Q1 2022 Americold Realty Trust Earnings Call
Okay.
Good day and welcome to the Americold Realty Trust first quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Scott Henderson VP of capital markets and Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us today for Americold Realty Trust first quarter 2022 earnings Conference call.
Addition to the press release distributed this afternoon.
A supplemental package with additional detail on our results, which is available on the Investor Relations section on our website at Www Dot <unk> Dot com.
Afternoons conference call is hosted by <unk>, Chief Executive Officer, George <unk>, Chief Commercial Officer, Rob Chambers, Chief Financial Officer, Mark <unk>.
Management will make some prepared comments 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.
A number of factors could cause actual results to differ materially from those anticipated.
Forward looking statements are based on current expectations assumptions and beliefs as well as information available to us at this time and speak.
Only as of the date, they are made and <unk>.
<unk> undertakes no obligation to update publicly any of them in light of new information future events.
During this call, we will discuss certain non-GAAP financial measures, including core EBITDA and <unk>.
Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures is contained in the supplemental information package available on the company's website.
Now I will turn the call over to George.
Thank you Scott and welcome to our first quarter 2022 earnings conference call SaaS.
Good afternoon, I will provide an update on our four near term priorities that we're focused on and summarize our results and then discuss our outlook for the remainder of the year.
Rob will then provide an update on our recent customer initiatives and Marc will review our financial results in more detail.
Let me start with the four near term priorities that we're focused on which I outlined on our last earnings call.
First we have made great progress in repricing, our warehouse business to offset inflationary pressures on our cost structure.
As a reminder, exiting the first quarter, we committed to cover all known inflation incurred through the end of 2021, which I am pleased to say we have achieved the progress of these price initiatives can be seen on page seven of our IR supplemental.
Rent and storage revenue per economic occupied pallet in our same store on a constant currency basis increased by five 6%.
Service revenue per throughput pallet increased by six 3%.
As the first quarter of this year progressed consistent with the broader economy. We have seen inflation continue to rise and we expect that trend to continue our pricing initiatives are ongoing and are targeted at addressing the incremental inflationary pressures that have written during the quarter, we will exit the second quarter on a run rate covering all known.
<unk> incurred through the first quarter.
Relates to our cost structure, we have added tightened controls created more robust processes and strengthened our team to ensure that we have an accurate real time view of each cost component. We are now in a much better position than we were in the third quarter last year, and we will not be surprised by a meaningful movement in our cost structure again.
Second we continue to focus on labor management with the goal of optimizing our mix of permanent and temporary associates in our facilities, our labor mix affects not only our wage rate structure, but also our productivity and efficiency temporary associates cost more per labor hour and are less productive than permanent americold.
Associates.
To mid 2021 in the aggregate we were staffed at approximately 70% permanent hours to 30% temporary hours and our warehouse portfolio throughout 2021 as the year progressed and the labor market became more challenging this ratio moved closer to 60 40.
<unk> forward, we are looking to hire more permanent americold associates into our facilities and have implemented several new initiatives to achieve this goal as well as taking action to increase retention during the first quarter, while we made some modest improvement and we're closer to 65 35 for the quarter, we are still lower than a permit.
Associate mix by approximately 600 basis points versus first quarter 2021, we expect to see continuing improvement throughout the year as a result of our efforts, but it will certainly take time during this challenging labor environment. Please keep in mind that a new associate is not fully productive for approximately three months. Additionally.
I am pleased to share that we added a new chief Human resources officer in the first quarter, Sam Charleston, Sam has deep expertise in HR and the food supply chain and will be overseeing our hiring and retention initiatives.
Third we're focused on differentiating our platform by providing best in class customer service, while relying on temporary labor. During 2021, we were less productive and less efficient and we know it negatively impacted customer service. Please note I do not think this is a americold specific issue I believe this impacted all companies.
In the services industry that are dependent on skilled labor the benefit of a productive predominantly permanent workforce is servicing our customers as best in class levels and ultimately lead to increased market share to improve our customer service. We've added a new leader, Dave Moore, Senior Vice President of integration and quality assurance.
Dave has extensive experience in our industry, having held leadership roles at agro merchants and Americold in the past and we're thrilled he has rejoined our team.
Our final focus area is ensuring that our development projects are delivered on time and on budget and then deliver the appropriate returns since I joined the company. We have completed comprehensive reviews of all recently completed and in process development projects I am pleased to report that the projects that have reached stabilization inclusive.
Chesapeake North Little rock, Columbus, and Savannah are performing in line with disclosed aided yields in the supplement I'm also happy to report that our Dunkirk project will be operational this month on time and on budget and is expected to stabilize as previously disclosed in our supplemental and the.
Minder this as a dedicated built to suit facility for a large private consumer packaged goods manufacturer with fixed commitment pricing structure and an initial 20 year term.
Due to well publicized global supply chain issues component availability and customer reflecting change orders, we have adjusted completion and stabilization dates for several in process development projects. We have also made minor adjustments to total estimated capital cost on several projects and adjusted the yields on the upper end.
But one project Atlanta phase one.
These changes can be seen on page 34 of the IR supplemental finally, I'm pleased to announce that we've added a new senior leader Unneeded Nanda Senior Vice President of Global development, Anita brings 25, plus years of automation and development experience.
Turning to our results and consumer demand for temperature controlled food remains strong, but COVID-19 related supply chain and labor disruptions continue to impact the global food supply chain.
Throughout the first quarter, our customers' production was impacted by S&P isn't due to the omicron search, but even after the omicron wave receded. The labor market remains very challenged and continues to strain our customer's ability to produce at pre COVID-19 levels.
Also please note that Easter fell later in April this year versus earlier in April last year, which contributed to the increase in our economic and physical occupancy in the same store pool for the month of March year over year, the seasonal Easter buildup occurring later this year versus last year as a meaningful driver for the slight economic occupancy.
The improvement in the same store pool in the first quarter 2022 versus first quarter 2021.
On the cost side, we continue to see inflation in multiple aspects of our business, which I highlighted earlier. Additionally, our absenteeism increased during the omicron surge, which increased our labor costs, along with our heavier reliance on temporary associates as I said earlier, not only do temporary associates cost more but they are less productive than a permanent.
Sure.
For the quarter, our global warehouse same store pool generated total revenue growth of 6%, while we experienced an NOI decline of three 6% both on a constant currency basis <unk> per share was 26.
The two main factors that led to these results were a meaningful increase in pricing combined with an even larger increase in our cost structure in the warehouse business let.
Let me quickly comment on stabilization of NOI contribution dollars within our same store pool, which now represents 90% of the total properties in our warehouse segment.
At this moment, we are focused on protecting NOI contribution dollars and not as much on NOI margin percentages. As you are well aware NOI dollars are what drive <unk> per share growth before prerequisite for seeing NOI contribution dollars returned to pre COVID-19 levels, our first word.
Need to continue our current pricing initiatives to offset inflation second we need to integrate and fully commercialized recently added same store facilities.
Third we must achieve the proper mix of Perm to temp hours ratio and finally, you need occupancy and throughput volume to recover to pre COVID-19 levels.
At this point I want to highlight that we published our third ESG report in April and it is available on our website. We cover numerous aspects of our approach we SG in this report, but I will call attention to a few of our key objectives. We are committing to adhering to science based targets for greenhouse gas emissions this year and we'll pursue.
Sue.
SPT verified carbon emission reduction goals to achieve net zero. We are also committing to achieve green building certifications on 50% of our portfolio by 2030. Additionally, this year, we are launching an inaugural global diversity and inclusion culture Committee and are developing a three to five year diversity and <unk>.
<unk> strategy.
These are just a few of the highlights we are very proud of the progress we have made in our ESG journey and look forward to continuing to move forward in this area.
Finally last week, we announced that we partnered with Kraft Heinz one of our largest customers and feed the children and organization a miracle to sponsor for numerous years to deliver frozen potatoes to families across the nation living below the poverty line.
Grocery prices have risen by almost 9% during the last 12 months impacting millions of families. We are proud of the work we are doing with Kraft Heinz and feed the children to help families. In this challenging environment with that I will turn it over to Rob.
Thank you George.
As we discussed on our last two earnings calls we increased the pricing of our warehouse business in order to address known cost increases.
We said, we would exit the first quarter with these price increases in place and we have accomplished that goal.
As George noted some of these increases were implemented during the first quarter, bringing the full run rate will not be seen until <unk> results.
However, we are continuing to see inflation in our cost structure in other areas and we expect it to continue as George discussed.
We have implemented additional price increases and we're being very targeted in our approach.
As a reminder, 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.
Approximately 70% of our warehouse revenue with our top 100 customers.
Half of these top 100 customers have contracts with formulaic mechanisms in place that allow for us to equitably adjust our pricing as long as theres been a demonstrable increase in costs.
Remaining half of these customers have come to the table clauses are.
That require a good faith negotiation to increase price as.
As a reminder, for our top 100 customers, we usually need to see the elevated cost for at least 60 days before we can trigger either our price increases are begin negotiations.
These price increase conversations have been very rational as we are increasing rates to cover macro level of inflation.
Outside of labor.
Power is our second largest expense.
During the first quarter power increased by approximately 18% in our same store on a constant currency basis year over year, we're seeing the majority of this increase in our European portfolio within the same store driven by the increase in the cost of energy due to the conflict in Ukraine.
Of our global warehouse revenue on a pro forma basis.
Additionally, our churn rate remain low at approximately 3.3% of total warehouse revenues.
Finally, I'm very proud of our Miracle associates, who allowed us to execute a successful Easter season for our customers and the role we played in delivering holiday cheer to millions of consumers are.
Our mission that a miracle is to help our customers feed the world, we continue to find new and innovative ways to partner with our customers to fulfill that mission.
In the first quarter of 2022, we grew our business with 80% of our top 45 customers year over year, our existing relationships with that strategic tier of customers averages over 30 years.
Comprehensive suite of solutions across both the infrastructure and services segments of our business continued to provide a compelling value proposition to our customers and led to several large new business contracts with the food manufacturers and retailers that were executed during the quarter.
Our pipeline for both global development and business plan for existing infrastructure remains strong as customers continue to look for ways to improve their supply chains.
We are grateful for the opportunity to support our customers growth initiatives through the strength of our platform.
Now I will turn it over to Mark.
Thank you Rob.
The first quarter reported total company revenue of $706 million, which reflects an 11% increase in growth across all segments of our business principally driven by our warehouse segment.
Total company NOI was $158 million, a 1% increase reflecting continuing challenges in the macro operating environment and inflationary pressure.
Our total company NOI margin decreased by 234 basis points to $22, 4%.
Corporate SG&A totalled $58 million for the first quarter of 2022 as.
As compared to $45 million for the prior year.
As we discussed on our last call and in line with our expectations. We had increases in our annual performance based cash compensation and then our stock compensation expense.
Primarily driven by the one time retentive stock grant awarded in the fourth quarter.
Additionally, as discussed and in line with our expectations, we had to increases in our icy spend insurance legal and professional fees.
Travel combined with other inflationary pressures, which were partially offset by synergies from a recent acquisitions.
Quarter, EBITDA was $111 million for the first quarter of 2022.
Decrease at five 9% year over year or.
<unk> margin decreased 284 basis points.
The 15.7%.
Our first quarter isso with $69 million or 26 cents per diluted share.
Now I will turn to our results within our global warehouse segment.
For the first quarter of 2022 global warehouse segment revenue with $541 million, an increase of 11% compared to the prior year.
This growth was driven by our pricing initiatives in the same store pool paired with recent acquisitions and the ramp of recently completed development projects.
Warehouse segment, NOI with $146 million for the first quarter of 2022, an increase of 0.1%.
The increase is driven by recently completed acquisitions, primarily offset by lower contribution in our same store pool. Additionally.
Additionally, approximately 2 million startup costs related to our development projects are also weighing on these results.
Global Warehouse segment margin was 27% for the first quarter of 2000, 2000 to 307 basis points decrease compared to the same quarter in the prior year.
Now I'll turn to our same store results within our global warehouse segment.
For the first quarter of 2022 are.
Same start global warehouse segment revenue was $483 million up 4.5% year over year, and 6% on a constant currency basis.
This was driven by increased revenue in both front and storage and warehouse services.
Same-store global warehouse and alive was $139 million.
Down for 7% year over year, and a decrease of 3.6% on a constant currency basis.
This is driven by NOI growth and the rent and storage portion of our business offset by lower contribution from the warehouse services portion.
Same store global warehouse NOI margin decrease 276 basis points to 28.8%.
For the first quarter Same-store global <unk> storage revenue increased by 5.2% year over year.
And increased by $6, 4% on a constant currency basis.
This was driven primarily by radar escalation and a modest increase in economic occupancy.
Our same store economic occupancy was 77, 6%, which reflects an increase of 22 basis points from last year's first quarter economic occupancy.
Related to the timing of the Easter buildup and offset by continued food production challenges, but stable and consumer demand.
The slight occupancy increase was coupled with a 5.6% increase to our constant currencies same store renton storage revenue for economic pallet, driven by our pricing initiatives and rate escalation.
Our same store global rent and storage and ally increased by 3% year over year and 4% on a constant currency basis.
This was due to previously described revenue growth.
Partially offset by the inflationary pressure on costs inclusive power facility maintenance property taxes, and other facility costs year over year.
Same store global rent and storage NOI margin decreased 130 basis points to 61.9% due to the same factors.
Same-store Global warehouse services revenue for the first quarter increased by 3.9% year over year, and five 7% on a constant currency basis.
This revenue growth was driven by our pricing initiatives, which increased our constant currency Same-store warehouse services revenue per throughput palette by 6.3%.
Partially offset by changes in business mix.
This revenue growth was also partially offset by a 0.6% decline in throughput driven by the challenge food production environment and the timing of Easter.
Our same store warehouse services NOI margin was 4.5% for the quarter, a decrease of 411 basis points from the prior year.
This was primarily driven by higher cost of labor and other services costs due to elevated inflation.
Now turning to our balance sheet.
At quarter end total debt outstanding was $3.2 billion, we have total liquidity of $657 million consisting of cash on hand and revolver availability.
Our net debt to pro forma four EBITDA was approximately $6 six times.
At this point, we have spent approximately $423 million on development projects in process, which reflects almost one term of left.
Now, let me discuss our outlook for the remainder of 2022.
We're maintaining our guidance for <unk> per share in the range of one dollar to $1.10.
Please refer to our IR supplemental or.
More detail on the additional assumptions embedded in the guidance.
While George and Rob already provided an update on the current environment, Let me provide some additional commentary around our guidance.
We expect food manufacturing to continue to be challenged for the remainder of the year, primarily driven by labor constraints.
We expect to continue to see inflationary pressures in the near term.
Given this inflationary environment.
Our ongoing pricing initiatives and the embedded lag for the full year on a constant currency basis. We expect the same store revenue growth will exceed our previous guidance.
We now expect it to be zero to 2% positive.
However, this higher revenue growth as being offset by higher inflationary costs and as a result, we are not changing our NOI contribution dollar expectations.
While there are not changes to our maintenance capital expenditure range. Please keep in mind that the first quarter 10 to be one of the lower quarters in terms of dollars spent within the year.
Finally, please keep in mind that our guidance does not include the impact of acquisition dispositions are capital markets activity beyond that which had been previously announced now.
Now, let me turn the call back to George for some closing remarks.
Thanks, Mark over the past few months I have had the opportunity to meet hundreds of our associates and cannot be more impressed with their dedication and passion to service our customers.
I look forward to meeting more of our associates. It's clear to me. They are what makes us a best in class service provider and the cold storage industry.
Extremely proud of the work and cannot express my gratitude to them enough.
Thank you again for joining us today, and we will now open up the call for questions.
Thank you now begin the question and answer session.
To ask a question you made stars and one on your telephone keypad.
You're using a speaker phone please pick up your handset before Christmas.
Key to withdraw your question please.
Two.
Please ask that you limit yourself to one question one follow up.
This time, we will cause momentarily to symbol all rusty.
And the first question that will be from Samir Kunal Evercore ISI. Please go ahead.
Good afternoon, everybody George maybe talk about kind of what you're hearing from your customers I know you talked about the labor.
Kind of situation being challenged but if you compare that to let's say 60 days ago. When you provided guidance I mean, do you think it sort of.
I mean, we would you compare that to and I guess it was.
Wanted to kind of get an idea of what the customers are saying to you from a labor.
What they are saying to me from a labour perspective is that the situation has not died better of this.
Still do not have enough land, which are produced at levels that they historically would be capable of.
They are trying everything they can to get people that just struggling as as we have and mentioned in our in our earnings release here. So I don't see any improvement yet I see a lot of effort.
People focused on our customers are certainly focused on it.
But with very little results to date.
Okay, and then and then I guess my second question is around maybe just make the mark on the on the average occupancy.
Which when you look at it year over year was pretty stable right, maybe even up a little bit, but I know you guys have talked about sort of being down about to 100 200 basis points. So how should we think about that.
The cadence of occupancy throughout the year.
Yeah, I think Q1 results as I mentioned my prepared remarks really impact by just the timing of Easter.
You look more broadly at the macroeconomic conditions and what our manufacturing clients have been saying in their public releases that they are they are struggling to increase production just as George had mentioned the.
The macro, especially the U S is our largest.
Component of our portfolio. If you look at the USDA data, you'll see year over year decline. So I think the macro environment is still challenged however, what you see in our Q1 results is roughly a lift due to the timing of where Easter fell.
So I think.
If you step in acting you normalize I think we're holding two or volumetric guidance is down roughly 100 200 basis points of the year.
Okay, so that hasn't changed.
Okay.
Alright, thank you.
The next question comes from Dave Rogers from Bird. Please go ahead.
Yeah, Good afternoon, everybody and George maybe somewhat akin to that question I wanted to ask about kind of what's your expectations longer term.
How long it'll take to rebuild the channel when.
When you have the labor issues, you have poultry stock and the like all kind of lower than they were when you guys kind of build back to the point, where you're comfortable kind of getting back to those pre COVID-19 levels.
Yeah, we really haven't set a time frame because we really we really can't say when the labor Force will show up and get back to work in the food industry I think everybody in the food industry is surprised that it's gone this long.
We would have expected.
The workforce that was there two years ago to be back by now it's not.
As I mentioned to all the companies I've spoken with our top customers. They are all doing all they can find people.
It's just very very difficult exactly what we're experiencing so I can't.
I can't say when it will happen I can say all of our customers are very motivated for it to happen.
There's unmet demand at retail that they know they can capture they have all said they could sell more if they could produce more I think if you look at those earnings releases at the very consistent statement. So they couldn't be more motivated.
But I can't predict when the Labor force will show that Bill.
And then may be on that labor topic as a follow up I mean, I know you're trying to drive more permanent labor.
If this continues to persist where you just have lower goods lower throughput one do you need to add more labor or is it just a shift in the labor and then too you talked about kind of market share. So do you think you lost market share with your performance.
Performance last year.
And how much do you think you can gain bag.
Well.
Will focus on the last part first where our churn rates as we did not lose market share our churn rate has been very consistent it stayed in the 3% level.
Right through the last few years, so and we don't know of any large customer we have lost.
It is simply that our customers are producing less for the reasons I mentioned when it comes to our labor, we don't need to reduce labor, we need to move labor from temporary associated to permanent associates.
You can see in the numbers, we made some progress we got to 65 35 off a base of 60 40, So we made.
Five percentage points of difference in our permanent workforce as it relates to our temporary workforce. We said we have historically been at 70 30 permanent people and I've said I would like to get to 82000. So we'll continue trying to hire people and reduce our dependence on temporary labor and we can we can do that now it's not <unk> it's not.
Required for more volume, it's simply changing the employee mixed we have today.
Okay. Thank you.
The next question is from Mike Mohler with J P. Morgan. Please go ahead.
Yeah, a couple a couple of follow up here for the Easter reference can you tell us what what.
The comparable number would have been next Easter impact or a best guess there and then can you let us know.
At the end of April with that conflict liked as well the first one.
Yeah as I said when you when you step back and you look at all the numbers everything altogether, it's roughly trending to within our guidance range, which is roughly the 100 200 basis points down. So you can see the impact of the Easter lift on on Q1.
Got it and that and that's gonna be comparable now okay and then on the expense side you talked about a few things power contract labor and then just inflationary costs. So if we're thinking about what's changed in terms of the higher expenses on a go forward basis. When you look at those three categories power contract labor timing and.
Then just general inflation is it is it more skewed to wanted that one of those items in the other or is it just kind of a third a third search.
Yeah, I think it's a little a function of the geography, I think what you would see in North America.
The inflationary pressures probably more scene in labor if you look in Europe , probably the inflationary pressures more scene in power.
So.
It's a little geographic specific in terms of what we're seeing obviously the the bulk of our dollar's spend as the labour spend dwarfs. The other categories to obviously, we're very focused on on that category in particular, but our top to spend categories being labour empowerment or the one for watching.
Got it thank you.
The next question is from many Korchman from city. Please go ahead.
Hey, everyone can you remind us in your conversations with your customers if you approach the customer or contractually.
Gotten them to increase their revenues.
Cover these costs increases.
What happens now so if.
Costs were up 5% now we're here a quarter later five months later or whatever that is and they're up another 5% is that another contractual increase or is at some point, there's a new contract.
Need to reflect what's actually happening and then you're on the hook for whatever happens future events.
Thanks, <unk> razo. So what happens is we have that same conversation that we had previously again. So we go back we.
Demonstrate the fact that cost of moves since we did our last price increase and depending on either whether it's formulaic or have come to the table discussion we end up.
Demonstrating that we've seen that cough agrees and then implementing the next rate increase to cover that.
Thanks, and then have you seen any changes in.
Whether it be consumer customer demand geographically and by geographically boats in the U S and Europe , but also just within different markets in the U S.
We have not I mean, it's been fairly consistent on our largest customers earnings releases that they know there is unmet demand our largest retail customers are still saying they hit.
Large out of stock conditions.
All of our largest customers have said they can sell more if they can make more so that hasn't changed I think consumers demand in retail was recently quoted as being.
Remained elevated levels versus food service, though.
It has not changed in the last quarter.
Michael <unk> minutes or the follow up question about sort of how this may certainly and just from the standpoint of.
Is the consumer we all probably aren't going to realize that everything's going to cost us more because all of these increased costs just keep on going through the entire chain.
Which is affecting the installation that we're all seeing and it just keeps on going until perhaps it doesn't or potentially going into a recessionary environment has too.
Too much of an impact.
What's going to happen if we do go into recession.
Your customers and come back to you and your call start to go up and how does this sort of play out if we go on the other side of this.
Because it it sounds like you're going to play catch up for a period of time and you're going to try to keep on passing all these costs through and if they go up but what happens when we go to the flip side.
[laughter].
Well, if we go to the flip side of things I mean, well first let me start with that's the reason we need to be able to price quickly to offset inflation rate, we want to compress the time.
Between we recognize the incremental inflation and we price for it.
That's important to us to eliminate a long lag that include.
Impact this one thing's turnaround.
But I mean is it conceivable that.
If the scenario you just mentioned played out that we would give price decreases if if if inflation did recede.
We would I mean, we've been pricing simply to offset inflation. That's why the NOI has not changed.
With the pricing with simply offsetting costs, it costs, which will reduce we.
We would be in a position where sure we would look at giving price decreases us I don't see that in the near future, but again, we're trying to just offset costs as it occurs and shouldn't environment.
Materialized, where causes decreases we would.
I would expect we we get pressure from our customers to reduce our pricing and we would do that yes.
And like maybe just building on that comment that's why for power, which tends to be more volatile costs. That's why we use surcharge mechanism. So that it can be turned on and turned off depending on the movement and those cough I think on a macro basis as you think about it if if we start to slow down and you.
Move into a recession, you see lower inflationary pressure eventually the inflation will fall back within our normal course G. R. I's that are embedded in our base contract and that will reduce the need to have that be kind of continually repricing the business.
The last thing I also just want to remind on that is one of the benefits of our platform as we do serve the food industry, which is a consumer staple which tends to be more recession resistant.
Then other other areas of the economy.
But yeah, but just all.
Let's go.
Go ahead sorry.
I was just going to add on I don't I don't see labor rates, reducing I don't I don't I don't see that ever happening.
And as you know that's the lion's share of our costs and most likely inflation.
So I don't see that happening I think mark highlighted probably the most common thing where we put in a power surcharge for a period of time and then we remove the surcharge if part of that stuff.
Right Yeah, no. It's it's I mean, this environment and obviously, it's extraordinarily mean everything is always unprecedented.
But you are in a position right now right where.
I don't know what stops.
[noise] tools cycle and at some point to the customers just sort of basket the inflationary pressures.
You know themselves.
A tough situation for each party to be in.
Neither is happy right [laughter]. So [laughter] I guess you can you can both be upset.
[laughter].
That's I think that's pretty accurate [laughter].
Thanks, guys.
The next question is from Michael Carroll from RBC capital markets. Please go ahead.
Yeah. Thanks, George can you provide us an updated view on how your viewing Russia, Ukraine conflict and how this could potentially impact your business is it still more of a trade route type issue or or is it starting to bleed into production concern I gather in Europe or the U S or how you are thinking about that.
I would say as we said last quarter. The number one issue was seeing his power increases.
Mark mentioned that when it comes to power Europe as the location of the scene most of the increases were offsetting those with power surcharges, but I'd say that is the number one issue we have seen related to the Ukraine. We have not seen any reduction in production levels, we haven't seen any material movement in inventory levels.
It's really just the power that has been a significant driver.
I think last time, we talked you were talking about how it could potentially change trade routes and that could impact your business positively or negatively you mean is it impacting trade routes at all.
It is not the board traffic in the ports in.
Central Europe , where we maintain a presence really have not been impacted I would say Poland is the one area that experienced.
A significant amount of disruption in the quarter related to the port, but it's a relatively small business for us there in in the main Europe did fine in that area.
Okay, great. Thanks.
Yes.
Okay and the next question is from key been Kim with Truest. Please go ahead.
Good afternoon, everyone.
You have to go back to a couple of points here just a couple of things that are.
[noise] and slumped right now you're going to come back to the table and tried to push an inflationary increase.
He talks about the power surcharge.
Correctly it is about one month lag period.
So when you think about those two things together what kind of.
Improvement and it seems more revenue should we expect as we go forward because I'm guessing that all those surcharges new surcharges hadn't been reflected in Q1 earnings.
That's right the all the impact of all of those surcharges have not necessarily been.
Impacted in Q1, what what we would say is that the impact that he saw as it relates to pricing the five 6% on on storage revenue per economically occupy palette and a $6 3% on the services side you know those those were increases that started in the fourth quarter.
Continued into the first quarter and will hit their full run rate.
Now that we're outside of the first quarter in queue, too and that largely offset the inflation that we knew about.
In the fourth quarter.
With continuing inflation going on in Q1, we've implemented.
Another round of rate increases, which.
Look look more like 200 basis points or another 2%.
That would go on top of what we've already implemented and just a reminder, what we've implemented.
You know that that that 6% range.
For us when we get the full run rate of that there's probably another 100 basis points there. So.
We will see the full impact of what we've done in Q4 and Q1 impact Q2, and then what we just did in queue to will.
Will impact you three one point to make though is that we.
We started this pricing initiative late.
<unk> Q3, and in the queue for so when you get to the back half of the year, where coughing against increases that started.
Last year.
Okay.
Those were a lot of numbers I, just Wanna clarify when you said.
Is it.
100, or two and you're basically improvement too that 6.3%.
Our service 90 per pallet.
So that's six 3% that we've implement when when that gets the full run rate that looks more like another 100 basis points.
And then on top of that we've done increases in key too.
Okay.
And next question I mean as robust.
Slowly climb out of it.
Labor shortage inflationary environment.
It seems like there might be another.
A storm brewing.
If you I'm not sure if you can.
Have a lot of conversations with your food producers about this but you know obviously, there's been a lot of changes and for the life of the cost.
And some severe weather patterns in the U S that might potentially impact crop yields.
I think in the West, Texas and the Great Plains.
About 48% of those field is considered.
Very dry.
So no soil moisture.
And you can look at some other states like in West, Texas up to 85% of that soil is unusable currently for production for crops.
I'm not sure if you have any kind of dropped off about this and how this might play out as we get into the rest of the year for not protein production, but for all of the spacecraft.
Yeah I know.
I have not had that conversation with with our top customers.
Really my conversations have all been above.
Labour availability, how quickly they can fully staffed facility and hopefully they can fully ramp up a facility and drive production to levels of pre COVID-19. So that I can be prepared to accept the inventories he'll produce.
I have not heard nor via the App, which may be why I didn't hear that raw material issues could be affected by weather and drove although whether it drove are issues. We face every year at least in my experience of the food industry. So I'm not sure.
How different this year will be but I have not had any discussions with customers that site that is an issue they are facing at the moment.
Okay. Thank you.
The next question is from Anthony Powell from Barclays. Please go ahead.
Hi, Good afternoon, just a question on the energy surcharges that part of the same contract negotiations or that you have regularly.
<unk> or is that something separate and new customers have the ability to.
Test that in any way.
It's part of the same conversations that we have with our customers I mean, it's.
That's more easily quantifiable than others, so that conversation.
Generally is is one that is very back face and there's less of a less of a lag between the time that we can put that in so it's part of the same conversation.
But an easy one to quantify.
Okay maybe.
Maybe bigger picture I mean, it sounds like you know.
Two producers of waiting for Labour to come back, but what.
There's been a kind of a structural change in libra availability for ginsberg producing Ah.
You seen union issues and a lot of different.
Sectors that as much integration. So that's the case is there a way for the industry to ramp up production with Ah permanently lower labor availability go forward.
I mean, I don't know the way they can ramp up production without people I mean, the to operate food manufacturing lines. It requires people to operate on so I don't know way. They can do that what I do know is that.
When there is demand consumer demand available for food producers to capture they are both very motivated to do it.
They will find a way to get labor I think you've seen in the marketplace some pretty creative.
Program is being developed by some of the largest companies in America I would expect that to continue.
And I ultimately think they will attract people back to that industry.
And produced two free COVID-19 levels, if not higher quite frankly to capture as much of this incremental domain as they can so I believe they will get there I don't know of an alternative.
I think the program just seeing that are getting very creative are designed to attract people and I think ultimately they will and.
And then if you look at the little slightly longer term I think the one thing where you do see is bigger investment and automation going into manufacturing, which is also why we see strong demand for automation in the supply chain. So really this the industry in total is looking for ways to how do we rigged.
Use the dependency on labor, especially if it stays tight like what we're seeing in this near term.
Alright, thank you.
The next question.
It's Joshua dinner line from Bank of America. Please go ahead.
Yeah, Yeah, everyone.
Understanding the your your ability to push through cost now or pushed through these cost onto the customers.
Is it is it is fair to assume that same store service margin has trough and should either stabilizer kind of go up across the rest of the year.
Yes. It definitely is you look at our results in the Q1 results and I think we've been very clear that you know that the.
The cost that we saw in the pricing that we've put in place for the cost we source in last year's result.
Would all be in place by the end of Q1. So you wouldn't see the full benefit and that's definitely true. If you look at our service margin. The other thing that I would call out that's definitely impacted our service margin in Q1 is the impact of omicron and the high level of absenteeism that we thought and then disruption how we saw as a result.
<unk> so as we move on we are still seeing as we said inflationary pressure, but as you also heard from our prepared remarks were much faster and a way of getting accurate. So over time, our goal is to still recover.
Our margin, but just as George mentioned his prepared remarks will focus is to make sure. We are recovering the dollars first ultimately the dollar's you've heard us say that a number of times over the years. Our focus is how do we actually grow for wall cash flow more than focused on growing margin. So we're focused on making sure we're recovering.
Price in offsetting costs and growing earnings.
Okay and.
Passing along with the cough.
Baker.
Are you guys doing something different with the the negotiated.
Component, where you have to go to that come to the table and kind of come to an agreement with the customer is there.
Are you just starting those earlier.
How're you doing something different.
No no real change to to the commercial conversation that it is just kind of the way the industry operates but but but as George mentioned in his prepared remarks, I would say that we have better systems and processes in place to make sure that we identify those cost increases quicker than that.
That would be our opportunity to recover faster is to make sure that that we have those processes in place to understand the cost changes faster.
The last thing I would just say to add that as these inflationary pressures aren't unique to a miracle of our clients are feeling the same pressures. So inflation is top of mine for not only us, but obviously for our customers evolve.
Yes.
The next question is from Vince to bones from Green Street Advisors. Please go ahead.
Hi, good afternoon.
Same store constant currency since growth is up over 10% in the first quarter I understand the focus on improving labor efficiency and reducing reliance on temp labor, but it sounds like that's going to take some time to play out and really see those small benefits. So.
<unk> guidance implies in store expenses are only going to be up 1% to 2% for the full year. So my question is I was hoping you can help me better understand how the expense trends in reverse so quickly and actually decline on a year over year basis for the remainder of the year.
Yes.
There's still a thoughtful Rob had mentioned earlier just as you go through the year is a big step up inexpensive happened in the third quarter. So as we move through the year of the actual expense comp will slowdown.
So the change in expenses will slow down as you start to cough against the entire cost base that's already in place so.
So we knew for for Q1 and likewise for Q2.
Pumping a much higher expense face, but when you get into Q3 and Q4 that to the real pain of that expense space is already in the baseline number so the year over year growth will slow down.
Got it that's helpful <unk>.
Target sorry, if you already mentioned this on when do you think.
You can reduce the reliance on temp labor or get back to where exceed that 70, 30 split fulltime to temp labor.
We don't for the same reason, we can't predict when the when the food industry recovers to pre Covid production levels every literally every week and sometimes every day every week, we're running job fairs were trying to recruit permut employees with converting temporary employees department employees when they wanted to join a miracle.
We revised hiring practices. So we can hire on the spot was implemented second chance programs to attract people that maybe we wouldn't test attract as aggressively as in the past with created part time positions, where before we really weren't interested in part time labor.
So we're doing everything we can and we're doing it every day.
I just can't tell you when when things will get back.
Back to normal SA.
No. That's that's all Sir is there anything you can help me as I think about the dieting cycle. So it sounds like guidance is probably assuming this is gonna take a while to play out and not really get the benefit in 2002 was up there.
That's correct, that's how the guidance was constructed yes.
Vince you're here to stay on the path that 2022 is definitely a transition year and at our guidance for the year reflects that this is indeed a fan.
Got it thank you.
The next question.
<unk> is from Bill Crow from Raymond James. Please go ahead.
Good evening, thanks for taking the time.
Question for you is.
Is there a excess capacity over the long term in this industry.
Do we just need to lose some capacity here to get occupancy back up a little.
But.
My opinion is no there is no excess capacity what there is is a.
No incremental excess capacity, let's put it that way.
Didn't exist three COVID-19, the only differences that large food manufacturers and even even the smallest food manufacturers are producing a lot less simply because they can't staff and operate the facility. The same amount of hours per week. They would have in the past.
So.
When that recovery and again.
I'm very confident and will because there is unmet consumer demand, which is which is really with every food manufacturer wants to satisfy when that comes back I think we go back to the environment. We're in where I don't think we were over capacity in the industry at all.
George you keep saying that.
They would sell more if they could if they could manufacture more.
What is that ratio of selling to inventory demand is that could that change in other words. They have been on her just in time sort of inventory level at this point.
To say they can't continue the ads and they can drive sales up 15 or 20%.
Impact to your facilities may not be as big as it might've been in the past is that.
That's something to worry about.
I don't believe so based on my time in the food industry. I mean retailers are all saying they still experience high degree of stock outs empty shells customer service levels are.
70, and 75% in my time decades in the food industry have never seen customer service levels that low.
All the cuts.
Customers I've talked to has said they were operating inefficiently because when you don't have the right amount of staffing in your facility you can't operate normally so they're operating very inefficiently, they don't like that.
And the amount of inventory.
Food producers would put it in the system in my opinion over the years wasn't excessive was typically four to six weeks I mean, that's not a not a ton of inventory.
So it wasn't like inventories were bloated and the supply chain to begin with so.
What I see is when they find people they'll go back to an operating model that's sufficient for them that they can manage better.
You'll go back to four to six weeks of inventory. So they can serve as retailers at 98.5%, a better which of the industry standards that I live by for 11 years.
Food will be back on shelves and consumers will be buying more than they by today and.
That's what I see Playhouse.
Thanks.
Question is really.
Just SG&A.
If you go back three years, three or four years were $110 million.
8% of revenues and.
And now we're up double that and nearly percent of revenues.
What should we think about is.
Ah stabilized.
Target.
Revenues, if that's the right way to think about it.
Yeah, I think I think I commented on this at the year end call. So if you if you look at the core EBITA, excluding the stock conflicts Spence.
Roughly of health flat and our guidance suggests that we fall flat at that historic trend as a percentage of revenue.
Obviously too much larger more global business, but that percent of revenue has held flat where you've seen the slight pick up recently as in stock confidence particular, as we mentioned in the fourth quarter of last year, we put in place a retentive stock crap.
Large gramps focused on kind of leaders across our organization and so the impact of that is being felt in this year skied in this year's.
Overall G&A expense.
But shouldn't shouldn't that percentage that hold flat.
Go down as you've grown into this this giant global company I mean, they're they're they're no efficiencies to be gained through M&A transactions.
No. There are there are but we've actually so we don't disagree with that and we do believe over time, we will leverage our G&A Spence.
We've actually been investing in G&A to support the growth that we've seen and we have one of the largest development pipelines working.
That we've ever had it in the company. So we have several hundred million dollars of ongoing development project does that G&A supporting we have north of about a billion dollars of <unk>.
Opportunities that are currently being underwritten.
By our team for future development, so that we have been investing in the business as well, but I agree on the.
Normal state, we will start to see leveraging of that G&A overtime.
Thanks for the time.
Thank you and the next question is from <unk> closet. Some darensbourg. Please go ahead.
Okay.
Leveraging.
It's been a while.
It has investment grade rating.
Is there any risks that the agent easily change your ratings when's the last time they reviewed.
Your rating.
And the question number one.
A number two maybe just can you talking about the current accurate and.
Environment I don't think so.
Johnny acquisitions this corner.
So maybe you can just kind of articulate what's going on there.
Unity.
What is the pricing look like.
Yeah, I'll take the first part and olive George comment on the acquisition environment. So.
Yeah, we maintain active dialogue with the rating agencies I think they're last for more reviews and you can see there are press releases were completed at the end of last year I think they are aware and we called out.
<unk>.
Our goal over the long term is to manage this business roughly around five times <unk>.
Leveraged level, we will we do expect to peek over that one more in heavy periods. Like we are right now of development I commented on my prepared remarks, we have over a turnover of leverage related to improv sets development today that are not yet operational contributing so obvious.
C as though his development to move to the online and start generating cash global naturally Delever also we did see some impacts our leverage as a result of.
Impacted of Covid in the supply chain challenges, but those two we do think helped us naturally delever over time as the business recovers.
George maybe you want to comment on yes, but when it comes to acquisitions.
We have a very strong pipeline, we are generally involves or contacted with almost every meaningful act.
Acquisition opportunities comes up in our industry.
It hasn't been materially increased or decreased over the last quarter.
And we're we're a pretty discerning buyer I mean, we want to look at things that add capability either.
Pure <unk>.
Customer capability or geographic capability and when we see something that we're very interested in.
We will aggressively go after but.
As of now.
The pipeline is essentially what it was and we're going through the process as we always do.
Okay, what about the pricing within the pipeline have you seen any changes.
Given the change in right.
Great wines potential.
Potential deals there.
I am not sure we're involved in anything whether you would see that at the moment.
The stages, where we're in we wouldn't have seen.
That type of change, but I don't know of any significant changes based on what you mentioned.
Mm, Okay I'll leave it there.
Ladies and gentlemen, this concludes our question and answer session and thus concludes today's call. Thank you very much for joining a miracle really trust first quarter's earnings call.
You may now disconnect your lines.
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