Q3 2019 Earnings Call
Greetings and welcome to the Americold Real T. Trust third quarter 2019 earnings Conference call.
At this time, all participants Arnie listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference.
<unk> zero on your telephone keypad.
As a reminder, this conference is being recorded.
Now like to turn the conference over to your hosts Mr. Scott Henderson Senior Vice President Investor Relations and capital markets. Please proceed.
Good afternoon, we would like to thank you for joining us today for AMERCO reality Trust third quarter 2000, It 19 earnings conference call.
In addition to the press release distributed this afternoon, we have filed a supplemental package with additional details on our results, which is available in the investor section of our website at W.W.W. Dot Americold Dot com.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements.
Or lookingstatements address matters that are subject to risk and uncertainties that may cause actual results to differ from those discussed today.
A number of factors could called actual results to differ my purely from those anticipated.
Forward looking statements are based on current expectations assumptions and beliefs as well as information available to us at this time and speak only as of the day, they're made in management undertakes no obligation to update publicly any of them in light of new information or future events.
During this call we will discuss certain non-GAAP financial measures.
More information about these non-GAAP financial measures in reconciliations to the comparable GAAP financial measures is contained in the supplemental information package available on the company's website.
We also would like to note the numbers presented in today's prepared remarks have been round it to the nearest million with the exception of per share the mouse.
The Saplings conference calls hosted by Americold, Chief Executive Officer, Fred Board, and Executive Vice President and Chief Financial Officer, If Mark Smirnoff.
Management will make some compared comments after which we will open up the call to your questions now I will turn Nicole over to Fred.
Thank you and welcome to our third quarter 2019 earnings Conference call. This afternoon, I will provide highlights for the quarter discuss macro transcribing our business and update you on our growth activity.
Will follow with a review of the third quarter results and then discuss her balance sheet and outlook.
After I prepared remarks will open the call for your questions.
The third quarter was a strong Puerto for Americold, We reported total company revenue growth of 16%.
The company <unk>, 18.9% in court either to grow up 21.6%.
This was driven primarily by three factors burst contribution from our second quarter acquisitions.
<unk>.
Platform and scale grow we continue to benefit from improved operating efficiencies integration synergies.
As a result total company I know why margin increase 65 basis points to 25.9%.
<unk>, either the margin increase 92 basis points to 20%.
Parents, a third quarter last year.
And third or quarter portfolio continues to perform well on a constant currency basis same store global warehouse <unk> revenue group like 3.3% and at a white grew by 2.3%.
Here today same stole global warehouse segment revenue through by 3.2% and animal I grew by 3.4% also on a constant currency basis.
Oh performance is supported by favorable macro trends, we continue to expect that demand worldwide steadily with population and consumption growth.
In addition, consumer preferences continue to shift towards healthy perishable food.
Manufacturers are supporting this demand for the introduction of new products and Reformulations the bold.
Increases the need for temperature controlled storage.
Across our portfolio, we see no signs that these trends will change and we believe we are uniquely positioned to capture outsize market share utilizing our fully integrated infrastructure.
On the supply side significant barriers to new development remain in place.
Systems and processes are backed by many years of research and millions of dollars of technology investment.
Further our customers trust us to maintain their brand integrity and we take this responsibility seriously.
We believe this customer centric focus combined with our portfolio that has the right out that isn't the right locations.
Well as we seek to achieve consistent and profitable growth over the long term.
In other news during the quarter, we were extremely pleased to receive an investment grade rating of B.W. three with a stable outlook for movies.
Rating combined with our triple be ratings from fish and D.B.R.S. Morningstar significantly reduces our cost of capital as our growth activity remains robust. This magnifies the benefit to the bottom line for our shareholders.
Across our active development pipeline, we have five projects currently underway totaling 42 million cubic feet and representing $261 million sum total investment.
These projects remain on track to be completed at dates ranging between the end of the fourth quarter 2019 to made 2021.
At our recently completed 15.7 million cubic foot state of the yard automated expansion project in Chicago, we continue to ramp up systems and onboard customers.
However, due to the weather related delays in completing construction customer requirements do utilize the space for the upcoming holiday season.
Our prioritization on meeting our customer service requirements.
Full stabilization at this facility May take 12 to 18 months.
Oh <unk> is always to get our operations right for our customers in our stabilized return expectations remained unchanged for this project.
With regard to the acquisitions, we announced earlier this year, we continue to integrate the operations onto our platform and implement or a mirror pulled operating system and commercial business practices to capture expected efficiency gains.
As noted previously we transition core S.G.N.A. functions to our headquarters, including H.R. Finance, I tea and engineering.
I'm excited about the progress to date, and we aren't track to achieve our synergy goals.
Also as we mentioned last quarter are percentage of fix commitment storage contracts in our global warehouse segment decreased as a result of the acquisitions, which had fewer picks commitment.
I'm pleased to say that in the third quarter, we increase start percentage affects commitment storage contracts by 170 basis points sequentially and we are now back to 40%.
Also as previously discussed we sold our minority J.B. interest in China. During the third quarter. This sale generated approximately $15 billion in cash proceeds.
Finally, I'm pleased to welcome care Julianne as our new executive Vice President and cheap Human resources Officer.
<unk> brings a wealth of experience in human resources, and we'll play a valuable role in developing our associates to support the company's grow.
Decided to have care on our team.
Oh, well now turned to call over to Mark will provide more details on our quarterly results balance sheet and outlook.
Thank you Fred and good afternoon, everyone.
Today will provide updates on our actual performance as well as certain metrics on a constant currency basis.
We reported total company revenue, a 466 million and total company I know why of 121 million, which reflects a 16% increase and then 18.9 per cent increase your over a year respectively.
<unk> was 93 million for the third quarter of 2019.
An increase of 21.6 per se, you're every year, primarily driven by our 2019 acquisitions.
Solid growth in our portfolio.
Continued improvement in operating efficiency.
Hardcore even thought margin grew by 92 basis points to 20%.
Please note are strong 40 bit dog gross margin improvement, we're impacted by factors, including higher healthcare expenses related to an increase in high dollar claims.
The j. curve associated with implementing and aligning our recent acquisition to the Americold operating structure and practices.
Start up costs related to our Chicago development project.
And the currency translation impact of the strengthening of the U.S. dollar.
It is important to know that higher health care costs were not related to workers calm, but rather made up of certain high dollar claims from associates and their dependence utilizing their health care benefits.
As we have noted in the past our quarterly results can be lumpy due to the timing of certain factors such as health care expenses, which is why we recommend continuing to focus on an annual rather than quarterly results.
So the third quarter 2019 reported net income of 27 million compared to net income of 25 million for the same quarter of the prior year.
Our third quarter core F.F., all what's 59 million or 30 cents per diluted chair.
A third quarter after though was 52 million or 27 cents per due to chair.
As a reminder, the full definition and reconciliation of course, <unk> core F.F.L. and after that though to reported net income can be found in our supplemental.
For the third quarter of 2019 Global warehouse segment revenue was 366 million, which reflects grow from 23 per se you're per year.
<unk> was 113 million, which reflects grow 21.1%.
Global warehouse pregnant margin was 31% for the third quarter at 48 basis point decline compared to the same quarter of the prior year.
Decreasing margin was primarily due to the factors impacting Cory but previously discussed.
<unk> quarter, and 244 million of our rent and stored revenue was derived from customers with fixed commitment in storage contracts as compared to 232 million in the second quarter of 2019, and 215 million in the third quarter of 2018.
From the third quarter of 2019, 40% of right and stored revenue was generated from fix commitment storage contracts a sequential increase a 170 basis points from the second quarter 2019 on a combined pro forma basis.
As of September 30th Plenty 19, our global portfolio consisted of 176 facilities to less than what reported at the end of the second quarter of 2019.
We ended the third quarter of 2019 with 165 facility in our global were how segment portfolio and 11 facilities in our third party manage segment portfolio.
During the third quarter, we exited at least facility in Hey, burn, Idaho, which was classified as non same store.
In connection with the exit of this lease relocated the majority of customer product within this facility to other own facilities within our network.
Additionally, we exited the operation of one of our third party manage facilities in Crete, Nebraska, and there was no material contribution to and a lie in the third quarter from this facility.
Now I will turn to our same store result in our global warehouse segment.
We define same store at facilities that have at least 24 months of normalize operation.
The third quarter 2019, 138 of R. 165 warehouses were included within our same store pool.
Remaining 27 Nonsame store warehouse facility include that 24 facilities that were acquired in 2019 and three legacy facilities that are in various stages of operational stabilization.
For the third quarter of 2019 are same store global warehouse segment revenue was 298 million, which reflects grow two per cent euro per year, and 3.3% on a constant currency basis.
And started global warehouse and <unk> was 93 million, which reflects broke a one per cent. Your every year and 2.3% on a common currency basis.
Things for global warehouse, and a wide margin decrease 31 basis points on a constant currency basis, but 31.1%.
This comparison was impacted by approximately 3 million up health care expenses related to hire claims reported in the third quarter that I previously mentioned.
Oh, well now this Scott our same store results in a little more detail.
So the third quarter same store global right and stores revenue grew by 1.4% your per year or 2.6% on the costs and currency basis.
Our same store economic occupancy what 79.2%.
This reflects a decline of 108 basis points from the prior year, well, partially offsetting the 196 basis point decline in physical occupancy.
Our same started global Renton storage and all I grew by 2.3% you're over a year or 3.4% on a constant currency basis.
Same store global rent and storage and a lie margin increased 54 basis points on a constant currency basis the 64.1%.
Yeah, I know I growth in March and expansion was a result continued portfolio management combined with our efforts to grow are fixed commitments sports contract and discipline cost control to the Americold operating system of our power and facility related costs.
Same store global warehouse services revenue for the third quarter increase 2.4% your per year or 3.9 per cent on a constant currency basis.
Results included the benefit of one extra business day, and the third quarter 2019, and excluding the same store warehouse services revenue wouldn't have increased 2.4% quarter over a quarter on a constant currency basis.
This revenue increase resulted from a favorable mix, which generated 4.1% growth in our same start warehouse service revenue per throughput palate on a constant currency basis.
Our same started global warehouse services in Hawaii declined by 8.3% you every year or 5.9 per sat in a constant currency basis.
I'll be increased health care costs previously discussed.
Despite his higher costs.
Same store warehouse services, and why margin, what 6% on the cost and currency basis Mcwhorter, a decline of only 63 basis points.
Using the same store pool for the first nine months of the year, which represents 137 facility are same store global warehouse.
Revenue growth was 3.2% and then why grow was 3.4% on a constant currency basis.
Please note that the nine month period. This year contain the same number of business days as last year.
You're to date same store revenue and I know I grow we're impacted by the same factors that drove a quarter over a quarter performance adjusting for the 2 million non recurring worker's comp benefit realizing the first half of 2018 that we previously discussed our <unk> would've been 4.2% on a costly.
Currency basis.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers, who on a pro forma basis account for approximately 60% of our global warehouse revenue and you have been with us on average for over 30 years.
Additionally are churn rate was approximately 3% of total warehouse revenue in 30 basis part reduction from the same period last year.
We believe our strong focus on customer service active portfolio management contribute to our ability to retain customers.
Corporate S.G.N.A. total 32 million for the third quarter of 2019 as compared to 27 million for the comparable prior to your Porter.
Increase is primarily a result, a B.S. jeanette absorbed from our recent acquisitions Nettops introduced.
Higher socks compliance costs.
Increased stock compensation <unk>.
An additional investment made to support our expanded development pipeline.
Additionally, we incurred total costs of 4 million for the third quarter as shown in the acquisitions litigation in other line item within our statement of operations, which primarily reflects Monday related integration retention and severance costs.
Of the 10 million in total cost savings that we expect to realize from the cloverleaf integration. We have already eliminated approximately 6 million on an annualized basis, and we have taken action to eliminate 4 million more of cost on an annualized basis.
As we stated we expect to capture the full benefit of the synergies by the end of the first 12 month after closing.
Now, let me update you on our development spending.
In aggregate, we have spent 155 million year to date on expansion development capital, including 50 million in the third quarter.
That's spread mentioned in Chicago, we have completed construction are commissioning our system.
And are currently I'm boarding and serving our customers.
Are active expansion development projects are on track and are expected to achieve our targeted return.
Is important to know during the period after completion until stabilization ruling cursed startup costs, such as making keep the facility hires.
Painting employees, bringing down the temperature and the facility.
Tuning automation system, and ramping up and down boarding new business.
As we work towards stabilization during this time, which normally takes approximately 12 month, there may be instances, where the revenue generated for the period and not cover the startup costs.
Now turning to our balance sheet.
As of September 30th 2019, total debt outstanding was 1.9 billion of which 76% wisdom in unsecured structure and then 92% was that a fixed rate.
A real estate that as they weighted average remaining term of 6.5 years and carries a weighted average contractual interest rate a 4.29 per cent.
At quarter N., we a total liquidity of approximately 1.5 billion.
Includes 372 million of net proceeds from our previously announced equity ports.
Our net that <unk> was approximately 4.1 times.
Additionally, during the third quarter, we filed in 500 million dollar at the market program as an additional capital source to support our growth strategies. At this time, we have not utilized are any T.N.
Finally received an investment grade rating of be doubly three with a stable outlook for Moody's.
This rating combined with far triple be rating from Fitch reduced our annual spread on our 475 million dollar term loan from 145 basis points to 100 pages points, resulting in a 2.1 million and annual interest savings.
Additionally, our annual spread on our 800 million dollar revolver, which at the end of the quarter was not drawn is reduced from 145 basis points to 90 basis points, resulting in significant interest savings when the revolver, it's being utilized.
Also as a result of this rating we moved to a flat 20 <unk> basis points facility be on our revolver.
Assuming an undrawn revolver just results in 1.2 million annual interest savings.
Before I turn the call back to Fred I would like to update our outlet for the remainder of 2019.
For the full year 2019, we expect the fall.
We I reiterating our global warehouse segment same store revenue growth range of between two and 4%.
Given the higher than expected health care costs experience here today, we now expect same store I know I grow for this year to be at the bottom half of our stated range of 100 to 200 basis points higher than the associated revenue growth.
Both of these gross rates are expressed on a constant currency basis.
The only general administrative expense is a percentage of total revenue is expected to range between seven and 7.2%.
Recurring maintenance an I.T. capital expenditures are now expected in the range of 50 to 60 million.
Broken expansion capital expenditures are expected to be 205 to 215 million.
Include spending related to the company's announced development project.
Anticipated <unk> ratio of 65 to 68 per cent, reflecting a full year weighted average deluded share account of 180 to 184 million shares <unk> on the call that <unk>.
Hi spark.
We're very pleased with our performance so far in 2019, we continue to generate strong results from our same store portfolio as well as grow our business grew strategic developments, an acquisition, which are fully funded with long-term capital.
As we look towards the end of 2019 and then some next year. We believe Americold is uniquely positioned to continue to drive long term gross and create shareholder value through best in class operational expertise and accredo portfolio growth.
I'd like to think all of our associates for their continued hard work and outstanding contributions as we continue to grow our company and serve our global customers.
Thanks, again for joining us today, and we will now open the call for your question operator.
Thank you at this time would be conducting a question and answer session. If you'd like to ask a question. Please press start one on your telephone keypad, a confirmation tone will indicate your line isn't the question Q. you May press start to if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your hands.
Set before pressing the star keys when moment, please while we pull for questions.
[noise]. Your first question comes from the line of <unk> been Kim with Suntrust Robinson Humphrey. Please proceed with your question.
[noise]. Thanks. Good afternoon every one I have you ever hi, yeah. It can be first start off in their classes side. So if I just try to remember correctly I thought the expense comp still negative it's still it'd be tough and the second half, but I'd that was supposed to get better cause I think you had a 2 million negative.
<unk> last quarter, you over here and it was supposed to be like 1 million and the second half it was supposed to get better but it's it looks like it got worse. So can you help me understand that better.
Yeah, So clearly and as we.
Spoke about in our prepared remarks, the third quarter, we at a higher number of high dollar a health insurance claims approximately 3 million in our same store portfolio. So if you look at that that contributed.
Roughly two or 330 basis points reduction in what we would have seen in our normalized and why growth rate.
For the warehouse segment or for the same for warehouse segment. So it's really isolated around that number.
You know, we will say overtime look we have roughly.
Several thousand bar employees on our health care programs, and we are self insured and we will see over time some variation in that number I would say that we don't believe this is the trend but over time over long thing given that population you may have quarters, where you have higher health care costs as happened to be one of them.
Okay.
And that 3 million I'm, just kind of get a better sense of when that starts to <unk>, how that dissipates overtime.
It was fully encouraged the score.
Yeah. So I mean, it's probably that one year from now that will be gone or would that kind of <unk> somehow.
Over the next four quarters.
Oh <unk>. These are like costs for medical procedures that you know happened during the quarter. So they're fully agree.
I see.
No.
Maybe bigger picture is there a weight are there ways that you're thinking about two maybe take the edge off D. is kind of volatiles expenses I'm not sure if reinsurances, even the possibility, but are you looking into anything like the like that.
Yeah, we we do retain reinsurance for for extreme high dollar claims yeah. The the increased that we saw this should these were when we talk high dollar clean for talking about planes in excess of quarter million dollars for an individual claim we had a significant number in this.
Quarter, we don't believe again that it's a trend and we do retain reinsurance above that level, but it's just as you know just like with regular car insurance you you don't have a zero deductible is prohibitively cost expensive yeah. We believe over the long term, we retain the appropriate level of of reinsurance to come in.
The rest of the business.
Thanks, and just last <unk> keep in just a follow up on that again, you know looking at it on an annual basis. You know we this is one of those items that we've called out before that can fluctuate on a on a quarterly basis, but over the over the span of the year. It tends to work itself out through the through the expenses. So again, that's another reason.
I believe in kind of focus on the full here.
Okay and in terms of that like the driving inside the business to business crimes. He just give us a little more clarity on some operating status like the least spreads your date and Twain 19.
And maybe that rent growth that you've seen and I know customer retention is probably a tricky stat given that 60% of your revenue is on you know month to month or not fixed rate commitments, but maybe just providing for more color and if it just sounds just whatever you get a better business sense of what's going on.
Yeah, it as as I mentioned in individual categories and breaking apart you probably best see this in our same store a portfolio, we're actually seeing decent a revenue growth and and we continue to hold our guidance for the full year you know, it's specifically in the quarter on a constant currency basis, we saw renton stored revenue growth of roughly 2.6%.
And we saw services warehouse services grow up with 3.9% you know on average or for the whole segment roughly three three which is just above the kind of been point of our guidance right. Yeah. I guess I was asking about what line items contributed to that 2.6% grow. So for example.
I think one or the catcher least exploration schedule, you, obviously rent <unk> eight more into the expiration on for this year. So it just kind of what kind of rental rate trends I could be seen when you are resigning leases.
Yeah. So if if if you come back to look at.
And this is in our supplements are same store written stores for occupied <unk> roughly going up about 4.4% your every year.
On average and on a constant currency basis closer to 5.5% so.
We are seeing strong growth and as we mentioned roughly you know 4% growth on revenue per throughput palate.
So we continue see strong revenue growth in the in the business I think remember on on the leases in the renewals and such you know our churn rate is very very low right. I mean, I think we we were talking about 3% to 4% churn rate. So very little rotation. So you know we we you know our customers are with us long term and we renew their <unk>.
Tracks as we go.
Okay. Thank you.
Thanks to keep them.
[noise]. Your next question comes from mine of Michael Carol with RBC Capital markets. Please proceed with a question.
Yeah. Thanks for that one yeah touch on Rochelle development I believe I heard you correctly, saying that you don't want expected to be stabilizing 12 months now I expected to be stabilized in 18 months can you kind of walk through why it's taking a little bit longer in and what's your expectations Sir.
Yeah, Yeah, I think we we we started to release that we expected to be between 12 and 18 you know it's it's it's all about ramping up and commissioning the automation you know if you recall.
Quarter ago, we we talked about the fact that we we experience you know extreme weather delays in getting that building built a above 140 days above and beyond our original expectations. You know the buildings 140 feet high you know when God.
You know I <unk> snow rain, Hey, any weather condition. You can you can think of a affected our ability and being able to Iraq that the wracking and then the the siding that goes that's attached to the racking.
What's that does is that prevents us from being able to fully passed in commission all of the automation that's within that building until you get the building wrapped. So is the results you know that that testing and you know kind of kind of fine tuning the automation didn't occur until you know late in life.
In a in the year when we are opening and we're expecting to onboard some business for a particular customer who was kind of in a pinch are running up against an expiration with our current provider. So are we on border that product in at the same time that we're that we're commissioning. So we're burning in if you will.
The the automation and getting it fine tune and you know we've made some decisions as as we're kind of getting late in the year two it'll be a little cautious about overburdening that during the holiday season. The most critical time of the year. So you know we've onboarded, we've got a couple different customers in there. The the system is is working it's just.
Where right up against the holiday schedule, which was unplanned due to the hundred and 40 days and delay. So we're just giving ourselves a little little cushion there to say that coming out of the holidays will start laughing more business into their and that's stabilization could be somewhere between 12 and 18 months.
So what happened in the third quarter related to financial impact to guess, how much money did richelle AD and then I guess I'm, assuming fourth quarter is going to be fairly stable and then we start seeing a ramp up as you go into 2020 is that correct.
Yeah, as we mentioned in our prepared remarks, you have to launch what facility there will be a j. curve, yeah, I think we'd called out certain of the types of expenses that you'd expect to see at the launch real facility. Obviously, we're we're bringing on the labor, we're bringing down the temperature you know before the the businesses ramping in were dial.
Thing in the automation so yeah, it's not uncommon in this is why we talked about you know typical a standard year to to stabilization being the first six months roughly being break even just because you have much higher cost is your onboarding learning the business, making sure you're servicing the business and then it really ramps from there and we expect.
Just as we've always said that first year on our stabilized run right.
So was there a contribution at third quirks I guess it was completed wasn't in between the first and second quarter and then if you're not bringing on new customers in the fourth quarter shall we expect a j. curb ramps there or is it going to be kind of similar to what it was this quarter.
Yeah, I said the J. curved typically can take you know a person you know the first six months. So you think about really a beginning of Q3 launches a facility. So yeah. We expect to have you know those costs through the balance of the year.
Okay grain and last question Mark.
That's reflected in our full your guidance.
Okay. Then last question Mark I think you send the guidance that you still expect and why gross to be about 100 basis points higher than your revenue growth through the first time onto it seems like it's only 20 basis points higher so what's gonna happen in the fourth quarter or is it just that the <unk> typically cease higher margin is the fourth quarter, given the seasonality and that's what's taking it up.
Significantly.
Yeah like Oh. This is this was this is the busiest time of the year. So this is when you typically convert a little bit more again. This is why we look at the full here.
Okay, great. Thank you.
Your next question comes from line of Dave Rodgers with Baird. Please proceed with your question.
Hey, Good afternoon, guys just wanted to follow up on Mike's question. So it sounds like you're at a full expense run rate for Rochelle and in the fourth quarter, if not before is that right.
Thats correct, Okay, and then I guess on the second question with the margin enhancement can you kind of walk through what is going to get you to the two to 400 basis points of margin expansion in the fourth quarter to kind of get John pays for the year I mean, it's almost upwards of 400, you'd need and that'd be great performance in the fourth quarter, and obviously you guys have confidence in that but just on top of the occupancy in them.
In the throughput we haven't seen that yet and so just kind of curious if you could walk through some of the mechanics of kind of getting up to that number.
Yes, no look I think the warehouse segment performance to actually is very strong as I said in my prepared remarks, we have the significant dollar amount roughly 3 million within our same store of costs.
Burdened our health care costs that burdened our same store the services margin and that that item alone was 330 basis points that impacted our same store revenue growth. So we're talking about going from a 2.3% revenue growth up to a five six so that's sort of say in the business continues to perform we don't.
Back to see the heavy healthcare that we saw this quarter.
Well the item is lumpy it tends not to be sustained over long periods of time so.
And so we look at that the core business performs and you can also take a look at.
Our year, while margins to to see.
The impact of the volume at the Port quarter has an overall business, yes. So so again normalized healthcare as well as the the ramp up of business.
When you when you talk about occupancy at this type of your number we've got such a diversified portfolio in assets that service a lot of different parts of the food supply chain, but this time of the here. This is this is where you know it's your key logistics centers your key logistics markets our distribution center.
There is that really ramp up in every single one of those markets are operating at 85% or higher so they're they're very very full.
But not to fall.
Which means that we're going to be able to operate at highly efficiently by not by not over filling the facilities being at 100% were like we used to be in the past. So yes. This is a high efficiency quarter for us and Thats why the and Hawaii is outsized.
Gosh I appreciate the added color on the Gionee, maybe for Mark you did talk about the synergies that you were getting post the clearly transaction and.
I wanted to ask is the DNA was up sequentially, even if you kind of back out I think some of the onetime items in the quarter is that it's still a good run rate kind of going forward or do you expect to be able to take some of the synergies out of that line are we seeing them come from somewhere else.
No as I said, roughly we've identified an action that an additional $4 million on an annualized basis of synergy that we should continue to see.
Benefit overall spend on the go forward basis.
And with the 6 million annualized fully reflected in the third quarter.
Well, the 6 million on an annualized basis. So it wouldn't be all 6 million in that order it'd be the annualized impact of that kind of midway through the quarter. If you think about.
More mid way so there's some benefit of the fourth quarter. Okay. That's helpful.
And then last maybe just Fred can you talk about kind of the the outlook or the appetite obviously of the appetite, but the pipeline for acquisitions.
Opportunity that you're seeing out there given your liquidity today.
Yes, no the same opportunities that we've seen we've got a as I say on the acquisition front, we capped out of a very wide net.
We're going to remain disciplined.
And make sure that we're we're buying things that make sense and fit within our portfolio in a way that we can fully integrate our enterprise. So again our approach is full on integration.
And that's that's important to us and so look we're looking out a number of things.
If something happens, we'll we'll actually if not.
Remember the other part of our growth pipeline is the development pipeline and that continues to be very robust.
Still have a pipeline in excess of $1 billion.
So you'll see us continue to execute on that in addition to the five active projects, we've got going right now.
Thank you.
Sure.
That.
Your next question comes from line of Manny Korchman with Citigroup. Please proceed with your question.
Hey, thanks.
Fred maybe to follow up a little bit on Dave's question in your press release, you talked at a wealth of potential opportunities is there something special you're looking at now that you would include that that line in the lease and with that line were you talking about acquisitions and developmental you're talking about sort of lease up opportunities.
More specifically.
I think we're speaking more about acquisitions and development, we're talking about growth.
And is there something going on at the moment that you chose to sort of lead with that you're in your prepared quote in the into the lease or is it just more of the same and you chose to just highlighted.
Yes, I know, it's I think we highlighted in every press release, because it's a fundamental part of our of our growth strategy.
Yeah, we don't give guidance on acquisitions, we say that that will be lumpy because of the fact that we are kind of Hudson pack and find the right the right acquisitions.
The development pipeline continues to be really strong. So this development pipeline spend the size ever since we went public we executed on a tremendous amount of it and we plan on continuing to do so so we're just calling out that that growth continues to be strong and.
As fuel for us.
And then there are long term model I think as you've heard US talk about is our goal is to start roughly between 75 to 200 million development project given calendar year, and we believe our pipeline is robust and continues to support that level of development growth.
Okay. If we can hop back to the discussion on the health care costs.
Just to help frame sort of what's going on what is sort of your annual outside of just the premium sensor. So those costs that you highlighted in the quarter. What's your total sort of annual spend on those.
And then what were they in.
That's an in total in the quarter that would have been.
I've been hired or you expect it makes sense.
Yeah, no exactly as we said on annual basis, our total health care spending in our same store to be close to an aggregate dollars around 40 million.
So this gives you a sense does that 3 million move is about roughly a 10% move.
On an annual basis, and obviously a much larger percent move on to if you think about the quarterly impact to that.
So instead of 10 million you spent 13 million in the quarter.
Correct.
And so should we should think about it being sort of at the $10 million Mark There's no reason to be thanks.
Yes look when we've looked back at our healthcare expenses over time, not not dissimilar, we've seen roughly about 5% growth over the long term in overall health care spending we factor that into our cost models and our escalation what I would say the thing I think we look at while we will as a business.
Going forward in the future we may see this level of Lumpiness yelling select quarters.
Overall, what I would say is this is the lease controllable of all the expenses that we manage the core business expenses the operations.
The efficiencies the workers comp those are performing.
This is something this is one of those items, that's probably a little more unique to our business than others.
And so we do our best management, we have lot of.
Investment through HR around health and wellness programs, but.
Look I wish you all had a crystal ball and can make sure. We knew we are going to get sick to do something about it but.
Okay and last one for me the preferred income tax benefit in the quarter was was much higher than we'd expected.
Is that an item that is going to continue sort of those levels or what would be more normalized level.
In future.
Yes.
With that particularly related to was the fact that our legacy business had some additional wells in our Trs and with the addition of the acquisition we were able to take advantage of some of those.
Those dental wells, which were previously reserved.
And so as we acquire businesses in the future.
And we continue to grow earnings we do think that there could be some level of benefits, but I think you'll see the bigger moves that in connection with.
When we make acquisitions.
Thanks, Mike.
Thanks very much. Your next question comes from the line of Mike Miller with JP Morgan. Please proceed with your question.
Yes, hi to two questions here in first apologize for another.
Chicago win, but if the startup cost in the third quarter.
Should we expect a similar no I know you touched on this but I don't think it was answered explicitly this way.
Should the drag or the startup cost in fourq to be fairly similar to what we saw in Threeq, you or will they be notably different for some reason.
Hey.
The cost base is more in there.
So, but but as Fred said this this fourth quarter is the busiest quarter or the year, our focus as a business is really on making sure we're serving our customers and performing for them. During this busy season. So I would expect not significantly greater cost, but I would also expect the ramp to really not you know not be focused until then.
Early part of next year.
Got it Okay, and then I guess, we're thinking about development investment over the next three years five years, what do you think the most in terms of annual development spend we'll see is any given year once once your ramped up.
Yeah, I think look I think we give guidance today of 75 to 200, certainly we're excited about the pipeline that we have out there, but you've got a mix of opportunities out there some of which our customer dedicated builds in some of which are more market builds like our chicago or like ours.
On a project those market builds we have a little bit more control over the timing the customer bills as we've discussed in the past can can fluctuate because we're really kind of at the mercy of the customer and their timing. So it's really hard to kind of pinpoint the the exact number.
Got it.
Okay. That's it thank you.
Your next question is a follow up from Chi bin Kim with Suntrust Robinson Humphrey. Please proceed with your question.
Thanks.
Any new updates on the Woolworth development in Australia.
In terms of timing.
Sure.
Speaking speaking of customer driven timelines, that's that's a that's a good lumpy then.
Yeah, we continue to to work with that customer I don't anticipate.
Any any news coming up soon.
Just with a lot of things that are going on I mean, they are working in their fourth quarter, which is their busiest time of the year right now and they've got a automated dri facility of their own that that they're working through so.
Look we continue to work with them and commercialize the deal as well as work through detailed design and we'll we'll know more as soon as the customer is ready to go as you know we took action and pushed out the forward because of our belief of matching funds with development projects.
If we're not breaking ground at the beginning of the year, we're confident that something else will be so again, thanks to having a rich pipeline.
And.
What's the probability of that deal actually ever even canceling it or almost like a zero, possibly that happening.
Well I'll never say zero Ki bin, but it's a big project, it's a big customer.
Well look exactly like it was when we when we started working on those two years ago, probably not.
But but we expect to get the same returns out of whatever we do do for them and will now status as it comes about.
Okay and just last question.
Hi, <unk> do you see much different rent growth patterns. When you look at your distribution facilities versus the production advantage facility.
No I'm really across our entire portfolio, even our public warehouses.
Yeah, we tend to see the same types of of rent increase in storage handling increases.
Yeah, we're out throughout all of our services and throw out all of our distribution types, yes. The numbers I quoted earlier kind of the weighted average across the broad portfolio, yeah, but they're pretty consistent not yet on a whole lot of fluctuation between.
Okay.
And this is a hard concept for me and I think allows people to understand and that's like the market rent growth rate. So not the in place rents are getting or higher revenue per pallet, but just a market overall, how would you describe the market rent growth in cold storage.
And is there any kind of big trends between the different cities or a geography.
Look I think the market is Fred's mentioned, we've talked about for some time remains tight you know this is still a market where you do not see people building on spec.
These are very expensive purpose driven mission critical assets and I think the market remains very disciplined and.
I think the other thing to remind you of is you know again. This is an industry. There is not rack rates, there's nobody out there publishing you know per square foot.
Rental rates and that type of thing our pricing is you need to every individual customer based on the profile of their business the space that they take out the size of their palettes. The the amount of times. It turns the amount of handling lots of different things that go into our pricing. So typically what happens ki bin and.
We're if we're giving increases on annual basis up to the 4% year and we are at the end of a five year contract or renewing a new five year contract it pretty much carries on through into the new contracts.
2% to 4% increase trendy me correct correct I see.
All right and you said your turnover rate is 3% to 4% is that how I think that meant annually.
That's pretty low.
Yeah.
So how do you do the calculus of are you pushing rent enough first of a turnover rate. That's you know from industry standpoint, whatever real estate, you're looking at is pretty low.
No look we it is pretty low.
If there is a little art and science to pricing right you want to be careful not to push it up too high and push customers out.
So we keep our eye on the market I mean, obviously, we we do bid on business on a regular basis through RFP isn't that helps us get some intelligence.
We also have you know the thing to remember here is we do have customer profitability.
Got pricing by customer by market, we have over 2600 customers across 178 sites that gives us a very very large database to understand what the market will bear in terms of pricing. So we leverage all of that data and all of that Intel along with participating in request.
The proposal and and and pricing on new business, that's coming in so again, there's nowhere to really go for publish guides on it is it's.
A little bit of art and science.
All right. Thanks, guys.
Thanks, Kevin Kevin.
Your next question.
Comes from Bill Crow with Raymond James. Please proceed with your question.
Hey, good evening guys.
Yes.
Credit Mark just on the insurance thing $40 million, a year and costs are 43 million maybe this year.
He said.
End of whatever premiums you're getting from your employees or how does that work.
Yeah.
What would the cost to Americold. If you if you went to traditional insurance.
It would be significantly greater so you know you see us most large companies you know once you get look 200 people is statistically significant once you get the portfolios, where you have thousands of employees you tend to find that it's much cheaper to self insure we do do that we do retained stop loss coverage.
But that isn't to say that that.
People don't get sick at times of certain illnesses that are very expensive to treat.
That's not elements as just people, having babies and such right. So I mean, if any medical procedure.
That one of our 13000 associates as having and we have about I think just over 7000 associates that are participating on our health care plan, you kind of budget that on a per employee or is that.
We think about deposits do give an annual would you do yeah as as I said, if you look back over time on average we've seen health care costs rising roughly about 5% a year I don't think thats too dissimilar than what you've seen in the broader you know marketplace.
I think if you could.
Yeah, we're all trying to square that the.
The bottom line results with all the great fundamentals that you guys are talking about <unk>.
Yeah, and you make sure that we understand.
The non recurring items in the quarter that.
As to EBITDA go down from Twoq to Threeq, you and where would we be I mean, I get the 3 million Bucks in healthcare and 3% changed to same store what else is in that number that we need to know about the weekend, we can use to to justify the fundamentals remain strong.
Yeah actually it overall I think the business is growing with total EBITDA as growing overall EBITDA margin. This growing I think the one area, where we were down slightly was the warehouse services in our same store portfolio.
The margins slipping as we said we reported overall growth in the same store of roughly 2.3% then ally and that after these $3 million of health care costs. So you can you can do the math and add back the 3 million. If you pro forma that 3 million back we would have seen services growth of.
5.6 in the quarter, which would have been pretty consistent with what you're seeing from prior right. So so remember again, we've got to look we gotta look on a on a full year basis still because the problem is one of the things is in addition to healthcare and not being controllable. We also have the volume that fluctuates from from quarter to quarter per month.
The month that we don't have direct control and that's that's our customers or our customers customers that are pulling that and remember keep in mind. The year to date number and then why growth was 3.4% and that's with the burden of that health care costs.
Talk a bit so without that.
We're we're smack Dab right in the middle of everything that we've guided to yes, there's still the guidance yeah and please understand our overall cost structure is not doesn't isn't steady by quarter as Fred mentioned this is the back half of the year in especially going into the fourth quarter. This is our busiest time as a year. So you will see us spending more.
On labor, there's greater activity.
Working through the warehouse.
Can offer great opportunity for us to get efficiencies.
We could we can continue this later on off this call. Thank you for your time sure. Thanks Bill.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Fred bowler for closing remarks.
Thank you and thank you everyone for joining the call and further questions that were asked.
We understand that we are two years young as a as a public company and people are still trying to get their heads around our business.
But that's why I will continue to guide to look at the annual aspect of this business.
It's a very strong underlying business continues to perform strong on a same store basis, and if you really look at it from a full year standpoint, Weve reconfirmed all of our full year guidance I think we had a similar type of situation between first quarter and second quarter.
Yes, where where I think people were expecting more to first quarter and and we kind of said give us give us the year and it will move out and sure enough. After second quarter came through it did so this is really a full year business and.
And we hope that you can see that and again, we reconfirmed guidance for the full year. So thank you for all of your support have a great leasing.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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