Q4 2021 Americold Realty Trust Earnings Call
Greetings and welcome to the Americold Realty Trust's fourth quarter and full year 2021 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this.
Is being recorded it is now my pleasure to introduce your host Scott Henderson Investor Relations. Thank you Scott you may begin.
Good afternoon. Thank you for joining us today for Americold Realty Trust's fourth quarter 2021 earnings conference call.
In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results, which is available in the Investor Relations section on our website at Www Dot <unk> Dot com.
This afternoon's conference call is hosted by Miracles, Chief Executive Officer, George Chappelle, Chief Commercial Officer, Rob Chambers, Chief Financial Officer, Mark spread at all.
Management will make some prepared remarks.
After which we will open up the call to your questions.
On today's call management's prepared remarks may contain forward looking statements forward looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today.
Number of factors could cause actual results to differ materially from those anticipated.
Forward looking statements based on current expectations assumptions and beliefs as well as information available to us at this time and speak only as of the date they are made and.
Management undertakes no obligation to update publicly any of them in light of new information or future events.
During this call, we will discuss certain non-GAAP financial measures, including core EBITDA and <unk>.
Full definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measure financial measures is contained in the supplemental information package available on the company's website.
Now I will turn the call over to George fell.
Thank you Scott and welcome to our fourth quarter 2021 earnings Conference call. This afternoon, I will summarize our 2021 results and then discuss current market conditions that are impacting our full year 2022 guidance. Rob will then provide an update on our recent pricing initiatives and Mark who will review results in more detail.
Providing commentary on our full year guidance.
But before I begin I would like to take a moment to comment on my appointment as permanent CEO .
That was announced this afternoon having.
Having spent decades in operational roles in the food industry I've been responsible for many cold storage operation, including providers like Americold in many of its competitive.
I've always considered America, the industry leader in quality and customer service as I've worked with the team over the past few months I've been impressed by their commitment to delivering operational excellence and disciplined growth I am very excited to be here and look forward to getting to know more of you in the future.
Onto our results while in consumer demand for temperature control food remains strong COVID-19 related to supply chain and labor disruptions continue to impact the global food supply chain at the time of our last earnings call. In early November Delta was the dominant ovarian and it seem to be peaking in various regions of the world.
Businesses, including us and our customers, we're making progress in adapting to Delta. However by late November the omicron variant began to rapidly spread worldwide.
This highly contagious variant introduce more uncertainty and disruption into an already strained supply chain the impact of <unk> can be seen in our results.
For the full year, our global warehouse same store pool generated total revenue growth of 0.3%, while we experienced an NOI decline of five 8% on a constant currency basis.
<unk> per share was $1 15 in line with our guidance. The main factors that led to these results were the following.
First a meaningful decrease in the year over year economic and physical occupancy across the same store pool of 327 basis points and 500 basis points respectively. These same pressures were also felt in the non same store pool, which is made up of recent acquisitions and completed development.
Second as discussed on last quarter's call. There was a significant increase in our labor power and other expenses beginning in the latter part of the third quarter. As you know we are not able to offset all of this cost pressure immediately through price increases on our warehouse segment business. There is a lag period, Rob will provide an update.
On our progress in this area. However, we remain on track to exit the first quarter with a run rate to cover all known inflation in our cost structure.
Third a reduction in throughput volumes also created a drag on contribution dollars in our warehouse business for the full year, our same store pool throughput volume decreased two 8%. The non same store pool was also impacted by throughput volume declines while we've made significant progress on the price increases.
In our warehouse business, we also need the throughput volumes recover for our contribution dollars to fully normalize.
Let me now discuss current market conditions that are underpinning our 2022 <unk> per share guidance of $1 to $1 10. Many of these challenging condition carryover from 2021, beginning with the revenue side as in many of other labor intensive industry labor availability continues to be a challenge.
For our food production customers, which negatively impacted their production levels. This in turn negatively impacts our economics in physical occupancy as well as throughput volumes. We are confident our manufacturing customers have the desire to increase production and satisfy rising demand. However, the labor challenges continue to be.
A barrier once labor normalizes, we are confident inventory will churn to historic norms.
Economic and physical occupancy in our portfolio and the overall industry continues to be significantly below pre COVID-19 levels.
Our economic and physical occupancy for the 2021 same store pool averaged approximately 77% and 68, 4% respectively.
Our 2019 same store pool, the most recent pre COVID-19 year averaged $79 475, 4%.
Similar patent exists in the USDA data overall total holdings in Kohl's stores are down 8% to 10% throughout 2021 versus 2019 levels.
Our commercialization efforts, particularly our fixed commit disruption.
<unk> us to mitigate part of the decline in overall holding.
Throughput volumes have been equally impacted over the year driven by the same challenges. These are expected to be lower than pre COVID-19 levels in the near term.
Fast rise of the Omicron variant further strained in an already challenging labor environment. Many of our customers saw an increase in absenteeism late in 2021 and into 2022 as did we.
<unk> has delayed labor recovery by three to six months and proven how fragile the operating environment is.
Answer the cost side of the equation.
Inflation in the global food supply chain remains a significant concern in many of our markets. We raised wages beginning in the third quarter last year to remain competitive while we believe we are paying competitive wages today inflation remains a concern and there is still a possibility wages will rise again.
We have taken action through price increases to address the cost pressures, we faced last year, we will seek to offset additional inflation through operating efficiencies, but we may take further pricing actions outside of our normal course general rate increases if needed as a reminder, there is a lag period between when cost increases occur and when the <unk>.
Price increases go into effect, Rob will discuss this in more detail.
<unk> has proven that our ability to predict when economic and physical occupancy levels will fully recover is impossible. So we'll refrain from doing so going forward. The global food supply chain continues to be strained and is not operating anywhere near normalized levels. Our 2022 guidance has these assumptions embedded.
And our range, which mark will discuss.
I've outlined some significant near term challenges in our business.
Due to the large amount of uncertainty created by Covid.
Inflation and the challenge labor environment. The good news is that structurally our business model remains intact and end consumer demand for temperature control remained strong.
Prior to Covid industry standards still rate objectives were 98, 5% now it is not uncommon to see fill rates in the 70% range. During my many years in the food industry I've never seen general fill rates at such a low level. Additionally, our retail customers have struggled to keep store shelves are fully stocked.
All of our customers are keenly focused on producing more food returning to normalized inventory levels in support of higher fill rates and satisfying unmet consumer demand at.
At the end of the day the state of the current food supply chain is a challenge for all participants food producer retailer Foodservice company restaurants, with cold storage industry, including a miracle and ultimately the end consumer we are absolutely confident that our food manufacturing customers want to satisfy unmet.
Demand when they are able to produce more we are fully prepared to accept their inventory and support their business with our strategic network of facilities and best in class customer service.
At this point I wanted to quickly highlight the recognition we received from Newsweek for our ESG effort for 2022 Americold is included in Newsweek's list of America's most responsible companies. We are very proud of this achievement. Additionally in 2021, the global Cold chain Alliance awarded 41.
One of our facilities gold silver bronze certification as part of its energy Excellence recognition program, bringing our total at year end to 203.
As of today, 84% of our warehouse segment portfolio is now certified in this program.
Lastly for the past two years the Americold team is continuing to work in an unprecedented extremely challenging operating environment in order to protect the integrity of the global food supply chain. We firmly believe that our success continues to rely on having a best in class team and we've continued to take actions to ensure this remains the key.
Over the past year, we've adjusted wages and offered enhanced incentive program for our frontline associates and we'll continue to do so to remain competitive in the marketplace and ensure americold remains a rewarding place to work with that I will turn it over to Rob.
Thank you George I will provide a brief update on our pricing initiatives related to our warehouse business and comment on our commercialization efforts.
As we discussed on our last call beginning in the third quarter, we raised hourly wages in many of our locations to retain our associates and recruit top talent.
The impact of these wage increases as reflected in our fourth quarter results.
In order to offset these and other inflationary pressures.
We have taken action by increasing the pricing of our warehouse business.
Please remember our pricing for our customers, it's very prescriptive.
And we do not take a one size fits all approach.
As you can see on page 37 of our IR supplemental we were able to increase our service revenue per throughput pallet and our same store on a constant currency basis by three 8% with this improvement accelerating during the quarter.
Most meaningful increases occurred in December up five 9% versus prior year's month of December .
As a reminder, our.
Our customer mix is made up of the following.
Approximately 30% of our warehouse revenue is with smaller customers, where our pricing can be adjusted at any time with a 30% to 45 day notice.
We took action on this customer group and almost all of this increase is in our fourth quarter results.
Approximately 70% of our warehouse revenue with our top 100 customers.
About half of these customers have contracts with formulaic mechanisms in place.
Now for us to equitably adjust our pricing as long as there has been a demonstrable increase in our costs.
The remaining half of these customers have come to the table clauses that require a good faith negotiation to increase price.
For the top 100, we initiated these conversations.
Third and fourth quarter of 2021.
And a meaningful amount of these pricing increases are in our fourth quarter 2021 results.
The remaining will be reflected in our results throughout the rest of the first quarter of 2022.
Second quarter 2022 results should show a full period of all pricing increases in place.
As a reminder, for our top 100 customers, we usually need to see the elevated cost for at least 60 days before we can either trigger or price increases or begin negotiations.
This is the lag period that George mentioned.
Please remember our normal course, escalators or general rate increases <unk> as we call them.
Have historically ranged from 2% to 4%.
Across both storage and services rates for our customers.
These are used to cover normal levels of inflation in our cost to serve our customers not just labor of our power costs property taxes, and insurance and warehouse supplies and equipment.
We see that our costs are outpacing our <unk>, we will revisit our pricing initiatives again to take similar action with our customers.
Onto our commercialization efforts.
At quarter end within our global warehouse segment rent and storage revenue from fixed commitment contracts increased on an absolute dollar basis to $356 million compared to $284 million at the end of the fourth quarter of 2020.
On a combined pro forma basis, we derived 39, 3% of rent and storage revenue from fixed commitment storage contracts.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers to.
To account for approximately 49% of our global warehouse revenue on a pro forma basis.
Additionally, our churn rate remained low at approximately three 3% of total warehouse revenues.
This metric demonstrates we're not losing a meaningful amount of customers. They are simply not using as much of our infrastructure and services while their production volumes are lower.
Finally.
Our global development pipeline remains strong.
Now I'll turn it over to Mark.
Thank you Rob.
Today, we will provide updates on our fourth quarter and full year results I will also provide our outlook for 2022.
For the fourth quarter, we reported total company revenue of $716 million and total company NOI of $161 million, which reflects a 37% increase and a 6% increase year over year respectively.
Corporate SG&A totaled $49 million for the fourth quarter of 2021 as compared to $40 million in the prior year, reflecting our external growth over the past year net of synergies and higher stock compensation expense.
This growth was partially offset by a decrease in our annual performance based cash incentive compensation expense.
Core EBITDA was $124 million for the fourth quarter of 2021.
An increase of five 6% year over year.
Our core EBITDA margin decreased 511 basis points 17, 3%.
Our fourth quarter, <unk> was 82 million or <unk> 31 per diluted share.
Now I'll turn to our results within our global warehouse segment.
For the fourth quarter of 2021 Global warehouse segment revenue was $554 million, an increase of 36% compared to the prior year.
This growth was driven by the recently completed acquisition and ramp of recently completed development projects paired with contractual and market driven rate escalation.
This growth was partially offset by the impact of food supply chain disruption, resulting in lower economic occupancy and throughput in our same store portfolio.
Warehouse segment NOI was $151 million for the fourth quarter of 2021, an increase of three 6%.
The increase in warehouse NOI is driven by our recently completed acquisitions, largely offset by the impact of inflationary pressures across our global portfolio.
Global Warehouse segment margin was 27, 2% for the fourth quarter of 2021.
849 basis point decrease compared to the same quarter of the prior year due to lower margin acquisition and inflationary cost pressures.
Now I'll turn to our same store results within our global warehouse segment.
For the fourth quarter of 2021, our same store global warehouse segment revenue was $379 million up two 5% year over year and two 7% on a constant currency basis.
Same store global warehouse NOI was $126 million down eight 2% year over year and a decrease of eight 1% on a constant currency basis.
Same store global warehouse NOI margin decreased 389 basis points to 33, 2%.
The ongoing disruption in food production combined with the challenging labor market and elevated inflation continued to weigh on our same store results.
For the fourth quarter same store global rent and storage revenue increased by two 9% year over year and increased by three 1% on a constant currency basis.
This was driven primarily by rate escalation, partially offset by a decline in economic occupancy.
Our same store economic occupancy was 79, 5%, which reflects a decrease of 129 basis points from last year's fourth quarter economic occupancy as we were impacted by reduced food production level, but stable consumer demand.
The occupancy decline was partially offset by a four 9% increase in our constant currency average storage rate per economic pallet, driven by rate escalation and business mix.
Consistent with the fourth quarter seasonal increase on a sequential basis economic occupancy improved approximately 285 basis points from the third quarter.
Our same store global rent and storage NOI increased by two 8% year over year and 3% on a constant currency basis.
This was due to rate escalation, partially offset by lower economic occupancy and higher costs inclusive of power property taxes and insurance year over year.
Same store global rent and storage NOI margin decreased five basis points to 68, 4% due to the same factors.
Same store global warehouse service revenue for the fourth quarter increased by two 3% year over year and two 4% on a constant currency basis.
This revenue growth was driven by rate increases and business mix, which increased our constant currency warehouse service revenue per throughput pallet by three 8%.
This was partially offset by a one 3% decline in throughput.
Our same store global warehouse services NOI decreased by 46, 3% year over year, and 46, 4% on a constant currency basis.
This was primarily driven by a higher cost of labor and warehouse supplies due to elevated inflation.
Same store warehouse services NOI margin was seven 5% for the quarter, a decrease of 684 basis points from the prior year.
Now, let me summarize our full year 2021 results.
Total revenues were $2 7 billion and global warehouse segment revenues were $2 1 billion, a 36, 6% and a 34, 6% increase respectively.
Total NOI was $630 million and global warehouse segment, NOI was $586 million, an increase of 14, 2% and 12, 7% respectively.
For the same store pool Global warehouse segment revenue grew by one 3% or <unk>, 3% on a constant currency basis and same store NOI decreased four 9% or five 8% on a constant currency basis.
Core EBITDA was $475 million, an increase of 11, 4% or 11% on a constant currency basis.
And <unk> was $299 million or $1 15 per diluted share using a weighted average share count of $261 million.
Finally, we announced $168 million of development starts and completed $766 million of global acquisition.
At this point I will briefly comment on a onetime retentive stock Grant we were awarded to certain non EVP associates in the fourth quarter.
The grant is being amortized over the next two years with $4 million already incorporated in our Q4 results.
Our noncash share based compensation expense will increase by approximately $11 million in 2022 and $5 million in 2023.
As a reminder, we exclude noncash share based compensation from <unk>.
Now turning to external growth.
Today, we announced an expansion project in Barcelona for approximately $15 million. This.
This is a conventional build and will support the growth of existing and new customers and consumer packaged goods and protein sectors.
Spain is a key producer and exporter of protein in our food distribution sites in Barcelona are within 20 miles of the Port which is one of the largest ports in the Mediterranean.
We're excited to continue to grow our footprint in this strategic market.
Turning to acquisition on November 12, we closed on our previously announced acquisition of a newly completed cold storage facility in Denver, which replace a smaller lease facility, we exited within the market.
On November 15, we closed on the previously announced acquisition of Lago Cold stores in Brisbane, Australia.
All of these investments were or will be match funded using a combination of cash.
Equity forwards that we had previously raised and our multi currency revolver.
Now turning to our balance sheet capital markets activity during.
During the quarter, we exercised $1 4 million of previously raised forward shares for approximately $55 million in net proceeds to help fund our developments and acquisitions.
Additionally in December we closed on a $150 million increase to our multi currency revolver and $50 million increase to our term loan a.
These actions improve our already strong liquidity and increases our fixed rate debt position.
At quarter end total debt outstanding was $3 1 billion, we have total liquidity of $803 million consisting of cash on hand and revolver availability.
Our net debt to pro forma core EBITDA was approximately $6 one times.
Turning to our full year 2022 guidance.
For the full year, we expect <unk> per share in the range of a $1 to $1 10.
Please refer to page 46 of our IR supplemental for detail on the additional assumptions embedded in this guidance.
While Georgia already provided an update on the current environment, Let me provide some additional commentary around the guidance.
Covid related supply chain and labor disruptions continue to impact the global food supply chain in 2022, and this can be seen in our occupancy and throughput.
Achieving the high end of our guidance range would result from macroeconomic factors driving an improvement in food manufacturing, which would result in higher levels of occupancy and throughput volumes.
The lower end implies the occupancy levels and throughput volumes deteriorate.
The low end of guidance implies wage and inflationary costs running at elevated levels above our expectations taking into account the lag Rob previously mentioned.
The high end implies inflationary pressures moderate.
Please note that we ended 2021 with total SG&A expense inclusive of stock compensation of $182 million.
Our 2022 range is $210 million to $229 million inclusive of stock compensation.
At the midpoint the increase is approximately $37 million. The key drivers of this increase are the resumption of performance based annual cash incentive compensation.
Incremental noncash share based compensation expense from the stock retention Grant I discussed earlier increased.
Increased <unk> spend as we begin to transition to more software as a service solution.
And inflationary pressures on corporate salaries, and other overhead such as travel insurance and benefits.
We are guiding to development starts in 2022 in the range of $100 million to $200 million this year.
Additionally.
Please note that we have six development projects that are expected to be completed later this year.
As a reminder, these projects will initially be a drag on overall warehouse NOI as they ramp to stabilization we.
We estimate an initial in year startup costs associated with these projects of $10 million to $12 million in the aggregate.
Our 2022 same store pool now includes 216 facilities, which is approximately 90% of the total properties in our warehouse segment.
I would like to point out that our new same store pool includes almost all the properties from our AMC Caspers, Paul and agro acquisition that were completed in 2020.
We have not yet fully implemented our commercialization practices, such as fixed commitments or the americold operating system into these facilities.
While both of our legacy properties and recent acquisitions continue to be impacted by the current market environment. Our legacy sites continue to benefit from our operational practices and business systems, which helped to offset some of the pressures felt in this environment.
Finally, please keep in mind that our guidance does not include the impact of acquisitions dispositions or capital markets activity beyond that which has been previously announced.
Now, let me turn the call back to George for some closing remarks.
Thanks, Mark I'd like to reiterate how pleased I am to join Americold on a permanent basis and lead the company's next chapter.
We are committed to providing best in class service for our customers and I would like to thank our customers for their confidence in us.
I'm also incredibly proud of our 16000, plus associates, who are the heart of our business I want to extend a special thank you to each of them for their hard work and dedication every day I look forward to spending more time with them in the near future. Thank you again for joining us today and we will now open the call for your questions. Operator, Please open the call.
For Q&A.
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Yes.
Thank you. Our first question is from Dave Rodgers with Baird. Please proceed with your question.
Yes, good evening, everyone I wanted to start with you George if I could first congratulations on your appointment as CEO , but two questions around that if I could you the board and management were pretty clear that this is not a possible outcome and so probably comes a little bit of a surprise. So one wanted to give you the chance to talk about kind of what the change of heart was.
Brought you to this permanent position and then two maybe what do you see as kind of the focus of your of your tenure here.
As the CEO and replacement of threat.
Yes, Thank you Dave I appreciate the.
The question <unk>.
And we said when asked that look Americold was the industry leader in cold storage and that anybody would have been triggered you to leave the company I certainly felt that way from the very beginning.
In my case that was coming out of retirement, even though it was a relatively short retirement and.
Those decisions.
Individual decisions. So it took a little bit of time to work through.
But what I can tell you is once the decision was made.
Joining americold with probably the easiest professional decisions I've ever made my life.
And like I said in my prepared remarks, I couldnt be more happy to be here.
So moving on to the second part of your question I would say the top three priorities for me.
Starting literally immediately are one labor management.
Enhancing our recruitment and retention processes.
Reducing our dependence on temp labor.
Increasing our ratio of permanent labor.
And we know when we increase permanent labor, we get number one.
Far more productivity, which translates into lower cost per per throughput pallet.
So that's one number two I think the industry has suffered.
And customer service, driven by Covid and labor issues I want to make sure that when we build back our labor force, we come back with customer service levels that are not only at pre COVID-19 levels, but but best in class I can tell you as a customer nothing.
Nothing means more than best in class customer service, and we're committing to getting back to those levels.
And then last.
Ensuring our development projects remain on track, we believe in each of those business cases.
But as you know development projects are not immune to the current macroeconomic environment.
Nor the immune to the supply chain issue so they require constant attention.
They are very complex builds and we remain dedicated to making sure they stay on track.
Particularly with respect to the business case, so I hope that answers your question.
It did thank you and if I could follow up one on operations, maybe related to Rob's comments around pricing and the increases that you've been able to achieve Rob. Thanks for your pointing out page 37, it's a good table.
How do we kind of track through the pricing increases on that table, we can see the labor increases, but as you look at kind of either same store revenues on a throughput basis or economic or physical occupancy.
Really haven't caught up in the fourth quarter.
Relative to those labor cost increases, so maybe a little bit more color on that.
And how youre thinking about that tracking through 2022.
Yes sure. Thank you.
For us.
What we've thought about as we've engaged in conversations with the majority of those customers with our customers and ultimately I think we still consistently feel like will be.
The full impact of the price increases that we put out.
<unk> will be felt really coming out of the first quarter end of the second quarter.
And at that point, we will have offset that inflation that we've seen particularly on the services side of the business.
Thank you. Our next question comes from Mike Mueller with Jpmorgan. Please proceed with your question.
Yes, hi.
Sequential revenue growth in service revenue per throughput pallet. It was about three 8% in the quarter and the prior few quarters. It was mid to high fours year over year growth. So I was wondering what drove that deceleration.
Yes, there's a number of things that factor into that which include business mix. So.
Obviously, it's.
Going in and throughout the year, you had lower throughput volume overall, we had a slight shift overall in business mix to.
Less volume less value added services, so that lower volume you tend to have less value added services and I think given the state of the supply chain some of the challenges.
What we saw is product moving through more quickly and less value added services being done within our warehouse to get the product more quickly to the end consumer but Mike its Scott I just wanted to follow up the three 8%.
Revenue year for.
<unk> throughput pallet in the same store would actually as Rob called out accelerated throughout the year.
So that was the average for the quarter, but remember as Rob worked to prices and there you saw that increase to five 9% in December as those increases as those price increases came in.
That's the way it worked its way back quarter.
Yes got that definitely picked up on that I appreciate that and then I guess in your conversations with customers have you had any instances where customers who were on fixed commitments have actually wanted to back off just because of the past couple of years experience.
We have it.
I think all of our customers as George mentioned recognize that there is a goal to get back to.
Pre COVID-19 production levels and as folks are able to bring labor back on I think everybody is going to be rising around the similar timeframe and so that leaves everybody to win.
Wanting to make sure that that space is available for them when the when the production ultimately does come back so we haven't been.
Even.
In our prepared remarks prepared remarks, we referenced the fact that our fixed commitments will continue to grow quarter over quarter and year over year. So <unk> structure, we're very comfortable with.
Thank you. Our next question comes from Craig Millman with Keybanc capital markets. Please proceed with your question.
Thanks, everyone and George I apologize I kind of cut off on Dave's first question, but I just wanted to kind of follow up.
Just because when we had chats around NAREIT I kind of ask you directly if you thought you'd be kind of the guy permanently in the newer.
Almost adamant that you wouldn't be than it's been.
Not that long with time period since I mean could you just go through kind of what changed in your view.
That got you comfortable being the permanent Guy and also just how deep you got in the search firms got into interviewing external candidates.
Yes.
What I can tell you is that there was nothing professional or a miracle base, let's say in my comments, what I said I was not a candidate.
It was about being retired and.
Being retired.
With the family and.
Working through the decision to come back to work full time, which as everybody knows is a.
A massive commitment so.
It had nothing to do with the Miracle that have nothing to do with the industry. It has nothing to do.
Other than the personal situation I was in at the time and the decision to leave that debt.
That first situation and go back to working full time, so and that did take.
A while to make sure. It was the right decision for me and my particular circumstances, so that was it.
When it comes to the search process.
I know it was extensive I know that it had a number of highly qualified candidates.
I mentioned in it probably was with view.
That it would attract a lot of incredibly talented people because it's the americold as an industry leader.
Has been an industry leader for a long time and has the capability to attract that type of account.
So that's really that's really it I can't really add any more to it.
That's helpful. And then just on the expense side it sounds like.
Youre through on your top tenants.
Gave some retention bonuses or true ups to kind of the non executives it sounds like about $16 million in total I don't know if it's more than that I know you said there was 4 million.
So maybe $20 million.
Correct, Thats about 20 million spread over.
It will hit three years, but it's $4 million that was already in this fourth quarter $11 million, which will impact next year.
2022.
And 5 million impacting 2023.
Okay, and then just trying to figure out.
What kind of cushion you guys gave yourselves in 2022.
Above that 2% to 4% to absorb.
So it may be higher.
Use of contract labor in the near term or just kind of higher wages above and beyond normal inflation.
Craig could you referenced the two what 2% to 4% of re referencing we just want to make sure. We're just the normal the normal cushion you guys have in your contracts to pass through costs.
Yes, So I think what our guide implies if you look in particular in our same store, where we're guiding actually negative 2% to flat really while we're getting the benefit of all the rate increases Rob mentioned.
Our guidance is that the disruption in the industry and I think you've seen that both in the USDA report both for last year and even the January report that was just filed just the other day.
The starting inventory the state of the inventory is not yet fully recovered we're still seeing negative year over year comps, which are weighing in to the overall guidance. So.
If you think about our outlook for the year and the implications that that same store guide entails is weak.
Mid point we.
We don't expect to see a significant recovery in 2022 or degradation as I mentioned in my prepared remarks, if we do see improvement in occupancy that will help us get to the upper end of our range, but will also drive associated throughput if we see degradation of <unk>.
Occupancy and associated throughput that will get us closer to the lower end of the range.
Okay.
Thank you. Our next question comes from Emmanuel Korchman with Citi. Please proceed with your question.
Michael Bilerman here with Manny George in Europe comment you said your ability to predict when economic and physical occupancy levels. We will fully recover was impossible and I assume the same goes for the expense recapture in terms of the amount and timing that you do.
Don't yet have the confidence and it's basically impossible to understand.
You ended your comments with some sort.
Sort of what you're doing with your customers and all of that I'm wondering if you can spend some time on the industrial side of things obviously, it's been a pretty tumultuous four months and then actually if you go back prior to you getting there.
There was a number of missteps that arguably led to the board deciding to bring three new members on them.
And terminate the prior CEO .
So what I really understand from your vantage point now that you've made the decision we made the decision to join the board and offer your devices and retiree you've now made the decision to.
The actives and fix the problems what confidence do you give to a shareholder.
That could be existing or that could be wanting to buy your stock about win we believe earnings will recover and I'm sure you've looked at the numbers.
Last year it was.
Just to be a Buck 50 for this year, that's where the street was thinking prior to.
The declines after three to print.
Even this year, we're supposed to be about 40, if you go back a year or two being at a dollar.
80% down at what point would those earnings come back so that shareholders can start underwriting that level and what confidence can you give them.
Yes, no very good question and I appreciate the sentiment.
Look my objective is to in the short term control what we can control right. That's labor management, I mentioned getting back to our permanent workforce.
On a percentage basis is far higher than it is today is controlling our development projects to ensure that they come in on time on budget and if the yields was published.
What I can't control is the recovery of the food industry when it occurs and how fast that occurs.
What I can tell you based on my years in the food industry is that when you have service levels at 70%, which I referenced in my.
Prepared remarks.
And you also have unmet demand the likes of which is higher than anything I've ever experienced in decades.
Food industry with very large customer very large manufacturers.
What I continue as they want to produce more they view that as a huge opportunity and they will do everything they can to produce more so my confidence that it'll come back historic inventory levels at Americold, specifically and in the cold chain in general will come back.
I can't be more confident of that but I can't tell you is when but when it does.
We do a good job of.
On things, we can control labor in development being the two biggest ones I am confident that investors will see the type of performance they expect from us.
The issue was when it comes back and in my prepared remarks that was being as honest as I could I can't tell you when it's going to happen.
George can you help us.
Remember when we spoke at NAREIT.
You can read read read our note it was pretty definitive that you weren't going to take the CLC extraordinary happy that you're in it but obviously.
Hi, Jeff.
Price can you just talk through a little bit on the timing because I assume acting as the interim CEO . The decision that you were making may be very different than if you were sitting in the seat for the longer term I view it as a caretaker versus someone who is strategically thinking about the business. The organization. The management team, there's a lot of <unk>.
Things that you would do with a permanent CEO that you wouldn't do as an interim and so when was the switch.
Need and how much time due diligence have you really spent in the organization.
And I recognize you've been now it's been four months what activities if you Don but how much more is coming is the board active you have three new board members, including yourselves. So I don't know if youre going to add someone else in for an independent perspective, but like.
And the board are they're going through a strategic review are you going to re change the executive management team how much more change just from an organization what about all the industry stuff.
The board thought there was an issue in the way the company is being run so I think I'm really trying to get at is what else should we be expecting.
In terms of changes from an organizational.
Capital deployment everything that goes into it from a CEO perspective.
Yes. Thanks for the question first off though I'd never considered myself a caretaker.
I had joined the board.
<unk>.
Very vested interest in Americold being successful as a board member.
I was given the support of the board.
To act as a leader not as a caretaker and Theres very little has changed in my posture or my decision making.
Literally since.
Arrived as the edge.
Leader.
So the mindset has been a mindset and energy has been consistent throughout the time period. So there is absolutely zero change.
In terms of.
Changes in the company.
I've said a number of times in my mind, there is nothing flawed with the business model of medical it is a vital component of the cold chain, it's not an optional component, it's a vital component.
Our task right now is to get our house in order and the things. We can control I mentioned labor management that I mentioned, the development projects and be ready to act.
<unk>.
All of the inventory, we possibly can when key producers can produce and to service customers that service levels that are at least 98, 5% if not higher when that occurs.
That would have been exactly what I said somebody asked me what the goal was four months ago.
It's the exact same answer today.
Thank you. Our next question comes from Michael Carroll with RBC Capital markets. Please proceed with your question.
Yes, obviously, the macro environment still remains fairly dynamic right now I guess with the current Russia conflict.
It seems like thats going to materially impact fertilizer and food exports I mean will this or could this further disrupt through production and how has this impacted your recovery outlook or expectations on the business.
Well.
Honestly very recent news will it have an impact on our European business I'm sure. It will right I mean.
It's hard to imagine that something of this magnitude.
Unfortunate as it is.
Would not have an impact on our European business, how that manifests itself I honestly don't know.
Sure you could you can theorize that energy may be an issue.
For sure.
There could be some others you've mentioned a couple I can't really predict it but I can tell you. We're extremely focused on it we will on the phone with our European team. This morning, we discuss it but I think it's wait and see it needs for the next couple of weeks to see what happens.
Okay, and then within your I mean, obviously you have a pretty global portfolio in the supply chain is pretty interlinked.
The weakness mainly be in Europe , or could you see issues in your Australian and South American and potentially our U S portfolio I guess, how insulated as the U S portfolio from this.
Right.
Think if you step back and look the U S portfolio is being impacted in the supply chain challenges that are being discussed are really global in nature. So theyre not unique to Europe theyre not unique to the U S are not unique to the other geographies that we operate in so we're seeing global challenges similar challenges around the globe.
Round labor labor availability power inflation. So we're addressing those on all fronts, Mike. So I don't think we see unique things if you step back many of the geographies that we serve tend to be bread basket geographies, where there are producers of food that we do export around the globe.
Right. So we will have to be seen how import flows import export flows change as a result of what's coming on in Europe , but the general markets. We serve are bread baskets.
I'll just add.
So think of impact in geographies, such as North America, Australia, New Zealand it probably is more on the import side and how those flows change given recent events.
And less so.
In country in that.
That's at least what we think today.
But.
But we will see again as.
As you can imagine incredibly fluid.
Situation and very new.
Thank you. Our next question comes from Samir Khanal with Evercore ISI. Please proceed with your question.
Good afternoon, everybody, Hey, Hey, Mark you talked about the guidance a little bit earlier, maybe help us understand what's sort of baked into the low end of guidance I know you talked about it.
During in the deterioration of occupancy I mean can you help us sort of quantify that.
Just trying to understand a bit more kind of the worst case scenario and me on the other side of that.
And what occupancy Youre assuming.
Yes.
If you look at.
Our economic occupancy in these occupancies just to remind everyone or the average for the quarter, but were roughly carrying in.
Q4, roughly 144 basis points.
Decline year over year across the portfolio.
And so roughly if you think about our guidance going into next year really carries that.
Russ.
Year over year decline forward. So we're thinking somewhere occupancy should be on a year over year basis anywhere between 100 to 200 basis points down on average throughout the year.
So what gets US improvement obviously is if we see a more quick recovery.
And we see greater occupancy and throughput that will drive us up to the upper end of the range. If the market continues to deteriorate. So just as George mentioned in his remarks all of US then consumers remained strong but the challenge is definitely persist in the industry in terms of labor availability and food production.
So it does continue to be challenge and.
It's a great from where they are today that could put pressure on and move us towards the lower end of the guidance.
Okay got it and I guess, Georgia second question here is.
I guess, what have you heard from your food manufacturing customers given your background as to when do you think we'll get back to sort of a sort of a normalized inventory level I know you said it sort of.
Uncertainty out there, but based on kind of your context, what do you what are you hearing directly from them.
What I'm hearing is that when they can attract the labor that they need in terms of numbers have the time to train them make them productive.
And then get the right flow and cadence of how they produce efficiently.
Inventories will build and that makes perfect sense to me that's exactly how it's done what they cannot offer is timing.
It gets back to.
Some of the comments in my prepared remarks, I mean, we've seen cases, where optimism.
Started to take hold and then.
Three steps back with <unk> and.
I think that has really been a shock to the system in terms of how quickly things can change.
It's prevented people from attempting to predict the future quite frankly, and I can certainly understand that.
Again, I know theyre motivated beyond motivated to ramp up.
Producing fluid for sale is what they do and I spent a lot of time and that I can tell you it's something they take very seriously.
But until the labor barriers removed they really have.
They're really handcuffed and.
Again timing is just something people are even willing to discuss because.
Yes.
It's just very variable based on labor availability.
Thank you. Our next question is from <unk> bin Kim with true Securities. Please proceed with your question.
Thanks, Tom and good evening everyone.
Just going back to your ability to push on inflationary costs to your tenants.
I didn't get it.
Might have missed it but I don't think I got it.
I'll answer on that in terms of like what percent is that what percent of your customers.
Including those in the variable I guess, you've pushed it all grew but especially those on a fixed contract basis like what percent of your customers are actually taking on the increases how much of the increases have been pushed through.
Yes, we've had.
Conversations across our entire customer portfolio.
<unk>.
Our top 100 customers those outside of the top 100, and those customers on fixed commitment contracts.
Yes.
Issues that.
<unk> experienced from a cost standpoint are extremely macro in nature. They are not specific to americold.
And we.
So the conversations have been very rational in our contracts do allow as we described in the prepared remarks for cost changes beyond our control, which is what the majority of these costs are and so we've been able to have the conversations across our entire customer base and maybe I can add.
Having been a customer in the not too distant past that strength of Americold has to be very analytical and the discussion so.
Fourth our price increase justified on actual data on customer performance and a cost base of the customer can relate to.
I think thats incredibly helpful. When passing these price increases through and a big part of the reason that they have had 100% of the portfolio and have gone through the system exactly as Rob mentioned and in line with our guidance last quarter that exiting the first quarter of this year, we will recur.
<unk>, all known inflation in our cost structure.
As scheduled.
Okay and in terms of G&A increase.
Youre guiding towards almost a $40 million increase I don't think there is I don't cover all risk, but that's probably got viewpoint the biggest ones.
Especially in light of your stock price, which is.
In a challenging situation.
G&A increase these are a little more attention can.
Can you just help us understand.
Why that size of magnitude and break it down a little bit further so we understand what's happening.
Yes.
Thanks, Mark and as I said in my prepared remarks, the key drivers of the increase are really the resumption of performance based cash incentive compensation. So obviously with the performance in 2021 that was not accrued are included in the year end results that wasn't earned but we do in our plan going forward with.
Do plan for that in the ordinary course.
Additionally on top of that we've talked about in my prepared remarks, the incremental $11 million of <unk>.
Noncash share expense retained are related to the pension program. The share based retention program that was put in place this year.
So those two items make up more than half of that increase.
On top of that one of the things we're doing.
IP is we're transitioning more of our software as we integrate businesses to a software as a service platform.
That does is it puts a little more operational expense in G&A, but it actually saves us maintenance capex over time, so from an <unk> perspective, those types of investments should be neutral.
From and then the last thing we continue to see is just inflationary cost pressures spill on overall wage environment.
Insurance, yes.
Travel et cetera, et cetera. So those other additional costs that are embedded in our G&A. Your normal annual treadmill costs are what make up for that.
Thank you. Our next question comes from Joshua <unk> with Bank of America. Please proceed with your question.
Yes, hey, everyone.
I wanted to ask about the 8-K.
The executive severance severance benefits plan is that it.
Changing control payouts, new or or or if it's not new is it different than what it was previously and if so why.
No they're consistent with what they previously were.
I think we've changed our function in terms of employment agreement is going to the standard program and Youll see that.
In terms of the benefits are very consistent if you look at our proxy from last year.
Okay. Okay.
I guess why.
Why would if needed like the new one the old one.
So just because you have.
Sure.
Yes, I think its something in terms of one of the things that are fortunate and working on in terms of moving to one of the best practices that they see in the industry and we're following the best practice.
Okay got it and then I wanted to ask about.
On page 37.
Should we be more focused on.
The economic occupancy and physical occupancy for the same store rent and storage revenues per occupied pallet, because I see that the.
Looks like for Q 'twenty, one on the physical side was declined versus what you had in <unk>.
Yes, yes, so definitely the economic occupancy is what truly drives our financial results. So we really encourage people to look at the economic occupancy the physical occupancy we always show it because obviously.
One of the things that drive throughput as the physical holdings of product in the network and clearly as you see what the physical holdings, just as you've heard I've.
As mentioned on our prepared remarks, the challenges in the overall food supply chain are definitely weighing on good producers ability to produce and thats showing up in our physical occupancy.
Okay.
Thank you. Our next question comes from Vince to Bone with Green Street. Please proceed with your question.
Hi, Good evening could you elaborate on the operating efficiency.
Mentioned that will help offset wage inflation given the majority of the wage increases were given in the back half of 'twenty. One I was surprised to see the guidance implies same store expenses to be down in 'twenty. Two any just color you can give on these fronts would be helpful.
Yes.
For two operating efficiency, it's really the mix between temp and Perm labor.
Which we wanted to dramatically shift to permanent labor.
And then second the approach the productivity you get with a permanent workforce. Once you have the ability to train them and get them to work in a rhythm.
Where they are consistently doing the same job for a period of time, which you never get the chance to deal with temp labor.
That in and of itself drives efficiencies around labor for throughput pallet et cetera, et cetera, and that's what I was referring to on the productivity front.
Got it that's helpful. And then is this how should we think about just the expenses and how they're trending as occupancy recovers.
We're focused a lot on this year, but maybe thinking a little bit 23 and beyond.
Occupancy rebounds.
Much more employees expense load do you think it would be negative to support the growing volumes or maybe Conversely, how much can you cut labor expenses, this year or when when inventory or occupancy could be could be down again.
Yes, so the way the way we manage our business on the throughput side is that the labor force is highly variable and theyre manage based on the work content presented so obviously as we start to see more production come up greater volume come in we will increase our.
<unk> spend on variable labor to support that volume.
But there is embedded margin in that and so with that higher throughput will earn not only greater dollars from starting that product, but we also earned product earn margin handling that product on behalf of our customers.
Thank you. Our next question comes from Anthony Powell with Barclays. Please proceed with your question.
Hi, Good evening question on your development I guess, you have starts up a $100 million and 200 million this year.
What returns are you looking at.
The returns still in the low teens given all of the.
Labor cost increases and whatnot.
However, returns I guess trended or how that should they trend going forward.
Yes. So if you look at page 41 of our supplement which details.
We're still seeing development opportunities and this is a cash on cash unlevered basis, where we believe we can generate yield stabilized yield in the low double digits.
With that I will.
Remind people.
The yields that we quote upon stabilization include not only the return for the infrastructure, but also the return for the services that we provide within that infrastructure.
Okay.
And that Hasnt changed.
Why hasn't that change why hasnt been gone down I guess, given given higher labor costs and what's allowed you to kind of maintain those levels given the environment.
I think because that's how we price. So obviously the cost side as an input to it can be margin up to drive our returns not just just as Rob has pricing inflation.
The existing portfolio he sees pricing inflation exactly the same way.
And a development project. So if accounted for identically got it alright, and I guess on the guidance. So the guidance doesn't assume any kind of additional needed a discussion with.
Customers in terms of price increases right. So.
It assumes that what you've done already is all you need to do that alright.
Yes.
We said in the prepared remarks, we've priced what we've seen if we continue to see inflation beyond the embedded normal escalation in our contract that would require us to go back to customers and as Rob mentioned in Jordan mentioned, both in their prepared remarks, there tends to be a slight lag where we need to.
<unk> that for a period of days and then we can.
Work to implement the rate increase.
So.
Thank you. Our next question is from Bill Crow with Raymond James. Please proceed with your question.
Yeah. Thanks, Good evening, George maybe it's just me, but the picture.
I think it's been painted Tonight is a company that has not been particularly well run and you talk about the.
The challenges.
Deliberate.
Service to your customers and that sort of thing I guess, the very fact that you are on this call into Q.
There has been a problem and I guess I'm trying to do.
I guess, maybe one did.
It <unk> make a mistake selling too.
To Americold and is that really prompted you or your decision that whole time.
Resurrect that number.
Number two.
Going back to <unk> comment.
If it has been talking about.
Challenging business.
Over the past couple of years, why is G&A going up $40 million and how much of that is staying at headquarters versus.
Workers out in the field.
Yes, I'll, let mark address the G&A question, but the first part of your question.
I don't think Americold has been run poorly just to be perfectly clear if you look at.
The company I'm aware of in the food industry.
And other than the cold chain lightweight category merchants the <unk>.
Macro economic environment, driven by Covid and unavailable labor, Okay, something I've never experienced in my career I've experienced high cost labor before I've never experienced unavailable labor to this degree I think that's what has really impacted service levels Thats what is really.
Disrupted companies and as we've said a lot of times Americold is not immune to those macroeconomic issues. So.
But to clarify no it's still our job to build that to where we were and beyond when it comes to customer service when it comes to our labor mix between permanent.
And temp labor and when it comes to ensuring our development projects deliver those are all things. We can control those are all things we have to make sure.
Emerge stronger than they were pre COVID-19 .
But but I don't I don't think its americold.
<unk>.
And in a poor way, it's the macroeconomic environment that impacted every company in the food supply chain.
So mark if you want to address the G&A.
So on the G&A price as I mentioned previously.
It's.
The step up is this is a performance driven culture and I think you've heard that through what George said clearly last year was not a performance.
The leadership team or.
The management team.
And the operators of the business earn their full incentives, but when we do plan, we've set aggressive targets and we plan to pay those cash incentives.
That's part of just the year over year step up.
The next piece is quite the contrary.
<unk> called the thought of as industry leaders, we develop talent and our leaders are well thought of throughout the industry.
So as part of that we improved our re tenant grant.
For tax that talent that we have across the organization as I mentioned natural approximately $11 million next year of that increase.
The final two buckets as I said as we're transitioning and as we're integrating systems and integrating our recent acquisitions were moving away from buying software to entering into agreements with our software providers, where it's software as a service so that manifests itself in our G&A and what Youll see over.
Time is a reduction in our maintenance capital spend around IP.
Think about those are both the component to <unk> and they will net offset each other overtime. So geography question. The final one is there is normal inflationary impact overall in the environment.
<unk>.
On core corporate salaries, and other overheads, such as travel insurance and just associated benefits.
That helps you bridge the gap.
I appreciate that Marc can you tell me how your how your thoughts about external growth acquisitions and development by the changed over the last.
Six to eight months as your cost of capital has gone from kind of an advantage for you to pretty significant handicap.
Yes look I think.
So we're very aware of the recent.
The recent impact of our cost of capital, but I think our core business model is designed around how do we continue to support our customers and their growth and we accomplished that a number of ways. We're focused on driving organic growth through our portfolio, we're focused on supporting our customers through.
Dedicated development project that support their business as I mentioned in my prepared remarks, we have six deliveries of projects in 2022 four of those are customer dedicated and those tend to be the larger projects and then lastly, we remain focused on strategic acquisition.
That enhance the platform and enhance our ability to serve our customers around the globe.
Thank you. This completes our question and answer session. Thank you for your participation you may now disconnect.