Q4 2022 Americold Realty Trust Inc Earnings Call
Greetings and welcome to the Americold Realty Realty trusts fourth quarter 2022 earnings call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Scott Henderson, Senior Vice President capital markets and Investor Relations.
Good afternoon. Thank you for joining us today for Americold Realty Trust's fourth quarter 2022 earnings conference call and.
In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results, which is available on the Investor Relations section on our website at Www Dot Americold Dot com.
Afternoon's Conference call is hosted by <unk>, 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 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>.
The 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 Companys website.
Now I will turn the call over to George.
Thank you Scott and welcome to our fourth quarter of 2022 earnings Conference call. This afternoon, I will provide an update on our four near term priorities and summarize our financial and operating results. I will then discuss the current market conditions that are underpinning our 2023 guidance.
Rob will provide an update on our recent customer initiatives.
Mark will comment on our capital markets activity.
Along with a detailed walk through of our full year 2023 guidance turning to our four near term priorities.
First we continue to effectively repriced, our warehouse business to offset inflationary pressures in our cost structure and protect margin dollars.
Additionally, as our longer term customer agreements come up for renewal. We are repricing these agreements, which will move us back towards our historical warehouse margin percentages.
For the fourth quarter rent and storage revenue for economic occupied pallet and our same store on a constant currency basis increased by eight 9% versus the prior year service revenue per throughput pallet increased by nine 8%.
During the fourth quarter, we used our inflationary pressures in our business begin to moderate sequentially. However, we continue to implement targeted pricing and power surcharge initiatives to address known inflation and we will exit the first quarter at a run rate covering all known inflation incurred through the fourth quarter.
Moving through the first quarter, we expect the majority of inflationary pressures to continue to be in power cost in select markets and in certain warehouse supply costs.
As such we will maintain our targeted pricing in power surcharge initiatives.
Consistent with our last call at this time and based on current market conditions, we do not anticipate significant moves in our overall labor rates going forward as I mentioned previously we have added tighter controls created more robust processes and strengthened our team to ensure that we have an accurate.
We view of each cost component and we are in a strong position to take action quickly if required.
Second we are focused on differentiating our platform by providing best in class customer service, we are continuing to see a positive shift in our customer service levels with the increase in our perm to temp ratio, which I will discuss momentarily as we expected our service levels are improving as our new.
Our associates get more familiar with the Americold operating system and our workforce ratio improves we expect this trend to continue without reference to reduce turnover as I have mentioned on previous calls we strongly believe that servicing our customers and best in class levels will ultimately lead to him.
Increased market share and has meaningfully contributed to our recent increase in occupancy for the fourth quarter 2022, our same store economic occupancy increased by 634 basis points over fourth quarter, 2021% to 85% a level not seen since the fourth quarter.
19 of pre Covid year.
We operated efficiently and providing best in class customer service at this level and we believe we can continue to drive occupancy.
Higher than pre Covid levels.
We cannot underscore enough the importance of our customer service initiatives, which are helping drive our strong incremental occupancy and market share gains.
Third we continue to focus on labor management with the goal of optimizing our mix of permanent and temporary associates in our facilities, while also reducing our turnover rate as we have mentioned in previous calls temporary associates cost more per labor hour and are less productive than permanent Americold associates.
Higher turnover is also costly and drives inefficiencies in our business during the fourth Florida. We are very pleased to have achieved a perm to temp hours ratio of $73 27.
This is 11 points higher than our fourth quarter 2021 levels and better than our pre COVID-19 levels of 70, 30, we are making progress toward our longer term goal of achieving a consistent 80 20 ratio.
Next our turnover rate is still significantly elevated when compared to both last year and pre COVID-19 levels, but we are making improvements.
Normalizing for the exit of a large retail customer and the corresponding associates and our third party managed segment. We ended December 2022 at an annualized turnover trend approximately 17 percentage points higher than that of December 2021, compared to December 2019.
Our pre Covid here, we were approximately 22 percentage points higher on a sequential basis, we improved our turnover rate slightly from the third quarter.
As a result for the near future. We expect to continue to be staffed with a relatively higher ratio of newer associates, who take time to move up the learning curve, which impacts our productivity and corresponding service margins are stable well trained workforce is critical to operating efficiently and returning to pre call.
But margins in our warehouse services business.
Our final focus area is ensuring that our development projects are delivered on time and on budget and then deliver the underwritten returns during the fourth quarter. We opened two new facilities, one in Dublin, Ireland and one in Barcelona, Spain.
Both projects are ramping to expected stabilized returns in line with our underwriting. Additionally, please note throughout 2022, we have taken significant steps to enhance the quality and expertise of our development platform. We have revamped our process on how we are executing current projects and how we evaluate.
The new projects, we have also significantly enhanced our development team.
We have recruited best in class talent from strong global automation organizations, such as dramatic Siemens and Vonda one day to name a few.
We have five automated facilities coming online this year and we look forward to each of them being a productive part of the food supply chain in support of our customers and creating shareholder value.
Our capabilities around underwriting capital deployment and operating our developments have vastly improved in short our development platform is much stronger than it was at the start of 2022, given the enhancements we have made in our development team.
And the strong improvement in occupancy across several key markets. We have identified certain critical markets, where customer demand is outstripping capacity we.
We are actively underwriting customer driven expansions in these select markets, which Rob will discuss momentarily.
Turning to our full year results for 2022, we delivered <unk> per share of $1 11 on the higher end of our increased guidance range. This performance was primarily driven by our global warehouse same store pool, which generated revenue growth of eight 5% and N O.
<unk> growth of six 7% versus prior year, both on a constant currency basis. Our strong same store revenue results were driven by a combination of our ongoing pricing initiatives and sustainable economic occupancy growth, partially offset by reduced throughput volumes rent and storage revenue.
Per economic occupied pallet and our same store on a constant currency basis increased seven 3% versus prior year service revenue per throughput pallet increased by seven 7% as for occupancy we delivered a 345 basis point increase in economic loss.
Occupancy over the prior year.
This increase in occupancy is attributed attributable to two factors first our food manufacturers continue to ramp production levels and second our intense focus on customer service led to an enhanced win rate on customer opportunities. In addition to new business our customers publicly recognized americold as before.
Let me give you a few examples unilever awarded of Miracles Sikeston, Missouri facility with its ice creams side of the year Award Butterball awarded our Russellville, Arkansas facility with inside of the year Award and then Australia Yum brands, Kentucky fried chicken business awarded us with.
Its supplier of the year award to name a few we appreciate this recognition and we look forward to continued progress around our customer service initiatives.
In summary throughout 2022, we significantly repriced, our warehouse business drove strong improvements in economic occupancy improved our customer service and we're laser focused on controlling the controllable in the face of a challenging labor and power environment.
We are very pleased with the progress we have made this year. Thanks to the hard work of our 15000 plus associates.
Now on to current market conditions that are underpinning, our 2023 guidance, which mark will go through in more detail for full year 2023, we expect our economic occupancy to continue to improve driven by food manufacturers continuing to ramp production and our best in class customer service however, given the.
Continued inflationary environment, coupled with a broader slowdown in consumer spending we do expect lower throughput volumes as N consumers reduce overall basket sizes and the amount of pantry stocking from a pricing standpoint, we expect to continue to cover inflation to benefit from our normal course annual rate escalation.
To reprice, our longer term agreements that come up for renewal and lastly to underwrite new business appropriately from an operational standpoint, we anticipate continued headwinds from a challenging labor market.
As a result, we expect higher than average turnover in our facilities to continue throughout 2023. The impact of this will be continued pressure on service margins. Additionally, we are expecting an improved NOI contribution from our development projects as they ramp up throughout 2023.
Lastly, we expect based interest rates to keep increasing in 2023, which impacts the cost of our floating rate debt against this backdrop, we are guiding to a full year 2023 <unk> per share range of $1 14 to $1 24.
During the course of this year, we will be accelerating the integration of global acquisitions.
Through the implementation of new best in class Cloud based back office systems to enable standard processes capture synergies and implement the Americold operating system. This new technology will position us well for growth globally reduce time to integrate future acquisitions and provide enhanced business analytics.
To further optimize our existing business Mark will go into more detail in his section of today's call. Lastly, let me comment on our ESG initiatives, which is a key priority for us here at Americold last year, we disclosed that we've completed our submission to the carbon disclosure project for 2022, we recent.
We received our inaugural carbon disclosure project score of C, which is in line with supply chain companies within Cdp's defined peer set we are committed to transparency around our ESG initiatives and are pleased to be part of the cdp's annual process going forward. Additionally, I'm pleased to report.
That 19 of our facilities in the United States was certified energy Star last year, making us a 2022 premier member of Energy Star certification nation to become certified buildings must meet strict energy performance standards set by the U S. Environmental Protection Agency we are.
<unk> to certifying additional facilities in 2023 with that I will turn it over to Rob.
Thank you George.
Over the past year, we have seen our food manufacturing customers continued to ramp production levels and fill rates meaningfully improve these overall industry trends are driving higher economic occupancy across our portfolio.
As a result, we have seen increasing demand for our facilities and services across all nodes in our network production advantage sites major market distribution centers and retail distribution centers.
We are also winning incremental wallet share from our top customers based on our keen focus on delivering best in class customer service and our network of critical infrastructure. We expect this to continue.
At this point I would like to provide some brief comments on our overall pricing initiatives.
First as our longer term customer agreements come up for renewal, we will continue to revisit our pricing structures in order to move us back to our historical warehouse margin percentages.
Please note that this is a multiyear process as the vast majority of our agreements are on three to seven year terms.
Second we will continue to benefit from our in place annual contractual rate Escalations on these current customer agreements.
Third as it relates to these agreements we will maintain our in year targeted pricing in power surcharge initiatives to address known inflation, which as George mentioned has begun to moderate in certain areas of our business.
For all new business and shorter term agreements are being priced with our current and forward view of our cost structure.
As for 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 $419 million compared to $357 million at the end of the fourth quarter of 2021.
On a combined pro forma basis, we derived 41, 9%.
Rent and storage revenue from fixed commitment storage contracts, which is an approximately 260 basis point improvement over the fourth quarter of 2021.
Enhanced commercialization, which includes our fixed commitment initiatives is a critical component of our strategy. We look forward to continuing to improve this metric, which will drive improvements in our economic occupancy.
Over the past few quarters, we are encouraged to have seen an acceleration of the customers' adoption of this commercial structure, which provides certainty of space for our customers and the overall industry occupancy increases.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers, who account for approximately 47% of our global warehouse revenue on a pro forma basis. We are pleased to know that we have increased our wallet share with the vast majority of our top 25 customers through our focus on best in <unk>.
Class customer service and network of strategically located in mission critical infrastructure.
Additionally, our churn rate remained low at approximately three 2% of total warehouse revenues consistent with historical churn rates.
Turning to development.
As you can see from our development schedule on page 38 of our IR supplemental we have five projects that have been or will be completed in 2023 and are expected to generate a meaningful amount of NOI over the next three years. These.
These include the following.
Two customer dedicated automated development projects for a large retailer one in Lancaster, Pennsylvania, and one in Plainville, Connecticut.
Our customer dedicated automated expansion project for a large food manufacturer in Russellville, Arkansas.
Our multi tenant automated expansion project anchored by large food manufacturers in Atlanta, Georgia.
In a multi tenant automated expansion project anchored by a large retailer and a large food manufacturer and spear what Australia.
We recently completed our customer dedicated automated facility in Lancaster, Pennsylvania, and we anticipate starting the process of inbound product into the facility over the next 30 days.
We are very excited about achieving this milestone and we look forward to servicing our customer and delivering on the expected returns outline for this project. Please.
Please note we have also extended out the target completion and expected stabilization dates for the sister project in Plainville, Connecticut for the same retail customer.
This change is being made in consultation with our retail customer to continue testing and commissioning the automated systems, while at the same time focusing on the launch of the other facility in Pennsylvania, We now expect the Connecticut facility to be completed in the third quarter of this year and stabilize in the first quarter of 2025.
Our stabilized return expectations have not changed while this impacts our overall non same store pool NOI in 2023 due to the shift in timing, we along with our customer feels strongly it is the prudent approach and this is reflected in our 2023 guidance.
As George mentioned, we have strengthened our development platform and.
And we have seen strong occupancy improvement across several key distribution markets in.
In these markets customer demand is outstripping capacity.
And we are evaluating and underwriting customer driven projects to address this demand.
Our development pipeline is robust and we are confident that we have built a world class team to deliver on current and future projects.
At this point I would like to comment on the recent partnership agreement, we have entered into with DP World a top five global port owner, and operator, DP World and Americold have entered into an agreement to explore opportunities for americold on a case by case basis to develop own and operate state of the art.
Cold storage facilities on DP World strategically located 80, plus ports located around the world DP World will benefit from increased traffic towards port locations, which will translate to incremental revenue due to our facilities.
And sure we will be fulfilling a need in DP world service offerings, which will be beneficial to all parties involved customers DP world and a miracle.
Because one of the world's largest port owners and operators DP World is an integral part of the supply chain moving approximately 10% of global trade or seamless interconnected global network of ports and terminals and logistics hubs at Marine services. We are already seeing the benefit of this relationship through customer synergies that are.
Resulting in an incremental occupancy and Americold current network.
We are very excited about this opportunity and look forward to providing updates on new development opportunities a DP world's port locations.
Lastly, I want to thank all of our Americold Associates, who worked hard every day during the fourth quarter, our busiest time of the year to ensure that we played our part in getting food through the supply chain and available for families as we gathered for the holiday season.
We are encouraged by the growth we've experienced in our occupancy across our portfolio and it is a direct reflection of the great work of our associates, the innovation of our solutions and the criticality of our infrastructure.
We thank our customers for their partnership and the opportunity to fulfill our mission of helping our customers feed the world now I will turn it over to Mark.
Thank you Rob.
Today, I'll discuss our capital markets activity, and then turn to FY 'twenty two 'twenty three guidance.
During the quarter, our capital markets activity included using proceeds from our delayed draw term loan to pay off our 264 million see MBS loan that would have matured in may 2023.
Following this repayment we have no secured real estate debt outstanding.
On December 5th we entered into interest rate swaps to fix the base interest rates on the remaining floating portion of our unsecured term loans into the year 2027.
As a result of these hedging transactions the only remaining floating rate debt in our capital structure is the outstanding amounts drawn under our unsecured revolver.
At year end 2022, 85% of our total debt outstanding is fixed and our nearest maturity is our 200 million notes due 2026.
At quarter end total debt outstanding was $3 3 billion.
We had total liquidity of $682 million, consisting of cash on hand and revolver availability.
Our net debt to pro forma core EBITDA was approximately six six times.
At this point, we have invested approximately $471 million on development projects in process, which reflects almost one turn of leverage.
We have approximately $76 million remaining to invest on announced in process development projects over the next year.
As George and Rob discussed we have five scheduled deliveries of large automated facilities in FY 2023, and combined with the maturation of the three projects. We delivered last year, we expect the company to organically Delever as all these projects ramp to stabilization.
We are cognizant of our leverage levels and continue to explore alternative sources of capital, which allows us to continue to support our customers' growth.
Turning to our full year 2023 guidance.
For the full year, we expect <unk> per share in the range of $1 14 to $1 24.
Please see page 42 of the IRR supplement for the individual components.
At this point I'll comment on the primary building blocks to get to <unk> <unk> per share and provide a bridge for each as it relates to last year's results.
Starting with our global warehouse segment.
Let me quickly comment on the new 2023 same store pool.
Our new pool is now 221 facilities, which is approximately 93% of the total number of properties in our warehouse segment.
The summary of the 2023 same store pool historical performance for 2022 as presented on page 37 of the supplement.
We have 17 facilities in the 2023 non same store pool.
For the full year 2023, we expect constant currency revenue growth in the same store to be in the range of 3% to 6%.
Let me provide more detail around the key drivers of this growth.
For occupancy and throughput volumes.
For the full year, we expect economic occupancy to increase by approximately 50 to 150 basis points as we expect food manufacturers to continue to ramp up production the benefit of recent commercialization efforts and softer throughput volumes.
For the full year, we expect a slight decline in throughput volumes of 1% to 2% as end consumer demand slows and basket sizes shrink due to the current economic environment.
For pricing.
For the full year, we expect constant currency rent and storage revenue per economic occupied pallet growth to be in the range of 4% to 6%.
Also for the full year, we expect constant currency service revenue per throughput pallet growth to be in the range of 4% to 6%.
This pricing guidance for both rent and storage revenue per economic occupied pallet and service revenue per throughput pallet reflects our continued pricing and power surcharge initiative to cover known inflation are in place annual contractual escalation in tier I step ups and the commercial.
<unk> of market based pricing for contracts that we underwrite or renew.
For the full year, we are now expecting same store constant currency NOI growth to be in the range of 4% to 9%, which is 100 to 300 basis points higher than the corresponding revenue growth.
Please note. The following guidance metrics are provided on an actual dollar basis not on a constant currency basis.
With regard to the new 2023, non same store pool.
As can be seen on page 37 of the supplement the new non same store pool generated negative $2 3 million in NOI in the fourth quarter 2022.
Our expectation is that the non same store pool will continue to generate negative NOI. During the first two quarters of 2023 at slightly more of a law than what the pool did in the fourth quarter of 2022 due to a ramp up of startup costs for five projects.
We expect to pull to generate positive NOI in the second half of 2023.
For the full year of 2023, we expect the new non same store pool to generate approximately zero to $15 million of NOI.
Turning to our managed and transportation segments NOI.
For the full year, we expect these segments combined to generate approximately $50 million to $57 million of NOI.
In 2022, excluding the approximately 11 months of NOI from our managed business that we exited in the fourth quarter of last year. These segments generated approximately $53 million of NOI.
Please note the lower end of our guidance range assumes some level of transportation decline in the face of broader economic headwinds.
Turning to our SG&A expense for.
For the full year, we expect total SG&A to be in the range of $216 million to $234 million inclusive of 24% to $25 million of stock compensation expense.
As a reminder, we exclude stock compensation expense from our total SG&A expense to arrive at what we call core SG&A expense, which is what truly impact F up.
For the full year, we expect core SG&A to be in the range of $192 million to $209 million.
The midpoint of this 2023 range is slightly down from our 2022 core SG&A expense of $203 million, primarily due to last year's core SG&A expense being elevated from the company achieving the higher end of its performance based annual cash incentive compensation program.
Turning to our interest expense.
For the full year, we expect interest expense to be approximately $134 million to $140 million.
This range is higher than our 2020 to interest expense of 116 million due to our expectation of full year 2023 average indebtedness being higher than that of 2022. Additionally.
Additionally, approximately 15% of our total outstanding debt is currently floating.
And we expect based interest rates to continue to increase into 2023.
Onto our cash tax expense, which is the number that impact <unk> for.
For the full year, we expect this expense to be approximately $5 million to $9 million. As a reminder, most of the corporate income taxes, we pay at Americold relate to our international operations.
Turning to our maintenance capital expenditures for the full year, we expect this investment to be approximately $80 million to $90 million.
We expect to announce development starts aggregating between $100 million to $200 million.
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 finally, please refer to our IR supplement for detail on the additional assumptions embedded in this guidance.
Lastly, as George mentioned, we are accelerating our global integration and beginning a multiyear investment into a new cloud based ERP billing human capital management and facility maintenance system to upgrade our current capabilities and bring recent global acquisitions onto a common platform.
At four <unk>.
During this implementation period, which we expect to be approximately three years, we'll be making an aggregate $100 million investment into the system, which includes approximately $50 million capital investment along with another $50 million of one time implementation and integration expenses.
We expect slightly under half of this investment to be made in FY 2023.
We believe the vast majority of the benefits from this investment will come from NOI enhancement net SG&A savings lower maintenance capital expenditures and working capital efficiencies.
Starting in 2025 ramping.
Ramping into 2026 and fully stabilizing in 2027, and we expect this investment to add approximately $15 million to $20 million incremental recurring F up.
During this three year period, the portion of the investment being capitalized will not impact recurring maintenance Capex and as a result will not impact F. Up. Additionally, during this three year period, we'll be excluding the impact of the expense portion of the investment from our core EBITDA and F O calculations.
Now, let me turn the call back to George for some closing remarks.
Thanks Mark.
Overall, I am very pleased with our performance in 2022 and our path forward.
We made good progress on our four near term priorities, we continued to enhance our internal capabilities around controlling what we can control we made significant progress on our customer service initiatives and we are very proud of the recognition and awards. We have received from our customers. Our core same store pool continued to recur.
Covered nicely as we saw economic occupancy meaningfully improve and we continue to price to offset inflation.
We can expect to see service NOI margins improve as we move towards our optimal perm to temporary ratio and stabilize our turnover rate. Finally, we extended debt duration on our balance sheet and took steps to minimize the impact of rising interest rates in the face of many challenging macro headwinds this last year.
I would like to thank the Americold team for their hard work and contributions to our performance. Thank.
Thank you again for joining us today, and we will now open the call for your questions operator.
Thank you.
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One moment, please open the call for questions.
Our first question comes from the line of Dave Rodgers with Baird. Please proceed.
Yeah. Good afternoon, everybody first for Mark and George It looks like based on your guidance that your occupancy and margin growth will be weighted and same store NOI growth weighted probably look towards the first half of the year. So I wanted to confirm that and then as I think about the second half of the year George What do you think the biggest components once you catch up on occupancy and.
Margin to where you were I guess what are the biggest components is it just down to labor inefficiency at that point to drive margin higher.
Yeah, Let me answer the second part first and then I'll turn it over to Mark, but you're absolutely right. Dave the second half of this year and really ongoing if you go back to our previous discussions it's all about labor getting permanent labor in that you can give the three months of time it takes to be a productive permanent employee and.
Limit the need for contract labor, which as we've said all along cost more and it's far less productive. So it's all about getting the permanent.
Temp ratio up closer to the 80%. We believe is right for this business and getting them to be with us for longer than three months. So they learn our processes. They learn our systems and they become much more productive and then youll see our services margin increase commensurately, so that's by far and away the.
The top priority throughout the year occupancy I would say the comp in the first half of the year is much easier than the comp in the second half of the year. So that drives some profitability into the first half versus the second half.
And Mark I don't know if you have more to add on that yes, I think the one thing just to build on that as I mentioned in my prepared remarks, and George and Rob. Both mentioned, we have a number of deliveries of large automated facilities coming on this year and as you see from the new same store pool that pool is carrying a slight loss.
Into the year based on our Q4 performance and we expect that loss to continue to grow through the first half of the year and then recover as those buildings become operational throughout the year I will remind everyone that the full year guide for the non same store pool is to make between zero and $50 million. So it does and positive for the pool, but there is.
That impact of the J curve in the first half.
And then if I could ask just a follow up on throughput, obviously, a big topic in the fourth quarter. As you look forward and you look back I guess at that.
Over the area.
Throughput really kind of accelerated I guess during COVID-19 and drove results for you guys and now it is kind of reversing out how long do you anticipate that to take before it really stabilizes out and you get back to a normalization do you have any read on that from the fourth quarter and moving into January and early February.
Well, if we look at.
What we believe the causes are we've had about a year now of pricing in the food industry in almost every category.
That nets out to somewhere between 10, and 15% increases year over year, you combine that with interest rates rising and squeezing disposable income and what you get is less buying power in the store per individual smaller basket sizes less foot traffic.
Very little if any pantry loading right youre buying.
Food for short durations, and you'll come back and buy more when you need it and that's that's really started to accelerate with the latest interest rate increases in some of the.
Earnings releases of large food manufacturers across our country, they're all citing the same dynamics as being soft on throughput. So when will that turn around well I mean, you've got to find some way to increase disposable income because it's very unlikely any price increases.
Roll back right, they're all driven by by macroeconomic issues around labor and I don't know anybody, including US who is planning on labor costs, reducing overtime. In fact, it may slightly increase over time, so it's really Dave down to when consumers have more disposable income in their pockets and.
Don't really have a.
A good way to get a read on that given you still have interest rate increases in front of us at least with the latest news.
Thanks, George I appreciate the time.
Dave.
Our next question comes from the line of Samir.
<unk> with Evercore ISI. Please proceed.
Hey, good afternoon, everybody, George but maybe help me walk through occupancy a little bit I know it's.
Bridging 80% for the year, you know you'll go back in history, it sort of.
Lovely you're at sort of pre Covid help.
Help me understand what why do you think this time, it's going to be.
You've talked about being up 50 to 100 basis points.
Into 'twenty three I'm, just trying to understand like why you think it's different this time around where occupancy can go even higher.
Yeah, well I think it will go higher partially because of the throughput question I just answered. So if you combine the reduction in throughput.
Driven by less disposable income that consumers have and higher prices at retail.
With the fact that food manufacturers are recovering their production. So I think it was Kraft who came out recently and said they hit 90% service levels.
They think they can get to 98%, which is the industry norm by the end of the year. So I think they would be a fairly typical manufacturer in the U S food industry and they clearly believe they can ramp up production and some of our other customers are not only believe it but they're doing it also so if you combine the recovery of food manufacturing.
With the slowdown in purchases at the consumer level inventory is going to rise. So that's why I believe our inventory will rise and that's why our guide is 50 to 150 basis points higher now why do I believe we can operate at higher levels, that's pretty simple we hit 85%.
Occupancy in the fourth quarter.
And we had great customer service. So we were able to take in every truck we had to turn it around and get it back out well within the metrics our customers expect we werent the most efficient in the world on the handling side for the reasons I mentioned, our new employees less than three months on the job.
Higher content of a contract hours given that fourth quarter is our busiest quarter, but if we can get through the fourth quarter as well as we did and we did a really good job on customer service at the 85% level I have no doubt we can grow our occupancy.
50 to 150 basis points this year and I believe it will happen.
The reasons I mentioned around throughput and food manufacturers ramping up.
So Sameer one one point this is Robert I would add to what George just said is I think also the acceleration we're seeing around the adoption of the fixed commitment structure.
Is is another reason why we're confident that our economic occupancy can go higher than pre Covid I mean, Justin.
Last 12 months, we increased our fixed commitment.
Revenue by by 17% in the amount of fixed commitment revenue. So I think if that if that trend continues and we can help smooth out the seasonality a bit of a business that it's going to allow us to see increases in economic occupancy as well.
Got it and then I guess just as another question here you know.
One thing we were trying to flush out what your revenue growth guidance here of 3% to 6% call. It four 5% at the midpoint.
You've done eight three in 'twenty two.
Would have thought maybe that.
Four and a half would've been higher considering the business continues to recover when you look at the USDA data that's trending in the right direction look I know you had the big occupancy pick up in 'twenty, two I get that but I'm just trying to make sure. We're not missing anything just trying to see how much conservatism.
And that range at this point thanks.
Yeah, I'd say that the difference between 2022 and 2023.
And revenue growth is driven by the pricing differential in the years So 2022.
I remember we were.
Fighting inflation every quarter I think we ended every quarter with in the next quarter will offset inflation in the previous quarter, we had numerous significant price increases throughout the year.
Don't see that in 2023 and 2023, we see labor moderating, we see power starting to moderate a little bit in Europe . So it's likely surcharges will reduce in Europe , we don't see the need for a significant power surges and or price increases to offset labor in Asia Pac so it.
Really the effect of inflation and power moderating at least that's our view for now and the lack of pricing beyond our normal annual price increases, which gets you to the range that we've put in our guide.
But but without the off cycle.
Price increases fighting inflation throughout the year, which happened in 2022.
Thank you.
Yes.
Our next question comes from the line of Mike Mueller with Jpmorgan. Please proceed.
Yeah, Hi, I guess on the comments of the tech investments of $100 million Tech investment, that's not going to be.
<unk>.
I guess capex for expenses.
Talking about $15 million to $20 million recurring episodes, where if we're thinking about the P&L.
Where exactly does that flow through down the road, where the key line items that we're going to see that benefit materializing.
Yeah, so for the <unk> impact side of that you will see it in a number of ways, you'll see it principally in NOI enhancement.
Flowing through the warehouse portfolio once fully stabilized secondarily youll see it in net SG&A savings.
And then lastly, as it relates to <unk>, you will see it in lower capital expenditures remember there is a geography shift so you have lower capex and a little more.
SG&A spend which is but there is still net SG&A savings. So those will be the three principal line item fulfill them.
Got it okay. Thank you.
Yeah.
Our next question comes from the line of Michael Carroll with RBC capital markets. Please proceed.
Yes. Thanks can you provide some more details on the DP world agreements I mean is this an exclusive relationship that you guys have with the with DP World and it looks like a number of those ports are international. So are you looking to expand more broadly in your existing international markets like Australia.
In Europe or are you looking to go into new international markets with this relationship.
Yeah. Thanks, Mike. So so it is what it does is it gives us the first right.
The ability to look at these opportunities and we'll look at we'll look at opportunities globally.
On a case by case basis under underwrite each one on a.
Standalone basis, and if there is an opportunity that we think.
Mexico Central will move forward. So it does it does give us that first first look so we're really excited about the opportunity and we're really excited about the partnership and it is it is very much a global relationship and so.
It will include.
Regions, where we do business today and it could include new opportunity is going to be a great great way to enter new markets for us into the future.
And I'll just say there are no quick.
George started sorry, Mike I, just want to add real quick that they have a view as to where.
Cold storage as needed based on there.
The expertise they have in the ports they serve around the world. So it's while we have right of first refusal we also have.
Their insight as to where they believe cold storage is needed in the level of business intelligence. They have is very very impressive so thats another side benefit.
Great and then are you are they the ones, bringing you the opportunities or is it vice versa. And then just one modeling question is this going to be on a land lease I'm, assuming so youre going to be building. The project had been to be leasing the land from from DP World.
Yes, it's a combination of both.
And both we have instances, where we're bringing some opportunities in instances, where they are bringing opportunities to us.
It should be a great partnership and yes, it will be land lease opportunities.
Okay, great. Thank you.
Our next question comes from the line of Vince <unk> with Green Street. Please proceed.
Hi, good afternoon.
So your occupancy in the fourth quarter was higher than 2019 levels, while the USDA data for all cold storage quantity stock was down about 7%.
Excuse me, 7% versus 19 level. So just what do you think is driving the delta in performance there.
Indicate that americold is gaining market share since the pandemic.
Yes, I think there's two components to that one is the USDA data is a subset of the data that we have in our.
In our warehouses. So let me give you a big example, one is the prepared foods as part of our business. So.
Items that you would typically find at Walmart Kroger Publix in the frozen foods section finished goods items that consumers buy that is not captured in the USDA data. The USDA data is more commodity based and used for inputs into the manufacturing process.
So that.
The data will never aligned 100%.
Can diverge as you just mentioned as more of the food processors pick up their volume.
And in the USDA data can remain flat on the.
On the raw materials side for manufacturing so I hope that's clear the USDA data being a subset of what we saw in our facilities.
Yeah I think.
The other thing that we benefit from is the fact that.
We are our book of business is skewed towards some of the larger food manufacturers, we talked about how just 25% or 25 customers make up 40%, 47% of our global warehouse revenue. So those are those customers those large food manufacturers.
They've been able to get people back they can they can certainly turn the volume on much faster than some of the smaller manufacturers that may be more prevalent than others books of business. So for US we benefited by.
Having the big Blue chip customers, a significant portion of our.
Overall percentage of our portfolio and seen them recover faster and therefore, you know for us as their main provider be able to take advantage of that from an occupancy perspective, you mentioned market share Jim.
Yeah, and I guess lastly from a market share standpoint, I do I do think what we've been able to see is.
An enhanced win rate that's allowed us to grab increasing wallet share with those big key accounts.
And large customers food manufacturers, so for us all of that.
Songs together and has resulted in strong occupancy gains.
No that's really helpful color. Thank you.
Just switching gears for my second question is you mentioned delivering five automated facilities. This year once those are stabilized how much higher.
NOI margins for new automated facilities versus older ones.
I mean the.
The yields are in our supplemental that that's what we've underwritten too and those are our targets.
Theres really no divergence from what you read in the supplement supplement versus what we're targeting so that can be computed but the five that we're turning on now this year 2023, they're all state of the art facilities. I mean, these are brand new facilities utilizing the best technology, the best hardware the best suppliers as we can.
<unk>.
To implement them in.
We would consider.
Both in the retail side too that are coming online and the food manufacturing side three that are coming online we would consider them absolutely best in class, but today for sure. There's no better technology out there that went into these facilities that we can find.
So just to clarify I didn't ask my question well, maybe just like the NOI margin not the development margin your development yield once it stabilized in your overall portfolio is right around 30% NOI margin roughly like your new our new automated builds 40% NOI margin as that isn't materially different than you know.
Yes no.
No youre correct. So the benefit of the automation as youre, putting much more capital investment upfront for lower operating costs on the backend as the automation and the machinery is replacing a lot of the direct labor. So we do expect those portfolios to operate at in here.
<unk> margins relative to our overall <unk>.
<unk> portfolio of conventional site. So as those come on you will see on an overall portfolio basis the margin expand within the overall warehouse book.
Are you able to quantify how much higher the margins could be as we're even ballpark would be helpful.
Yeah look I would say if you look at ballparks of sites. It varies by exact application, but they can be anywhere from.
10 percentage points to 15 plus.
Got it thank you.
Alright. So question comes from the line of Craig Mailman with split with Citi. Please proceed.
Hey, guys Mark I, just wanted to hit on a couple other guidance items here on the G&A.
You guys had 55 million X the non cash comp this quarter was there something in there one time that would make that a bad run rate.
Yeah as I said for the for the full year guide and as you saw our earnings accelerate through the year. So based on our performance based bonus that would have accelerated commensurate with our earnings and that's why if you heard in my prepared remarks I did mention our guide for next year on core <unk>.
SG&A is actually slightly down year over year and part of the reason is down because we have reset the bar back on the performance based cash compensation.
Okay.
So from a modeling perspective, I would look to that to the new guide.
More so than the run rate exiting Q4.
Even with the growth some of the hires that George was talking about on the development side general inflation.
And the growth in earnings I mean, you don't think that there's going to be.
Pick up in G&A, just in I O.
Only asked because it's it's kind of a.
<unk> you know everyone else is kind of taking in higher labor cost next year in overhead and you guys are telling me I mean, it just seems a little bit counterintuitive when inflation is still a lot of constant yet you guys are the correct people more.
Craig I will say is if you looked at our SG&A over the last couple of years, we've been commenting that we have been investing in our G&A in order to support the growth that we have in the delivery and so we have the requisite support.
Now that we've mentioned within the business. We do continue to look at gaining synergies and streamlining operations through re can as we've talked in net acquisitions as well. So you do have some of the benefit of that netting in.
But overall I would focus on the full year guide that we provided not the Q4 run rate.
Okay and on the interest expense side.
You guys are moving into Plainville liberally.
Our two quarters, so that saves you a couple of million Bucks on tap G&A is there a cap interest is there also capped interest on.
You said about $50 million 100 million youre going to spend on the systems upgrade does that does that also offsetting interest expense.
It's probably a tremendous amount most of the cap interest is related to the large capital projects and as you can see last year roughly <unk> <unk>.
Capitalized just under $12 million in interest expense related to the development projects and roughly $3 million in the fourth quarter. So it kind of gives you a sense of the run rate going forward.
Right.
The run rate.
Oh, sorry, I was just looking at the run rate of interest expense in the fourth quarter, but that's about the $132 million alright itself, which is and that doesn't account for the forward curve gone up over $500 million floating so I'm just trying to think of it.
Cap interest burden us.
Already there it just I was just trying to figure out the other.
Hope that you guys have interest.
Interest expense excuse me the other yes, the other benefits us when we swapped into fixed we swapped into fixed with a longer duration. So if you looked at the shape of the curve, we're actually in certain cases, lowering our interest rate expense moving from floating rate interest down to fixed and so.
Out of that and the benefit of the overall forecast.
Right.
And just separately outside of guidance just George.
You kind of talk about.
Throughput being down.
Well margins going higher.
In.
Obviously going higher because people are.
Producing more but at the same time, the economy's slowing I mean at a certain point do your customers stop.
As soon as much as we're already at.
Inventory levels are about.
So stable demand and so I'm just trying to figure out is.
No linear offer some growth this year into a slowing economy will slow throughput how that trends.
Translates into margin expansion.
Yes, I think the the throughput Craig reduction has far less of an impact on us.
Versus the increase in production from our manufacturing customers. So our manufacturing customers have not reached optimal fill rates yet so they have a ways to go in building inventory to get there. We also know did not producing the full portfolio of their products because they can't cycled through the schedule.
Efficiently enough yet to do that and we also know that there's been a real.
Slowdown or even disappearance in some cases of new product development and new product launches all of those numbers are still way off from pre COVID-19. So we have a ways to go to build that reliable inventory you can get to.
Fill rates are pre COVID-19.
Based on our full portfolio of products. So that's.
That's one point and why we're still bullish on occupancy and why we still think our margins will expand by.
By taking our workforce from a relatively new workforce to a experienced and productive workforce the throughput component in.
Relative terms is a minor adjustment as opposed to what I just described on the build side from manufacturers.
Yeah.
Our next question comes from the line of Bill Crow with Raymond James. Please proceed.
Hey.
Good evening thanks.
George if I could just follow up on that last one and then I do have a follow up question, but.
Your customers your public customers seem to have been rewarded for producing less and charging more of getting higher margins.
I am having the same.
Issue understanding why they're going to pick up production.
If it's just going to sit in the warehouse that has become increasingly expensive.
To utilize.
Well as we've always said our costs are for warehousing are relatively minor low single digit percentages of a typical product cost are fully loaded product costs, but to get you. The main part of your question, they're going to continue to produce because theres still not producing efficiently. They can't produce all of their products and they can't.
Produce them inefficient cycles to to get back to the product cost that they had pre COVID-19.
And they're all pretty much said that they've said that they are trying to stretch their manufacturing cycle is longer.
We're getting there but slowly their fill rates are not at 98% I think Kraft again. They quoted 90 I would say, that's probably typical give or take a few hundred basis points by by manufacturer our retailers still have out of stocks unexpected deliveries late deliveries et cetera. So the supply chain is not operating normally.
It's operating better.
Wasn't in the let's say the second half of last year, but it's not operating normally and until it does.
We need to continue to produce more and and again the throughput issue is definitely real but it's it's you know it's not it's not nearly the driver that the production side of the business.
Is at least with respect to us so.
There is nothing in our warehouse cost that would prevent any manufacturer from continuing to build inventory to support the business and drive better service levels. It's exactly what we saw in the second half of last year and Thats, what we expect to continue to see at least for the first half of this coming year.
Then we might see normalization in terms of.
Better throughput in the second half of the year. It really comes down to what the manufacturers are capable of.
And hopefully consumers get a little bit more disposable income in their pocket and use that to.
Reestablish buying habits and food stores that existed pre COVID-19.
Alright. Thanks, My follow up question is really on the labor front.
Before that there wasn't really an amount out there that would draw a stable workforce to your facilities that you kept pushing up rates and you still had the turnover.
Are you are you sensing any change in the workforce at all from them.
Psychological change of wanting to come to work needing to come to work or anything else going on out there.
I hope you're well.
I don't think so I mean, we have made progress the fourth quarter, we quoted.
Perm to attempt at 70 327, essentially above pre COVID-19 levels. So we are getting people in the door retention is still high.
It's roughly 20 percentage points or a little higher than that than pre COVID-19. So we're still having a much higher.
Washout rate than we would like in that.
That we need to make a sufficient but we are making progress and I think I've said all along that the progress is going to be slow it takes a lot of work to.
Bringing some new associate into the business teach them the business train them to be efficient and productive and as we've said all along we have to pay a premium in our business because the work is.
Is more difficult than let's say, an ambient warehouse the worst it would be done there. So not a lot has changed we've made progress as the numbers say.
But we still have a lot more to go and I think it was last call I said that I don't expect us to normalize anytime in 2023, I expect steady progress and Thats exactly the same way I feel now we won't completely normalize in 2023, but we should continue to make steady progress.
And even at the rate we've been making progress we should exit this year far better off than we are right now.
If not back to normalized levels.
Thanks.
Yeah.
Our next question comes from the line of Anthony Powell with Barclays. Please proceed.
Hi, Good evening I had a question on the the prepared foods versus I guess, the raw commodities a difference that is it a long term benefit for you to have more exposure to prepared foods. If consumers are consuming more of those as they have less time in.
Want more convenience and on the other side is at risk. If we went to a more deep recession and consumers need to save money and they buy fewer of these prepared foods.
Well I think the strength of our portfolio is that we're in multiple.
Commodities multiple nodes in the network and we serve all customers whether there are manufacturers retailers.
Or even import export it so I think one of the great things about americold them when it makes it so strong and resilient is the fact that we have the breadth of portfolio I just described.
When it comes to the prepared foods side of the business and pricing that's gone on there and throughput.
Throughput discussion we've had all of that's normal course of business in the prepared foods World. That's none of that's new I think it's accentuated because of the macroeconomic environment. We are in at the moment coming out of the pandemic et cetera. So I wouldn't say, it's normal but all the things that are going on have happened in the past just at lower levels.
Given the environment so.
I guess that's it.
A long way of saying, we do participate in the prepared foods business.
I believe we liked the business like we like all aspects of our business and we don't see it as a significant risk to our performance going forward.
Got it. Thanks. So one quick one on guidance is there any foreign exchange either benefit or a headwind on a year over year basis and in the end.
So guidance.
Yeah, our hedging strategy has really served to mute the impact of FX. So while.
Operationally, we try to hedge.
By having both our revenue and operational cost in the same currency in our foreign operations in our largest markets. We also hedged through the debt portion of the capital structure.
Generally that the benefit that you see in the operations or the pain youre seeing the operations the opposite will be felt through below the line through how we manage the debt side of the capital structure. So overall it tends to be very minimal impact on the <unk>.
Our next question comes from the line of Josh <unk> with Bank of America. Please proceed.
Yeah, Hey, guys. Thanks for the time.
Just wanted to kind of follow up on your comments on the development platform you mentioned.
Overhauled the team and how you go about the development process, just really curious to hear just kind of more color there and why you thought that was necessary.
Yeah the reason.
We thought it was necessary was was really setting ourselves up for this year I mean, five large automated projects coming online is a is something we've been waiting for and we're happy it's here but.
It also.
Middle of last year, maybe a little earlier than that it was clear that we needed to bring in some real top talent to be able to keep these projects on track five at a time and launch them all reliably, which we'll do this year.
And as a result, we've strengthened the team in all areas, whether it's planning, whether it's finance, whether it's the technical aspects of automation and engineering that goes with that software engineering, we have a new leader that comes with 25 years of experience with Siemens I think probably known as the.
One of the best automation companies in the World. So we've put a lot of effort into making sure that we have a team that is.
Top notch and can pull off.
Five.
Large complex automated projects successfully in a very short timeframe. So.
That's the rationale as to why we brought in.
Other team and and we believe we will get the benefits of it this year.
Okay.
And you just go over kind of the medium term.
Yeah.
You'll be able to do more developments or maybe better better Oh.
Our returns as well.
I think we'll definitely be able to do more developments in.
As you can see in our guide we have $100 million to $200 million dedicated to doing just that.
What remains to be seen is if there'll be automated or conventional and.
The problem with automated developments right now if there is a problem is the cost has gone up anywhere from 25% to 35% on the materials and labor to execute them.
And that's a material difference when it comes to our customers affording them.
Its not immaterial. So if that were to roll back I think automation would become much more popular if it doesn't I think conventional will go forward because.
I think the the.
The industry and certainly our customers need more capacity they are letting us know that.
We will react to that.
<unk>.
Our primary purpose here is to serve our customer needs and we would never let a customer expansion opportunity slip.
Slip bias.
Right.
Right now if I had to hedge it I would say that we're probably more leaning towards the conventional side given the cost environment.
But if things change on the cost side I could easily see a few build the automation way, but either way we have a team capable of executing and we.
We will.
Be very aggressive on.
Putting some developments in the plan this year.
Sure.
Thanks.
Yeah.
Our next question comes from the line of key bin Kim with Truest. Please proceed.
Thanks, Good evening everyone.
I wanted to go back to the DP World.
Can you just.
Help us understand what the total scope of that part of the partnership would look like the ownership structure.
And in terms of the income in our ownership of the debarment properties would it be.
Just on a pro rata basis or would you have to pay them a fee.
Okay.
Yeah, no I mean that the scope of the arrangement.
Global partnership it gives us the opportunity to evaluate opportunities on a case by case basis. If we find one where we want to go forward Americold would develop we would own and we would operate the cold storage facility that would be built on DP world land at one of their global ports and we were.
Sign a land lease that would benefit DP world. They would also get the benefit of increased traffic through the forwards, particularly in locations that today have none or very little cold chain infrastructure. So it would be a traditional type of structure, where we develop we own we operate.
But it would be mutually beneficial for both parties involved and for DP world. It would be as a result of a land lease and increased traffic through their port locations.
And then in terms of scope like I guess I know, it's early but what do you think that total dollars could be.
Yeah, we haven't we haven't gotten to a point, where we're ready to.
Really even put anything like that out there I can I can tell you it's already we're off.
Already.
Valuation multiple opportunities.
<unk> several different geographies, but.
Not at a point in time, where we would we would.
We are comfortable with with an amount.
<unk>.
From the total partnership.
Our next question comes from the line of Nate Crossett with BNP Paribas. Please proceed.
Hey, good evening.
Maybe just following up there how would you guys go about funding these opportunities.
I think in the prepared prepared remarks, you mentioned.
Alternative sources of capital.
Does that mean JV or whats, maybe the tolerance of equity issuance here.
Yes, we are we are talking about JV, when we mentioned our alternate forms of capital and where we've been mentioning this for a while we've done a lot of work around this area. We feel like that there are partners out there that.
Would work with us in a structure that we would like.
Which is an important part of.
Of establishing a JV, but we're very confident that we can arrive at a very solid relationship that we can manage and we like the structure of and that would be the way we would fund.
Many of the opportunities we are discussing.
Okay. That's helpful and then just on the balance sheet.
Getting rid of all of that secured debt does that.
Any potential for a higher credit rating.
But it's definitely a step towards it I think as you look at the platform and I mentioned in my prepared remarks, we are cognizant of where our leverage levels is but as I said roughly almost a turn of that leverage relates to in process development, which will be moving from being built to moving to <unk>.
Operational so as the earnings come on we will organically Delever back down so definitely look for we're happy to have made the step to move to a fully unsecured debt structure for our real estate debt and we think that suits us long term in terms of being able to raise cost efficient <unk>.
<unk>.
Yeah.
Thank you.
No further questions at this time and this will conclude today's conference you may disconnect. Your lines. Thank you for your participation.