Q4 2021 AppHarvest Inc Earnings Call
Yes.
Good day, and thank you for standing by welcome to the harvest fourth quarter and full year 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 to ask a question you will need to press star one on your telephone if you require any further assistance. Please press star Zero now, it's my pleasure to hand, the conference over to your host today cave. Okay. Thank you.
Please go ahead.
Thank you for joining us on the App harvest fourth quarter and full year 2021 earnings call.
Back to you Ari 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.
Julie Nelson, Chief operating Officer, and Lauren Angleton, Chief Financial Officer, a copy of our earnings release and slide presentation is available on our investor website at investors <unk> App harvests dot com on today's call. We will begin with prepared remarks, and Jonathan and the rest of the team then we will open the call to 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 forward looking statements. The company disclaims any intent or obligation to update them for additional information.
Important factors that could affect these expectations. Please see our most recent SEC filings and now I'd like to turn the call over to Jonathan.
Thanks, Colby I'm proud of the progress our team made in our first full year of operations and as a public company from our initial form in Morehead, Kentucky, We produced over 18 million pounds Tomatoes, achieving over $9 million in net revenue and distributing product to thousands of top grocery stores and restaurants last year.
We expect to more than double that in total company sales in 2022 by the end of this year. We're on track to quadruple our number of farms opening three new farms. In addition to Moorehead. We expect these forms to accelerate our sales growth enable us to be financially self sufficient and attracts new investment that will allow us to continue to grow our high.
Tech form network in central Appalachia and beyond.
We're only in the first inning when it comes to the growth of the controlled environment agriculture industry in the United States and App harvest is extremely well positioned to grow within CE. We're partnered with the top players in the industry and we see growing demand for our large national customers. These customers are looking to significantly increase their local U S supply.
A fresh fruits and vegetables, especially from adds scale full product line providers like App harvest, who also operate in a more sustainable way, while carrying out our mission.
While carrying out a mission that include supporting good jobs in agriculture are planned to meet this growing demand puts nature first boosted by World class technology inside a network of high Tech Indoor farms, we believe our high tech forms are advantaged over the long term versus other small scale approaches.
As the benefits of passive solar and rainwater recapture helped to make our facilities less natural resource intensive.
We recognize that a leading approach must be backed by a world class operation and that's why we took the step last week to reduce primarily non operations head count and open positions in our corporate office by approximately 50%.
We structured the business to better align around farm operations.
A process that impacted nearly every department across the company. We expect this action will generate around $16 million in annualized run rate savings for us to reinvest in the business, which David and Laura will discuss in greater detail turning to the fourth quarter. We continued to deliver on our top priority of efficient harvesting at Moorhead.
All remaining on track with the timeline on our three new farms. We accomplished this while achieving net sales results that were a little better than expected as we finished the year with.
With the solid performance on shipping premium Tomatoes, and a slight tailwind from higher tomato pricing. We delivered on the 2021 annual outlook that we shared in August and we're confident in our ability to achieve the 2022 outlook that we introduced today to sum up we're making progress toward our long term goal of building App harvest in.
One of the most trusted sustainable food companies in the world and into a leading applied technology company, serving the global <unk> industry with robotics and software solutions that we've had some challenges as we've ramped up over our first two growing seasons, we've applied those lessons learned and we remain on track to complete one of the biggest CE.
<unk> build outs in the world in 2022 with a steadily improving operation of Moorhead, our more streamlined corporate center and a more robust operating playbook for three new forms opening this year. Our teams are focused on core business improvement and positive operating cash flow generation and.
And let me be clear these actions were taken with the intention of enabling us to secure the additional funding needed to keep pursuing our goal to get to 12 farms by the end of 2025 finally as one of a handful of traded public benefit corporations that is also B Corp. Certified we're spearheading the move to a sustainable.
Annabelle future for agriculture, with ESG principles as our foundation I will now ask our president David Li to give more detail on our year end results and year ahead David.
Thanks, Jonathan I'm also pleased with our strong finish to our first year, we focus on the fundamentals of our business and delivered our top priorities continuing to improve operational performance at Morehead and remaining on track to quadruple our number of farms. This year, all while successfully NAV.
The gating a challenging supply chain environment.
We also completed a significant reduction in force and issued a 2022 outlook that we expect will more than double our topline and keep adjusted EBITDA in line with last year, Despite rising cost pressures and a much larger farm network compared to last year.
We believe that completing our current development phase puts us in a prime position to deliver positive operating cash flow with our four farm network.
Beyond the four farms, we plan to develop additional facilities only after securing the required capital and we remain confident in our ability to do that and be self sufficient.
Fundamental improvements we are driving in our business has been key to our success in this area.
We have seen strong early results from appointing Julie Nelson as our head of operations over the summer.
That's why I'm, especially pleased to announce her promotion to Chief operating officer, leading both farm development and operations.
With her deep operational experience from Pepsico Julie's data driven approach has been instrumental in leveraging performance management to drive accountability to.
To enhance our training programs to improve productivity.
And to implement a new supply chain process.
The operational rigor that Julie and her team are implementing is a critical part of our profitable growth plans as we continue to scale operations across four farms and diversify with new crops.
Now I'd like to ask Julie to review operational highlights Julie.
Thank you David.
In the fourth quarter, the harvest from our second growing season at Moorhead begin to ramp up can we sell nearly $4 4 million pounds at.
Perfect.
This resulted in net sales price of 61 cents per pound almost double the price we achieved in the third quarter.
The team drove these results with a more favorable ratio of premium to Nina and better gross market prices for Temenos.
We continue to expect the main driver of our financial results to be delivering on our operational Kpis, which as Jonathan noted is the focus of the organization.
Encouragingly through the first few weeks of Q1 2022, when compared to our Q4 results.
Tracking sustainable yield of $3 million plus more pounds of containers in Q1 from Q4.
Quality levels and to meet our growth market prices in line with Q4.
And distribution fee expenses in line with our internal projections.
Slight increases in the cost of freight.
The inflation impacting other industries has affected our business as well and we have been executing an aggressive plan to attack it.
First by planning for it within our financial outlook.
And then by significantly reducing our own cost structure.
And by supporting our partners as they work with end customers to pass along price increases.
Now, let me hand, it back over to David Lee.
As a pioneer in the industry App harvest also is seeing potential benefits as the controlled environment agriculture sector or CA sector continues to mature.
Working closely with our distributor mastronardi produce we are reaching the top 25 national grocery store chains and restaurants.
In fact, we've been sold in more than 1000 stores and mastronardi confirms that buyers are appreciating the reliable quality and consistent volume that CA farms can deliver as compared to open field agriculture.
We expect this to result in our ability to continue to take additional shelf space in the produce aisle.
You no doubt have noticed the increasing investment in CA coming from some of these top retail customers private equity and other ESG focused investors. In addition to the general market.
This recognition of the quality and sustainability benefits of <unk> stands to benefit the entire sector.
In summary, our focus on the fundamentals is paying off our premium volumes have increased and our quality is steadily improving.
We have implemented robust cost containment measures and believe these actions will lead to more consistent and improved operating and financial performance.
We remain confident in the fundamentals of our core business. The continued growth of our industry and in our ability to drive positive operating cash flow as we soon transition from heavy building to scaling network operations.
Before I turn it over to our CFO Loren Angleton I'd like to acknowledge the employment of Kevin Willis to the App Harvest Board of directors that was announced earlier this month.
Kevin is senior Vice President and CFO of Ashland, a global public specialty materials company and joined the board as Chairman of the Audit Committee, Kevin is a seasoned leader who brings expertise talent and independents to the board and we expect his appointment will accelerate our efforts to create.
Long term value for all shareholders.
Now over to Loren, who will review, our financial performance and outlook in greater detail.
Lauren.
Thanks, David.
Start by briefly reviewing our fourth quarter and full year results give an update on our development progress and then move to the 2022 outlook.
We achieved fourth quarter net sales of $3 $1 million as compared to no sales in the fourth quarter of 2020 before are more farmers operational.
Fourth quarter net loss of $88 $4 million was driven by a $59 9 million dollar impairment of goodwill and intangible assets, which we discussed in our preliminary results released on January 31.
Our fourth quarter adjusted EBITDA loss was $18 $3 million in terms of yield we generated approximately $4 4 million pounds of tomatoes for sale.
Now a 3 million pounds above our third quarter production levels.
For the full year 2021, we achieved net sales of $9 $1 million versus our previously announced outlook of $7 million to $9 million.
And Ruben quality and higher than projected tomato market prices in Q4 enabled us to deliver sales results above the high end of our 2021 net sales guidance.
We recorded a net loss of $166 $2 million and adjusted EBITDA loss was $69 $9 million.
That performance is slightly better than our previous outlook of an adjusted EBITDA loss of $70 million to $75 million.
Primarily driven by higher sales improved operating performance and better cost containment.
Let me turn next to our progress on farm development and financing.
Work continues on our previously announced CEO facilities under construction.
The three farms remain on schedule and we expect them to begin operating by the end of the year.
<unk> 15 acre Berea, Kentucky salad Greens facility is about 68% complete.
Ah 60 acre Richmond, Kentucky tomato facility is approximately 65% complete.
And the 30 acre Somerset, Kentucky, Barrie facility is about 55% complete.
We expect to ramp up each facility with a phased approach that brings on additional acreage over time similar to the opening of the full 60 acres at Moorhead.
We expect that the first phased opening of this kind will be at the <unk> facility. Starting this summer as David mentioned, we believe the completion of our current development phase with our four farm network to be an important milestone at.
It enables us to be financially self reliant and use only the funding we have secured so far to generate positive operating cash flow over time.
Turning to the balance sheet, we ended the year with cash and cash equivalents of $151 million and we have approximately $59 million and availability remaining on our credit facility with equilibrium capital as we announced in December . We also established a $100 million committed equity facility with B Riley principal capital.
But we have yet to draw upon.
Lastly, there remain two of our facilities Berea, and Somerset, which we have yet to announce permanent financing for.
But that we believe can become additional sources of liquidity through asset backed loan structures. We are currently negotiating these types of financing arrangements with interested parties and are highly confident that these two farms can raise incremental capital in a similar fashion to moorhead enrichment.
In terms of capital expenditures for the full year 2022.
We expect to invest approximately $140 million to $150 million.
Which accounts for the completion of the three construction projects underway and their related equipment needed to run them.
Importantly of this total we anticipate only $40 million or so we'll need to be funded with balance sheet cash as we expect our existing credit line arrangements with equilibrium and J P. Morgan to satisfy the majority of our 2022 capex needs.
Now, let me turn to our full year 2022, net sales and adjusted EBITDA outlook.
For now we are limiting guidance to full year 2022 only.
We expect to deliver total company net sales in the range of $24 million to $32 million. This year drew.
Driven by production from Moorehead.
We expect a contribution in the mid single digit million range from the three new farms based on their estimated completion dates towards the end of the year.
Additionally, our outlook for Moorhead also accounts for steps, we recently took to mitigate the impacts of a disease affecting some of our tomato plants there.
Which we estimate could reduce yields by between 10 and 15% from 2022.
As mentioned however, these effects are already reflected in our 2022 outlook and the proactive steps we took to mitigate the issue appear to have been well timed and effective.
Regarding adjusted EBITDA, our full year 2022 loss expectation is in the range from $70 million to $80 million were just modestly higher than the $69 9 million in 2021. Despite the expected quadrupling of the size of our farm network and significant year over year inflation.
Similar to others, we have observed cost bikes and a number of important areas of our business such as a 20% increase year over year in the cost of freight.
A 16% increase in health care as.
As well as significant increases in cost of electricity natural gas and paper products that we use in our packaging.
The good news is our outlook reflects the anticipated negative impacts from inflation, which we have moved aggressively to mitigate.
We're also cautiously optimistic such increases won't continue at these levels throughout the year.
If inflationary pressures continue we are prepared to take additional steps to reduce our cost structure similar to the action, we just completed which resulted.
And approximately $16 million in annualized savings I remain confident in our team's continued ability to operate efficiently.
I'm proud of the progress we've made to streamline the organization to position the company and our shareholders for future profitable growth.
With that I'll turn it back over to our VP of finance and Investor Relations Cava Bakhtiar.
Thank you Lauren with that operator, we'll now begin to take questions.
Thank you Sir as a reminder to all participants if you would like to ask a question. Please press star one on your phone again. Please press star followed by the number one on your telephone keypad. Please standby, while we compile the Q&A roster.
Okay.
Your first question comes from the line of Brian Holland with Cowen <unk> Company. Your line is open.
Yes, Thanks, and appreciate all the color around the update.
I'm curious and forgive me if you've made any reference to this but just the update on <unk>.
Your route AI robotics acquisition and.
The harvesting tools.
How they've been deployed and the progress they're making.
Thanks, Brian This is David Lee the good news is we're very pleased with the progress and how we've been using our technology from route AI. One metric. We track is that are picking speed actually from our robots are two times faster already than when we initially made our acquisition and importantly, we've already deployed the initial.
Version of the Labor management software solution that goes well beyond robotics, it's about managing the information flow in these controlled environment AG facilities.
We're very excited about the technology.
And we remain confident as we mentioned in previous calls that there is sufficient appetite from new external investors to spin out of what we are.
Now, calling our tech business, but we're not providing material update on that initiative in this quarterly release.
Understood. Thank you and then you've made reference to kind of the retail landscape.
Obviously encouraging to hear about the increased distribution.
I was wondering if you could just kind of talk about that retail landscape and given the broader supply chain issues.
And product shortages, including.
The protein space.
Obviously, youre limited by your capacity and I'll presume that the interest in your product exceeds.
Your capacity today, but I'm wondering if that delta has widened at all in recent months for the exact reason that you referenced earlier that retailers are seeing the product.
And beginning to appreciate the relative supply security.
As compared to conventional techniques.
Yes, Brian the demand for CBA production in the U S continues to strengthen and grow.
I would say across all the grocer network, we mentioned that.
Through mastronardi reach over 25 of the top 20 grocers in the U S.
The grocery demand as well as as foodservice demand continues to strengthen across products and thats for US why we're focused on getting these three additional farms online.
And we're focused on being able to have a diversity of crop by the end of the year to service that demand and we don't see that.
Slowing down anytime soon.
And then for US it's about quality.
Quality and reliability and consistency on a year round basis. So the demand side is there and for US It's simple head down execution between now and the end of the year.
I appreciate the color.
Michael There are others on the line I'll ask one more and then get back in the queue, but just thinking about the construct of the fiscal 'twenty two revenue guide I.
I'm wondering what's being assumed to the extent you can discuss from the yield side and from the price side. So all of those two factors come together.
Just just thinking about kind of level of conservatism that's being built in.
Because obviously that's going to be a question that gets asked as you think about the kind of growth that you're projecting.
How are they going to get there, but getting there from yield or is there an assumption of getting price versus just wondering if you can help us segment those two factors.
The revenue number thank you.
Sure. It's a great question first Brian It is important since we're a new public company to reiterate our overall philosophy on guidance you recall that in the summer we changed our guidance for 2021, because we wanted to have a balanced view and guide to numbers. We believe we could achieve that hit and that has not changed in that.
<unk> that we've offered today.
I'd say, while we are not breaking out today. The components for example of net price per pound you will note that in our results in Q4, we were extremely pleased with what we saw in the marketplace. One of those factors and you and I have discussed can be viewed as outside our control and in fact in previous quarters, we talked about how over a 10 year.
Tomato prices in general will revert back to the mean, even if they enter at trough relatively quickly while we can't predict what that would be the Q4 results are encouraging.
Im going to turn it to Julie in a moment because in the first two weeks of this quarter. While it is very early there are some interesting signs for our progress against our achievement in 2022, Julie can you offer some perspective in the first two weeks.
Sure.
Sure Yes.
We are.
As mentioned earlier, we are on track to.
That is now over 3 million more pounds in Q1 versus Q4.
There are two key drivers of this increase in yield.
And the first part of Q4, we were ramping up production following our summer refresh.
The harvest actually began at the end of October and.
In Q1, we expect to have a full three months of production.
In addition, as our plants mature.
We increased our density.
So we should have higher output per square meter as we get further into the season and Thats really the primary driver as Lauren mentioned in his comments as we think about our competition of farms Morehead, it's very important for those operational factors Lauren can provide any additional commentary on how to think about the remainder of the guidance, but we're really.
<unk> on Morehead and standing up these three facilities.
Does that answer your question Brian .
Yes, It does I appreciate it David Thank you.
Okay.
Your next question comes from the line of Ben Sawyer with Barclays. Your line is open.
Perfect.
Thank you very much and congrats on results.
First question is just following up a little bit on what youre seeing within your facilities.
The yield obviously.
You hit the guidance on the higher end slightly exceeded.
But if you look into some of the operational issues and the yield is coming out.
How much of that.
The sequential improvement that you've just mentioned that youre trailing about 3 million pounds better on a quarterly basis, but.
Just to understand what would be like optimal level in terms of volume and a quarter and.
What does it need to get to that level.
Next question.
Well first its important to remind Ted.
Chad This is David Lee by the way. Thank you for the question.
We have the benefit within our Moorhead facility to be now enjoying essentially the third season in harvest and the lessons learned from the first two which include a plan to refresh. This year means that you will see similar quarterly variation in our annual results. It's one of the reasons why we're guiding to the full year.
But as I mentioned in the previous question by Brian .
The impact of yields and the impact on market pricing from our guidance perspective is based on what we deliver having now experienced two full seasons and a refresh if you recall when we were first going public.
Short year ago, we had not even fully stood up for or received any empirical data on what can be produced.
The benefit of better management with Julie Nelson, but we also had a history and data.
That I don't think I can break out for you the components I can tell you. We do look at yield for number one quality USDA non number one USDA, but we're not breaking that detail out for you as you look at Morehead.
It contributes to our overall annual guidance.
Okay, perfect and then.
Yes.
Obviously.
Okay.
Out here and Thats call it about 141.
<unk>.
Yes very much.
Yes.
We currently have.
All the financing on construction financing.
Mark just to be sure.
How are you going to plan on the findings.
You think about the cash flow in 2022, how much.
Capex is actually going to be funded.
Out of your cash balance and how much is coming from project finance Keith could you clarify that.
Yes.
Alright.
So we've got $151 million in cash.
59 million and availability on our equilibrium credit facility, we're still at the Jpmorgan credit facility, we estimate that with our 2022 Capex plan that we're only going to be using approximately $40 million of cash on the balance sheet.
The credit facilities.
And thats not including the CF facility.
Okay perfect. Thank you very much.
Your next question is from the line of Kristen.
All in with Oppenheimer. Your line is open.
Great. Thank you so much for taking the question.
Hi, Thanks.
Tim I wanted to come back to the question about pricing and not so much to understand and what the assumptions are in 2022, but you really understand chow.
It changes that you are making on the operational side are influencing your net pricing.
As you've seen any signs that you are reporting in the quarter Thats, obviously a function of that.
The yield is number one tomatoes.
The market pricing that you're receiving so I'm wondering if you could just help us parse out how much of that incremental pricing you're achieving as a result of that improved yield and then I'll have a follow up thank you.
Yes, just before I turn to Julie Who's who really runs the business for US just to reminder, Kristen there are three components of net pricing for us that we drove in our Q4 performance. The first obviously is the absolute amount of high quality number one tomatoes, which as you know yields are significantly higher price in market.
That's obviously most important but the second is the extent to which we can leverage direct ship customers and not expand against the distribution expense associated with it for those high quality Tomatoes.
We've identified examples of those customers from previous quarters, but theyre very large foodservice and retail customers. We eliminate another take out of our gross sales to net sales and then the third piece is <unk>.
Those two we have actually more varieties.
Look forward to 2022, and we will have three additional facilities with berries in greenway and another tomato facility, but even within what we have at Morehead. There are different varieties that command different prices that all contribute to our realized benefit on net sales per pound julie's or any other color one offer thanks David.
One of the key drivers of our ability to deliver premium product is the quality of our labor.
And our investments in hands on training and performance management Hasnt paying off our labor productivity and importantly, our labor quality has been steadily improving since the beginning and Stephen too.
I'd also like.
Some additional commentary on our distribution expense.
We have both freight and handling charges.
That make up our distribution expense.
<unk> freight.
Work closely with our distributor master any prejudice to ensure our truck utilization, meaning the amount of product we have on the trailer is as high as possible.
Also working as David mentioned with Mastercard to maximize the number of shipments that we make that go directly to customers and this reduces miles interim reducing freight expense and also importantly reduces handling charges that we might otherwise incur and their distribution facilities.
I appreciate that color actually dovetails into my next question, which is really about as you start to layer in these additional products I'm talking about leafy green sorry at the end of next year.
I understand that this will not contribute to the 2022 performance, but as we're thinking about sort of the long term business model here can you just update us on how you're thinking about that mix of incremental product on deals.
The overall impact on the P&L sort of exiting 2022, and how we think about the seasonality of the business at a full run rate in 2023.
Hey, Chris This is Lauren I think.
We mentioned on our call.
Of the net sales.
Look for the year of the 24 to 32, we expect.
The new farm, so the <unk> 30 acre barriers Somerset.
As well as the new 60 acre tomato enrichment to contribute approximately mid single digit million.
Of that outlook.
And so again.
All three of those we expect to be online.
And producing by the end of this calendar year.
One thing that I would add is with the addition of three new farms, we have a great opportunity to realize SG&A leverage.
Our management team across the three farms and we have purchasing leverage as well.
So we'll see.
Cost improvements associated with the entrance of new farms.
Christian one note that Youre hearing on this call that may seem different although it's not different operationally is.
As you heard me say, we're really focused on the rigor and the basics of operating what we can control. So as a result, we're guiding to only 2022, because we have line of sight to 2022, and we're really focused on what we can achieve in the range of guidance, but that range of guidance does include a contribution from these three new farms.
As you've heard on all three of them were greater well over 50% complete.
Which is why we are comfortable including it in our guidance.
Thank you I appreciate all the color.
Your last question is from the line of Raj Sharma with B Riley Your line is open.
Hello, Good afternoon guys.
I just wanted to ask about the farm economics from.
From what you've indicated earlier just a question really trying to understand how the.
Unit economics, the revenues and EBITDA long term sort of run rate fully loaded.
Those unit economics changed at all given recent challenges and learnings that I mean should we assume any changes longer term due to supply chain costs.
At all could you could you comment on that please.
Sure.
Raj. Thank you for the question our unit economics. Since we are just now coming into our own and our third season in our first farm is really about our long term guidance and as you've noted we are not providing any update or changing our long term guidance.
When you think about our business with regard to your question on the recent environment. We have the privilege of serving primarily a U S driven business for which there is excess demand today and as you heard us say for our new farms, we purchased a number of the materials in advance and so relative to the news of today versus.
Other investments some of our investors have made we feel very good about our ability to deliver against the unit economics for our business.
But more than that we really are not offering any change in perspective today on our long term guidance.
Got it got it and then.
Yeah.
A question on just can you give more color on the comp competitive dynamics.
Mexican imports just the recent suspension of avocado inputs I know you don't get an outgoing avocados, but any sort of impact do you foresee any competitive changes that you foresee.
Going forward.
Yes.
The tailwind or back Raj I mean, what you just saw with the <unk>.
Avocado import restriction coming out of Mexico into the U S. It's very real and <unk>.
<unk> got Fortune 100, Fortune 500 grocers.
That are holding that liability thats going on their shelf.
And people are very aware of it so.
Again, you can look at the La times article that came out a month or two months ago.
With tomato imports that were being restricted from Mexico into the U S.
This again will continue to escalate over time and I think as is something that will ultimately benefit the industry in the U S. As we clean up our our agricultural agriculture system in North America.
Got it got it great. Thank you for answering my questions I'll take it offline.
Okay.
As there are no more questions. Thank you that ends our question and answer session as well as our call for today everyone. Thank you for participating you may now disconnect stay safe and well have a good day.
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