Q2 2022 Americold Realty Trust Inc Earnings Call
Thank you for standing by this is the conference operator, welcome to the Americold Realty Trust's second quarter 2022 earnings call.
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I would now like to turn the conference over to Scott Henderson S V P capital markets and Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us today for Americold Realty Trust second quarter 2022 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 Americold Dot com.
This afternoon's conference call is hosted by Americold, Chief Executive Officer, George Chappelle, Chief Commercial Officer, Rob Chambers.
And Chief Financial Officer, Mark Smirnoff.
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.
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 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 the comparable GAAP financial measures are 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 second quarter 2022 earnings Conference call. This afternoon, I will provide an update on the four near term priorities that we are focused on summarize our results and comment on recent external growth activity.
I will then discuss our outlook for the remainder of the year Rob.
Rob will then provide an update on recent customer initiatives and Marc will review our financial results in more detail.
Let me start with the four near term priorities that we are focused on.
First we continue to make great progress in repricing, our warehouse business to offset inflationary pressures in our cost structure exiting.
Existing the second quarter, we committed to covering all known inflation incurred through the end of the first quarter, which we have achieved the progress of these price initiatives can be seen on page eight of our IR supplemental rent and storage revenue per economic occupied pallet and our same store on a constant currency basis.
<unk> increased by six 6% service revenue per throughput pallet increased by seven 9% as a reminder, some of these increases were implemented during the second quarter, meaning the full run rate will not be seen until the third quarter results as it relates to the second quarter the majority of the.
Larry pressures, we saw were in power costs and in warehouse supplies costs, we have implemented additional targeted pricing and power surcharge initiatives to address this known inflation and we will exit the third quarter at a run rate covering all known inflation incurred through the second quarter moving through.
The third quarter, we expect the majority of the inflationary pressures to continue to be both empower and warehouse supplies. If this is the case, we will continue to revisit our pricing and power surcharge initiatives.
We continue to focus on labor management with the goal of optimizing our mix of permanent and temporary associates and our facilities, while also significantly reducing our turnover rate temporary associates costs more for labor hour and are less productive and permanent americold associates higher turnover.
It is also costly and drive inefficiencies in our business as a reminder, prior to mid 2021 in the aggregate we were staffed at approximately 70% permanent hours to 30% temporary hours in our warehouse portfolio throughout the back half of 2021. This ratio move closer to 60 40.
During the second quarter, we made significant improvement and return to 70 30. However, our turnover rate is still significantly elevated when compared to both last year and pre COVID-19 levels. We ended June this year at an annualized turnover trend approximately 22 percentage points higher than that of June.
<unk> 2021, compared to 2019, our pre COVID-19 year and more in line with historical levels, we were approximately 30 percentage points higher than 2019.
While higher turnover rates can be expected during this environment as we work to increase our perm to temporary shiao. We certainly are very focused on reducing this metric. Please keep in mind that a new associate is not fully productive for approximately three months, we expect to see continuing improvement throughout the year as a result of our team's efforts.
But it will certainly take time during this challenging labor environment to continue to drive our perm to temp ratio and reduce turnover.
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. Additionally throughout 'twenty, one and into 2022.
We have had significantly higher turnover, which also negatively impacted customer service for the same reasons. Please note as I said last call I do not think these are americold specific issues I believe this labor market impacted all companies in the services industry that are dependent on skilled labor the bench.
<unk> of our productive store.
Table and predominantly permanent workforce fully trained on the Americold operating system is servicing our customers at best in class levels, and ultimately leads to increased market share.
Our final focus area is ensuring that our development projects are delivered on time and on budget and then deliver the appropriate returns our Dunkirk project became operational in the second quarter on time and on budget and is on track to stabilize as disclosed in our IR supplemental we.
We continue to make progress in this area and look forward to successful delivery of our projects.
Turning to the current operating environment, and our second quarter results a significant amount of our food manufacturing customers are beginning to see some improvement in the labor market, which has enabled them to begin ramping up their production levels. Additionally, while end consumer demand for temperature controlled food remains strong the challenging inflationary my.
Market has started to change consumer behavior.
Consumers are buying less at the grocery store as they are stretched by inflation.
These two factors increased production by a food manufacturers combined with slightly less consumer buying has resulted in meaningful increases in both our physical and economic occupancy for the quarter and our same store pool, we saw economic occupancy increased by 288 basis points.
Second quarter 2021. This is the first time economic occupancy has increased year over year since the second quarter of 2020.
As we have discussed economic occupancy improvement is very accretive to the bottom line.
We are encouraged by this and believe this improvement is sustainable throughout the remainder of the year.
This occupancy improvement, which aligns directionally with the cold storage industry data provided by the USDA.
Demonstrates the mission critical aspect of our infrastructure and services within the temperature controlled food supply chain food manufacturers product flows through our production advantaged facilities distribution centers.
And retail distribution centers and then it ultimately arrived at a grocery store restaurant, where it can be purchased by consumers.
On the cost side, while the majority of inflation is in our power and warehouse supply costs, we continue to see labor inflation in select markets. Additionally, even though we are moving more towards the historical perm to temporary ratio in our staffing model. Our turnover ratio is significantly elevated this level of turnover.
Negatively impacts our productivity and efficiency. It is also costly as we have to recruit.
Higher and trained new permanent associates all of these labor challenges are seen in our warehouse services margin.
For the quarter, our global warehouse same store pool generated total revenue and NOI growth of eight 1% and three 1% respectively. Both on a constant currency basis <unk> per share was 27.
The main factors that led to these results were a meaningful increase in pricing and occupancy partially offset by continued inflation in our cost structure and labor inefficiencies and our services and warehouse business and the strengthening of the U S. Dollar.
Now, let me turn to our external growth activity, we continue to execute on strategic investments and acquisitions that will help us better serve our customers on a global scale. Many countries within South America have a large agricultural and food producing economies and have strong population growth today, we announced the.
Our recent formation of a Latin American focused joint venture with Patria, an experienced Brazilian based private equity firm affiliated with Blackstone. As a reminder, we are currently 15% partners with Patria in Super Frio, Brazil focused JV Latam the name for this new JV.
<unk> is focused on high growth food production in Latin American countries outside of Brazil, such as Mexico, Chile, Uruguay and Colombia.
Latam has its own professional management team separate and apart from the Super Frio platform under the terms of the agreement. The total equity commitment for this platform is just under $300 million of which <unk> commitment is 15% or $45 million Americold has a seat on the board.
And retains the exclusive option to acquire our partner's 85% ownership starting in 2026 the.
The investment period is expected to be over the next four to five years Americold has recently contributed Chilean asset to seed the JV, which is effectively pre funded the majority of our equity commitment. We are very excited about this new growth opportunity Adil.
Additionally, during the quarter, we completed the purchase of one port facility in Poland.
That we previously leased as we've discussed in the past, we would prefer to own versus lease as it provides us with more control over our facilities over the long term also subsequent to quarter end, we acquired two brewing cold storage in Tasmania, Australia to brewing consists of one facility totaling approximately $2 million.
Cubic feet.
It is the largest cold storage operator in Tasmania. It is strategically located at the port of Bernie and near the Port of Davenport.
<unk> customer mix includes dairy potato and sea food producers and a significant amount of these customers are current customers of Americold. Additionally, this acquisition has enabled America to already win new business from a large quick service restaurant customer who is looking for a partner with a footprint in both Victoria and Tasmania.
Finally subsequent to quarter end, we also completed the purchase of one facility in New Zealand that we previously leased.
On to full year guidance at this point, we are maintaining our full year 2022 <unk> per share guidance in the range of $1 to $1 10.
Mike will provide commentary around the individual components. We are encouraged by the recent success of our pricing initiatives initiatives and the improvement in occupancy and its positive effect on our core warehouse business. While we expect this to continue throughout the remainder of the year. The operational headwinds are as follows a continued reduction of <unk>.
Throughput volumes as inflation impacts in consumer buying habits continued inflation in our in our business, primarily power and warehouse supplies and select labor markets with continued pricing offsets that will lag 30 to 60 days in most cases.
Labor inefficiencies and elevated turnover and our services in the warehouse business due to a challenging labor market and uncertainty around COVID-19 continues to be a potential disruption.
Below the NOI level. We are also seeing the following macroeconomic headwinds higher interest expense on our floating rate debt due to increasing base rates and a stronger U S dollar, which negatively affects earnings from international markets due to currency translation.
Finally, as it relates to ESG, which is a key priority for us here at Americold I am happy to report, we recently completed our submission to the carbon disclosure project and <unk> for 2022, we expect to receive our <unk> score in the fourth quarter and look forward to receiving our first CDP score later this year with that.
That I will turn it over to Rob.
Thank you George.
For the second quarter. We are pleased to report total company revenue and NOI growth of 11% and 8% respectively.
This revenue and NOI growth occurred across all three segments, primarily driven by our warehouse business.
We're seeing positive results in the topline and fundamentals in our warehouse business across the food manufacturers and retailers.
First we have seen a strong improvement in economic occupancy and we believe this is sustainable for the rest of the year second we continue to be successful with our pricing initiatives.
As we have discussed on previous calls we will continue our pricing initiatives within our global warehouse business in order to address known cost increases from inflation.
During this inflationary period, we must do this in order to protect our margin dollars. We successfully exited the second quarter with price increases in place in order to cover known inflation from the first quarter.
Some of these increases were implemented during the second quarter, meaning the full run rate will not be seen until third quarter results.
As George mentioned, our progress of these price initiatives can be seen on page eight of our IR supplemental.
Rent and storage revenue for economic occupied pallet and our same store on a constant currency basis increased by six 6%.
Service revenue per throughput pallet increased by seven 9%.
<unk> with customers continue to be productive around our pricing initiatives, we are being very targeted and data driven in our approach.
As a result, we continue to demonstrate <unk> ability to protect margin dollars through pricing increases to offset inflationary pressures.
With occupancy now beginning to return our focus is on ensuring we provide best in class service.
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 $379 million compared to $333 million at the end of the second quarter of 2021.
On a combined pro forma basis, we derived 45% of rent and storage revenue from fixed commitment storage contracts, while we have consistently grown the absolute dollars across both our legacy and acquisition businesses. We are pleased to see this metric back in the <unk>.
As a reminder, it dipped into the mid Thirty's when we acquired agro at the end of 2020.
Enhanced commercialization, which includes our fixed commitment initiatives is a critical component of our M&A strategy, we look forward to continuing to improve this metric.
Within our global warehouse segment.
We had no material changes to the composition of our top 25 customers to.
To account for approximately 48% of our global warehouse revenue on a pro forma basis.
Additionally, our churn rate remained low at approximately three 3% of total warehouse revenues consistent with historical churn rates.
With regard to our development projects, our Dunkirk project, a dedicated build to suit facility for a large private consumer packaged goods manufacturer became operational this quarter.
This was a conventional build for a top 25 customer who is on a fixed commitment pricing structure with an initial 20 year term. This is a great example of how we continue to work with our customers.
And ways to support their production and supply chains with long term critical infrastructure.
In the second half of this year, we're completing one of the two highly automated build to suit facilities for an industry leading global retailer.
This facility is in Pennsylvania the.
The second facility in Connecticut will be completed next year, we look forward to getting these sites operational and Haynesville showcase <unk>, leading position as a best in class operator, and owner of highly automated sites for retail customers.
Additionally, in the second half of this year, we are completing two conventional multi tenant developments in Ireland and Spain. Our business development team has made significant progress in signing up new and existing customers.
Meaningful pallet positions in both of these facilities.
Lastly, I want to thank our Americold associates, who allowed us to deliver a successful fourth of July holiday for our customers and end consumers are infrastructure and service offerings continue to be best in class and that certainly is resonating with our customers.
As we have previously stated there will be clear winners and losers as occupancy begins to recover.
We are already seeing business increased with new and existing customers across our portfolio.
<unk> continues to be well positioned to earn a significant share of more volume recovery based on our long track record of customer service, our innovative solutions and our comprehensive and integrated network.
Our pipeline for both global development and business plan for existing infrastructure remains strong as customers continue to look for ways to drive efficiencies into their supply chain.
America is committed to supporting those initiatives and we remain grateful for the opportunity to facilitate our customers' growth.
Now I'll turn it over to Mark.
Thank you Rob.
For the second quarter, we reported total company revenue of $730 million, which reflects an 11% increase year over year and as Rob mentioned growth across all segments of our business principally driven by our warehouse segment.
Total company NOI was $168 million, an 8% increase reflecting an improvement in the operating environment and investment activity offset by higher cost and inefficiencies.
Our total company NOI margin decreased by 66 basis points to 23, 1%.
Corporate SG&A totaled $56 million for the second quarter of 2022 as compared to 42 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 bonus expense and our stock compensation expense, which was primarily driven by the onetime retentive stock grant awarded in the fourth quarter of 2021.
Additionally, as discussed in in line with our expectations, we had increases in our it spend insurance legal and professional fees and travel combined with other inflationary pressures, partially offset by synergies from recent acquisitions.
Core EBITDA was $120 million for the second quarter of 2022, an increase of one 6% year over year, our core EBITDA margin decreased 160 basis points to 16, 5%.
Our second quarter, <unk> was $74 million or 27 per diluted share compared to 72 million or <unk> 28 per diluted share in the prior year quarter.
Now I'll turn to our results within our global warehouse segment.
For the second quarter of 2022 Global warehouse segment revenue was $564 million, an increase of 12% compared to prior year.
This growth was primarily driven by our pricing initiatives and economic occupancy improvement in the same store pool paired with the recently completed acquisition and the ramp of recently completed development projects.
Warehouse segment NOI was $151 million for the second quarter of 2022, an increase of four 6%.
This increase was a result of the same drivers above offset by lower services contribution in our same store pool.
Additionally, approximately $2 4 million startup costs related to our development projects are also weighing on these results.
Global Warehouse segment margin was 26, 8% for the second quarter of 2020 to a 191 basis point decrease compared to the same quarter of the prior year.
Now I'll turn to our same store results within our global warehouse segment.
For the second quarter of 2022 or.
Our same store global warehouse segment revenue was $498 million up five 9% year over year and eight 1% on a constant currency basis.
This was driven by increased revenue in both rent and storage and warehouse services.
Our actual results were partially offset by the strength of the U S dollar.
Same store global warehouse NOI was $144 million up one 6% year over year and three 1% on a constant currency basis.
This was driven by NOI growth and rent and storage business offset by lower contribution from the warehouse services same store global warehouse NOI margin decreased 123 basis points to 28, 9%.
For the second quarter.
Same store global rent and storage revenue increased by eight 7% year over year and increased by 10, 7% on a constant currency basis.
This was driven primarily by rate escalation and a meaningful increase in economic occupancy.
Our same store economic occupancy was 78, 1%, which reflects an increase of 288 basis points from last year's second quarter economic occupancy.
As George mentioned, the economic occupancy increase was driven by increased production by our food manufacturers combined with changes to end consumer buying behaviors due to inflationary pressures.
The occupancy increase was coupled with a six 6% increase in our constant currency same store rent and storage revenue per economic pallet, driven by our pricing initiative and rate Escalations.
Our same store global rent and storage NOI increased by 10, 2% year over year and 12% on a constant currency basis.
This was due to the previously described revenue growth, partially offset by the inflationary pressures on costs inclusive of power facility maintenance property taxes, and other facility costs year over year.
Same store global rent storage NOI margin increased to 82 basis points to 61, 9% due to the same factors.
As we had said previously economic occupancy growth is highly accretive to our overall results.
Same store global warehouse services revenue for the second quarter increased by three 9% year over year and six 2% 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 pallet by seven 9%.
These results were partially offset by changes in business mix and a one 5% decline in throughput, which includes the impact of the inflationary environment on end consumer demand.
Our same store warehouse services NOI margin was four 6% for the quarter, a decrease of 375 basis points from the prior year.
This was primarily driven by higher labor costs, and lower efficiencies due to the current labor environment and the time it takes to train new associates on the Americold operating system.
Combined with the higher cost of warehouse supplies and other service costs due to elevated inflation.
Regarding our recent investment activity.
As George mentioned, we closed on our Polish lease buyout for approximately $7 million euros on April 28.
We closed on our Latam JV on June one.
Subsequent to quarter end, we closed on our Australian acquisition for approximately 25 million Australian dollars.
On July one.
Finally, we closed on our New Zealand lease buyout and renovation for approximately 18 million New Zealand dollars on.
First.
The acquisition and to lease buyouts were funded using a combination of cash and our multi currency revolver.
Now turning to our balance sheet at.
At quarter end total debt outstanding was $3 2 billion.
We had total liquidity of $597 million, consisting of cash on hand and revolver availability.
Our net debt to pro forma quarter EBITDA was approximately six six times at this point, we have invested approximately $463 million and development projects in process, which reflects almost one turn of leverage.
We have approximately $130 million remaining to invest on announced and profit development projects over the next 18 months.
Now, let me discuss our outlook for the remainder of 2022.
We are maintaining our guidance for <unk> per share in the range of $1 to $1 10.
While we are encouraged by the improvement in economic occupancy and our continued pricing initiatives.
<unk> remain which impact bottom line results let.
Let me provide some additional commentary around our guidance.
At the revenue and NOI level.
We expect economic occupancy improvement in our same store pool to be in the range of 100 to 300 basis points for the full year.
We expect throughput volume declines of 1% to 3% for the full year given these expectations combined with the inflationary environment and our ongoing pricing initiatives for the full year on a constant currency basis, we expect same store revenue growth will exceed our previous guidance.
We now expect it to be 3% to 5% positive.
We expect to see NOI growth as well. However, we expect this growth to be zero to 200 basis points lower than the associated revenue growth.
In the non same store pool, we continue to see ramp up costs as we work to stabilize our recently completed developments and startup cost and our soon to be completed development.
These are headwinds to our overall warehouse segment NOI growth.
Below the NOI level.
At quarter end, our floating rate debt exposure was 30% we.
We expect continued headwinds from increasing base rates for the second half of the year.
We expect continued currency translation headwinds due to the strengthening of the U S dollar against most currencies in our business.
Year to date or <unk> <unk> per share was negatively impacted by approximately <unk> <unk> due to FX.
This accelerating in the second quarter.
Finally, please keep in mind that our guidance does not include the impact of acquisitions dispositions or capital markets activity beyond which has been previously announced.
Please refer to our IR supplemental for detail on the additional assumptions embedded in this guidance now let me turn the call back to George for some closing remarks.
Thanks, Mark overall during this quarter, we made significant progress on our four near term priorities. We also saw economic occupancy improvement in our warehouse business and we continue to demonstrate that we can achieve pricing in our warehouse business to overcome inflation, we still have plenty to do but I want to thank.
All of our associates for their hard work and contributions to our performance I am extremely proud of their efforts and cannot express my gratitude to them enough.
Thank you again for joining us today, and we will now open the call for your questions operator.
Thank you.
We will now begin the question and answer session. One question and one follow up please.
Joining my question queue, you May Press Star then one.
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Your first question today comes from Dave Rodgers.
Please go ahead.
Yeah. Good evening, everybody Mark I wanted to start with you on the revenue guidance. Thanks for the additional details that you just provided a moment ago I guess I wanted to dive in you have 7% year to date on a constant currency basis in the guide is really three to five so despite the.
The components that you gave us what is the challenge that you see in the second half of the year. It sounds like rate continues to work well you've already got a good jump on occupancy I know.
Throughput and offset it just seems like that too much of an offset in the guidance and maybe there's some conservatism. So I'd love a little additional color. Please.
Yes, I think the color is as we ramp through the year, our pricing initiatives really started very late in the third quarter and kind of ramp through the fourth quarter. So as we move throughout the year, we're going to the comp gets tougher from a topline revenue growth just as we start to ramp against our pricing initiatives.
I mean do you expect to lose occupancy or does the occupancy improvement in the second half of the year slowed down for you guys as you kind of look out.
Yeah.
No. It's not so much I think our occupancy guidance for the full year, it's roughly as we've quoted we're looking for roughly a 100 300 basis points of overall occupancy growth year over year, but I think where the challenges. When you look at the actual rate comp will start to slow down so youll get benefit from.
Occupancy improvement on overall revenue, but the comp on revenue per.
As a throughput pallet or through economically occupied pallet gets tougher as we get later into the year.
Okay, and maybe follow up for you George wanted to ask with your Crystal ball kind of what you see as the trajectory of the recovery and stabilization for the business.
You've talked before it could take a couple of quarters could take six or eight quarters. As you look at labor for the manufacturers as you look at your own labor and you've made some strides and have some more to go what do you sense as kind of the trajectory of the recovery for the business. When you look out maybe late this year sometime into next year et cetera.
Well, it's clear to me that full recovery is not this year I mean, we're seeing labor improvement.
But I would classify it as more of a triple.
On a constant flow.
It's great that production has increased but it's increased.
Minimal amounts.
I think consumer demand being down a little bit is helping build inventory I think that's a good thing for the food supply chain in the short term, but I don't see full recovery this year and I'd, even push it out to mid next year.
Yes.
Okay. Thank you.
Yes.
Thank you.
Our next question comes from Mike Mueller with Jpmorgan. Please go ahead.
Just have a quick I have a question you were talking about.
I guess higher inflation, causing changes in consumer habits, and maybe more inventory build happening because lets goods were being bought the stores, but what about what about the old argument.
Everybody 2000 calories, a day and if youre not buying the food the store, you're you're seeing it go out food services and restaurants et cetera, I mean, how should we think about that dynamic.
Well I think the consumer demand is definitely going to be impacted by higher inflation less disposable income and people will trade down I think historically and in my experience people trade down into categories that cost less.
That provide similar nutritional benefit them with you.
Just described.
Good news for US is we typically store in.
And ship products that are in categories that people trade into versus out of in times like this so I don't know that it will necessarily be a.
Big drag on our business, but certainly consumers have less money to spend.
And as a result, we'll make choices that are different than they used to make even a few months ago.
Yes, I think Mike the other thing that weighs in on that is there is due to the inflationary environment you tend to see smaller basket sizes, which I think we're starting to see the retailers report and Youre seeing less pantry stocking that we saw through the Covid cycle is inflation weighs on the average consumer.
Got it.
The quick follow up can you talk about the occupancy trends for July .
Yes. Good question now the trend for July are in line with our guidance we are seeing.
Occupancy year over year improvement well with well within the range that we updated the guidance on so as we said in the in the prepared remarks, we expect that to continue through the year in July .
Certainly back that up.
Okay. Thank you.
Thank you.
Your next question comes from Michael Carroll with RBC.
Please go ahead.
Yes, Thanks, I wanted to touch back on to the guidance question and it looks like in 2021, which was obviously a difficult second half I mean, you did about 57 basis. So but now your guidance is kind of implying about 52 cents in 2022.
<unk> occupancy being up pretty significantly youre able to pass on those higher labor costs.
What's the disconnect I mean, why would 2022 waves and so drop below what it was in 2021.
Yes, as we mentioned in our prepared remarks, we're very pleased by the progress of the core business in terms of driving NOI growth, but there are headwinds and <unk>.
<unk> higher.
Higher interest rate environment, which creates higher interest expense.
And the <unk>.
<unk> the U S dollar, which has the translation impact on our earnings from our foreign operations.
Can you kind of quantify how big of an FX impact do you expect to see in 2022.
Do you are you underwriting more currency exchange or a movement that has already occurred.
Yes, so as I mentioned in our prepared remarks, roughly FX year to date cost us about a penny a share but you definitely saw the dollar accelerate as we move through the.
Our strengthened as we moved through the quarter.
No.
I think those are the biggest drivers were also as we.
Commented earlier and you can see in our guidance one other item below.
Our below NOI is also SG&A, which is still in our overall guidance range that we gave at the beginning of the year, but that is also a detail.
Okay.
Thank you.
Your next question comes from.
<unk> <unk> with Evercore. Please go ahead.
Hey, good afternoon, everybody I guess, George you talked about the <unk>.
<unk> costs being high in pushing constant customers.
<unk> with.
So to all of the increase is known as <unk> are you can you go back to the same customer and negotiate.
Higher prices again in the event that.
Costs continue to be high and inflation is worse than we think I mean can you go back to sort of negotiate contracts again.
Yes, we can in fact, we've done it now three or four times already.
And if a fifth time as necessary, we will do it.
We've said, it's not exactly the same based on the inflation, we see so power surcharges just go right on the invoice thats not a negotiation that the industry is condition to that and we certainly are.
Provided the data to customers the effects of the changes when we do it it's a very fluid process typically only takes 30 days to implement the labor inflation. We've highlighted the different methods. We use whether you are in our top 100 outside of our top 100.
But we will do at this time if necessary.
We've said we've committed to we're not going to let inflation structurally change our margin structure and we're as committed to that today as we were when we first made that statement.
Okay got it and then I guess to an earlier question about that.
Defense is that your business is in a recession.
I guess, what are you factoring into guidance to incorporate that slowdown and even as we think about 'twenty three right, we're not even sort of it.
There's a view that yes, maybe there is a potential recession here, but.
There's a sense that from a modeling perspective like that throughput pallet that continues to decline is that the way to think about it.
Let's kind of the assumptions when we do sort of go into recession within the next 12 months that would happen.
Yes, So I guess, if you look at our business and our business would be aligned with the food industry really when it comes to recession, which I hope does not occur or is not a deep recession, but the characteristics of our businesses are that we typically store and forward food.
Food products that are center of the aisle Walmart center of the Kroger that typically categories that people trade into a recession versus out of due to the price points and.
There is a thought also that if a recession were to occur hiring could increase or availability of people would increase so I would say no business I know there is recession proof, but the food industry and are part of it tends to be somewhat.
Recession resistant.
And I think on that point.
Our guidance around decline in throughput.
Pallets.
Selective of our view on the impact for the balance of the year.
Thank you.
Thank you. Your next question comes from Joshua <unk> with Bank of America.
Please go ahead.
Yes, Hey, guys.
Just trying to get a sense of the macro environment impact on your guidance.
How big of an impact is the rising interest rates.
Yes, I think what were your back half quarter versus this quarter yeah.
Yeah as you think about it based on the amount of floating rate debt that we have roughly on a full year basis, a 100 basis point move in interest rate would be approximately $10 million of incremental cost.
Hopefully that helps you get a metric.
So a 100 basis point move in the 10 year.
Is $10 million for the full year.
Yes, 100 basis point move in base rates.
What translates to $10 million on a full year basis.
Okay, and what's the base rate is it or.
Effectively socal.
Okay, Alright, thanks, guys.
Thank you.
Question comes from Tim.
Please go ahead.
Thanks, Good afternoon I just wanted to go back to your comments about July occupancy I was just curious about.
The recovery in economic occupancy and.
The labor.
<unk>, how that cadence looks like throughout the quarter.
You always have an element of seasonality to your business.
It's hard to just look at the numbers.
Value.
So you can just provide some color on that.
Yes. So in June in the second quarter, we were 288 basis points higher year over year.
We revised our guidance on occupancy to be a 100 basis points to 300 basis points higher for the full year.
And July is coming in well within that range. So we expect to hit the revised occupancy guidance. If you extrapolate that we should be within 100 to 300 basis points higher month over month for the remainder of the year.
Yes.
And you mentioned.
Impact of expense pass throughs.
<unk> can.
Can you just talk about what additional upside there is.
Whatever metric that Youre looking at.
We can get it.
We're saying what we're saying is in the second quarter, we still experienced inflation in labor.
House supplies and power and due to the nature of the lags various different lags with those each of those inflationary items.
We would not have it all priced it in the second quarter. So this pricing in the third quarter that offsets those.
That inflation.
That is rolling into the third quarter as we experienced more inflation in the third quarter, we will price set in the fourth quarter. So essentially we're lagging a quarter with each.
With each inflationary items.
Okay, and if I can squeeze a third one in your guidance for same store revenue, 3% to 5% year to date, you've already done inside then clearly occupancy move in the right direction I have a little bit more uplift from getting a full impact of expense pass throughs.
Your guidance implies about 1% same store revenue in the back half.
I mean, I'm trying to get a sense of is that just being conservative.
Because even the throughput coming down I don't think could take your.
And it's hard to believe that we will get 1% same store revenue in the second half.
Yes.
Certainly throughput, we don't expect to have that level of impact it comes down to.
The fourth quarter of last year.
Having a lot of price in that quarter that basically went off pricing actions began to hit the business for the fourth quarter of last year. So as we comp the fourth quarter. The revenue increase year over year is going to decrease and it's really just that that item that is causing us to guide to that level.
Okay. Thank you.
Yes.
Thank you.
A reminder to please keep your questions to one per person with follow up.
Your next question comes from Craig Mailman with Citigroup.
Please go ahead.
Hey, good afternoon everybody.
Yes, I don't want to speak for everyone on the call, but it seems like.
Uh huh.
Given that we're all trying to get.
Bridge right for Hawaii.
Because as I listen to you.
You guys have 53% in the first half of the year and I know you can't annualize the business because of seasonality.
But as you think about kind of fourth quarter.
Relative to the first quarter, you could be up a couple of hundred basis points Youre pricing I understand that.
There's going to be a lag on the power surcharge.
Piece of the business, you're going to have a floating rate piece of the business, maybe something on that sacks.
But on the other side of the call.
Consumer does slow.
Your tenants are going to have a chance to actually.
Build inventories faster than what you would think right.
The throughput business may not be as high but from at least economic occupancy standpoint.
Hello.
Upside there so I guess.
What I'm trying to get at is.
Ken I know someone referenced to 52.
That kind of gets to the 105 in the back half of the year and I just wanted to try to put some per share numbers around.
Some of the drivers.
I understand 100 basis points of floating rate debt.
<unk>.
Annual basis, so maybe.
Can you share drag per quarter.
And similar thing on that tax rates, maybe you get two cents a share per quarter.
Quarter, there, but then the flip side Youre getting.
So I know, it's kind of the.
A long preamble there Budd.
I'm, just really trying to get to per share bridge.
Yes.
Yeah.
Yes.
Yes, I can try to jump in and bridge some of the other items outside of the ones that we've already called out.
I would look to the timing of our maintenance capital spend youll see that our maintenance capital spend against our full year guidance ramps up through the back half of the year obviously.
And it's our forecast implies that we're growing that fan relative to last year as our asset base has grown.
Well so if you recall in our initial year guidance I commented that will have startup cost obviously as we get closer to the to the end of the year given what Rob discussed about big projects start to come online, we'll start seeing some higher drag from those development projects in terms of.
The initial startup costs. So those are just a few of the items. In addition to the other comment that we mentioned that do put some pressure on the back half of the year and the SG&A mark that you've called out.
Yes.
Right no I get that but that's all kind of you guys are talking big picture Im looking for actual.
In tax on a per share basis.
To bridge the gap.
You guys are throwing a bunch of stuff on the headwind side of things.
Yes.
To try to and now I would love to also see right. Keith you guys didn't get a full quarter of the price increases right. So that's going to continue on the power surcharge Simon. Thank you dates with 30 days behind right.
So you will get some of that back throughout the year, so like whats the real drag from that.
And then Dunkirk.
There's going to be a drag do it but.
You guys have condition to the street with the J curve on.
The NOI coming online and so.
That should be.
In People's kind of thought process.
I'm just trying to think what's incremental that kind of gets you from that 53.
To better fundamentals.
And the ability to reprice.
Yes, Craig it as I said first look as to the timing of maintenance capital spend.
You look to the midpoint of our guide it's roughly at $12 million increase over the back half from the front half. That's worth if you think about our weighted average shares outstanding anywhere between four to five.
There.
So that's just timing of how that capital is deployed.
Okay.
Alright, thanks, guys.
Thank you the.
Your next question comes from Bill Crow with Raymond James. Please go ahead.
Great. Thank you good evening guys.
George can I get a clarification before I ask my question.
You referenced the second quarter of 2023 is.
More of a stabilized point, but im trying to figure out what was that reference to labor was that to margins was that occupancy is that does that kind of because I think that.
The timeframe for recovery accelerated a little bit maybe.
It may be towards that mid 'twenty three.
Can you just tell me, what you're referring to.
Yes, I think the context of the question was the labor market specifically.
In my comments, where I don't see the labor market is coming back to let's say fully normalized pre COVID-19 levels. This year for sure.
And I'm very doubtful it will happen in the first half of next year as well I think it takes.
A long time to rehire the people.
We lost and I'm talking from an industry standpoint, now the food industry.
And.
Then you have to train them.
Have to get them to stay turnover as we mentioned in our prepared remarks is an issue and when people believe they can work in this environment and then and then find out that they really they really can't.
And then all of that has to stabilize and I don't see any stabilization at the levels.
Of employees that were in the food industry.
Pre COVID-19 anytime before.
The back half of next year that was the context of the comments. Okay. And then we should just assume that that'll be even beyond that before.
Occupancy gets back to 2019 levels and margins improve right. It sounds like those would lag.
The workforce stabilization is that fair.
I think Thats fair I mean, you should see some improvement in when we get back to those levels, but it takes time right.
The biggest variable is when does the workforce become as productive as they were pre COVID-19. The numbers can of people employed can can be.
At levels, but productivity is a big piece of it so I agree with that yes.
Okay and then my.
Thanks for the clarification multi part clarification and one question for you is on the operating cost increases as the second derivative has started to decline are we are we have we've gone past peak.
As far as the rate of increase.
<unk>.
I don't know if we've gone past peak, but it's changed a bit.
It really matters what geographies spa.
Specifically youre talking about so in the U S. It seems like the labor inflation has subsided to a degree but warehouse supplies, which is probably driven by labor and our suppliers' business and power has increased there was a little bit of a mix change there.
<unk>, our European business is now full on with labor inflation.
It has lagged the U S, but its there now and we're dealing with it exactly the same way we did in the U S. But.
In addition to power increases that we've talked about in the past the Europe now has significant labor inflation. So it's a little bit of a moving target, but specific to labor in the U S. I would say, yes that is to a degree subsided.
Okay. Thank you I'll leave it there.
Okay.
Thank you your.
Your next question comes from Vince <unk> with Green Street Advisors. Please go ahead.
Hi, good evening.
Looking at page 27 of the supplemental economic occupancy is higher in the second quarter. This year.
Unite.
I understand the portfolio has changed a lot of this period, but what I'm trying to get at.
Maybe how much occupancy upside.
From current levels once food production levels normalize.
Well again, we have our guide of 100 to 300 basis points higher on an annualized basis. So that should we don't think we'll exceed that we would have raised it. So for this year 100 to 300 basis points is that we will land and we feel pretty confident about that.
And ideally throughput picks up right I mean, when the system normalizes and buy the system I mean, the food supply chain, you should see higher output from manufacturers.
Should see occupancy rise, but you should also see throughput increase and that has not happened so that would suppress inventory to a degree.
So you need to factor that in.
Yes.
So I'm trying to kind of look at maybe more a 'twenty three and beyond like Google like structural on the upside from food production or in the second quarter kind of pulling that forward because the throughput was down.
Do you see what I'm trying to get at.
Well, we said it'd be.
Turning to the occupancy gain.
Again, we've recently, maybe you said there were two factors increased production and slowing.
Slowing consumer demand due to less less.
Rosebel income than the average consumer today.
Those dynamics should change over time and when we normalize.
We should normalize back to inventory levels that reflect not only higher production with higher throughput driven by normalized consumer demand.
So.
I'm not sure if I'm answering your question correctly.
No that's helpful.
Clarify like is that on a seasonally adjusted basis like in the second quarter do you think for a second quarter level do you think that higher or lower or about the same.
Stabilized occupancy once everything normalizes versus the actual in the second quarter this year.
It's really hard to say im not sure I can predict that I'd be honest.
I can say I wouldn't expect it to be worse, let's put it that way.
Okay, No fair enough. Thank you for the time.
Yes.
Thank you.
Your next question comes from Anthony Powell with Barclays. Please go ahead.
Hi, Good evening question on the relationship between I guess end consumer demand and production.
Right now youre seeing benefit from consumers buying less but.
Over the medium term should eventually result in proceed producers producing less because there's less stuff to be bought and if we go into a downturn does that mean there'll be more pressure on end consumer demand.
Yes, I think the first question I think there is a long way for manufacturers to go on the production side before they would be comfortable.
They reached inventory levels.
Feel like not only meet consumer demand, but allows them to run our facilities efficiently right. So there's a lot of room I mentioned earlier that the occupancy improvement. We've seen is more of a trickle than then.
And then anything substantial so I think theres a lot of room, there and I, certainly hope consumer demand picks up.
That will ultimately.
Make the food supply chain normalized back to pre COVID-19 levels. So I'm, hoping that's a short term issue not a long term issue.
Maybe on the labor turnover, you're seeing I mean, we've seen a lot of announcements about warehouse employees being kind of lead offer solid hiring there, but you still seem to see a lot of turnover in your business.
When do you believe your facilities, where are they going and I guess, how do you see the competitive landscape for leber evolving the next several quarters.
Well. The first question is when they leave us I don't know whether they go I can't answer that.
But I think the labor market will remain very competitive I think I've mentioned through at least the first half of next year and our turnover is related to.
Individuals who joined our company and believe that they can work in our environment and just find that the environment is harsher than they.
They believed it was.
We deal with that all the time, we have programs to address it with cold acclamation programs.
Better on boarding processes, but we've got to become a better employer of choice.
We've got to have better onboarding practices, we've got to have better checking practices with employees was strengthening all of those processes now.
But it will remain competitive and I expect churn over to be the biggest challenge we faced certainly in the second half of this next year second half of this year and into the first half of next year.
Is it harder to staff new developments versus your kind of legacy developments or is it kind of the same issues in both portfolios.
Typically a completely different dynamic most of our new developments incorporate some type of automation, which means youre hiring.
Systems professionals, it professionals engineering professionals.
We're a more conventional facilities that have been in the system.
Lot longer we're hiring.
Hourly workforce that is going to more $20 an hour workforce, that's going to do much more labor in a manual way than any automated way. So there are two the two completely different.
Skill sets in two completely different markets, both of which are tight to find people but for different reasons.
Thank you.
Yes.
Thank you.
This concludes the question and answer session as well as today's conference call. You May now disconnect. Your lines. Thank you for participating and have a pleasant day.
Yes.
Sure.
Yes.
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