worldwide. And we've been working with Tyson for a number of years on this. They were looking to optimize their supply chain. They decided that they're not the best cold storage warehousers in the world, and they were looking for a partner to take on for their facilities, and really, importantly to them, 1,000 of their team members. And so we closed this on our way here yesterday, and we'll take over those 1,000 team members. The culture, the values, the ability to seamlessly integrate mattered a lot to them. And then secondly, they want to optimize their future North American supply chain. So we worked with them on what products they should be storing where, how much capacity they need in each market and then how competitive can we get to lower their cost long term. They publicly announced that they'll save $200 million on this. This will be -- this will drive over $100 million in incremental EBITDA for us by 2030. And the selection criteria was really who do they trust to take on 1,000 of their team members that have been with them for a long time and then who has the best automation software technology out there in our industry and then who can seamlessly execute the transition of the product from where it's stored currently into these future highly automated buildings. And so this is by far one of their most important initiatives over the next several years, and they trusted us to partner with them to execute on it. And yes, there is others that are in the hopper. I was meeting with a CEO last week on a deal that looks not too different.

And what do the yields look like on the development aspect of the Tyson's deal?

Do you want to take that?

Yes. So generally around 10% is -- that's what we've got in the past. That's what we expect here. There is some near-term benefit, as we talked about in the last earnings call, from the acquisitions as well, immediately benefits us this year and into next year as we have taken over these facilities. And then we're starting to build. And then as Greg mentioned, $100 million-plus EBITDA opportunity in 2030. So I think the big thing with this deal, it's a win-win, right? We're partnering with a customer. It's good for them. It's good for us. It's a very special thing to be able to do something like this. You have to have our scale. You have to have our capabilities. There's really no one else that could do this. And it allows us to really take work with a long-term customer. As Greg mentioned, we talked about this for a long time and we're super excited. And it's just an example of the reason why we went public, our lower cost of capital, investment-grade balance sheet. There's many, many more of these type of things that we can do moving forward. And I think it's really exciting. As the industry leader, you're positioned to win. It's on us to continue to grow, and we've never been better positioned than we are today.

And can you talk about the external growth opportunities? Obviously, internal growth is a big aspect. External growth, you can buy, build, redevelop. What does that opportunity set look like?

Yes. I mean just like the 120 acquisitions we've done over the last 15 years, and most of those were in the last several, and our competitors have also acquired some companies. The industry is still super fragmented. The top 10 are still only around 20% of the global market share. And so we can hit singles and doubles all day around the world and buy accretively. And we have the engine to integrate successfully and get synergies once we buy companies. So a lot of runway there. And we don't love our cost of capital right now given the share price, but it's still certainly lower than those at our competition, both public and private.

Okay. And a balance sheet question for Rob. Can you just maybe provide an overview on your leverage, debt-to-EBITDA ratios, how you expect to fund deals like the Tyson's deal and how much can be generated by internal free cash flow?

Yes. So we're still an investment-grade company, very committed to that. Right now, we're right in the mid-5s from a net debt-to-EBITDA standpoint, which is a little bit towards the higher end of where we plan to be over a long period of time, very consistent with solid investment-grade. We've got a lot of liquidity. We have a revolver, so we fund -- we generate cash and then we also draw on our revolver to do things like Tyson. Over time, we'll have the opportunity to access public markets on the debt side as an investor-grade company. So we're really excited. And then over time, as Greg mentioned, I think as you get more reasonable equity price, you also have the bit to issue equity for very accretive acquisitions. So we're very committed to investment-grade. Again, that was really the reason to do the IPO. We just delevered with our proceeds on the IPO, and that allows us to do a Tyson. It allows us to do many more deals to come over the next several years, especially as our EBITDA starts to grow again here in the second half of the year.

And what does your debt maturity schedule look like?

Yes. We're -- no near-term maturities. So we're in really good shape. We paid off $4 billion-plus of debt the IPO.

And let me stop here one more time for questions from the audience. All right. We got a question. If you want to speak into the mic, please?

Can you touch on the top 2 or 3 global growth markets that you must be in? I mean this asset class is fairly new there. I mean it's so fragmented. I mean where would you find those high growth?

Yes. We talked about our footprint today and...

Yes. I mean we're in 19 countries today. We're still growing in our established markets, and we're evaluating different Southeast Asian countries that are growing. And we'll -- we generally enter new markets by sourcing a really good management team that we can support, invest in and grow around. And because of the companies that are out -- that are still out there that are private are family-owned generally, those -- it's very opportunistic and episodic in when they come for sale. And so I think the good news is we are -- we consider ourselves the acquirer of choice in the industry because of our values, the culture of the company, the way we treat people, the way we follow through on commitments we make through the acquisition process. So the vast majority of our deals were proprietary without any sort of process. So as those become available in developing and growing countries, we'll evaluate those markets and opportunities.

Yes. I mean, I think it's a big advantage being a global company and having our strong balance sheet. And we sit here -- every Monday, we do a capital deployment call. We look at opportunities throughout the world, development, M&A, and we really can find the best risk-adjusted returns. We got to think in terms of things like tax, right? We pay tax in the U.S. REIT, we do in other countries, we do in the TRS. So we're looking at driving as much AFFO per share growth as possible and doing that in the best risk-adjusted manner. And we're in a really strong position because we can look at things all over the world and find the best ones.

Any other questions? Well, that brings us to an end. Thank you very much for your time. And thank you, everyone, for joining.

Thanks, everybody.

Thank you, everybody.