Lineage, Inc. Q2 FY2025 earnings call

Quarterly performance review

• Second quarter AFFO per share grew above 8%. Total revenue increased modestly by 1% and adjusted EBITDA decreased by 2% due to challenging market dynamics like persistently higher food prices, interest rates, tariff impacts, and reduced inventory build expectations.

Second quarter results

• Global warehousing was in line with expectations. Same warehouse NOI was down 6% year - over - year against elevated inventory levels but saw sequential improvement. Global integrated Solutions had 8% year - over - year segment NOI growth led by U.S. transportation and direct - to - consumer businesses. LinOS rollout continued to accelerate and perform above expectations with 6 conventional sites, expecting 10 conversions by year - end. Completed inaugural $500 million investment - grade bond offering and executed on M&A and development pipeline, deploying $535 million in growth capital.

Company positioning

• Lineage is positioned as the industry leader with broad customer relationships, largest network, cutting - edge technology, and world leader in warehouse automation. Focused on partnering with customers to optimize supply chain and driving LinOS technology deployment.

Second half - year outlook

• Lowered full - year 2025 outlook due to muted seasonal inventory levels. Revised annual AFFO per share guidance to $3.20 - $3.40 from $3.40 - $3.60, and adjusted EBITDA guidance to $1.29 billion - $1.34 billion from $1.35 billion - $1.40 billion. Initiated Q3 guidance: AFFO per share between $0.75 and $0.79 and adjusted EBITDA between $326 million and $336 million, with some maintenance CapEx moved from Q2 to Q3.

Long - term success initiatives

• Focused on 3 key areas:
  • Delivering customer success: Addressing customer concerns by marrying global integrated solutions with warehouse network and enhancing customer care through partnership with Cognizant.
  • Leveraging network effects: Using scale to drive cost savings, consolidate facilities in excess capacity markets, and support global customer needs.
  • Enhancing warehouse productivity: LinOS pilots showing double - digit productivity improvements, with aim to accelerate rollout in future years and lower cost structure.

Global Warehouse segment

• Total revenue grew slightly. Total NOI declined 4% to $367 million. Same warehouse revenue was down 3%, while same warehouse cost of operations decreased 1% aided by labor and energy productivity initiatives. Contribution from non - same warehouse NOI grew 33%, driven by acquisitions and developments that continue to ramp. There is $109 million of incremental future NOI from previously completed and in - process development projects yet to stabilize.

Global Integrated Solutions segment

• Revenue was up 2% to $380 million and NOI was up 8% to $68 million. NOI margin was up 100 basis points to 17.9%. Strong momentum in U.S. transportation and direct - to - consumer businesses is seen, and strong momentum is expected to continue in the second half of 2025 with double - digit growth.

• Lowered full - year 2025 AFFO per share guidance to $3.20 - $3.40 from $3.40 - $3.60 and adjusted EBITDA guidance to $1.29 billion - $1.34 billion from $1.35 billion - $1.40 billion due to muted seasonal inventory levels.
• Initiated Q3 guidance: AFFO per share between $0.75 and $0.79 and adjusted EBITDA between $326 million and $336 million, with some maintenance CapEx moved from Q2 to Q3.
• Expect strong momentum to continue in the second half of 2025 for global integrated solutions with double - digit growth.

• Market dynamics risks including persistently higher food prices, interest rates, tariff impacts leading to reduced inventory build expectations.
• Interest rate risks related to expiring swaps causing potential interest expense headwind in 2026.
• Industry supply risks such as changes in new supply delivery volumes in the industry.

Q: Alex, just want to understand everything was tracking well until basically June 1. And then after that, things fell off. It just seems a little tough, again, especially given that you guys had an opportunity to revise them. Just curious what you're thinking and how things were trending then versus what materially happened subsequent to NAREIT that caused you guys to reduce the outlook?

A: Alex, honestly, great question. And you're right. What changed is our occupancy guide. We had been trending in line with typical seasonality. And I think everyone remembers we described and we described typical seasonality is the normal seasonal pattern of we were referencing 2015 to 2019 before all the disruptions of COVID, when the normal seasonal pattern happened for generations really before that disruption and that you start in Q1, you dropped to a bottom in Q2 and then you build up to through Q3 and Q4. And so at NAREIT, we were trending actually in line with typical seasonality, actually a little bit better than normal seasonality and how the USDA indicated the market was performing. So we were above the line, as indicated on our Slide 5. In June, when we typically see utilization inflect after bottoming in May. And this year, we just started to see the typical seasonal uplift of utilization in late July, which is obviously later than usual, and that pickup has been a little bit more gradual than it typically is. So we do still anticipate a seasonal uplift in the second half, and we do see that happening now in the last couple of weeks. But because of the delay and because of the muted seasonal pattern that we're seeing today versus what we were seeing when we talked at NAREIT and because of the ongoing uncertainty around tariffs that elevated inventory carrying costs, we're just lowering our expectations on the magnitude of the uplift. Importantly, as you saw, we did see sequential improvement in our same - store NOI Q1 to Q2, and we expect to improve in each quarter of the year.

Q: Maybe we can just start off at a higher level. What's the best argument you think you've heard from your clients in terms of why occupancy is too low or throughput volume is too low today versus what, I guess, the industry players and yourselves included might think what is normal going forward. So what are the best argument for that?

A: Yes. I think as I mentioned on the prepared remarks, we believe the industry is bouncing along the bottom right now. I mean food producers on their earnings calls and in all of our meetings continue to cite just high food pricing and value - seeking behavior from customers. Our view right now is that inventories have been under serious pressure for a couple of years now and in servicing consumers without stock outs, which nobody will handle would be very difficult at even lower levels. And so we definitely feel we're bouncing off the bottom. There are some data -- positive data points out there like the beef herd counts, which are obviously still below the 2021 levels, that appear to stabilize based on the 2025 USDA data, and Circana's data showed that restaurant industry in -- the whole industry gained momentum after a slow start to the year. Also, our customers are pushing very, very hard for -- to increase volumes through incentives and their sales efforts. And if those incentives are successful or we get any interest rate relief either one of those things could act as a stimulus for increasing inventories moving forward.

Q: Appreciate the comments earlier on the LinOS pilot. And I know you said you'd kind of quantify the benefits of that later in the year. But maybe can you give us any anecdotal examples of initiatives you're undertaking and maybe some of the benefits you've seen from the implementation of these pilot 6 or 10 facilities, however many it's been?

A: Yes. We have 6 implemented so far, we'll do 10 by the end of the year. And all I can say is this is -- our initiative is exciting. It's on track. It's exceeding expectations. And we're seeing double - digit total labor productivity improvements across the 6 sites. So to remind everyone, LinOS is our proprietary warehouse execution system. This started many years ago from a vision and a belief from Sudarsan Thattai, our CIO; and Elliott Wolf, our Chief Data Scientist and their teams that we can reimagine the way warehouses run and that technology and data science are the enablers. And so LinOS through our own proprietary algorithms optimizes literally every resource and movement that happens in the warehouse, much like air traffic control, if you will, from how trucks are loaded and unloaded to where product is put away to directing each task in the building with the result of optimizing performance for customers and dramatically increasing our warehouse efficiency. And so we have the evidence now that this vision is coming to life and can fundamentally change our competitive position over time given its impact on customers' cost and even our employee experience. And most great things take time and LinOS is no different. And this year is about proving out the functionality and getting it rolled out to different types of facilities before a much broader and accelerated rollout next year and the year after. And so we're increasingly excited about how this can just fundamentally transform our operations because we see the benefit now across the 6 sites, not only in direct labor, which was the primary focus but also in indirect labor, employee benefits, energy, safety, employee turnover, the employee experience, training expense. We even think it's going to materially lower both our CapEx and our facility maintenance expense over time as we're more efficient in the use of our facilities and our material handling equipment. And so over time, we think it will materially lower our cost structure, help us compete and improve what we already have as an excellent service for our customers. So we're highly encouraged, and we believe LinOS is going to be everything we thought it would be, and we can't wait to share a lot more detail around kind of financials and how these algorithms work around the NAREIT conference later this year.