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, LLC for $94.5 million, including incentive compensation to the Nonstop management team. Nonstop is a leading provider of residential last mile delivery services. Nonstop delivers 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 non-asset-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. With that, we'll turn the call over to the operator for any questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star and then one on your touchtone phone. If you wish to be removed from the queue please press the pound sign or the hash key. If you are using a speaker phone you may need to pickup your handset before pressing the keys. Once again, if you have a question, please press star then one on your touchtone phone. We have a question from Justin Long from Stephens.
Thanks. Good morning, and congratulations on the deal.
Thanks, Justin.
Thank you.
Maybe to start, could you talk about the total purchase price for the deal, just to help us think through the valuation paid? 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. Good morning. Sure. The total value was about $94.5 million. The vast majority of that was in cash. There is a portion of that would be management incentive 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 revenue, around $10 million EBITDA. Our best estimate at this point in terms of transaction amortization and expense related to other transaction features is around $6 million. We'd 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. Obviously, rapid growth in last 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 this 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, did you want to take that?
Sure. Yeah. Thanks. 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. When we are getting in with a customer, making sure that we do such a good job that we continue to organically grow with them. 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. All those customers continue to invest in their home delivery network, and so we anticipate that's going to continue well into next year. 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.
We also feel that we're going to bring a lot of new customers, and that should be, we think, in a mid-teen 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. Really excited about that, and think the opportunity is very large for us.
Okay. Mid-teens revenue growth next year. Any expectation on margins? Just following up on the synergy piece of the question.
Sure. We do anticipate margin expansion. We have seen this year a move to more basic delivery. The higher margin opportunity is really in more of those room of choice and assembly opportunities. While that hasn't been as fast of a grower, we think that will going forward. 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. That will range probably in the lower single-digit million opportunity on an annual basis going forward. Still very strong opportunities, but most of it is geared towards growing the business and continuing to invest in it.
Okay, great. Very helpful. I appreciate the time, and congrats again.
Thanks, Justin. Thank you.
Thank you. The next question comes from Scott Group from Wolfe Research.
Hey, thanks. Morning, guys. Just a couple follow-ups. Can you say, are there any earn-out payments on top of that $94.5 million? Can you share what the D&A of the businesses within that $10 million of EBITDA?
Sure, yeah. No earn-outs 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.
Any ongoing depreciation on top of that [inaudible]
Yeah. Yeah, that would be included in the $6 million. The depreciation is less than a million.
Okay. You think it's really $4 million of operating income that'll come to the bottom line?
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.
Is it one or two big customers that make up a large majority, or is it diversified?
There are a couple big customers, and we're going to look to grow with new Hub customers and diversify the customer base.
Just last one, maybe for you, Dave. 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 acted basically as 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. In blue states where there's potential issues from whether they're an employee or an independent contractor, actually, the agents that they have, they make sure that all of their delivery people are employees. That will give us a wall on whether it's an independent contractor or an employee. In addition, these agents, they work for other people as well. What NonstopDelivery will do is they facilitate getting the products to the agent. The agent is completely independent.
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. 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.
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, is 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 in all the major markets, they have multiple delivery agents of differing sizes and scales. I think that gives a lot of flexibility to make sure they're managing performance effectively. I think of it more as a brokerage type of model than really agent, if that makes sense.
That's very helpful. Thank you, guys.
Thanks, Scott.
Thanks, Scott.
Thank you. The next question comes from Todd Fowler from KeyBanc.
Great. Thanks, and good morning, and 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 warehouse and reverse logistics. How much of that is kind of some of the other service offerings that they provide?
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 Agents warehouse, where it may sit for a day or two before it goes out on that last leg. 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 then maybe buy five things and they tend to keep only one or two and return the rest.
Yeah. Okay. 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.
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 or exercise equipment that are outsized? 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 a 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. It's actually a pretty vast range, even within a customer.
Okay. It sounds like pretty asset light, but will there be any additional capital requirements, ongoing capital requirements 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's 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. Yeah, the intermodal business, I think you can see it with the railroads. Their weekly volume numbers remains quite strong. Out of California, the demand may have lessened a bit, but it's still far stronger than what would be the historic norms for this time of the year. We are seeing also ongoing strength in a lot of other areas in the country, especially the gateways. 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. I would say we'll finish 2020 in a pretty strong fashion.
Okay, good. I appreciate the comments. Congratulations.
Thank you.
Thank you.
Thank you. The next question comes from Jason Seidl from Cowen and Company.
Thank you, operator. Good morning, gentlemen, and congratulations on the transaction. 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 uptick comes?
Sure. Yeah. I would say that, 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. We're actually anticipating stronger than that mid-teen kind of growth potential, just organically. I would tell you, I think the organic piece will, just the existing platform will drive really strong growth through the first kind of four 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. 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 prove our service to new Hub customers and bring on and onboard new customers for NSD. 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 historical organic growth rate, and we take out 2020, what was it running at over the last five years prior to 2020?
I'd be pretty similar to the industry growth rate, which pre-COVID was in that 10%-15% range.
10%-15%. Okay, fantastic. Well, gentlemen, that's all I have. I appreciate the time.
Thanks, Jason. Bye.
Thank you.
Thank you. Our next question comes from Bascome Majors from Susquehanna.
You addressed the customer exposure and the industry vertical exposure in a couple of the other questions. I was curious, from the company's website, the asset footprint certainly looks national, but I'm sure if the revenue footprint is overweight in any particular region versus your core business.
No, it's going to be national. No concentration there.
Yeah, it's pretty well-
Thanks.
I would say the Northeast 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.
Yeah. There are several targets that we've laid out. Some that we've been having discussions with already prior to the acquisition, really gauging their interest in partnering with Hub Group if we had a solution. We feel as though we've vetted that very well. Some of them are our 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. Any new solution that can help them, they think is a great opportunity.
Just the amount of vetting and the conversations we've had with our clients around their need for this, we think gives us a lot of confidence around that growth opportunity.
Last one from me. Was this a competitive auction process, or was 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, into the fit with the management team, and really got to know and knew the management team historically, and got to know them a little bit better during the process. Pretty excited for that part of it. You don't often see that.
Thank you.
Thanks, Bascome.
Thank you. Our next question comes from Brian Ossenbeck from JP Morgan.
Hey, good morning. Thanks for taking the question. Just wanted to ask about the competitive landscape in heavy home good delivery. We've seen a few folks get in, some get out, and some scale. What does it feel like having a bigger footprint in there in terms of pricing trends? Obviously, demand has been very strong, but just as you go forward, where do you expect pricing will be in this area? 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 high level of service and especially if you're doing more white glove when things normalize.
Sure. Yeah. No, this is Geoff. It's a large market, it's fairly fragmented. By our research, it's a $30 billion-$40 billion market growing at those double-digit rates. There are a pretty good number of competitors out there that are in the market, just given the size and the growth dynamics, the growth profile. I think what really attracted us to NonstopDelivery is that high service offering that they have. You can read on the website, they win Carrier of the Year awards, which really distinguishes them from their competition. 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 some very demanding and high-profile names in the retail space. That's how they differentiate 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 little watermark. How do you see that progressing, and I guess what's more normalized in terms of the overall service mix?
Sure. Yeah, the mix really did 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 quarantining and consumers not wanting people coming into their homes. We expect over time, that'll return to the kind of more normalized mix.
Okay, any thoughts? Just is it 50/50 or what's sort of a normal pre-COVID white glove?
Yeah, that's probably the right way to think about it. It's a higher revenue, but low piece that compared to the front door drop off. Some mix between volume and revenue is probably 50/50, is the way we think about it.
Okay. Last question, just on the returns aspect, clearly part of the life cycle of this business. Looks like it's increasingly commonplace. It also could, I think, maybe be a little bit challenging if you've got big and bulky stuff going the opposite direction, and everybody thinks returns are free for the most part. How does that fit into the business? Is that something that they do a lot of and they're pretty proficient with it, or is this something you think that NSD and the industry is going to have to try to figure out the economics on a go forward basis?
Yeah. 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. I think a lot of companies that are investing in e-commerce are seeing that that's something they need to build into their cost structure. There is a willingness to pay for that service because when the experience is bad, there is really some consumer issues, whether it's reviews or things like that really challenge some of these larger retailers. They are putting a priority on reverse logistics, given the cost, given the burden on overall consumer view of their company.
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. We actually think it's an opportunity for growth and differentiation in the business.
Okay. All right. Thank you very much for the time. Appreciate it.
Sure.
Thank you. Our next question comes from Ravi Shanker from Morgan Stanley.
Thanks, morning all. Gents, the growth opportunity of 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 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. This is Phil. 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. 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.
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 today.
Got it. Just on that note, kind of, I believe there are like three or four big players in the space, and then there's a pretty big gap to kind of some of the more regional players. Is that your target kind of getting up there to be one of the top three, four players in this industry and kind of some of the other, like some new entrants in this industry have kind of tried to do that and they've kind of struggled to scale up. 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. 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. Yeah, certainly that's our target is to be one of the larger players. We think with this flexible and scalable model, that's certainly very doable. It's going to take us continuing to evolve and meet the needs of our customers as they're changing their model. We think this sets us up extremely well and gives us a platform to really do that off of.
Got it. 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 and select NSD, or was this a specific opportunity that came your way?
Yeah. 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 could never get comfortable with.
With the operating model around the owner-operator exposure. That's really one of the things that attracted us to Nonstop is both their model and our long history with them.
Great. Thank you.
Thank you. Our next question comes from Tom Wadewitz from UBS.
Yeah, good morning. 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 is there some component that, is it company sales? It sounds like it's a fairly small customer base, or are the agents only on the capacity side, or they do some of both? I think just if you could run through that a bit. Yeah on both, kind of capacity and sales side, how the model works.
Well, that's exactly it. I think you nailed it. The agents really act as the source of end capacity, both on the warehousing and driver side. There is a centralized sales customer service function actually here in D.C. 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. We also have a diverse base in the larger markets.
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? In the majority of instances, NSD is making up a significant portion of that agent's business, which obviously gives us a scale advantage as well, in some of those markets. Always working on kind of new agent development, bringing on new high-quality capacity sources that will allow us to compete and grow. 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.
Yeah, great. That's helpful. Yeah, it does sound like sales is company sales or centralized, and you have a lot of-
Correct.
That makes it easier to scale it up, and you're not reliant on adding more agents to grow your customer base. That's, yeah, 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 the delivery people in, or the drivers would be dedicated to you within the agent? Or is it something that's not branded, that the driver could be doing deliveries for you one day and then doing for someone else the next day?
They could be doing deliveries for other companies, but typically not, right? When a customer has an issue, they are talking to a NSD team member really under the brand of NSD, right? I think that service control, that service quality, has been a big part of the success. As you can see, a lot of very large retailers really think very highly of the service that they provide.
Yeah. Great. Just one more quick one on the scaling up. I think a prior question asked about where you'd like it to get to. We've seen some of the. Obviously, J.B. Hunt comes to mind with putting together scale through multiple acquisitions. Is that something you'd consider that you could do more to build scale, or is this something that you say, "Hey, this is really an organic where we're looking forward?"
We're always going to be on the lookout for acquisitions. We feel like we've got a good platform here that we're intending to grow through the cross-sell.
I would say that we're going to try to develop new offerings and hit new end markets where we see opportunities. If we can find a great company that brings value that we don't think we could replicate, we'll be on the lookout for acquisitions as well. 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.
Right. Okay. Thanks for the time.
Thank you. As a reminder, if you have any questions, please press star one. The next question comes from Jon Chappell from Evercore ISI.
Thank you. Good morning. First question on technology. Did NSD have a platform that maybe when integrated into the Hub platform could kind of drive more synergies? Maybe on the other side of that, too, have they not really focused a lot of capital on building a technological platform and just the introduction of their business onto your platforms could create more cost synergies?
Yeah, I think that's part of what attracted us to it is that they really have done a fantastic job with developing their technology and a very similar strategy to us. We've gone through an in-depth review of their technology and seen that it's a great user interface. It's on top of a transportation management system, very similar to what we have with OTM. 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. 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 have done. It's actually a 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 non-competes 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, maybe kind of customary for these types of transactions.
Okay. The final thing, just to be clear on those annual numbers you gave. Does 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 where it may close at some point in the first quarter?
No, we close this morning.
Great. All right. Thank you, Phil. Thanks, Geoff.
Thanks.
Thank you. At this moment, we show no further questions. I would like to turn the call back to Mr. 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, are as 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.