NonstopDelivery, Inc. (HUBG) Earnings Call Transcript & Summary

Good morning, and welcome to the Hub Group conference call announcing the acquisition of NonstopDelivery. Dave Yeager, our CEO, will begin the discussion. Following Dave's prepared presentation, there will be a question-and-answer session. Phil Yeager, Hub's President and Chief Operating Officer; and Geoff DeMartino, Hub's CFO, will join us for the question-and-answer session. Any forward-looking statements made during the course of the call or contained in the release represent the company's best good faith judgment as to what may happen in the future. Statements that are forward looking can be identified by the use of words such as believe, expect, anticipate and project and variations of these words. Please review the cautionary statements in the release. In addition, you should refer to the disclosures in the company's Form 10-K and other SEC filings regarding factors that could cause actual results to differ materially from those projected in these forward-looking statements. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to your host, Dave Yeager. You may now begin.

Thank you for joining us today. This morning, we announced that we purchased NonstopDelivery for $94.5 million, including incentive compensation to the Nonstop management team. Nonstop is a leading provider of residential last mile delivery services. NonstopDelivery, big and bulky items, including indoor and outdoor furniture, fitness equipment and home improvement products such as cabinets and doors. Their service offering ranges from a basic delivery to white glove, including product assembly and setup and also includes reverse logistics. Over the last 20 years, the company has built a stellar reputation for service and works with many leading retailers and e-commerce companies frequently winning carrier of the year awards. Many of Nonstop's top customers are also customers of Hub. The company operates through a nonasset-based model, working with local delivery companies who have locations in 170 markets nationwide, which allows for service to every ZIP code in the United States. We've known the management team for many years as Nonstop has been a customer of Hub since 2009. We're excited to partner with the team and continue to grow the business. The residential last mile services sector is one of the fastest-growing parts of the transportation and logistics market, and we anticipate continued strong growth as consumers are increasingly comfortable with ordering big and bulky items online. We intend to accelerate the growth of the business with opportunities from Hub Group's diverse customer base. Nonstop expects to generate approximately $150 million of revenue and $10 million of EBITDA in 2020. The company performed extremely well during the pandemic, with revenue growth of over 40% this year. We expect the transaction will be accretive to our earnings in 2021, and the purchase price will be funded from cash on hand. We're pleased that the Nonstop management team will continue to lead the business and the company's headquarters will remain in Chantilly, Virginia. We're very excited to welcome the company's 150 employees to the Hub family. And with that, we'll turn the call over to the operator for any questions.

[Operator Instructions] We have a question from Justin Long from Stephens.

Congratulations on the deal.

Thanks, Justin.

Maybe to start, could you talk about the total purchase price for the deal? Just to help us think through the valuation paid? And then I know you mentioned accretion in 2021, but just wondering if you could give some more color around the magnitude you're expecting?

Sure. This is Geoff DeMartino. Sure. So the total value was about $94.5 million. The vast majority of that was in cash. And then there is -- a portion of that would be management incentives for the ongoing team to help them stay motivated and engaged and continue to grow the business. In terms of financial profile, around $150 million in revenue, around $10 million of EBITDA. And then our best estimate at this point in terms of transaction amortization and expense related to other transaction features is around $6 million. And so we would expect most of that to fall to the bottom line, a little bit of interest expense on the cash portion used in the consideration.

Okay. And obviously, rapid growth and final mile in this business in 2020. As you thought about this deal, maybe you could just help us think through your view on the sustainability of the strength as we look into 2021 and beyond? And what you're kind of baking in, in terms of long-term growth of this business, margins and then maybe any synergy opportunity as well.

Phil, do you want to take that?

Sure. Yes, thanks. So I think one of the things that we did really well with the CaseStack acquisition was taking a measured approach to onboarding new clients, making sure we're maintaining service levels. And when we are getting in with the customer, making sure that we do such a good job that we continue to organically grow with them. And so we plan to take a very measured approach here, but we do anticipate there's going to continue to be strong organic growth in the business with the existing customers that the company has. Their -- all those customers continue to invest in their home delivery network. And so we anticipate that's going to continue well into next year. And obviously, as you know, consumer behavior, there's a large level of comfort now that I think has been even driven forward through the pandemic. But we also feel that we're going to bring a lot of new customers, and that should be, we think, in kind of a mid-teens sort of range next year as we take that measured approach. We certainly think we could go faster. And that would continue going forward as we bring new clients that Hub has that NSD has not had in the past into the platform. So really excited about that. And I think the opportunity is very large for us.

Okay. So mid-teens revenue growth next year, any expectation on margins? And then just following up on the synergy piece of the question.

Sure. So we do anticipate margin expansion. We've seen this year a move to more basic delivery. And the higher-margin opportunity is really in more of those room of choice and assembly opportunities. And so while that hasn't been as fast as a grower, we think that will going forward. And then we do have some strong operational synergies that we see out there, taking out redundant systems and operational tasks. As we mentioned, they've been a customer for quite some time. So we know the network very well. And that will range probably in the lower sort of single-digit million opportunity on an annual basis going forward but still strong opportunities. But most of it is geared towards growing the business and continuing to invest in it.

Okay. Very helpful. I appreciate the time and congrats again.

Justin, thank you.

The next question comes from Scott Group from Wolfe Research.

Just a couple of follow-ups. Can you say -- are there any earn-out payments on top of that $94.5 million? And then can you share what the D&A of the business is within that $10 million of EBITDA.

Sure. Yes. So no earn-out for this transaction. Below that $10 million of EBITDA, our best estimate at this point on the transaction amortization as well as amortization of the incentive comp is about $6 million in total.

And then I'm just -- and then any ongoing just depreciation on top of that? I'm just trying to figure out what the underlying.

Yes, that would be -- included in the $6 million, depreciation is less than $1 million.

Okay. So it's -- you think it's really $4 million of operating income that will come to the bottom line.

Correct. Correct.

Okay. Can you share who the top customers are of the business and customer concentration?

We don't want to get into the customer detail other than to say it's retailers and e-commerce companies. Many of the top customers of NSD are also customers of Hub on the intermodal or brokerage side.

But is it 1 or 2 big customers that make up a large majority? Or is it diversified?

There are a couple of big customers, and we're going to look to grow with new Hub customers and diversify the customer base.

Okay. And then just last one, maybe for you, Dave. So I think this is an agent business. Mode was an agent business. What gives you confidence that this model will go differently this time? Sometimes the agent businesses are tough to integrate into company sales models. Why do you think this one goes differently?

Well, Mode was a completely different type of an agent model. Basically, they were solely employed by Mode, and the agent would generate all revenue that went through Mode. Mode basically is a backroom support entity for them. This is a company, which I really like the business model, a great deal because they've got the overall agent model. But in states where there's blue states, where there's potential issues from -- whether they're an employee or an independent contractor, they -- actually, the agents that they have, they make sure that they -- all of their delivery people are employees. So that will give us a wall on the -- whether it's an independent contractor or an employee. In addition, these agents, they work for other people as well. And what Nonstop will do is they facilitate getting the product to the agent, but the agent is completely independent and doesn't -- so they can very easily. I think part of the beauty of it is also that if you look at the 40% growth, it's a very scalable model because as they grow an area, they can add on additional agents, providing that they're qualified according to NSD standards. So it's a very different proposition than Mode. They employ agents. They don't actually control them and act as a backroom support for them.

Yes. And this is Phil. I think a good way to think about it is there is a centralized customer service and sales and really operating function outside of the actual delivery, and that's where the delivery agents come in as they employ the drivers. They purchase the equipment and really operate as an independent agent in that network. It's also not exclusive agents, as you can tell, with the 170 and all the major markets, they have multiple delivery agents of different sizes and scales. And so I think that gives a lot of flexibility to make sure they're managing performance effectively. So I think of it more as a broker type of model than really agent, if that makes sense.

The next question comes from Todd Fowler from KeyBanc.

Great. Thanks for hosting the call. Geoff, can you provide a little bit of a breakout of the revenue? How much of that is true, kind of what we think of last mile delivery and then on NSD's website, there's warehousing, reverse logistics, how much of that is kind of some of the other service offerings that they provide?

Well, it's really -- think of it all as last mile. It's an integrated offering. In some cases, the customers may forward stock inventory to put the inventory closer to the ultimate consumer. In some cases, a piece of furniture is moving from the retailer's DC to the Nonstop's agents warehouse where it may sit for a day or 2 before it goes out on that last leg. So it's really an integrated offering. Reverse logistics is actually very interesting. They're doing it right now for a couple of customers. We think that's a really interesting path for growth, as you read in the press. That's a more and more growing part of the market just -- as people buy more and more goods online and the -- and then maybe buy 5 things and intend to keep only 1 or 2 and return the rest.

Yes. Okay. So it sounds like that they're not doing just warehousing or kind of inventory management, it's all tied into the final mile piece. Okay.

That's right.

Okay. Maybe just another way to ask part of Scott's question. Out of the verticals that they're in, is there any area, is it furniture or appliances that are -- or exercise equipment that are outsized? Or if you can share any sort of breakout of the different kind of verticals that they have exposure to kind of the relative size of the verticals?

Sure. I mean it's all retailers and e-commerce. I mean some of the multi-line retailers, the products are pretty vast, anywhere from fitness equipment to couch for your house. They do work with some of the home improvement retailers, where the product range there could be indoor, patio furniture, grills, things like cabinets and doors for your home improvement projects. So it's actually pretty vast range even within a customer.

Okay. And then it sounds like pretty asset-light, but do you have -- will there be any additional capital requirements, ongoing capital requirements that you -- or that we should pencil in for the business?

No, nothing material. Really, the capital is pretty small, and it's going to be IT related.

Okay. Great. Just my last one. Dave, do you care to share any comments on kind of the core business right now, how peak season is trending, how maybe intermodal volumes have trended now that we're into December? Just kind of any update on what you're seeing within the existing legacy business?

Sure, Todd. Yes, the intermodal business, I think you can see it with the railroads, their weekly volume numbers is -- remains quite strong. Out of California, the demand is may have lessened a bit, but it's still far stronger than what would be historic norms for this time of the year. So -- and we are seeing also ongoing strength in a lot of other areas in the country, especially the gateways. So it remains very strong. I think an awful lot of it is e-commerce-related that we're continuing to deploy and the import levels are very strong right now. So I would say we'll finish 2020 in a pretty strong fashion.

The next question comes from Jason Seidl from Cowen and Company.

Congratulations on the transaction. I wanted to drill down a little bit on the outlook for 2021. You said mid-teens. But how should we think about that growth first half compared to second half of the year assuming the upcoming comps?

Yes. Yes. I would say the -- so what I meant by that was, we see that as the additional growth opportunity that Hub can bring on top of the growth that the existing core business would be expecting outside of that. So we're actually anticipating stronger than that mid-teen kind of growth potential just organically. And I would tell you, I think the organic piece will -- just the existing platform will drive really strong growth through the first kind of 4 months of the year. We will start to overlap some of those tougher comparables as we get past that, obviously, as the peak of the pandemic really took hold. And then however, we think that, that is really when the cross-selling will start to take hold as well as we've introduced the product. We've started to improve our service to new Hub customers and bring on and onboard kind of new customers for NSD. So I would anticipate that we'll be able to overlap those tougher comparables with growth throughout the year.

If we look at the company's historic organic growth rate and we take out 2020, what was it running at over the last 5 years prior to 2020?

Pretty similar to the industry growth rate, which is pre-COVID was in that 10% to 15% range.

10% to 15%. Okay. Fantastic.

Thanks, Jason.

Our next question comes from Bascome Majors from Susquehanna.

Yes. You've addressed the customer exposure and the industry vertical exposure and a couple of the other questions. I was curious, I mean, from the company's website, the asset footprint certainly looks national, but I'm sure if the revenue footprint is overweighed in any particular region versus your core business?

No, it's going to be national. Nothing -- no concentration there.

Yes, it's pretty well. I would say the Northeast is has been a strong growth market, but really no concentration. It's pretty well diversified nationally.

From the cross-selling opportunity you addressed in the prior question, what's the lowest hanging fruit? Is it certain type of customers that you just have and they don't? I'm just curious where you're really going to get that quick of an uptake.

Yes. So there are several targets that we've laid out, some that we've been having discussions with already prior to the acquisition, really kind of gauging their interest in partnering with Hub group if we had a solution. And so we feel as though we've vetted that very well. We think we're -- some of them are out -- logistics customers where we know that the opportunity is right there in front of us and can really win very quickly. The others happen to be just large retail companies that are investing in their e-commerce platforms and continuing to focus on growth there. It's also a place of opportunity for us because they're increasing spend on a constant basis and continuing to see cost creep there. So any new solution that can help them, they think is a great opportunity. So just the amount of vetting and the conversations we've had with our clients around their need for this, that we think gives us a lot of confidence around that growth opportunity.

And last one for me. Was this a competitive auction process? Or is this similar to CaseStack where you guys had an early inside track and were able to work something out?

We believe it was bilateral. One of the real nice features about this acquisition that you don't often see is the fact that we've been working together for over 10 years together and had pretty good insight into their culture and to the fit with the management team and really got to know and knew the management team historically got to know them a little bit better during the process. So pretty excited for that part of it. You don't often see that.

Our next question comes from Brian Ossenbeck from JPMorgan.

I just wanted to ask about the competitive landscape and heavy [ on grade ] delivery. We've seen a few folks get in, some get out and some scale. So what is it -- what it feel like having a bigger footprint in there in terms of pricing trends? Obviously, demand has been quite strong. But just as you go forward, what do you expect pricing will be in this area? And then if you can maybe address the ability to even grow with the demand, hiring some of the key delivery drivers, obviously, at the agent level, but getting good people to give a high level of service and especially if you're doing more white glove when things sort of normalize.

Sure. Yes, this is Geoff. It's a large market, and it's fairly fragmented. By our research, it's a $30 billion to $40 billion market, growing at those double-digit rates. So there are a pretty good number of competitors out there that are in the market, just given the size and the growth dynamic or growth profile. I think what really attracted us to not tap is that high service offering that they have. You can read on their website. They win Carrier of the Year awards, which really distinguishes them from their competition. And we were pretty impressed with the customer base they have. They're a relatively small company in the grand scheme of things, but are working with so very demanding and high-profile names in the retail space. And so that's how they differentiated themselves, and that was what attracted us to move forward with them.

Okay. Can you give us some sense, again, maybe more on a normalized basis of just what type of delivery is the higher value stuff, the white glove, the assembly and what that's been, I guess, in 2020 is maybe a low watermark? How do you see that progressing? And I guess what's more normalized in terms of the overall service mix?

Sure. Yes. The mix really used to be much more balanced between the kind of drop off at the front door versus the more white glove room of choice, including the product assembly and setup and removal of the old goods. That was a much smaller part of the business in 2020, just with COVID and quarantine and consumers not wanting people coming into their homes. But we expect over time, that will return to the kind of a more normalized mix.

Okay. Any thoughts, just is it 50-50 or what's sort of a normal pre-COVID white glove?

Yes, that's probably the right way to think about it. I mean it's a higher revenue but low piece as compared to the front door drop off. But on some mix between volume and revenue would be is probably 50-50 is the right way to think about it.

Okay. Last question, just on the returns aspect, clearly, part of the life cycle of this business. It looks like it's increasingly commonplace. But it also could, I think, maybe be a little bit challenging if you've got big and bulky stuff going in the opposite direction, and everybody thinks returns are free for the most part. So how does that -- how does that fit into the business? Is that something that they do a lot of and they are pretty efficient with it? Or is this something you think that the NSD and the industry is going to have to try to figure out the economics on a go-forward basis?

Yes. This is Phil. I think what NSD has done is really treated the return just like a delivery with the same service expectation, which is very different than the competitive set and the industry as a whole. And I think a lot of companies that are investing in commerce are seen that that's something they need to build into their cost structure. And so there is a willingness to pay for that service because when the experience is bad, there is really some consumer -- consumer issues, whether it's reviews or things like that, that really challenge some of these larger retailers. So they are putting a priority on reverse logistics given the cost, given the burden on overall consumer view of their company. And we think it's a great opportunity just given how big of an issue it is for a lot of our customers and the way that NSD handles it. So we actually think it's an opportunity for growth and differentiation in the business.

Our next question comes from Ravi Shanker from Morgan Stanley.

Yes, the growth opportunity in the end market is quite clear, but just wanted to clarify, in this particular instance, is the growth potential just kind of riding the market and the growing pie are higher? Or do you see room to expand into new geographic areas and maybe take share or other kind of more idiosyncratic growth opportunities here?

Yes. So this is Phil. So the goal is certainly to take share. There are a lot of companies that are growing in this space that NSD is currently not working with. We think we have the operating model and structure to do that. We actually think we're going to see some cost structure improvements through the integration of our organizations, and that should actually help in our ability to take share as well. And so certainly feel we can grow above market through continuing the great organic growth rate that they have with the existing customer base, but also the opportunity to grow with new Hub customers that they haven't worked with in the past. So -- and so we anticipate also the ability to add new service offerings that can help us continue to grow and take share as well, whether that's new end markets or just continuing to expand kind of the offerings that we have to that.

Got it. And just on that note, kind of I believe there are like 3 or 4 big players in the space, and then there's a pretty big gap to kind of some of the more regional players. So is that your target kind of getting up there to be one of the top 3, 4 players in this industry? And kind of some of the other -- like some new entrants in this industry, I kind of tried to do that, and they've kind of struggled to scale up, but you guys did mention the scalability of this business model. Like when do you think you can get up to those kind of large-scale levels?

Sure. So as we mentioned, we want to grow methodically and make sure that we're doing it in a way that maintains why this business has been so successful, which is the great service that they provide. But yes, certainly, that's our target is to be one of the larger players. And we think with this flexible and scalable model, that's certainly very doable. So it's going to take us continuing to evolve and meet the needs of our customers as they're changing their model, but we think this sets us up extremely well and gives us a platform to really do that off of.

Got it. And just last one, can you give us a little bit of insight into the process here. I mean was this an end market that you were really looking to get into? Did you look at a number of other players in [ select entity ] or was this a specific opportunity that came in your way?

Yes. We've targeted this space for a while as one of our acquisition priorities. We have looked at some other competitors in the space and really we could never get comfortable with the operating model around the owner-operator exposure, and that's really one of the things that attracted us to Nonstop is both their model and our long history with them.

Our next question comes from Tom Wadewitz from UBS.

I know you talked a bit about the model kind of earlier in the Q&A session. But I wondered if you could revisit that and just explain a little bit more about the sales side and the capacity side and kind of -- is there some component that is it company sales? And it sounds like it's a fairly small customer base or do the agents -- are the agents only on the capacity side or they do some of both? So I think just if you could run through that a bit on both kind of capacity and sales side, how the model works.

Well, that's exactly it. I think you nailed that the agents really act as the source of end capacity, both on the warehousing and driver side. And there is a centralized sales, customer service function, actually here in DC. So -- and that has been a very successful model. That's why we think it's different than a Mode and more geared towards sort of a brokerage model, I think, is a good way to think about it, where -- but we also have a diverse base in the larger markets. So you take a larger market in the southeast like Atlanta. There are multiple agents and providers that we're utilizing there. That gives us an ability to scale very quickly to manage cost effectively. And to make sure that we're managing service effectively, right? So -- and in the majority of instances, NSD is making up a significant portion of that agents business, which obviously gives us a scale advantage as well in some of those markets, but always working on kind of new agent development, bringing on new high-quality capacity sources that will allow us to compete and grow. So feel very good about just the model and the process that they've put into place to help kind of drive that forward in a very flexible but also cost-effective way?

Yes. Great. That's helpful. So yes, it does sound if sales is -- company sales are centralized, and you have a lot of -- that makes it easier to scale it up and you're not relying on adding more agents to grow your customer base. So that's -- yes, that sounds great. In terms of the capacity side, is that something where they would be kind of uniform for NSD, and they would be that the delivery people in or the drivers would be dedicated to you within the agent? Or is it something that's not branded that you kind of -- the driver could be doing deliveries for you one day and then doing for someone else the next day?

Yes. So they could be doing deliveries for other companies, but typically not, right? And there is -- when a customer has an issue, they are talking to an NSD team member really under the brand of NSD, right? So -- and I think that service control, that service quality has been a big part of the success. And as you can see, a lot of very large retailers really think very highly of the service that they provide.

So yes. Great. Just one more quick one on the scaling up. I think the prior question asked about what you'd like it to get to. We've seen some of the -- I mean, obviously, J.B. Hunt comes to mind with putting together scale through multiple acquisitions. Is that something you consider that you could do more to build scale? Or is this something that you say, hey, this is really an organic grower looking forward?

We're always going to be on the lookout for acquisitions, but we feel like we've got a good platform here that we're intending to grow through the cross-sell.

Yes. And I would say there would be -- we're going to try to develop new offerings and hit new end markets where we see opportunities. But if we can find a great company that brings value that we don't think we could replicate. That would -- we'll be on the lookout for acquisitions as well. It's not -- so I believe it should be mostly organic, but we will be looking for opportunities to continue to grow with the right businesses with the right expertise.

[Operator Instructions] The next question comes from Jon Chappell from Evercore ISI.

First question on technology. Did NSD have a platform that may be when integrated into the Hub platform could kind of drive more synergies? Or maybe on the other side of that, too, had they not really focused a lot of capital on building a technological platform and just the introduction of their business onto your platforms to create more cost synergies.

Yes. I think that's part of what attracted us to it is that they really have done a fantastic job with developing their technology in a very similar strategy to us. We have -- we've gone through an in-depth review of their technology and seen that there just is a -- it's a great user interface. It's on top of a transportation management system, very similar to what we have with OTM, but they've really done a great job of customizing the workflow, building a very customer-friendly customer interface. And making sure that it's very seamless, very easy to get through their workflow on a daily basis and maintain great communication. So I think that was a big part of our diligence process, and we have a high level of comfort with their technology stack and their technology team and the work that they've done. So it's actually really exciting piece of it.

Good. It also sounds quite an entrepreneurial company, kind of like you guys. I know that you're keeping most of the employees presently in the senior management. Are there any noncompetes or kind of retention durations associated with the top management at NSD that keeps them at Hub for a sustainable period of time?

There are and may be kind of customary for these types of transactions.

Okay. And then the final thing, just to be clear on those annual numbers you gave. Did the transaction close today or by year-end, so that when we think about those type of annual figures, we can start on January 1? Or is there a process that needs to take place or it may close at some point in the first quarter?

No, we closed this morning.

At this moment, we show no further questions. I would like to turn the call back to Mr. Dave Yeager for final remarks.

Well, again, thank you for joining us on the conference call this morning. As always, Geoff and I and Phil when he gets back from Washington is available. If we do not speak to you beforehand though, we wish all of you a safe and happy holiday season.

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