Q2 2021 AppHarvest Inc Earnings Call

Congrats on the App harvest second quarter 2021 earnings call I'm kind of day back TRA VP Investor Relations for App harvest and joining me in Kentucky today are several members of the senior management team, including Jonathan Webb founder and CEO, David Lee Board member and President and Loren Angleton Chief financial.

<unk> officer, a copy of our earnings release and slide presentation is available on our website at investors Dot App harvest Dot com on today's call. We will begin with prepared remarks from Jonathan and the rest of the team then we will open the call for questions.

Before we start I'd like to remind you that comments today regarding the company's future business plans prospects and financial performance are forward looking statements that we make pursuant to the safe Harbor provisions of the Securities laws. These statements are made based on management's current knowledge and assumptions about future events and they involve risks and uncertainties that could cause actual results to differ materially from our expectations in providing projections and other for.

Looking statements the company disclaims any intent or obligation to update them for additional information on important factors that could affect these expectations. Please see our most recent SEC filings and with that I'd like to turn the call over to Jonathan.

When I got on my first public all three months ago, I talked about how COVID-19 started to expose the cracks in our feed system when feedstock crossing borders and grocery stores had food shortages.

Today, we see droughts to continue to devastate, Mexico, California, and other traditional agricultural regions floods that have decimated agricultural harvest around the world and impacted society at large and still despite surging interest from investors and policymakers and sustainable agricultural solutions no part of.

The United States today can be considered self sufficient in terms of having access to a safe and domestic food supply at scale.

<unk>, we face today are the result of a path, we decided to walk down long ago, the industrialization of agriculture, and relentless pursuit of low cost production combined with a policy of cheap energy made it possible to move food across great distances to sell for low prices and much of it at very low quality with a <unk>.

Great deal of production outsourced to other countries.

At the same time places that had little to no local resources to produce food have burst forth as America's fastest growing cities, placing additional strain and risk on our existing food supply chains. The good news is folks are starting to pay attention to the environmental and societal costs associated with the massive.

<unk> of the imported fruits and vegetables.

The status quo has negatively impacted the freshness quality and security of our nation's food supply for far too long.

Our overdue for an overall the reality is climate change is going to continue to affect the growing conditions for outdoor agriculture from severe temperatures to the amount of water available for crops and some parts of the western U S over 70% other water supply today is used for agriculture in California last week announced.

New restrictions on its usage.

Lake need, which supplies parts of Arizona, Southern California, Nevada, and Mexico as a water level at its lowest since it was built in $19.35.

In central Appalachia, or fortunate because climate changes, making our region wetter in fact, the past decade has seen the most rainfall in Kentucky history with three of those years being the wettest on record.

For those of you new to the App harvest story for joining US today on our second conference call as a public company for applied technology company for the solution to disrupt agriculture and solve for some of our most pressing food and social challenges.

We are building and upgrading to resilient new food system for a world that we believe needs controlled environment agriculture now more than ever.

Our approach incorporates the highest ESG principles as we are about $1 five publicly traded benefit corporations, who will also a B Corp certified company.

We leverage the best nature has to offer like the priest sunlight and rainwater we capture from our large glass roofs, and boosted with tech just where needed.

That's what we're doing for them the heart of Appalachia, where we can reach about 70% of the U S population in a day's drive.

Our technology and approach can enable us to get up to 30 times the yield per acre than that of traditional agriculture in a way that uses up to 90% less water and without runoff soil erosion or harsh chemical pesticides.

Improving the freshness and quality of our produce and backing it up with our best in class CA systems technology and strong brand.

Now, let me turn to our second quarter performance.

While true that prices for <unk> stake Tomatoes hit a 10 year low in May our realized price was also impacted by quality.

Our percent of store shelf ready produce what we call number ones came in lower than we expected while disappointing we launched a set of actions to improve our performance immediately and we're using these key lessons for our operators going forward with the App harvest, two <unk> initiative, which David will discuss in greater.

Tail, despite some growing pains in the second quarter, we delivered net sales of $3.1 million an increase of nearly 40% from our first quarter as a public company $8.6 million pounds of Tomatoes sold which more than doubled production from the first quarter Groundbreakings on two new farms in Kentucky to grow.

Berries, and leafy Greens, which in addition to our Richmond and Bria sites currently under construction means we expect to have five farms fully operational by the end of next year.

New sources of non dilutive financing, including $91 million from equilibrium capital in July and $75 million from Robow Agro finance earlier in June, which along with cash on hand leaves us with ample room to fund the five farms I just mentioned and finally, we're announcing our plan today to <unk>.

Transition to a more decentralized setup to facilitate our growth within the global <unk> industry.

David and Ron will provide more detail on our outlook and the planned changes to our organizational structure, but.

So let me just say now that in addition to ramping up our initial farm in Moorhead to full production capacity. Our team has been busy laying the groundwork for our long term growth by executing our strategy.

Having a path to grow our presence within CA more broadly.

Can we expect for long term benefits of this move to significantly outweigh the near term investment costs.

Our long term goal is to build app harvest into one of the most trusted sustainable food companies in the world.

And then to a leading applied technology company, serving the global <unk> industry.

With five farms fully operational by the end of next year, we expect the benefit of the actions we are taking to capture long term value to become more visible.

We've already announced our plan to introduce new crop types, including berries, and leafy Greens and we're now preparing to launch into value added products.

With that I'll ask our President and Board member David Lee to explain how we are executing on our plan the app harvest to <unk> initiatives David.

Thanks, Jonathan.

In the second quarter, we all saw many extreme weather events related to climate change and other factors.

These events point to demand for climate resistant food systems that is greater than we all initially expected in developing faster than anticipated.

Harsh droughts and new water restrictions in the Western U S and new ESG and CEO specific investment vehicles are driving increased demand for it sustainably grown U S produce.

We believe that our platform our model and our brand position allows us to be a leading global applied tech companies, serving CA and we're accelerating our investment into our company and our growing industry with the App harvest to point out initiatives.

Before I get into our long term path forward. However, I wanted to do a deep dive on the quarter I will cover the following topics in my section for.

I'll give you an operational update on Q2.

Next I will describe the planned transition at up harvest to a holding company structure that enables us to grow more broadly within the CBA industry as part of our App harvest to Plano initiative.

After that I'll briefly touch on the restructuring and other actions we are taking today to establish that foundation for long term growth.

And finally, I will share the updated 2021 and long term outlook associated with our actions, which our CFO Laura in Angleton will review in greater detail.

I'll begin first with our operations.

In the second quarter, we successfully ramped up to the full 60 acres for production at our first high Tech farm in Morehead, Kentucky is for.

First <unk> facility in the country to rely solely on local labor and our eight 6 million pounds of tomato sold in the quarter is a significant increase from the Q1 total of $3.8 million.

We achieved several significant milestones in our first facility, but as Jonathan mentioned lower quality than we anticipated due to labor training and productivity challenges with the primary driver of our Q2 results along with low market prices for Tomatoes.

We're disappointed with these results, but the good news is that prevailing market prices for tomatoes have already rebounded from the lows we experienced in the second quarter.

Additionally, the speed bumps associated with our initial harvests are fixable and we've already deployed solutions against these problems in advance of our next targets.

For example.

We overhauled our pack house to minimize bottlenecks, while increasing quality checks, which helps us deliver our targeted volume of USDA, great number one tomatoes.

We're also implementing changes to our piece rate or bonus system to drive improvements in our operational productivity and ability to meet surges in demand for plant care.

And lastly, we changed operational leadership and the chain of command structure within Morehead and all our future farmers going forward.

As of late July I am now directly accountable for the performance inside our high Tech farms.

Some of you on this call May Associate me with my more recent role as the CFO and CFO of impossible foods, but as a reminder, earlier in my career I led the fruit and vegetable business at del Monte Foods and spent nearly nine years at the company.

Now what it takes to deliver high quality products to consumers and are making rapid progress in building. The team that's going to help us do that here at harvest.

For example, last month, we announced the hiring of Mark Kelly from Amazon, who joins us as SVP of our software applications platform.

And last week, we announced the hiring of Julie Nelson with a background at Pepsico and Mckinsey, who joins us as our new EVP of operations.

Mark the SVP of software applications played a key role in launching Amazon's large scale warehouses deploying kiva robotics technology Hill, the integral to our effort to build out a new digital operating model for farming that we expect will make fresh fruit and vegetable production as reliable as consumer.

Goods manufacturing.

Additionally, in his short time with that privacy is already act as a magnet for high performing rare tech talent and we've been able to add two more members to his team in short order to help accelerate delivery of our product.

Julie has designed the manufacturing and distribution network for several high growth brands and has the right multi site operations experience from her time at Pepsico to implement the best in class operating processes, we need to drive improvements for both the top and bottom line as we scale.

She will also lead our project new leaf to deliver $40 million in annualized efficiencies and reductions in cost of goods sold and SG&A versus the current rate of expense. This will all be accomplished by the end of 2022, which we will use to generate more self funding.

For higher levels of investment in technology.

Earlier in the second quarter. We also had hired Anna Maria a formal naval aviator and operations officer to be our vice president of supply chain and procurement.

Adam brings significant experience from Apple and other Ceos startups.

He will report to Julian ensure implementation of best practices learned in the first season and deploy them as standard operating procedures at Morehead and across new facilities as they come online.

Based on actions, we took to improve our performance we began to see immediate improvement in our results as we approach the start of our summer refresh.

As a reminder, the summer refresh is an annual activity and our volume crop facilities, where we tear out <unk> com post the use of crop and sanitize and preparing for facility for replanting, which we expect will result in Q3, typically being our lowest quarter for tomato production seasonally.

While we had to learn some lessons the hard way in the second quarter. The amount of inbound demand. We continue to see from customers for our sustainably grown produce leaves us more bullish on the long term opportunity than before.

Furthermore, we believe that the issues we experienced in our ramp up are not unique to app harvest for.

There are challenges that impact practically all greenhouse and other <unk> operators, which puts us in a solid position to provide industry wide solutions that we intend to scale.

That's why we are announcing a strategic decision to evolve our business to the App harvest to Plano model one that over time, we expect to result in App harvests, taking the form of a holding company or a portfolio of well positioned high growth <unk> businesses.

This will allow us to accelerate our growth within CA more broadly to create more value for our shareholders and to ensure that our most attractive growth opportunities are capitalized.

And to accomplish this we need to structure ourselves differently.

For example, within our business to date, we see the potential for several businesses.

First in Appalachia co that includes our planned network of Hi Tech at scale indoor farms focus on the production and sale of fresh produce to our distribution partner mastronardi.

This business also leverages, the App harvest brand and sustainability story to expand into value added products.

We've already begun testing of salsa and bloody Mary products. This year and plan to launch three products by the end of next year. In addition to dedicating a skunk works space and Moorehead for trial varieties to use and value added products.

Second.

Tutko that Leverages best in class CA solutions to first optimize our network of farms and then turned its focus to large global opportunities for turnkey solutions with an emphasis on countries that lack the geography climate.

Resources or labor needed to enhance food security.

And finally <unk>.

Which is an entity we plan to establish to capture growth with other CDA facilities globally, including in the United States outside of Appalachia.

With growth, we're recognizing and plan to capitalize on the opportunity to expand growing operations beyond Appalachia.

Today, our most promising opportunity within the proposed <unk> entity is the non binding letter of intent, we signed yesterday to established a joint venture with our industry, leading distribution partner mastronardi produce.

The proposed joint venture, which we refer to as farm co.

Would represent a big step forward in our partnership which started in 2017.

The proposed farm co plan calls for us to contribute one of our farms along with $10 million.

For the majority control of a joint venture and the ability to consolidate its revenue into our parent company.

<unk> will contribute its own CDA facility, which currently is already operating and growth in sales produced today.

This would allow us to gain access to a new fundraising vehicle.

<unk> will use the contributed assets to raise additional capital to finance its own growth.

And we plan for the formation of this joint venture to be contingent on securing debt financing, which we are confident we can secure.

If the plan proceeds per the terms of the letter of intent. We believe we will form armco by the end of Q1 in 2022.

We believe that over time opportunities like farm co and others within our proposed grill coast structure has the potential to become as large a financial opportunity as all of Appalachia co is not bigger given the growth we expect in global CEO over time.

There are other benefits to app harvest shareholders, such as for potential for independent capital raises that occur off our balance sheet.

There is also majority ownership and control of the entity itself with financials into a part of it but with its own leadership team, which increases the bandwidth of the management team of our parent company.

To sum up we see the potential to unlock a significant amount of trapped equity value by transitioning to a new holding company structure.

We anticipate providing detailed information on the next quarterly call. However, it one driver of the value we expect to deliver in one we've already completed today is to move for it with a smaller more nimble corporate center.

As part of this initiative in the past several weeks, we notified employees other restructuring action that eliminated a C level position reduced head count and streamline the structure of our corporate office.

While difficult. These actions are a step forward to accelerating our growth within CA through our planned subsidiary companies.

Our restructuring has the intended effect of reducing our cost structure, but it also represents a shift of resources toward our best opportunities in operations and tech.

We believe these businesses will benefit from a deeper level of investment and focus when they're supported by a smaller corporate office.

The new structure will position, our proposed Appalachia co Petco and Grill co leaders, who we expect NIM over the course of the next few months.

Closer to their customers and in the best position to drive innovation and growth with MCA.

Furthermore, we believe that a more decentralized approach at corporate is key to unlocking it.

Relative Jonathan myself and the rest of the management team will be to facilitate that growth that make sure businesses are adequately capitalized and that they perform to expectations.

We'll have more to share on the team that will help unleash growth within CA, but we can share today that Jonathan web will continue as chairman and CEO of the App harvest holding company and as leader of the Appalachia Coast subsidiary, we are organizing let.

Let me now turn to our 2021 guidance and long term outlook, which reflects updates from our first full quarter production and our plan to pursue faster growth in CA through a decentralized structure.

It also represents what we believe to be a significant reduction in risk regarding our outlook as we have incorporated more conservative assumptions regarding our core Appalachia co business, while leveraging a distinct management team to pursue upside from technology for.

For 2021, we've adjusted our full year net sales outlook to $7 million to $9 million from 20% to $25 million to reflect our revised expectations on price yield and distribution costs that we expect to achieve in our first year of operations.

Most of the revision is driven by the quality challenges, we experienced in ramping up I discussed earlier, however, lower than expected market pricing for Tomatoes, and our strategic decision to reserve production space at Moorhead to develop commercial technology for the industry at large have also impacted the numbers.

The adjusted EBITDA outlook in 2021 associated with our operational performance to date and strategic investments is now expected to be -70% to $75 million for minus $48 million to $52 million prior.

While disappointing our near term adjusted EBITDA outlook has never been reflective of the long term value, we expect to create Furthermore, our long term backers and the board of directors have already expressed support of our strategic pursuit of the commercial and shareholder return opportunity associated with becoming a lead.

<unk> solutions provider, serving the growing industry and we intend to deliver on that goal.

Turning now to our long term outlook.

We expect to achieve $350 million to $400 million and net sales by year end 2025, which is in line with our prior long term net sales outlook driven by new benefits from telco and value added products business as we've discussed in.

In terms of the outlook.

We are providing guidance based on a more conservative delivery of nine high Tech indoor farms in Appalachia by the end of 2025.

We are still on track with the full 12 by 'twenty five planned for our Appalachian Farm network that we previously discussed and our long range plan continues to call for 12.

But for the purposes of issuing financial guidance, we are limiting our operational focus to nine in order to accelerate delivery of our targeted results and reduced operational and financial risk.

Additionally, we have a high degree of confidence in our ability to deliver a portfolio of nine high tech farms in central Appalachia by the end of 2025, given that we already have for currently under construction today and have demonstrated the ability to secure additional non dilutive funding for that development.

Accordingly, we expect consolidated adjusted EBITDA to be in the range from positive $115 million to $130 million at year end 2025.

This includes the benefit of items not contemplated in our initial forecast, including the expected benefit from selling our technology and our license fashion to other global operators and the potential benefit from launching value added products made from our fresh produce.

It does not include any benefit from the proposed railcar vehicle I discussed earlier.

Importantly, this outlook also reflects moderated expectations regarding our fresh produce business.

The end result is that we arrive at roughly the same long term outlet, but with a more conservative risk profile and with increased management focus on near term results from the core Appalachia co business.

Over the long term however, our applied technology for CBA remains the best path to scale.

The organizational changes, we've made and the personnel and resources, we are aligning around our technology team will enable us to accelerate the launch of our technical products.

We believe that we are already in a period, where global demand for CA is strong enough, even inexperienced operators and pools of capital that one assets, but don't have knowledge to operate a high tech greenhouse.

We'll seek to own food utility.

Solution oriented customers are already in the marketplace today looking to buy pre packaged offerings that are guaranteed to work in harsh climates.

But today's turnkey projects are not actually turnkey in practice we.

We intend to provide a seamless solution that enables new companies and countries to enter the space from ground zero.

<unk> has secured its first customer Red sea farms in connection with a paid pilot at a farm ops technology that <unk> is developing for etsy funds.

Red Sea farmers as a <unk> company based in the Middle East and was chosen as the first customer for a paid pilot to prove the effectiveness of our systems and one of the world's most challenging growing environments. The Arabian peninsula.

As detailed in our earnings release, we also made a strategic investment in <unk> farms to seize an opportunity to gain experience and establish a footprint in this region, which has been heavily reliant on food imports we.

We estimate the addressable market opportunity associated with this line of business in <unk> would be large over $30 billion in the United States alone over $300 billion globally based on estimates from the United Nations.

Revenue associated with this opportunity, we expect to ramp slowly as capital is beginning to flow into the sector and climate change drives production of more crops and doors before delivering a range of revenue that we expect to be $40 million to $50 million by the end of 2025.

In addition to updating our long term outlook with the benefit from our new strategic initiatives and emphasis on applied Tech. We've also moderated expectations regarding key inputs to our original forecast.

This includes a lower expectation of future price inflation, given what we saw play out in the tomato market this year.

And unexpected increase in the distribution fee to be more aligned with realized results.

We believe this creates a more robust long term outlook, which Lauren will review in greater detail.

Alright. Thanks.

Thanks, David I'll start by reviewing our second quarter results in greater detail.

An update on our development timeline and financing before moving to the outlook.

We achieved second quarter net sales of $3.1 million as compared to no sales in the second quarter of 2020 before our Moorhead farm was operation.

In terms of yield we generated $8.6 million pounds of Tomatoes for sale, which met our expectations for production, but not on quality.

Adjusted EBITDA loss was $22.6 million.

Primarily due to the operational headwinds and ramp up we previously discussed the strength of speed bumps and ramping up with our initial harvest. We remain confident we are on the right path and our business model will continue to develop and to an industry standard for CE. We believe this because our performance in the quarter was principally due to lower quality driven by solvable issues related to <unk>.

Labor productivity training as well as lower market prices for Tomatoes, and higher distribution and shipping fees and not any fundamental fall with our business model or approach.

There has been no decline in demand from our exclusive distributor for the end consumer for our products on a contrary demand for our product continues to be strong. Despite the performance shortfall and our partner Messenger RNA has requested for us to produce a new variety of tomato for them. In addition to the <unk> stake varieties, we delivered to them during our initial harp.

Third the corrective actions, we have already implemented have begun to drive quality yield and productivity higher as we approach the start of our summer refresh in late July and will be well established and time for subsequent harvests and finally, our approach continues to offer several key advantages, even when compared to other novel economic.

Solutions to CBA.

Especially from the freezing rain water and sunlight recapture via our large glass roofs. For example, we recently completed a period of more head, where we harvested but didn't turn on lights for weeks line instead on our Sunshine from longer summer days to drive photosynthesis and our tomato plants.

This synergy benefit along with the rain water that we store in our large reservoir next to our farm.

Real advantages to our model, but we expect it will show up in our income statement over time.

Along with the price premium that we expect to earn by continuing to develop a strong brand.

Let me turn next to our progress on farm development and financing.

Work continues on the for our previously announced CEO facilities currently under construction.

We remain on track with our plan to deliver total Hy Tech indoor farms by the end of 2020 as David mentioned, we're now counting on nine and our external guidance.

Ill Berea, Kentucky, leafy Green facility, approximately 37% complete and our Richmond, Kentucky Tomato farm is approximately 31% complete.

Both facilities are scheduled for completion by mid 2022.

Two additional facilities that we announced that we broke ground on in June are in Somerset, Kentucky, and Morehead, Kentucky.

The Somerset facility is expected to grow berries, and the mooring facility, which is adjacent to our first facility is expected to grow leafy Greens.

We expect these facilities to be operational by the end of 2022.

We ended the second quarter with cash and cash equivalents of $273.1 million on the balance sheet, which we believe leaves us ample room to execute on our near term development timeline.

On June 16th we announced that we secured a $75 million non dilutive credit facility from Raimo Agro finance tied to a 60% loan to value mortgage on our initial Morehead farm and on July 27, we announced the $91 million financing approximately 66% loan to value in the form of a construction loan from a sustainability folks.

And leading <unk> investor equilibrium capital.

Has supported us since early in our history.

The borrowings under the $75 million credit facility with Bravo carries an interest rate of four 1%.

For the $91 million construction loan with equilibrium as an interest rate of approximately 8%.

We continue to be encouraged by our progress in financing and pleased with our ability to secure additional forms of non dilutive capital to fund our growth.

We believe that overtime more fixed income investors and other types of capital will step in to support investment in controlled environment Agriculture systems.

We believe that CAE will eventually come to be regarded as critical infrastructure akin to other large scale industrial projects.

Similar to what we have seen play out in the renewable and clean energy space over the past decade.

These and other large scale infrastructure would be cost prohibitive and impact on our finance using equity alone.

Which is why we believe it's important to drive progress in this area are dependent on our shareholders and our industry.

Turning now to our full year 2021 outlook.

As David mentioned, we are reducing our net sales expectation to a range from $7 million to $9 million and our adjusted EBITDA loss expectation to a range from $70 million to $75 million.

The primary driver of the updated outlook is the lower net sales expectation due to the quality challenges we encountered in ramping up our first facility.

And higher than expected cost of goods sold with labor farm costs associated with lower than expected labor productivity.

In terms of capital expenditures in 2021, we now expect to spend approximately $185 million to $205 million.

Up from 145 to 155 million prior.

This is to account for the two additional construction projects currently underway and some are set and more head north.

As Jonathan that David has said we are more encouraged than before about the long term growth opportunity for our company and our industry worsening climate change and drought and traditional agricultural regions fast tracking the need for food.

Food security is likely to continue to be a major issue in the coming decades.

Especially for historically, Eric regions and countries that encountered issues in securing food for their people in a scenario where the borders are closed like we saw during COVID-19.

With respect to our long term outlook that we reiterated today, we do not ascribe any benefit to our company for the overall industry growth that we expect.

Based on our strategic initiatives, David outlined earlier as part of our App harvests two <unk> initiative.

We now expect to deliver full year 2025 net sales of <unk>.

$350 million to $400 million.

And adjusted EBITDA of $115 million to $130 million by the end of 2025.

This is in line with a $387 million in net sales and $122 million and adjusted EBITDA from our initial projection at our December 2020 analyst day, and it's driven by three key factors.

One financial benefit from launching sales of licensed technology to other global operators from within and Petco, which we expect to provide approximately 40% to $50 million of incremental net sales in 2025.

Two the financial benefit for launching value added products within Appalachia, co, which we expect to provide approximately 15% to $25 million.

Incremental net sales benefit in 2025.

And three for $80 million in net sales impact we expect from the combined effect of having three less farms in the outlook.

Along with more modest expectations in our fresh produce business regarding future price inflation, and our sales and distribution fees we.

We expect for 2025 net sales headwind from these two items will be split roughly 50, 50 or about $40 million each.

Although our long term outlook is largely unchanged on a net basis, we expect them for targeted investments in technology brand and product that we are making will far exceed their upfront investment costs, even when incorporating our latest view of operational performance.

With that I'll turn it back over to our VP of Investor Relations.

Gary.

Thank you Lauren.

As an investor or analyst, reflecting on our second quarter of 2021, you may feel that there is a lot to unpack here today and Thats because there is for.

We're driving operational improvements in our model as we prepare to scale up rapidly we're laying the foundation in place to build on our vision and execute on our plan to deliver long term value to our shareholders above all we're honoring our commitment to produce and distribute food in a sustainable way with ESG at the core of everything we do.

ESG guide us in terms of how we operate whom we decided to hire how we work together and how we allocate capital.

For farmers and Futurists and we're on a mission to provide a sustainable alternative for the socially economically and environmentally destructive practices that have come to be associated with conventional agriculture.

With that operator, we'll now begin to take questions.

No other to ask a question per star one to remove yourself from the queue press Okonski are for.

First question will come from the line of Brian Holland from Cowen income you may begin.

Yeah. Thanks, good morning.

Start with the higher distribution fees, both in the second quarter and to the extent you would revise those fees higher going forward.

First can you quantify the magnitude of impact.

More specifically in the quarter I guess long term, it's kind of embedded in that $40 million and then la.

<unk> curve, while I understand the impact of mix in Q2 why are you assuming those.

If that persists going forward given it sounds as though this is an addressable issue.

Yes, Thanks, Brian This is Jonathan.

So as we mentioned in the call. So training as we ramped up to 400 employees was an issue I mean operators globally, regardless of the industry have had issues with scaling this year, obviously and we were one of those.

It's disappointing.

But the.

For the optimistic view, we have is we've put training programs in place now we've replaced management and we've put put procedures in place on training.

We'll see as we scale other facilities.

That.

That impact of a number one versus number two tomato, we did not realize until.

Until we saw it which is.

We get great value and our number one tomatoes.

Very little to no value in our number two tomatoes.

And so the number one is what we have to optimize for end and Thats where training.

And being able to achieve our number one target on tomatoes, it's not overall volume that matters. It's the volume of number one tomatoes, which directly.

Directly impacts our bottom line I'll, let lorie talk to the numbers.

Sure Yes.

So.

During Q2, obviously, we saw historically low tomato pricing for <unk> in these day Tomatoes.

And as I mentioned because of the quality mix challenges.

We realized lower pricing and higher distribution fees.

To your question specifically.

I would say approximately 80% of the lower outlook is attributable to net sales within that 80%, we think of it about 30% of that being due to higher distribution fees.

Okay.

Outside of the 80%, but net of 20% is.

Due to lower yield expectations, Brian. This is David Lee, Let me offer to your question of guidance two perspectives.

First.

There was a transition in leadership of our day to day operations, not just worried about our future farms and.

In my past, taking a hard independent look at everything which is what I've done starting in July has led me to help this team guide to I think more moderated assumptions I have a strong beef that we need to guide to what we can absolutely deliver that's part of what youre seeing in our guidance for 2000.

'twenty one it's certainly one of the reasons why we are building 12 by 2025, but we're clear that we are guiding only to nine farms.

So I think part of it was execution challenges that are very real and our first major.

Full season of harvest as a company, but the second is a change in our philosophy and approach to ensure that we can deliver what we promise as part of the leadership changes that occurred.

The last thing I'd say.

Farm co opportunity deepens the relationship with Mastercard, which we've had since 2017 I view this as a strategic partnership and I'm seeing.

Frankly, mastronardi performed very well with us it's on us to deliver the quality that they expect.

But I believe that our partnership with Mastercard is deepening and improving.

On an ongoing basis.

Okay I appreciate the color everyone.

With respect to the long term outlook.

While non farm the right number to forecast off of from the 12 before and then maybe more specifically why is this the more why is this a more conservative approach to guidance because you are maintaining the same range, but you are now relying on incremental <unk>.

So.

One is why is it more conservative and then maybe within that is this really just a byproduct of you being closer to commercializing some of these products and now having confidence because previously these were all sources of just pure upside in the model of a.

Call option, if you will.

Yes, let me let me start this is David Lee I think to your first question of line nine versus 12, well you know by the end of next year, we're going to have five already underway and you've seen our confidence in securing for example, the $91 million of construction financing from equilibrium I mean candidly.

We're seeing our major partners arguably we believe leaders equilibrium capital.

Mastronardi double down on our business and while we're only a little over six months old as a public company being able to see a pipeline of development being able to have access to capital and having a leader in sales and distribution is as we replace not just that we electron 12 Tonight.

And we have a very much clearer view of what those 9% to 12 really are.

And that's the reason why bottoms up we looked at what we are highly confident in delivering versus the night with regard to the questions on why is the overall consolidated forecast conservative because we're including arrange for value added.

I come from what we're calling value added products, having a team that is tested products that were confident in has given us the confidence that our range is appropriate and achievable multiple.

Multiple years out I would also say, we only purchase route AI.

Recently, but having now traveled to Amsterdam as a team and really understanding the landscape. We're seeing just so much interest in having a real technology solution that we believe that it's appropriate and it's frankly accretive to call. The ball like part of that part of the approaches established long term guide.

So we can achieve that create internal accountability on a big opportunity for shareholders, which were more bullish about which is the fact that CA is definitely coming in the technology ecosystem is quite immature.

So that's why we feel collectively this is the right shareholder value proposition to build Thats why we are restructuring and that our 2025 long term outlook is achievable.

Okay I appreciate that David So maybe just last one for me again kind of big picture in nature, but typically when we see kind of a miss led in part by execution challenges.

Company talks about simplifying things nascent stage I suppose that's not necessarily an option, but this morning youre introducing several layers for the story and while I. Appreciate some of those initiatives, where we're always part of the plan and maybe Youre just advancing the ball on some of these today just help us get comfortable with the notion that now.

Now is the right time to lean into this app harvest two point of restructuring.

Yes, Brian So we've got our team in Morehead laser focus David mentioned earlier that he has taken that over we hired Julie Nelson from Pepsico and that team is laser focused we know what we need to do we need to produce not only yield but number one tomatoes.

And that team is laser focused on that task at hand, the other teams inside of the company have already been.

This has already been in place and all we're doing now is holding them accountable.

The tech team has been developing their products, David mentioned that the higher from Amazon that is helping lead that mark.

And then our value added products team, which we've hired somebody from the vital farms team that's now on our team.

And we've been building out that division I've been working with Martha Stewart pretty closely on evaluating products and we just want to be Frank that yes, we had a challenge of hiring 400 people and training them and hitting the yield not only yield book quality.

We must get.

That that we can solve for and that team that's working on that can solve for that but these other opportunities which David outlined.

<unk>.

<unk> added products, and then farm co which we.

We have been working on with mastronardi for almost six to nine months.

And signed yesterday, and we're sprinting into that with them you look at the three partners in this last quarter.

<unk> equilibrium and rabobank are arguably the three most qualified parties globally and CEO have all double down and gotten closer to us.

In the middle of some of these.

Challenges of.

Our second quarter and more Ed So it's our job as a team to figure out how to how to had it not only simplify and focus in moorhead, but also prudently look at these other opportunities that continue to come our way and that's our job for for investors and shareholders and Thats something David has to help execute on with us here.

I appreciate that color Jonathan best of luck, everyone going for it.

Our next question comes from the line of John Baumgartner from Mizuho Securities You may begin.

Good morning, Thanks for the question.

I guess, maybe two for me first is in terms of the planned JV with astronauts just to clarify I mean, what I'm hearing is that the JV is meant to be complementary. So can you walk through that in more detail I mean, aside from enhancing the pace of financing and the Optionality there will the JV target different crops than average harvest will the JV focus it's.

Farm networks outside of Appalachia, just curious how the two structures co exist and then my follow up is on project New lease. If you can clarify I'm trying to reconcile a degree of instrumentality of that $40 million in savings in light of the long term EBITDA target Dean reiterated the.

The impact of the reduction facility count and so on there's a lot of moving parts. There. So just curious of new leaf.

Incremental are those savings relative to what was in the plan previously thank you.

I'll take number one David will take number two so farm co which is underneath of that entity, we've created which is grow co.

Is equal to what we're doing here in Appalachia.

We've made it very clear that our goal is to build in central Appalachia, we've been focused on eastern Kentucky looking deeply at West Virginia.

But we're very cognizant that this industry needs to be solved that only nationwide, but globally for co allows us to immediately expand throughout the U S. Further into the northeast.

Into the northern markets as well as Atlantic and further west.

As David mentioned, we will be rolling out in detail in the next Q call what that looks like but it will have its own management team.

We'll be able to raise capital into that joint venture through private sources.

And that is that as a vehicle debt that will that will rival our internal on balance sheet.

Asset at Appalachia go, but it's complementary so we'll be growing volume crops berries, and leafy Greens and again mastronardi, it's not just a distribution deal they're contributing a CEO facility that's operating into that JV. So again, as we're having challenges and more Ed.

The industry that knows this space is doubling down with us for the long term.

But again.

Again to be very clear here, because I know theres going to be a lot coming off of this call. We are disappointed.

About what has taken place in Morehead and we're addressing it but we are very bullish and optimistic but we know that we need to prove to you all in Q3 and Q4 and into Q1, yes, one thing to offer.

Yes.

Farm co it's about focusing all of our existing management on Appalachia coal.

When you missed as we did in Q2 and you have to address the headwinds it means that the full weight and muscle of our management team needs to deliver on the network with farms in Appalachia and now my job.

But at the same time, creating a growth structure means that we don't distract existing management, we consolidate the benefit of non Appalachian CE activity and we access capital that doesn't need to flow through topco, it's actually a form of focusing existing management on the business at hand, but.

Accessing the upside in a capital light way for us and our management bandwidth bandwidth lifeway for US all of the growth outside of the Appalachian focus we have here with regard to project new leaf.

When you think about the $40 million, we tried to be specific but as you guide Lauren can take you through this.

The EBITDA associated with 2025, there is significant.

Out of the cost reduction that shows up in that guidance.

Frankly, we believe the potential cost reductions and waste reductions far exceed what the EBITDA suggests in our guidance and it's part of our new philosophy to.

As a point of goals that we absolutely can achieve I'll, let Lori give you we will by the way report on project New leaf every quarter in a rigorous way, but I'll, let Laura speak.

Speak to the particulars on the sources of cost reduction and waste reduction, which I think is on slide 15.

Projects, new lease so that you're clear on how we're going to get there.

Yes, so as we laid out approximately $40 million in annual cost savings and productivity gains.

We would expect to realize.

Approximately $5 million of that through the rest of this year, but most of that's really going to come as we kind of ramp into next year 2022.

That's going to be around training.

And investment in technology.

One of the automation.

Improving business processes.

No.

Great. Thank you very much for the details greatly appreciate it.

Our next question will come from the line of more tons.

<unk> from Stephens, Michigan.

Hey, Good morning. This is John rider on for Mark.

So our first question could you just talk more about the operational fine tuning youre doing as you figure out how to get to the optimal results for mixed with your tomato crops and then are there opportunities within the nutrients that greenhouse conditions or something else.

No Mark it was as simple as training.

Don't want to be more blunt than that but it was training and management protocols hiring 400 people that have never done this before.

We we delivered close to yield and we did not deliver on the number one quality that we expect.

To achieve.

And it's been a matter of putting the right training protocols in place and Thats been taking place that is currently taking place and that is at or on track or above where we were we would like to currently be.

Mark it's as simple as training 400 people to run this facility.

Debt.

That has been a challenge, but the good thing is that that's solvable.

We're aggressively leaning in on the training programs internally I'll, let David talk to that yes. Thank you John.

I am going to turn you to detailed so I don't want to repeat everything, but if you look to slide seven on the right hand side, Here's the good news the business model works at Moorhead.

And if you think about the things we're working on there for key areas right overhauling. The pack house that we have the ability to check quality to produce more number one remember operationally the more number ones, we produce which has significantly better pricing potential. It also has significantly better yield benefit over.

Your time, because the more we can manage our quality we can replicated across many of these other feature farms.

Jonathan was talking about is this primarily this productivity savings were one of the few companies that has local access to skilled labor. During COVID-19 you hear so many other companies talk about labor shortages, we prove the business model there are plenty of very either.

Skilled labor resident here in central Appalachia to help us build our farms. So while we proved that we now need to have a world class system that is driven by productivity, we talked about piece rate for.

For providing upward incentives to employees, who are already get a living wage, but who also need to be incentive for performing better. This is an example of what Jonathan was talking about.

And then I got to tell you that the management focus and simplification, having a clear chain of command.

Accountable to Jonathan.

Now have experienced operators running morehead and with Julie helping optimize across our future network I think that's really important having that absolute focus on daily delivery of results is the last piece that you'll see on that slide.

And Mark there is no easy way about it there is no easy way to train 400 people and that's something that we can step so forth.

Okay.

Okay. Thank you and then how different are the conditions you create in the greenhouse as you move from colder outdoor attempts to warmer.

Is it mostly just through the HVAC system or do you change the way you.

Seed apply fertilizer managed passionately outdoor seasonal change.

Anything else.

Yes, Mark it is very complex I mean, the greenhouse facility I don't like to say greenhouse because you can think of a plastic hoop house with a dirt floor what were using the facility itself is alive, while the plants are alive and yes as the temperature changes up.

For down and what those swings are we're changing the facility itself to monitor and control that environment again, none of that was really the issue here. The facility operated as planned I mean, if you remember the ice storm back in February we operated through that and continue to operate the facility.

So the asset itself is operating the way we had anticipated. The one challenge. We had was again led back to management and training of the new 400 employees, we have and that's where we're focused but the facility itself. Yes, we're making improvements every facility. We build is going to be innovating on top of the last but.

We have a great design, where we're building for other facilities now in.

For the facility itself is proven now as the people inside that we need to give the tools to be able to succeed.

Alright, thank you.

Thank you that's all.

Its only here for questions today.

And this will conclude our conference call. Thank you for participating you may now disconnect.

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