Q2 2021 Americold Realty Trust Earnings Call
[music].
On today's call management prepared remarks, and the answers to your questions may contain forward looking statements.
Forward looking statements address matters that are subject to risks of uncertainties. The may cause actual results to differ from those discussed today.
A number of factors could call the actual results to differ materially 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 date. There May management undertakes no obligation to update publicly any of the in light of new information of future of minutes.
During this call, we will discuss certain non-GAAP financial measures, including core EBITDA Cora flow and <unk>.
The whole definitions of these non-GAAP financial measures reconciliations to the comparable GAAP financial measures. The contained in the supplemental information package available on the company's website.
Before I hand, it over to Fred I would like to provide some brief commentary on our second quarter results of activity.
We continue to see boot manufacturers producing at less than full capacity, primarily due to the labor constraints, which ultimately reduces our physical occupancy.
Of ultimately reduced our physical inventory levels.
While COVID-19 cases were declining in the second quarter of this year. We're now seeing increases in cases in certain locations, which may continue to impact production.
The retail channel continues to run at higher levels than before Covid and the foodservice channel is showing signs of recovery power.
However, food manufacturers of finding it challenging to recruit and retain workers.
This is broadly limiting the amount of food being produced this along with steady end user consumer demand continues to weigh on our physical inventory levels.
Our commercial business processes, including our fixed commitment contracts mitigate some but not all of this impact.
While we continue to make progress we would remind you that nearly all of our recent acquisitions over the past few years did not initially have a meaningful number of fixed commitment contracts.
That said, we are actively working with our customers to bring these acquisitions onto our commercial standards. This is how we continue to enhance value for our customers and shareholders.
We fully expect food production levels to ultimately return to pre COVID-19 levels over time.
The recently 26 states announced they would no longer accept COVID-19 related supplemental federal unemployment benefits.
Many of these states are in the southeast Midwest and northwest areas of the U S, which are home to major food production plants.
While the rising case counts in some areas in the U S and around the world pose some risk we continue to believe that recent improving trends will continue in the second half of 2021.
As of now school openings remain on track for most regions of the country, bringing up many caretakers from the additional responsibility of being at home with their children during the day.
This combined with the announced end of the supplemental federal unemployment benefits from September should increase the size of the labor pool, enabling food manufacturers to improve their staffing positions and ramp up production to more normalized levels and inventory positions.
U S same store inbound volume increase from the second quarter versus the first quarter by approximately 5% and versus second quarter of 2020 by approximately 3%.
This illustrates that food manufacturers are gaining traction in ramping up production.
However, as our occupancy shows product is not being stored long enough in our facilities to increase inventory levels yet.
The conversations with our food manufacturers indicate that production volumes are expected to continue to increase.
Many of our customers are seeking to improve their inventory positions to better support their customers, who are the retailers and foodservice companies.
Not only does and consumer demand remains stable, but retailers and foodservice companies have increased expectations of service levels and fill rates to pre COVID-19 levels.
This further incentivize manufacturers to ramp up production.
We recently conducted a formal survey of our top 50 customers, which generate approximately 60% of our warehouse revenue.
Many of our manufacturing customers are currently producing at approximately 80% to 85% of pre COVID-19 levels.
While they continue to ramp up production they are not expecting to reach normalized inventory levels until mid 2022.
We remain confident in the global demand for all types of food in our diverse portfolio and we are confident that food manufacturers will return to pre COVID-19 inventory levels at the end consumer demand remains firmly intact.
Now, let me turn to our external growth activity.
We continue to execute on strategic developments and acquisitions that will help us better serve our customers and their supply chain needs on the global scale.
Today, we announced 3 development projects in Atlanta, Georgia, Dunkirk, New York, and Dublin, Ireland for a total of the investment of approximately $111 million.
On the back of strong demand for our recently completed the Atlanta development, we are launching phase 2 of our Atlanta major market expansion of our gateway facility.
This will be of highly automated expansion similar to phase 1 with the diverse mix of existing and new customers in our pipeline.
We have also started construction of a dedicated build to suit facility for a large private consumer packaged goods manufacturer in Dunkirk New York.
This is of conventional build for a top 25 customer which will be on a fixed commitment pricing structure with an initial 20 year term.
This is a great example of how we continue to work with our customers to find ways to support their production and supply chains with long term infrastructure.
Finally, we are launching of major market expansion at our Dublin, Ireland site that we acquired with aggregate at the start of the year.
This will be of conventional build on the site located 10 miles from the Dublin Port which is of critical gateway for protein exports and perishable importance.
We have a diverse mix of customers in our pipeline consisting of manufacturers of protein dairy fresh fruits and vegetables as well as retail customers.
Turning to our developments that were completed in the second quarter.
Our 3 facilities in Morgan, Northern Ireland, Auckland, New Zealand, and Atlanta, Georgia received their certificates of occupancy and are all on track the stabilized as previously disclosed.
As a reminder, <unk> was a major market expansion to support several customers and is fully sold.
Ocwen was an expansion to support the top 5 retail customer underwritten with the long term fixed commitment contracts.
And lastly, Atlanta is a fully automated site anchored by 2 top 5 customers on long term fixed commitments.
Turning to other recently completed projects.
If you recall, we disclosed in February that we are hampered by travel restrictions with our European based automation partners, who are tasked with improving the performance at our Rochelle facility.
Since may they have been on site and have made improvements to the systems working.
Services for its customers.
Almost all of the cold codes customers are new to Americold and include unique brands focused on meal kits protein bars, and drink smoothies confectionery items Baby foods and high end pet foods.
We are retaining the coal co founders to help grow this direct to consumer business with a new type of customer.
We also recently entered into a purchase agreement to acquire Newark facility management in Newark, New Jersey.
Newer consist of 1 on facility that is the dedicated retail distribution center for a leading regional grocers, serving the northeast and mid Atlantic U S.
This grocer as a top 10 customer of ours and has been with us for decades.
We currently serve this customer out of 2 other facilities in our network.
As we said earlier nearly all of our previous acquisitions did not have meaningful contractual commitments in place with their customers.
But in this case Newark has a fixed commitment structure in place with this grocer with approximately 16 years of duration remaining on the contract.
In addition, we are also acquiring 3 acres of adjacent to the site for future development.
Retail distribution is 1 of the fastest growing areas for Americold and we are very excited about expanding our relationship with this leading grocer, we expect to close this transaction in September of 2021.
Finally, we recently entered into a purchase agreement to acquire a lago cold stores in Brisbane, which is Australia's third largest and fastest growing city.
Lago consists of 1 owned facility generating approximately 78% of total NOI and 2 leased facilities.
<unk> zone facility, which is $5.4 million cubic feet is adjacent to our recently acquired agro Brisbane facility.
These facilities are strategically located less than 10 miles from the port of Brisbane.
This transaction grows our exposure with several top 100 customers and add new customers to the portfolio.
The customer mix includes protein and potato producers quick service restaurants and retail customers.
This acquisition of subject to customary closing conditions and regulatory approval and is expected to close on the fourth quarter of 2021.
With regard to our ongoing ESG efforts, we continued to be very active on this front.
In the second quarter, we partnered with Tyson foods, 1 of our largest customers and feed the children and organization Americold is sponsored for numerous years to launch an alliance to defeat hunger with intensity tour across the U S.
Throughout the tour of our 3 organizations will supplement nearly 2 million meals to help feed families in rural communities.
Additionally, we recently submitted our responses for the 2021, Graysby real estate assessment and the carbon disclosure project.
These are important milestones for us as we continue to progress in our ESG initiatives.
In summary, we continued to drive internal growth through our portfolio of diversity and scale the effectiveness of our commercial processes and the Americold operating system.
On the external growth front, we continue to execute on the mission critical development projects and strategic acquisitions as evidenced by this quarter's activity.
Barriers to entry remain high on our business it would be difficult if not impossible to replicate our strong market share and our integrated global platform, which now spans 4 continents.
I will now turn the call over to Mark.
Thank you Fred and good afternoon, everyone.
For the second quarter, we reported total company revenue of 655 million and total company NOI of $155 million, which reflects a 36% increase and a 21% increase year over year respectively.
This growth was driven by our 2020 in 2021 acquisitions and developments completed over the past year, which helped increase our NOI from our global warehouse and transportation segments.
Core EBITDA was $118 million per the second quarter of 2021, an increase of 18% year over year. This growth was driven by the total company NOI growth, which was partially offset by incremental corporate SG&A net of synergies related to our recent acquisitions.
Core EBITDA margin declined 276 basis points to 18, 1%.
This margin decline was from a combination of lower warehouse margins from recently acquired businesses additional contribution from the transportation segment due to recent M&A activity.
And lower storage revenue in our same store.
Our second quarter <unk> of 72 million or <unk> 28 per diluted share.
Turning to our global warehouse segment.
Global warehouse segment revenue was $504 million, which reflects growth of 35% year over year.
Global warehouse segment, NOI was $144 million, which reflects growth of 20%.
Global Warehouse segment NOI margin was 28, 7% for the second quarter of 360 basis point decrease compared to the same quarter of the prior year.
The revenue and NOI growth were primarily due to our acquisitions and contractual rate Escalations and a modest increase in service revenue, partially offset by a decline in our storage revenue within our same store pool.
At quarter end rent and storage revenue from fixed commitment storage contracts increased on an absolute dollar basis, the $333 million from the sequential quarter.
On a combined pro forma basis, we derived 38, 9% of rent and storage revenue from fixed commitment storage contracts, which is a 240 basis point increase from the sequential quarter, primarily driven by the conversion of the top 5 customer 2 of fixed commitment contracts, which was mentioned.
On last quarter's call.
Now I'll turn to our same store results within our global warehouse segment.
For the second quarter of 2021.
By 3.8% year over year and decreased by 4.9% on the constant currency basis.
This was due to lower economic occupancy as well as increased costs year over year, including power property taxes and property insurance.
These costs were partially offset by contractual right escalation.
The same store global rent storage NOI margin decreased 166 basis points. The 63, 7% due to the same factors.
Same store global warehouse services revenue for the second quarter increased by 4.7% year over year and increased by 1.9% on of constant currency basis.
This revenue growth was driven by business mix, including elevated retail activity contractual right escalation and a modest improvement and throughput.
Our same store global warehouse services, the NOI increased by 16.3% year over year or 11.5% on the constant currency basis.
This increase in the NOI was driven by higher revenue and partially offset by Labour expense growth net of the appreciation bonus paid last year.
A number of factors are contributing to the increase on our labor expense, including labor availability in the inflationary wage pressures similar to what our customers in the broad market are facing.
The same store warehouse services NOI margin was 9.6% for the quarter, which wasn't 81 basis point improvement over the prior year.
Please note we have provided additional disclosure around the historical performance of our current Same-store pool, and our IR supplements.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers to account for approximately 48% of our global warehouse revenue on of pro forma basis.
Our acquisition activity as both the enhanced our wallets share of our key customers, while providing further overall diversification. Additionally, our churn rate remained low at approximately 3.4% of total warehouse revenues.
Corporate SG&A total of $42 million for the second quarter of 2021 as compared to $32 million for the comparable prior year quarter.
The increase was driven by SG&A absorbed net of synergies through our recent acquisitions to support our global platform.
As a reminder, we assume $38 million in annual SG&A from Halton Aggro combined.
And expected to eliminate between 10 and 13 million over the first 2 years.
Integration is of critical component of our M&A strategy.
As of today. We are ahead of plan in terms of timing and the dollar amount of as we have taken actions to remove $14 million an annualized SG&A.
With respect to our current developments, we invested approximately 70 million on expansion on development capital during the second quarter.
Regarding our recent investment activity as Fred mentioned, we announce 3 new development starts. We also completed on our acquisitions of Bowman in May and Cold Cohen on August and we executed purchase agreements for Newark in Lago, which are expected to close in September in the fourth quarter of respectively.
All of these new transactions were or will be match funded using a combination of cash equity in our multi currency revolver.
Now turning to our balance sheet and capital markets activity.
We continue to believe maintaining a low lever flexible balance sheet provide the competitive advantage as we seek to drive internal and external growth over the long term.
During the quarter, we exercise $8.4 million of previously raised forward chairs for approximately $215 million of net proceeds to help fund our developments in acquisitions.
Additionally, during the quarter, we issued 1.5 million shares all on of forward basis at a weighted average growth price of $38.96 per share under our ATM program in order to fund growth initiatives.
At quarter end total debt outstanding was $2.9 billion.
We have a total of liquidity of approximately $1.3 billion, consisting of cash on hand revolver availability and $231 million of outstanding equity forward.
Our net debt to pro forma quarter EBITDA was approximately 4.9 times.
Now, let me discuss our outlook for 2021.
We are revising our guidance for SFO per share to the range of of $1.34 to $1.40 given the unprecedented the uncertainty and the food supply chain and challenges president in the labor market.
Additionally, we're revising our same store constant currency annual guidance for 2021.
We now expect the same store constant currency revenue growth to be between zero and 2% and the corresponding NOI growth to exceed revenue growth by zero 2 of 100 basis points.
This is reflective of the current market conditions.
Which we do not expect to persist long term.
Please note are long term guideposts around the same store have not changed.
Please refer to our supplemental for detail on additional assumptions embedded in the guidance.
Please keep in mind that our guidance does not include the impact of acquisition dispositions or capital markets activity on which has been previously announced.
Thanks, again for joining us today, and we will now open the call for your questions operator.
We will now begin the question and answer the question.
<unk>.
Did you have any question key you may price stop and 1 on your telephone keypad.
You'll hear any time acknowledging the request.
If you can you can you speak of plain. Please pick up your handset the full price in any case.
Which all of your question please price Dot N T.
We also keep your question to 1 person with 1 follow up question.
The first question today comes from the same projects with that please go ahead.
Yeah. Good evening, everyone. Fred wanted to start with you on the first quarter call. You really mentioned that you were beginning to experience the recovery already and that you were more comfortable with the bounce back in the second half of the year I guess I would just say you gave a lot of data and details, but I guess what were you seeing what's changed and I guess what is embedded in the occupancy ramp for the SEC.
Half of the year, they get your confidence with the new range.
Yeah sure. So look 1 of the things that we've said in the in the first quarter.
Were asked questions about the the wildness of our original range and we were asked.
What what drives each of the top of his of the range versus the bottom of the the range of he said the top end of the range was really a function of the the market recovering fast right.
And the lower end of the range was.
A little slower range.
Little slower recovery.
Coming out of the first quarter, we were seeing volume pickup and indeed on the second quarter. We saw volume pick up I think inbound pallets were up by 5% over the preceding quarter.
So that was given us.
Confidence that manufacturers, we're starting to get back up to speed the.
Of that with what are you seeing also with the labor issues within your portfolio. It looked like you should have had maybe a little bit better margin enhancement given the comp that you had last year. So can you give us a sense for kind of both of the occupancy in the in the cost pressures that you're expecting in the second half of the year for labor.
Yeah on the wafer I'll, let mark take the occupancy and then all of them I'll hit the the the labor issue.
Look were feeling the labor issue no different than it's been the manufacturers the.
Thing is it doesn't impact us as much in the business as it is getting the volume in the door.
So.
It's not because of our cost is going higher I think are our margin issue is really driven by a couple of things 1 with the mix.
We're doing more retail, which is great business that generates the tone of cash flow, but it has a lower margin percentage associated with it and number 2.
Is the lack of storage.
Our highest margin part of our business. So the products coming through again, that's the good news is our infrastructure is going to be used no matter what to help facilitate the movement of those goods from that point of manufacturer all the way through the supply chain to the point of consumer acquisition that is still occurring the problem is.
Not sticking to our warehouses, it's not it's not.
Sitting and building inventory back like like it was pre COVID-19.
So that's the that's the situation happening with the margin Mark I don't know, what you want to say about occupancy but yeah.
Think about occupancy growth through the balance of the year, we're entering into the phase where typically late this quarter early next quarter, we will start to see the.
Normal seasonal build as we have as Fred mentioned as we mentioned last we are seeing improvement from our clients in terms of manufacturing. We just haven't seen them really crossed that threshold, where they're able to produce significantly more than what is a very stable and steady ultimate end consumer demand. So.
We're.
That will continue to improve back.
Through the balance of the year, but I don't from on overall growth.
We're thinking somewhere it could be around 100 to possibly 200 basis points overall on economics.
Growth through the back half.
Thank you very much.
Thank you next day.
Your next question comes from Manny Korchman with Citi. Please go ahead.
Hey, good evening everyone.
Mark just to go back to your comments on serving your customers.
I assume youre out there always sort of surveying of maybe not.
As rigorously as hitting your top 50.
But I guess at the time of the last call 3 months ago, where they are.
Were they sort of thinking the same thing and then you thought things would improve or the day sort of see this coming and maybe how are they the handling it within their own businesses.
Yes look I think the spread.
We were getting indirect communication we're on.
Paul was talking with our customers, but we felt we actually put out a formal survey of formal written response campaign.
After our after our call the tried to get more formal dialogue going on.
But no the by the volume was relatively positive and the the buyers coming in the out of the first quarter was hey, Covid is starting to subside.
The restrictions are starting to mitigate we're able to speed up our production lines. That's great. So there was a lot of optimism.
Throughout the first quarter of that things were going to start to really ramp back up and then then came the federal subsidy and it just it just slammed the makeup of the law.
Labor market down. So these guys. The manufacturers are all ready to produce and are wanting to produce at the higher levels of rebuild their inventories.
In the end to be able to provide good steady steady demand flow.
But.
They can't find the labor to do it.
So that's.
That's what we transition to right so that subsidy I think kicked in late March.
So leading leading up to that people were like Hey, we're coming out of Covid things are going to start ramping back up we're going to start hiring people and get to work.
And.
It just it just didn't go as planned.
Thank you for that and then as we look into next.
The next year. It sounds you get the confidence that this is all going on just kind of make up for itself and bounce back.
Are there other sort of steps along the way the we should watch for could think of softer due the conversations changed just as goods are flowing through on sitting in your warehouses does the change does it make some customer change any of that happen sort of between now and mid 'twenty 2 when you expect things to normalize.
Yeah, no we're not expecting any change in the mix of our business I mean, if you look at our churn rate of our churn is like 3.5 per cent 3.4% I think so we're not losing customers, it's not necessarily read mixing out different than we would normally see with new customer acquisition and such.
This is purely a function of the food manufacturers being able to up their production.
1000%, so as that volume starts to come back up.
We'll fill the forward points first of its kind of what's happening right now if you listen to the.
The news in the watch what's going on with Kroger in Walmart and some of these other guys.
Sysco and US foods, what Theyre doing is theyre building up their inventory on their Dcs and replenishing it so that products flowing through our facilities getting all the way to that end node of the supply chain and filling that up first.
Once that Phil.
They'll start going up the distribution centers, which are our facilities that are feeding those those retail distribution centers and then the production advantage sites you will start to rebuild of inventory too so.
I have all of the confidence because every single 1 of our customers I mean I cannot name..1 that is said Hey, you know, what we're going to operate with lower and the inventory going forward.
It's really just a matter and I wish I had the crystal ball.
To say when Covid will end when the subsidies will end and when we will get back.
Just to get people back to work and get back up to full production.
Yes.
Based on everything I can see here today, we're guessing that that is going to slowly continue to improve over the next call. It 9 to 12 months.
Fred on that point on NIM filling their own D CS and sort of pulling product through.
And forgive me for maybe not understanding the business that well, but.
Wouldn't that just created an air pocket that essentially gets filled so they had holds in there do you see the.
Order of bunch of stuff.
Shrink store inventory now there do you see as full shouldn't that drive an inventory build in your warehouse and shouldn't it be sort of quicker than the 9 to 12 months of what part of that am I missing if they're simply pulling through product I guess faster. There's just no no no no no.
Go ahead.
So the concept what you just said is absolutely correct.
That's exactly the states that it will happen, but the food manufacturers.
Our basically.
Just above.
Being able to take care of production to fill the current demand so demand from us as consumers hasnt changed throughout this whole thing so the.
When they work.
The production if you will just a couple of months ago, They werent able to keep up with demand. So as the resolve inventories were being depleted.
So they've got to get to a point where <unk>.
Inventories are no longer being depleted.
In other words demand is being demand is being replenished up to par than those retailers and food manufacturers can start to get to get back in the inventory position. So what I'm, saying is by the time, Kroger and Wal Mart and Publix.
All of these.
Sysco and us foods when their warehouses are full.
And they've replenished that part of the supply chain they are not there yet.
That's the piece that's being refilled first then it will start to fill of the back end of the supply chain, which is primarily our nodes.
So thanks for the look I don't have a crystal ball as to whether that's going to be 9 months of 12 months. So it could be 6 months, but it's just everything has gone slower than what I think we all anticipated due to this labor market.
Yeah.
Thank you.
Thank you.
Your next question comes from Michael Carroll.
VC capital markets. Please go ahead.
Yes, thanks, not to focus on this too much but I guess Fred on your prepared remarks, you highlighted that manufacturers are back to 85% of pre COVID-19 levels. What is that up from I guess, where 1 of your their production in the beginning of this year.
And is the expectation that they get back to a 100% in the fall or is it just too early to tell because we don't know about the the labor problems and then the Delta variant.
Yes, I mean, there is obviously those those unknowns, which are more recent right there.
The new variant I guess thats going to South America right now.
I mean, no 1 can predict what's going to happen there all I can tell you I can't put our finger on exactly what the number was.
Earlier this year in terms of production capacity.
The 80% to 85% is what came directly back from our written responses to our formal survey.
So that's the only.
The point of reference that I can I can.
I can give you they didn't tell us when they would be back up to a 100% of our 110 per science necessary necessarily what they told US was that they felt that production will continue to ramp and they get back to normalized inventory levels by mid next year.
That was the feedback from our top 50 customers.
Okay, and then can you talk a little bit about how your customer agreements work I guess does the miracle would have a buffer on the contracts that are not fixed rate commitments. So if a customer doesn't hits their customer profile that you have on everybody. I mean is there a true up payment on at the end of the year I mean, if that's true is that included in your guidance or.
How should we think about that potential piece of the business.
Yeah, there are not true up payments its more of if we.
We feel that the profile is going to be the long.
Prolonged further we can change the rates.
And then it's.
From that point forward.
But what we don't want to get into of situations, where we're <unk>, our customers and increasing rates because of their profiles different now and then 6 months later, it's back to where it should be so we're.
On a weather and some of that storm, we factor all of this cost and this difference into our activity based costing so all of the new business Thats coming in as being price based on what our true cost of service.
Our general rate increases.
Net debt, we issue out there in the marketplace from the non contracted long term contracted customers.
We'll obviously take into consideration of our increased costs as well so.
That's the way, we will kind of a recovery of it won't be any kind of lump lump of recovery at.
At the end of the year.
Okay. So those customer profiles of its really helpful. When there is a specific customer issue not when there is a macro issue since everybody is being impacted right now there's no reason to change anything.
That is correct.
Okay, great. Thank you.
Thank you.
The next question comes from keeping Kim with Trust. Please.
Please go ahead.
Thanks, just wanted to go back to your earlier comments about.
Youre manufacturers, the kind of thing that 2020 to make lengthening the period you might see normally of inventory.
Does that mean miracles will see normalized occupancy or is there a delay.
Cause I would imagine you can't just get to 100 per cent food production levels, you have to overproduce to start to build inventory that makes its way into your warehouses.
So high level I'm, just trying to see if.
Theres actually a risk into 2022 per.
For your company.
Yeah remember our customers inventory is our physical occupancy we are their infrastructure. So when I talk about their inventory of that sorry, that's a direct correlation to our physical.
Occupancy.
Okay. So I guess, even if things go perfectly.
The skull. According to plan in mid 2020 until you get back to normalized inventory is still I guess creates a little bit of a.
So I guess from rest of the twinkling too right because.
First that type of wood and the year of strong in 2000 range would be normal year, but it seems like 'twenty 'twenty 2 it might be a transition year as well on Mike I'm, sorry, if I'm, putting words in your mouth, but just trying to understand that yeah no no.
That's exactly what we're saying is the manufacturers are telling us. They don't think there'll be back up to full inventory, which means we won't be back up to a full physical inventory until mid 2022.
Okay and earlier, you said that you haven't seen the similar labor issue for your portfolio.
Oh for your company I'm curious why that is because I would imagine.
You should and there could be some upward pressure to the labor cost for your portfolio of maybe it hasn't shown up yet but.
Yeah, I would imagine the next week on what happens.
The point I was trying to make is while we have labor pressure.
Not as impactful of idle facility of that has 30 people.
Need.
10% down on labor of 20% down on labor.
Youre talking about what 3 the success. So it's not as dramatic as the manufacturing plant that has hundreds of people.
And when Theyre down when they are down by 20% its far more meaningful theres lines that they can't run.
And so it's just a.
It's a magnitude of the most important thing from us is to get the throughput volume coming through our operations, even if volume short on labor.
We're more flexible at 245 sites I move labor around to where the work is.
We can work over time without without killing ourselves and without blowing out the the.
Cost side of the the budget so.
Thanks, if I can squeeze a quick third 1 and 2.
And I understand like the cadence going into August.
What is your physical occupancy today versus a year ago.
So keeping our physical occupancy in our same store is down 700 basis points from where we were in the prior year.
At this point so that's the bellwether of what we're talking about this is the phenomenon of the price has been describing with an environment with stable and consumer demand.
The limited production there is eating into our inventory, which is the buffer stock.
As Fred mentioned in his prepared remarks the.
The inbounds, we are seeing growth in the inbound of product, which we're encouraged by the looking both sequentially and year over year. The fact that we are seeing more inbound product shows that our manufacturing clients are improving production. It just hasn't it hasn't crossed that margin to where theyre starting to meaningfully build.
Tori.
So that's why you see our inventory has been getting drawn down through this process. However, I would point out and I think of we mentioned this on our last call. If you look on the broad market data the USDA data, especially.
Key products you have significant product when you look through the April may June timeframe that are running somewhere at.
70% to 80% of where they were this time of prior year. So I think our portfolio of relatively speaking relative to the broad market is holding up well. It's just that there are still challenges president of the market until we got the slaver back and get manufacturing fully ramped up.
Okay, just to clarify that comment.
You said your inventory growth pick up on occupancy was down 700, but in the June 30 of the your physical occupancy was down 531 basis points of them I.
Am I looking at the apples to apples.
Yes, correct. So I was looking at the absolute dollar on the absolute number of physical pallets was down 700 basis points.
There are some changes we work with customers the highest we have to reconfigure the facilities to support new business changing business. So.
As of quoting the alright. Thank you.
Okay.
Thank you.
The next question comes from the Bill Crow with Raymond James. Please go ahead.
Hey, good evening thanks.
So Fred you said that the producers are producing at levels of.
The demand.
So we arent seeing shortages.
Tumors.
So why is it that they need to have all of this additional inventory sitting around.
On your facilities.
The all businesses are being rethought and rebuilt.
And the changes are being made in Japan and <unk>.
Engineer at Smithfield Foods, why am I, not suggesting the reduce that inventory level to more of a just in time sort of flow.
This is a permanent change.
No I really don't think that it is.
And certainly.
My colleagues out there in manufacturing and retail wood wood.
All of that.
Yeah, there's a couple of things here the number 1 walking any single grocery store and Theres lots of [laughter] empty empty space right. So.
So what's happening right now is there is substitution going on right. If you don't find something that you are looking forward to moving on to the next item, but most of US 1 of our selection. So what a lot of the manufacturers of done is they may take a manufacturer and they produce 50 different items.
Today.
What theyre doing is theyre, just theyre, producing 30 items and they're not producing the other 20 items and they're just trying to get the main items out there on the floor and kind of the secondary and tertiary items or are the ones that are being left behind due to the shortage of production. So.
They want to get their full assortments out there that's how they drive their margin long term because remember volume from like these retailers will start to slow now as as the the.
The restaurants open right and so we saw some momentum with restaurants opening and such but.
Both of those retailers need the mix out with all of those various skus to help drive their margins and their performance within their business and think of the food manufacturers. Some of the slower moving items are the higher margin items.
So there is the desire to get back to that level and then you know as <unk>.
As the country and really is a world of grocery is highly promotional.
And that's where you need safety stocks as as as different campaigns are running in promotions or running the draws on certain skus faster than the other skus.
Manufacturers have plant shutdowns, they need to have a buffer of inventory to be able to clean the airlines and to be able to go through their ordinary maintenance.
This is this is all reasons why you have safety stock in the supply chain and the weather storms.
Hurricanes in the weather weather conditions that.
That Craig supply chain James.
That's why you need safety stock.
If we did not have that safety stock now nobody expected the type of 100 year plus income again anytime soon hopefully for another 100 years.
And but if we didn't have that safety stock going into this.
Boy, we'd be in a much much tougher situation.
Where we wouldnt, we wouldnt have the supply.
So that's kind of the basics high level as to as to why we believe inventory will get back to normal.
Alright, and speaking of a 100 year flood is it possible the next quarter.
Talking about the drought in the west and how that's impacted the harvest volumes or <unk>.
The processing or anything like that or is that not an issue.
Yeah.
We haven't seen as much of that yet.
<unk>.
Anything is possible, but I mean, I think in that part of the west where the drought is happening there isn't a ton of of AG that were that were supporting.
So I don't expect so we're not we're not hearing anything from our team there.
Around the concerns about.
Profit levels.
Okay alright. Thanks.
Thank you.
Once again in the interest of time, we ask participants to limit themselves to 1 question.
Your next question comes from Mike Mueller of Jpmorgan. Please go ahead.
Yeah, Hi, Mark on your comments about picking up hundreds of 200 basis points of economic occupancy in the second half how.
How much of that would you chalk up to just normal seasonality versus the building back on top of that.
Yes look I think Mike during that period, we expect to see of normal seasonal lift but in order to get that normal seasonal lift you need the the.
Over the over production to be there. So it's a little hard to distinguish between the 2 at this point, but I think collectively what our outlook tells us we expect to see roughly about the on work between that 100.200 point lift as we go through the back end of the year.
Yeah.
Got it okay. Thank you.
Yeah.
Thank you.
The next question comes from Joshua <unk> with Bank of America. Please go ahead.
Yeah, Hey, guys.
I guess I'm just kind of curious what are your assumptions as far as the labor coming back to the producers like is it truly like a September everyone's back or a slow ramp just trying to figure out where high and low end guidance kind of shakes out and what we should be watching as far as the flavor.
Yeah, we think it's going to be again slow and steady based on what the manufacturers are telling us a couple of key data points to keep an eye on is number 1.
At the beginning of September the supplements and.
At least.
We believe that it is going to end I mean understood.
It's hard to tell I mean, right the rent recovery.
The thing just got extended even though it ended too.
So we'll have to see what.
What occurs come September but as of right now of that program in the September 6 so that's the that's the key data point to keep an eye on and then number 2 back to school. So right now we're anticipating that everybody is going back to school that frees up those those family members that are otherwise having the stay at home the.
Take care of their kids.
So that frees them up to be able to get back to work as well so as long as we don't go into.
A complete shutdown in the schools close and we go back to a 100% virtual learning.
That will free up some labor as well. So I think those are 2 data points that we got to keep an eye on in both of those happened right at the beginning of September. So we should have a good feel there.
Alright, and maybe the rephrase it why why would happy to hear from production.
Production stays flat like where where does that leave you in guidance.
Look I think if production stays challenge that gets us to the lower end of our guidance just as we said when we announced guidance at the beginning of the year. We mentioned there is a lot of uncertainty around the ramp in labor coming back on what we'd see.
Our guidance was wider in the beginning of the year with the upper end being a faster recovery on the lower end being of sustained challenge recovery.
Just on what we've seen.
As Fred mentioned in on.
On the Q&A in the prepared remarks, we are seeing improvement, but we still put it in the more challenged aspect on the slower slower recovery path. Yeah, I'll tell you what's not built in obviously.
As if if production volume decreases.
So that's the whole new animal if we stop to see if we stop seeing the the improvement on the growth that we're seeing right now and then reverted back the other way and plant had the start shutting down.
That's the whole different that's the whole different ball game.
But we're not projecting that and anticipating that.
Okay.
Covid kind of flares up and things flow it could be.
You could end up below guidance basically.
Right Yeah.
Again, I'm, just kind of hanging on on production volume so if production inbound.
Loews, regardless of what the causes.
But that will that will push us lower debt.
Just remind everyone we're in the.
The second year of of managing through Covid all of our clients on our infrastructure is all of the central infrastructure. So even in the word of our veg youre going to figure out ways to keep people working and trying to be as productive as possible. So we're talking about feeding the nations, where we have infrastructure.
Yeah.
Thank you.
Your next question comes from Nate Crossett with Byrne of Bank.
Please go ahead.
Hey, good evening, Thanks for fitting me in.
If we could just switch gears and maybe talk about the new Newark facility in milazzo of cold.
Were those competitive lead the transaction.
It looks like the cap rate, it's kind of on the low way that we've seen in Ohio.
But you can just speak to kind of yield more generally.
Yields on coming down.
The impact on effect in terms of development yields.
Okay.
So on the acquisitions themselves.
Yes, there is the lower a lower number I mean look we can talk about cap rates continuing to compress of this industry, there's no doubt.
There's been a lot of activity in every time there is activity there is.
There's kind of a tightening of those those cap rates for sure.
The Newark, 1 in particular.
We did have exclusivity on bass and going through the negotiations I think the difference in this facility versus.
Some of the other acquisitions. We've done is this is a full dedicated retail operation.
So it's a little bit different is it drives a tremendous amount of cash flow.
Through the box and it has a very very long contract associated with it.
We have 16 years remaining on the on an agreement there so very very rare.
Of our customers don't have.
Don't have I mean, most of our competitors and the companies that we've looked at don't have commercial arrangements.
Don't have contracts certainly not of.
Of the length of term of this 1 so this 1 to have a little bit more value that and the fact that of sitting in Newark, New Jersey.
Very very expensive area overall, so I think thats why youre seeing that that 1 in particular being a little bit tighter from a from a cap rate standpoint on the development side.
We still continue to develop at the at the same yields that we always have.
And we expect to continue that.
Yes.
Okay. Thank you. Thank the Q1 quick follow up just on.
On the producers again is there anything that you can use going forward, so you're not as exposed to these kind of the ebbs and flows of what.
The producers are doing is it can you do more fixed contract or yes.
We're on it.
The total need whether it's the 'twenty 2 of 23 is there anything that you can do so it doesn't necessarily happen like this again.
Yeah, I mean look on.
Obviously, continuing to drive fixed shields us.
On what not not not.
Non wholly.
But certainly helps I would.
0.2 of the fact that we continue to make progress even through <unk>.
15 months of Covid, we continue quarter over quarter to increase our fixed commitments. So from a dollar standpoint.
The increased our fixed commitment quarter over quarter.
As the percent, it's lower but that's really just merely a function of all of the acquisitions that we're doing that don't have folks commitment southern.
Kind of on boarding of downloads denominator, if you will so.
We continue to make progress on that and I believe that we will continue as we go forward and I think the key here Nate is that this is this is about the long game. This is this is infrastructure.
I don't I don't think we want to turn her on the commercial process upside down on the task because of what's going on because all of us in this industry retail manufacturer and providers such as us.
No that the inventory is going to get back to normal they're going to need the space. We have no customers that are pushing us and yelling at us because they are paying for fixed commitments and they don't have inventory on there because they know theyre going to need it and if they release it somebody else is going to grab it and then when they get back up the full production they are not going to have.
Anywhere to put it.
So that's kind of the dynamics going on so we're trying to weather the storm and of its hard to predict when the storm is going to be over but we continue to see positive signs in terms of the volume and hope that that continues.
Yeah.
Okay. Thank you.
Thank you Keith.
Your next question comes from Craig Mailman with Keybanc capital markets. Please go ahead.
Hey, guys I know, we touched on kind of of the rebound in the inventories a lot on this call, but I guess, just coming out from a different way, especially on the labor side of things with the.
The upward pressure for all of the producers I mean, what is that due to your ability on the rate side of things once in.
Inventories do you start to normalize hopefully in 'twenty 2 I'm just kind of does it limit your ability to move to the right side of the equation at all.
No no.
We have of activity based costing model. So 1 of the inputs, obviously into our model as labor costs and wage growth and if that's higher than we would expect to see over time.
Our rates to reflect that in the escalation that we're seeing the reflect that so.
That's how we factored in.
Yeah.
Great. Thanks.
Thank you.
We have reached the end of that question and answer session I'd like to turn it back just Red zone human.
Great. Thank you everyone.
In closing I'd, just like to say that while the global food supply chain continues to face unprecedented challenges we remain focused on delivering all 3 of our key drivers of long term value creation. The same store pool mission critical developments and strategic M&A.
At the same time, we are dedicated to maintaining a low levered flexible balance sheet.
We would like to welcome the new work coal co in Lago associates to the Americold family and we again want to thank all of our associates, especially our frontline team members for all of their hard work and dedication. Thank you all for joining us today.
That does conclude our conference for today. Thank you for participating you may now disconnect your lines.
Yeah.
[music].
Okay.
Yeah.
Yeah.
[music].
Yeah.
[music].
Okay.
[music].
Hmm.
[music].