Q3 2021 AppHarvest Inc Earnings Call
Good afternoon, and welcome to the <unk> Harvest third quarter 2021 earnings Conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
Please be advised that today's conference is being recorded.
I'd now like to hand, the conference over to the call host Cathy back to Gary. Please go ahead.
Thank you for joining us on the App harvest third quarter of 2021 earnings call I am called me back GRE, VP Finance and Investor Relations for App harvest 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 lower Nicholson, Chief Financial Officer, a copy of our earnings release and is available on our Investor website at investors <unk> App harvests dot com on.
On today's call, we will begin with prepared remarks from Jonathan and the rest of the team then we will open the call to questions before we start I would 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.
And they involve risks and uncertainties that could cause actual results to differ materially from our expectations in providing projections and other forward 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. Thanks.
I am impressed and proud of the progress our teams made in the third quarter first.
We delivered on our top priority of efficiently wrapping up the first growing season, and completing the summer refresh and replanting on schedule in September we.
We accomplished this while achieving net sales results that were a little better than we expected coming into the quarter and doing so we remained on track with the 2021 annual outlook that we shared in August next along with key leadership changes, we designed and implemented an effective new training program.
The training resulted in a quadrupling of the number of crop care specialist, earning a productivity bonuses as a result through the first part of the fourth quarter. The mix of number one Tomatoes, we produce was increased and is currently above our internal projections.
Proved quality and our production provides the dual benefit of increasing the price per pound, we receive for our tomatoes, and lowering our distribution costs.
And finally, we continue to make progress on our form network in Kentucky, along with consistently improving our operating results.
Development of our network of farms remains a top priority and key focus.
We expect additional high tech indoor farms to be operating at scale by the end of next year. These.
These farms will diversify our crops with leafy Greens in berries, which we expect to lift our realized price per pound, while reducing volatility.
We expect this to remain a bright spot for our development team in the current environment.
Our teams across the company are energized by our mission, which remains important as ever given climate change and continued strong interest in sustainable solutions like our controlled environment agriculture approach, we're entering into a second growing season with lessons learned more experience under our belt.
We're excited by the opportunity to raise the bar as we harvest this new season's crop.
Our operation is performing at a higher level the development team and construction teams continue to work on expanding our farm network.
Finance team has done a great job of positioning us to raise the additional capital necessary to fund our expansion of farms as one of only a handful of traded public benefit Corporation that are also B Corp. Certified we're moving to a sustainable future with ESG principles as our foundation to sum up we're making progress.
Yes towards our long term goal of building App harvest into one of the most trusted sustainable food companies in the world and into a leading applied technology company, serving the global <unk> industry.
With increased scale and diversity of crops by the end of next year, we expect the progress, we're making to deliver long term value to our shareholders employees and communities.
David Lee now, we will provide more detail on the quarter.
David.
Thanks, Jonathan I'm also pleased with our progress in the quarter, we focus on the fundamentals of our business and delivered our top priorities improving operational performance at Morehead and New farm development.
Before I get into more detail on our strategic initiatives I want to do a deep dive on the quarter beginning with operations.
In the third quarter, we wrapped up the harvest from our first growing season, a little early to better prepare for the current season and sold nearly $1 5 million pounds of tomatoes for over a half million dollars.
Importantly, Q3 results do not reflect the new plants and operating changes from the summer refresh.
Q3 results reflect remnants Q2 plants planted pre summer refresh.
This resulted in 37 cents per pound.
Figure driven by factors similar to last quarter, namely and unfavorable ratio of USDA number one versus number two tomatoes.
Historically low market prices for tomatoes, and higher distribution expense.
However, we expect the leadership changes, we have already implemented that refocused the business on quality.
And the investments we made in improving training to pay off in the second growing season.
In fact, although it's early in the harvest in Q4, we are encouraged by the progress we're seeing.
Specifically.
One <unk>.
Early overall yields and the percent of USDA number ones in Q4 are both higher than we initially projected through the first two weeks of harvesting and higher than the first two weeks of season one.
Two.
As a percent of number one so far in the fourth quarter shows a nearly 20 percentage point improvement over the full second quarter.
Three we've.
We've made meaningful strides in labor productivity, while avoiding significant impacts from supply chain and labor availability and.
Poor.
Based on our analysis of 10 years of USDA pricing data. We note that Q3 typically marks a seasonal low point in terms of tomato prices.
The rebound period between troughs in midpoint pricing typically has been about two quarters.
We believe pricing appears poised to improve in Q4 in line with historic averages.
The fundamental improvements we are driving in the business has been intentional and the results of our re dedicated focus on quality.
While we still have opportunities to improve we've seen strong early results from our actions.
One take a data driven approach to our second season by focusing on real time performance management to drive accountability.
To redesign and increase the resources of our training program.
Three implement a best in class supply chain planning process.
And for redesign and streamline the operations organization, removing a layer of leadership by having our Moorhead site report directly into our newly appointed executive Vice Presidents of operations, Julie Nelson, who brings significant operations experience from her time at Pepsico.
Importantly in the third quarter, we completed the replanting for a second growing season on schedule in September.
Over 700000, <unk> stake and tomato on the mine plants were planted and amounts roughly similar to last year and both varieties are ramped up to full production levels as of this week.
New for the second grilling season, our select rows of premium cocktail tomato, which in the past has generally retail for a significant premium to both be stake and tomato on the volume.
The new cocktail variety is currently growing well.
We will continue to look for opportunities to optimize our skus that can improve our mix over time.
In summary, our focus on the fundamentals is paying off our volumes have been good and now our quality is steadily improving our strategy to focus on our core business is also enabled by the structure, we announced last quarter.
The platform to attract off balance sheet funding and install separate management teams that are proposed telco and farm co joint venture initiatives.
We've made good early progress in this area, which enables us to continue to focus on driving improvement within our core business and we expect to have more to announce on these strategic initiatives on our next call.
I'll now turn it over to our CFO Loren Egelton, who will review, our financial performance and farm development in greater detail Loren.
Thanks, David I'll start by reviewing our third quarter results give an update on our development timeline and financing and then move to the 2021 outlook.
We achieved third quarter net sales of $543000 as compared to no sales in the third quarter 2020, before our Moorhead farm was operational.
In terms of yield we generated approximately $1 5 million pounds of Tomatoes for sale.
Similar economics to the second quarter.
As the first growing season stretch into the beginning of the third quarter.
However, our third quarter net sales still came in above our initial projections because we concluded the first growing season.
As Jonathan and David mentioned, we've made significant operational progress based on lessons learned from our first growing season.
We're optimistic about our second growing season.
We recorded a net loss of $17 3 million and adjusted EBITDA loss was $16 5 million in the third quarter in line with expectations.
Third quarter results were driven by continued labor productivity investments associated with the training and development of the new workforce at the Morehead farm and costs associated with the summer refresh and planting of the new crop to prepare for the second season.
We have discussed previously quality is the most important determinant of our tomato pricing.
We are encouraged by the initial quality through the first several weeks of our second growing season in Q4.
And we are seeing tomato prices rebound from the seasonal lows typically experienced in Q3 based on the 10 year historical data from the USDA.
Let me turn next to our progress on farm development and financing.
Work continues on three previously announced CEO facilities now under construction.
We remain on track with our external guidance from last quarter to deliver nine high tech into our farms by the end of 2025.
Our 15 acre Berea, Kentucky, leafy Green facility, and our 60 acre Richmond, Kentucky tomato facility are both over 50% complete and both are scheduled to begin operations by the end of 2022.
In June we announced that we broke ground on a 30 acre Barrie facility in Somerset, Kentucky.
The Somerset facility is approximately 30% complete with operations expected to begin by the end of 2022.
In June we also announced that we'd begun initial site prep on a 10 acre leafy green facility located adjacent to our flagship platform.
We made the strategic decision to pause construction temporarily on this facility for two reasons.
First to apply lessons learned from the construction and operation of our brewery, a leafy green facility and two to maintain financial flexibility as we pursue additional financing options.
We recognize the benefits in doing this based on changes from our first tomato facility at Moorhead that we apply to the construction and design process, our second tomato facility enrichment.
Despite the decision to temporarily pause construction at more head north we remain on track to finish and operate four firms by the end of next year and nine by the end of 2025.
We're continuing to work toward a network of 12 farms by 2025 as.
As we make additional progress in financing.
A disciplined stage gating approach to our high Tech Park development.
Overall I'm very pleased with the progress our team has made to fund our future and farm development through a number of financing vehicles.
I believe we remain in solid position to execute on our near term development timeline because of the $221 million in cash on our balance sheet.
The over $75 million in available credit on our financing agreement equal them capital.
We announced in July.
The $25 million credit facility with Jpmorgan, we announced in September.
And finally <unk>.
Proximately $20 million in 2021 reduced capex.
As a result of pausing construction at more head north.
We've made solid and regular progress when it comes to deploying the capital needed to fund our growth.
And we expect to have even more progress to announce in this area soon.
We ended the third quarter with cash and cash equivalents of $221 $6 million and have approximately 95 million and total availability on our credit facilities.
In terms of capital expenditures for the full year 2021.
We now expect to invest approximately $150 million, which accounts for the three construction projects now underway and the initial spending on the more I think I believe your green facility.
Now, let me turn to our full year 2021 outlook.
We remain on track to meet our net sales expectation of $7 million to $9 million in 2021.
And our adjusted EBITDA loss expectation remains in the range from $70 million to $75 million.
Regarding corporate SG&A.
Just to keep it roughly flat.
Even as we scale up to a significantly larger for farm operation offering three crop types by the end of next year.
This is the goal of project New lease plan, we announced last quarter targeting $40 million annualized G&A savings and productivity gains by the end of 2022.
With that I'll turn it back over to our VP of finance and Investor Relations.
Bacteria. Thank you Lauren with that operator, we will now begin to take questions.
As a reminder to ask a question you will need to press star one on your telephone.
Your question press the pound key.
By while we compile the Q&A roster.
Your first question comes from the line of Ben Fever of Barclays. Your line is open.
Hey, good afternoon, and thank you very much for taking my question Jonathan David.
Loren congrats on the results.
That was obviously, a little better than expected and even a little above your expectation. So two questions. If I may to start off first.
You basically said in the commentary in the prepared remarks.
But you are off to a better start when it comes to.
Number one tomatoes in the current quarter and that your outlook also is that pricing is going to recover. So the question really is what have you made if friend at the beginning of this harvesting how much if you learned.
Taken away maybe from from how you would know more partner.
With the funds that mastronardi just to give you an update on what are the changes you've been implementing to actually achieve better level than what your initial outlook was and then the second question just to understand the dried Lauren on the.
Change in changing the decision to step temporary pause temporarily.
Morehead North addition for leafy Greens.
Do I understand it right as you said, it's really about let's get one facility for leafy Greens done first to see what we can improve in the second instead of building two at the same time those would be my two first initial questions. Thank you.
Yes, Ben it's Jonathan I'll start.
So yes, our number ones are up almost 20 percentage points in Q4 versus Q2, so far in and Thats really been due to a new training program that is <unk>.
<unk> and four times more crop care specialist, earning productivity bonuses.
So the work we've been putting in to have the right process and procedures in place under Julie Nelsons leadership.
We're really starting to take effect.
And I'll, let I'll, let David talk to the pricing point that you had mentioned a moment ago one of the things Ben we're doing a better job of is partnering better with mastronardi because they are so good at understanding the market a lot of the changes that we've seen on quality new training comes from a lot of the best practices. They seen amongst all the.
Best operating CA facilities that they work with.
So what are the pricing just to underscore this it's very important to note that the Q3 results do not reflect all of the improved operations that we've worked with in order to ensure that post the refresh.
We have the better.
Performance that Jonathan just mentioned Q3 price its really a remnant of some of the historical challenges we reported in Q2.
Wanted to also point to the commentary we did study very hard 10 years on a monthly and quarterly basis for total USDA tomato pricing.
Because aside from our view I think it's important for us to provide the empirical evidence that when you look at the last 10 years of overall USDA tomato pricing from a trough that you're seeing in say one quarter. There appears to be roughly a two quarter lag between that trough reverts to the mid point across the 10 year average.
That along with early feedback from our market partners make us encouraged that we will see better pricing broadly in the market.
The more number ones that we can make aside from where the market is the better gross pricing, we receive and the better net pricing we receive because we incur often less of the repackaging distribution fees that come with non number one tomatoes.
Let me pause there and turn to Lauren for your question with regard to our development, Yes, Hey, Ben.
So I think it's important to remember that we're still on track to achieve the nine facilities by 2025.
We are pausing more head north.
For the two reasons mentioned on the call, but wanted to provide us financial flexibility. The other to incorporate design and other changes we know will likely want to make after operating are firstly for green facility.
Yep.
After constructing the more of that facility. We recognized that there were certain things that we wanted to change for our next tomato facility changes that we did implement into the Richmond facility.
Which is a different pack house, one way out.
Different type of air handling system.
Yes, those sorts of things that we wanted to put in place.
Regarding the financial flexibility the market currently seems to show a preference for funding <unk> assets on a project by project basis, which we're comfortable with and are having a lot of success with the shift in this approach.
We still expect to complete more head north.
Our current estimate is just that it's just into 2023 instead of 2022.
Okay, and then one last point that I want to mention Korea is not a small facility.
A 15 acre leafy facility could arguably you wanted to be the largest of its kind in North America and so this is in no way a pullback from diversifying our crop into I think a very interesting <unk> business that is on track by end of 2020 to Iberia.
I was not saying small with the 15 acre, but 15 acres small compared to fixed anyway.
Different one and then one one last follow up David you can keep this brief just around the restructure you've announced roughly three months ago between KEPCO Appalachia coal co.
You haven't talked much about details in the prepared remarks I was just wondering if you have any update on on the free different ones and particularly on the proposed JV on the <unk> together with <unk> anything you can share.
Yes.
I just want to make sure I remind all of ourselves that the structure, we announced was to allow our management to be even more focused on our core Appalachia coal business and to leverage our sources of funding that's not from our own balance sheet to go after the considerable growth outside of Appalachia, one of the things I don't know that I communicated well on the.
Last call was that the strategic structure creates more focus and less execution risk on our core business, having said that we've made great progress both with farm co in partnership with Mastronardi. We actually have received initial terms from one of our existing lenders for potential loan amounts for the contributed assets that we.
And in our last call and we've had formal meetings with investors that are quite encouraging we're not ready on this call to announce those results, but I'm very encouraged by the progress on farm co. We have also made great progress on Tesco, we didn't want to mislead our investors. This is not our primary area of focus our core biz.
<unk> is our primary area of focus, but telco helps us in our core business and in fact, we've actually deployed to harvesting robots or we will be slated to deploy them soon and more head as we discussed in the last quarter and we have already deployed significant improvements in some of the pack house design and operating systems that we find in the refresh.
From our tech team, but we will provide much more color commentary on those two strategic initiatives in the call that comes next quarter.
Perfect well, thank you very much Johnson David.
Congrats again.
Your next question comes from the line of Brian Holland of Cowen and company. Your line is open.
Thanks, and good afternoon, everyone. So just a couple of points of clarification it sounds like.
And forgive me if you.
We're clear on that.
Revenue.
Early on.
Got it.
Moved off kind of that 35 cents per pound range.
Okay I appreciate it just a couple of weeks in here, but we are we are seeing sequential improvement in that metric specifically.
Yes, let me clarify that first I wanted to point out that here. We are two weeks into Q4, so I don't want to overstate. The initial progress that we're excited about so we are excited the number one driver of improved net pricing for App harvest is within our control, which is how many number one U S.
D a quality tomatoes, we produce as well as the varieties. We produced and we noted that for example for the first time, we've introduced a specialty crop, which has historically priced when you look at history higher than the non specialty crops such as the Campari crop. So we're encouraged by the things we can control which is the quality.
As well as the specialty items that we're producing we're also encouraged in the first two weeks, but the predictors of yields. The reason why we talk about training and we've talked about productivity bonuses is thats, how we harvest better now.
Now I want to comment on what we can control, which is the 10 year analysis I mentioned on large USDA tomato prices here in the U S.
We've really studied how trough pricing reverts to mean pricing and seeing 10 years.
Data across the sector and seeing how quickly. These consumables remember these prototypes are not like a lot of consumer packaged goods items, they're consumed and produced frequently seeing that two quarter lag on average from the trough reverting to the mean gives us confidence and then lastly, while it's only a few weeks into the quarter.
We are very much in touch with the market and early indications from market signals suggest that this quarter should be a better quarter with regard to market pricing broadly.
Yes, I appreciate the color there David and.
And maybe to that end.
You brought in Julie Nelson this past quarter, I think you called out in the press release here.
Sort of data driven approach to.
Real time performance management.
Maybe this leads into a bigger question, but just obviously you talk about the number of things that are in your control.
<unk> instituted several measures brought in a lot of leadership here can you talk about an example, or two specifically of where youre seeing tangible evidence and maybe if it's on the labor productivity side and if it is just like to understand specifically what those folks are doing that wasn't being done before such that this.
It is not just this is a sustainable and sustainable level of improvement that can build the momentum as you add more folks in more facilities.
I call upon a number of items that Jonathan already mentioned, but let me call. Upon three key drivers that encourage us first with regard to management changes recall in the last quarterly release, we announced the hiring of Julie but she hadn't started we announced her hiring in early August. She started shortly thereafter in mid August so she has been hands on.
Running moorhead, eliminating a layer of leadership and improving the leadership there.
A couple of months.
Want to underscore that hiring folks who have a history in packaged food, but in particular for Pepsi co food experience in her mckinsey experience, we thought would suit us very well and we're finding that indeed that approach to rigor and accountability has the second thing aside from management as I put the data we all.
Talk about controlled environment AG versus open field for us the benefit of measuring a lot of the key factors in predicting improved yield we've significantly increased the use of our data system. So that we have now high quality inputs going into the data programs that really fueled the daily and weekly dashboards that we can see on the <unk>.
Drivers of performance.
Be able to find it or you're just deciding how best to deploy it.
Yeah, just you're just you're stepping back to give yourself more flexibility I will tell you I've consistently in the last six to nine months being without harvest been surprised by the more options. We have an off balance sheet financing just looked at what we've announced in Q1 Q2, what we just announced.
In this Q3 release, the 60% LTV program at the low end of 4% for Morehead that we announced previously the new facilities from equilibrium I think the capital markets are waking up that CA will be a global inevitability and we are seeing more interest for more parties.
And so before we commit to one traditional source of financing we want to take upbeat and I want to be clear. We are on track with our developed remember we guided to nine farms, but were internally still targeting 12 by 2025 that still remains true, but I want to make sure that we match our sources and uses to the best return on it.
Vested capital I wanted to turn to Jonathan because he is very close to the pace of our development independent of the capital that funds it.
Just wanted to touch on.
We are building some of the largest infrastructure in the world right now in the middle of what is <unk>.
Supply chain pressure globally, and we were able to navigate that.
And for US we wanted to do the prudent thing, which we think is launched three.
Farms into next year versus four allow or allow our construction and development team to continue to perform an outperform on a weekly basis and and so just narrowing the focus of our development and construction team, while allowing David and Lauren to continue to explore all of the various financing options that are available so.
We just thought it was the most prudent thing for us to do as we close out this year going into next year.
I appreciate the color a little bar, but the look.
<unk>.
Your next question comes from the line of Christian Alvin of open Heimer. Your line is open.
Hi, everyone. Thank you for taking my questions. If I could follow up just on the last point that you made Jonathan about the supply chain and the inflationary environment. If you could just remind us higher managing building commodity costs and the shipment of your prefab facilities.
Through higher managing that cost item. Thank you.
Well we have.
No delays expected with completing.
And operating for farms by the end of 2022, we've had no material impact on pricing.
No material issue of getting products to our farms, but that is because of our team. Obviously, we are facing the same environment everyone else's.
With global supply chain issues. Our team is just problem solving on a day to day basis and.
I do believe that that is one one of the firm bright spots of this of this company is being able to develop and construct on time on budget.
Just wanted to add to that Chris.
Christian that in addition to Julie I will note that we hired a great Vice president of supply chain that has the professional backgrounds have good management health, but also frankly the scale of our development helps.
We have the ability to attract some of the leading suppliers because they know what we're going to be building targeting 12, guiding deny and by 2025 and these are large facilities. So I think that gives us an advantage beyond our execution in kind of presenting some of the inflationary supply chain issue C C with other companies.
I appreciate that color and and again you started to heat up My My next question here, which is you can't do this rapid expansion over the last year and a lot of things have changed within the organization, but the mantra and the soul of the company has really stayed the same.
Wanted to ask you a question that may seem silly at this early stage of the business but.
And how are you finding employee engagement at this stage and employee retention. That's obviously another source of friction in this market.
We stopped tracking it but at one point this year, we had nearly 8000 people apply to work at this company.
We've been hosting various political leaders across the spectrum from our governor to Senator Mcconnell earlier. This week, both left and right who continue to ask US how are we how are we getting employees. How are we retaining employees in this in this environment and I think it has to do with our mission. We've we've set out.
Go into bold mission too.
Pursue.
Being one of the largest food and agriculture companies not only in this region, but in the us and world.
And we have people that want to help us hit those targets daily.
Daily and weekly so we've had no room material issue on on building a team other than scaling from what was 20 employees to 400 employees in the nearly on.
On track to be roughly 2000 employees a year from now so mainly.
Maintaining that culture and being mission first has has been something we're very proud of and continue to.
Result in large benefits throughout the organization.
That's great to hear I'll leave it there. Thank you so much.
And I'm showing no further question at this time this will conclude our conference for today. Thank you for your participation you may now disconnect.
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