Q3 2023 Americold Realty Trust Inc Earnings Call
Greetings and welcome to the Americold Realty Trust third quarter, 'twenty Q3 earnings call.
If anyone should require operator assistance during the conference. Please press star zero any telephone keypad.
As a reminder, this conference being recorded.
It is now my pleasure to introduce your host Scott Anderson, Chief investment Officer, often make hold. Thank you you may begin.
Good afternoon.
Thank you for joining us today for Americold Realty Trust third quarter 2023 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 Americold dot com.
This 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.
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>.
This afternoon, I will discuss some key operational metrics and financial results for the third quarter.
And then comment on our outlook for the remainder of the year.
Rob will provide an update on our recent customer initiatives.
And an update on our growth activity.
Mark will also provide some additional commentary on our recent capital markets activity.
Third quarter results and a detailed walk through of our guidance for the remainder of the year.
Turning to our core business priorities first.
Customer service continues to support strong occupancy in our portfolio for the third quarter, our same store economic occupancy increased to 84%, which is a 345 basis point increase over last year, and an 80 basis point decline sequentially from the second quarter as we discussed we expect.
The sequential decline to be 100 to 200 basis points, but we were able to partially overcome this through the normal course seasonal build of inventory.
We also derived 54% of rent and storage revenue from fixed commitment storage contracts in the third quarter, which is 187 basis points higher than the second quarter's level and set another record for this metric at americold, while maintaining our low customer churn rate at approximately $3 two.
Percent of total warehouse revenues, Rob will go into more shortly but these key operational metrics illustrate that we continue to perform at high levels for our customers.
Second turning to our priorities around labor management.
During the third quarter, we achieved a parent to Tampa hours ratio of 70 525.
This is 300 basis points improvement to our third quarter 2022 permanent labor levels and on a sequential basis roughly flat to the second quarter 2023 due to seasonality when we tend to use more temporary labor in the second half of the year, making the year over year metric more relevant.
Additionally, we ended the third quarter at an annualized turnover trend approximately 12 percentage points lower compared to prior year.
Compared to the end of 2019 pre Covid year. We ended September at approximately 11 percentage points higher is pre COVID-19 turnover level is an important kpis as we work to improve our services margins.
Third we continue to make progress on our in process development projects during the third quarter, we completed our customer dedicated automated project in Russellville, Arkansas that supports a large food manufacturer and our multi tenant automated project and Speer with Australia that is anchored by a half.
Handful of our top customers.
Both facilities went live and we are now in the process of in bounding products as we gave them ramping up to stabilization.
At this 0.4 of our five automated developments.
We outlined at the beginning of the year have completed and launched.
With the launching of these four facilities. This year Americold is the first and only cold storage company to deliver automated solutions at all three key nodes of the supply chain production advantage major market distribution and retail distribution to.
They have done so in a single year illustrates the enhancements we have made to our platform over the last 24 months to create industry, leading automation capabilities. Additionally.
Additionally, during the quarter, we were excited to break ground on our previously announced expansion project with RSA, our JV partner in Dubai, and we consider this a key step in expanding our relationship with DP World.
For the third quarter rent and storage revenue per economic occupied pallet and our same store on a constant currency basis increased three 5% versus the prior year, which was impacted by the reduction of power surcharges in certain markets.
Service revenue per throughput pallet increased six 1%.
Moving through the fourth quarter, we will continue to take a surgical approach to our pricing initiatives to continue to drive margin dollars and increase margin percent.
At this point, let me comment on our recent common equity raise completed during the third quarter in support of our new growth initiatives.
We issued $13 2 million shares off our ATM program at a weighted average price of $31 63 per share for total gross proceeds of $419 million.
We utilized all net proceeds to reduce the balance outstanding on our revolver, which decreased our interest expense for the remainder of the year and reduced our current leverage to five seven times core EBITDA.
These proceeds reduced leverage but will ultimately be used to fund new growth initiatives, while bridging the gap to organic delevering from improved same store results and stabilizing developments.
Turning to grow today, we are excited to announce an approximately $85 million expansion of our Allentown, Pennsylvania facility.
We have said we are seeing very strong demand from our customer base in key distribution markets within our network and we are well positioned to capitalize on these opportunities as.
As a reminder expansion projects are our lowest risk highest return development projects due to our embedded customer base in a local market knowledge and our ability to utilize our existing operating platform and.
In addition, two expansions we continue to accelerate the underwriting process around our other two key areas of development focus first our customer dedicated build to suit developments and second our CPE Casey and DP world collaborations.
Additionally, today, we announced the strategic tuck in acquisition of Safeway Freezers or temperature control company located in southern New Jersey for a total investment of approximately $37 million.
New Jersey is a strategic market for Americold, where we own 15 facilities and we fulfill a variety of customer needs such as major market distribution citrus repackaging retail distribution protein import and export and other port services. This acquisition complements our existing portfolio in this market.
Right.
Before turning to our third quarter results I am pleased to share that we recently added two new executives to our management team.
Brian <unk> has joined US as our new Chief operating officer of North America.
Brian is a supply chain leader with over 30 years of experience in retail and wholesale grocery supply chain at Albertsons.
His background and experience are particularly relevant as we look to drive customer service improve productivity and increase our services NOI margins.
Second Nathan Harwell, who joined us as our new Chief legal officer.
He joins us from U S. Xpress enterprises, one of the nation's largest trucking and logistics services companies and bring deep experience addressing legal operational and strategic issues across a variety of companies and industries.
We are very excited to have Brian and Nathan on the Americas team.
Turning to our third quarter results, we delivered <unk> per share of 32 and.
An increase of over 10% versus prior year's quarter. This performance was primarily driven by our global warehouse same store pool, which generated NOI growth of five 3% versus prior year on a constant currency basis.
Our strong same store pool results were driven by meaningful economic occupancy growth and pricing initiatives, partially offset by reduced throughput volumes reduced throughput was primarily driven by temporary changes to end consumer demand and behavior is due to the challenging economic environment, which has been mentioned by several large food manufacturers.
And retailers.
Some of the factors driving this and consumer behavior and food historically high inflation impacting food prices reduced snap benefits for certain end consumers the restart of student loan payments and higher floating interest rates impacting all forms of consumer debt to name a few.
These temporary and consumer behavior changes include less pantry stocking actively reducing at home inventories cooking more meals from scratch and more use of leftovers.
We do not believe <unk> weight loss drugs had any impact on third quarter results, but let me briefly share initial observations related to the temperature controlled food supply chain based on what we know today.
Large food manufacturers and retailers have indicated there has been a little or no volume impact attributable to GL PD one drugs to date.
There also seems to be consensus developing the G. L. P. One drugs may impact categories, such as soft drinks snacks.
Snacks potato chips as an example and candy.
None of which are meaningful temperature controlled categories.
Food industry led by food Science, driven innovation has successfully developed products to meet changing consumer behaviors and diet nutrition for much longer than my years in the industry to summarize our global temperature control product portfolio is incredibly diverse and includes proteins agriculture products and prepared pack.
<unk> foods with each category, having excellent nutritional options for a healthy diet today and we are confident that will remain the case in the future.
For the third quarter, our same store economic occupancy increased 345 basis points over the third quarter, 2022% to 84%.
On a sequential basis occupancy declined 80 basis points from second quarter, which was slightly less than the 100 to 200 basis points, we anticipated due to a seasonal lift.
Our same store throughput volumes declined by approximately 900 basis points versus prior year, primarily driven by the temporary changes to end consumer demand and behaviors due to the challenging economic environment.
Despite the 900 basis point drop in throughput volumes, we were able to deliver services margins of two 8%, which is approximately 30 basis points better than the first half of the year through aggressive variable cost management.
We have said the services business has an approximately 50% fixed cost structure, but we can still make meaningful progress on margin improvement by focusing on the variable portion of our cost structure is very encouraging to see us improve services margins with throughput volumes down as it shows that our productivity improvements are beginning.
To take hold.
Heading into the fourth quarter, we expect economic occupancy and throughput volumes to rise sequentially from the third quarter as our customers ramp up for the normal course holiday season.
Not surprisingly given the economic climate, most large manufacturers and retailers have started promotional activities designed to bring more and consumers into the store to support the holiday season through programs like increased store fliers couponing and buy one get one free.
However, even with aggressive promotional activity picking up we do expect throughput volumes to continue to be a headwind year over year, given the challenging environment that the end consumer is facing.
Turning to full year guidance as a result of the progress we have made around economic occupancy in our same store pool in combination with our ability to manage all aspects of our variable cost structure and the reduction of interest expense due to the pay down of debt. We are raising our full year 2023 <unk> per share guidance up.
By <unk> from a midpoint of $1 25 to a midpoint of $1 27 within our revised range of $1 24 to $1 30.
Lastly, before I hand, it over to Rob Let me comment on our sustainability initiatives, which is a key priority for us here at Americold.
I am happy to report, we recently received our 2023 <unk> score of 80, which is an improvement of five points versus last year's score. Additionally against our peer set we also improved our ranked first versus second last year we.
We are very pleased with this outcome and look forward to continued progress in our sustainability journey with that I will turn it over to Ralph Thank.
Thank you George.
As George mentioned, our company delivered strong results during the third quarter.
Economic occupancy and 84% for the same store pool and another quarter of record setting fixed commitment percentage levels for our total warehouse segment.
At quarter end within our global warehouse segment rent and storage revenue from fixed commitment contracts increased on an absolute dollar basis to $551 million compared to $379 million at the end of the third quarter of 2022.
On a combined pro forma basis, we derived 54% of rent and storage revenue from fixed commitment storage contracts, which has an approximately 950 basis point improvement over the third quarter 2022.
This marks the first quarter in the company's history, where more than 50% of total rent and storage revenue has been generated from fixed storage contracts.
Since our IPO in 2018, we have added over $350 million and fixed storage revenue.
Testament that speaks to both the benefits our customers derived from the structure along with our best in class commercial practices.
Pleased with this continued progress in particular the.
Meaningful progress that has been made this year and re commercializing our European platform as we transition more of that business to a fixed commitment structure.
Turning to pricing for the third quarter rent and storage revenue for economic occupied pallet and our same store on a constant currency basis increased by three 5% versus the prior year.
Please note that during the third quarter, we reduced power surcharges in certain markets, which was a headwind to our increase by approximately 150 to 200 basis points.
Service revenue per throughput pallet increased by six 1%.
We remain very focused on our pricing initiatives to ensure that we both offset inflationary pressures and price our business to reflect the value of the service we provide to our customers.
We're continuously investing in our facilities employees technology and sustainability in order to provide the industry leading service our customers require.
We will continue to take a surgical approach to pricing the renewal of existing business, along with embedding rate escalation that reflect the current operating environment.
<unk> new business with a forward view of our cost structure in the current market rates.
We will also implement our annual general rate increase or <unk>. The majority of which are implemented in January each year.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers, who account for approximately 48% of our global warehouse revenue on a pro forma basis.
Our churn rate continued to remain low at approximately three 2% of total warehouse revenues consistent with historical churn rates.
Given our strong operating metrics, we are continuing to accelerate the underwriting process in evaluating development opportunities across our three primary areas of focus, but Georgia as mentioned previously expansion.
<unk> projects customer dedicated build to suit developments in our CP, Casey and DP world collaborations.
Combine this macro backdrop, along with our strengthened development platform positions us well to capitalize on these potential opportunities.
Let me comment on today's announcement.
First we're excited about announcing our plans to build a conventional multi customer expansion project on our Allentown, Pennsylvania site that will be approximately 37000 pallet positions and approximately 15 million cubic feet.
We estimate this total investment to be approximately $85 million and the expansion facility will be anchored by some of our largest food manufacturing customers.
We expect to break ground on this expansion in the second quarter of 2024.
There are multiple other key markets, where demand currently outstrips capacity.
We're also looking at developing.
Any of these locations, we already own land and are in the final stages of underwriting.
Second during the quarter, we broke ground on our previously announced expansion project with RSA, our JV partner in Dubai, and we consider this a key step in our expanding relationship with DP World.
As a reminder, DP world operates over 80 port terminals around the world many of which lacked temperature control of infrastructure.
In addition to the DP World partnership we.
We are actively underwriting projects tied to our <unk> collaboration.
This collaboration will create significant supply chain value to our joint customers by having new America facilities strategically located on C. Pkc's vast rail network.
For the next five years, we expect 500 million to a 1 billion of development opportunities combined from these two strategic partnerships.
Lastly, our customer dedicated pipeline continues to grow and progress as customers refocus their efforts on long term planning, having moved past the disruptions from Covid.
Our long term relationships with these large customers position us well to secure these build to suit opportunities.
As for our current in process developments as George mentioned during the third quarter, we completed our customer dedicated automated project in Russellville, Arkansas that supports a large food manufacturer and our multi tenant automated project in spirit to Australia. It was anchored by a handful of our top customers.
Both facilities went live and we are now in the process of inbound product as we begin ramping to stabilization.
Looking forward, we now expect to complete our customer dedicated automated facility in Plainville, Connecticut by the end of the fourth quarter and for it to begin inbound product into the facility by early 2024.
This project has a 20 year fixed commitment in place with a leading global grocery and once we start in bounding, we will begin generating a 100% of the underwritten rent and storage revenue from this project.
We look forward to servicing our customer in this facility.
Completion of these five facilities represents over $500 million in capital investment being delivered in 2023.
Collectively these five facilities at approximately 145000 pallet positions and 46 million cubic feet to the Americold network across all three nodes in the supply chain.
The delivery of these advanced automated facilities demonstrates the power of our development and automation platform and will create tremendous value for our customers.
Lastly, subsequent to quarter end, we completed the strategic tuck in acquisition of Safeway Freezers in Southern New Jersey for a total investment of approximately $37 million.
Safeway facility is a major market distribution center that consists of approximately 16800 pallet positions totaling approximately 6 million cubic feet.
Safeway It has a very strong customer base, consisting of some new and current americold customers.
Bakery, dairy potato and juice product lines and service grocery retailers and quick service restaurants.
As George mentioned, New Jersey is a very strategic market for Americold, where we fulfill a variety of our customers' needs and inclusive of this acquisition America now owns 15 facilities totaling approximately 320000 pallet positions and New Jersey, now I'll turn it over to Mark.
Thank you Rob.
Today, I will discuss our net investment activities, our recent capital markets activities, our capital position and liquidity.
I will then provide an update on our full year guidance.
During the third quarter, we completed the previously announced purchase one distribution facility in Brisbane, Australia for a total investment of approximately 36 million Australian dollars.
Additionally, as George Ralph discussed subsequent to quarter end, we completed the acquisition of Safeway Freezers for a total investment of approximately $37 million at approximately a 9% net entry NOI yield.
We funded these investments through a combination of available cash and our multi currency revolver.
On the disposition front during the third quarter, we completed the sale of <unk> in Brazil, which resulted in a de minimis amount of net proceeds to americold.
Moving to our balance sheet.
During the third quarter, we issued $13 2 million shares off our ATM program at a weighted average price of $31 63 per share.
At a total gross proceeds of $419 million.
We utilized all of the net proceeds to reduce the balance outstanding on our revolver, which decreased our interest expense for the remainder of the year.
As George mentioned these proceeds to reduce leverage but will ultimately be used to fund new growth initiatives. This capital rate is better positioned to balance sheet has returned to growth.
At quarter end total debt outstanding was $3 2 billion.
We had total liquidity of 824 million consisting of cash on hand and revolver availability.
Our net debt to pro forma core EBITDA was approximately five seven times.
At this point, we have invested 159 million and our Plainville, Connecticut project and process and have approximately $32 million remaining to invest on this and other recently completed projects throughout the remainder of the year.
Additionally, as George and Rob discussed, we're recently announced an expansion of our Allentown, Pennsylvania facility at a total investment of approximately $85 million we.
We expect to break ground on this expansion in the second quarter of 2024.
Please see page 38 of the IR supplemental for additional details on our development projects.
As George mentioned, we are tightening our full year 2023, <unk> per share guidance to a new range of $1 24 to $1 30, an increase of two cents at the midpoint.
Please see page 40 of the IR supplemental for the key components underpinnings guidance.
At this point I will comment on our primary building blocks to get to <unk> per share and provide a bridge for each as it relates to the full year.
Please note the comparisons described represent comparisons to the corresponding prior year results.
We are now expecting constant currency revenue growth in the same store pool for the full year to be in the range of 3% to 5% year.
Year to date was five 4%.
This implies a fourth quarter to be in the range of negative 4% to positive 3%.
Let me provide more detail around the key drivers of this range.
For occupancy and throughput volumes.
The full year, we expect economic occupancy to increase by approximately 425 to 475 basis points.
Year to date economic occupancy increased by 597 basis points.
This implies economic occupancy for the fourth quarter to be plus or minus 100 basis points compared to the prior year.
We expect to continue benefiting from recent commercialization efforts translating to higher fixed commitments.
Potentially offset by the impact of manufacturers reacting to the challenging economic environment.
For the full year, we now expect a decline in throughput volume of six to seven 5%.
Year to date throughput volumes decreased by six 7%.
This implies throughput volumes decrease during the fourth quarter to be approximately 4% to 10% as end consumer demand continues to slow and basket sizes shrink due to the current economic environment and the factors discussed earlier on the call.
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 five to five 5% year.
Year to date increased by 6%.
This implies growth for the fourth quarter to be approximately 2% to 4%, reflecting our prior year pricing initiatives and the impact of the reduction of power surcharges in certain markets.
Also for the full year, we expect constant currency service revenue per throughput pallet growth to be in the range of 6% to 7%.
Year to date increased seven 2%.
This implies growth for the fourth quarter to be approximately 2% to 6% again, reflecting the impact of our prior year pricing initiatives.
For the full year, we're now expecting same store constant currency NOI growth to be in the range of 11, and a half to 14, 5%, which is approximately 850 to 950 basis points higher than the corresponding revenue growth.
This implies growth for the fourth quarter of 2% to 14%.
We are expecting the primary driver of NOI growth to come from rent and storage.
Please note. The following guidance metrics are provided on an actual dollar basis not on a constant currency basis.
Turning to the non same store pool.
Full year, we expect the non same store pool to generate approximately $6 million to $10 million of NOI year to date. The non same store pool generated approximately $2 million of NOI. This.
This implies a fourth quarter to be in the range of approximately $4 million to $8 million and NOI.
During the third quarter, we completed our spirit expansion and moved the legacy site to the non same store pool.
Turning to our managed transportation services NOI for the full year. We expect these segments combined to generate approximately $46 million to $49 million of NOI.
Year to date this segment generated approximately $35 million of NOI.
This implies the fourth quarter to be in the range of approximately $11 million to $14 million.
Turning to our SG&A expense.
For the full year, we expect total SG&A to be in the range of $224 million to $228 million inclusive of 23 to 25 million of stock compensation expense.
Year to date, SG&A expense was $169 million inclusive of $18 million of stock comp expense.
As a reminder, we exclude stock comp expense from our total SG&A expense to arrive at what we call core SG&A expense, which is what truly impacts <unk>.
Sure.
For the full year, we expect core SG&A to be in the range of $201 million to $203 million.
Year to date core SG&A was $151 million.
This was driven by increased cost control efforts, given the challenging economic environment, the incremental capitalization of certain costs associated with resources dedicated to the company's in process automated development and the timing of efforts related to our ERP project.
Turning to our interest expense for the full year, we expect interest expense to be approximately $138 million to $141 million.
This reflects savings related to the pay down our revolver borrowings following our capital raise during the third quarter and higher interest capitalization related to the delay in the completion of our Plainville development project.
Onto our cash tax expense, which is the number that impacted <unk>.
For the full year, we expect this expense to be approximately $7 million to $9 million year to date. It was six months.
Turning to our maintenance capital expenditures.
For the full year, we expect this investment to be approximately $70 million to $80 million year to date was $60 million.
We have lowered the range for maintenance capital expended shares commensurate with a slowdown in throughput activity as many of our preventative maintenance activities are based on usage.
Inclusive of today's development announcements, we expect aggregate starts of $85 million and then additional capital commitment of $5 million to our joint ventures to fund development.
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 details on the additional assumptions embedded in that guidance now let me turn the call back to George for some closing remarks.
Thanks, Mark we have made significant progress with respect to key operational improvements such as fixed commits exceeding 50% of our global rent and storage revenue and.
And showing sequential improvement in services margins in the face of throughput volume headwinds.
Latest two automated developments going live can you give us automated and conventional product offerings at every node in the supply chain.
Our capital raise which improved our balance sheet will provide the fuel for growth in support of our three development initiatives first our expansion projects, such as Allentown, which was announced today.
Second our customer dedicated build to suit developments and third our CP Casey and DP world collaborations.
In closing I'd like to thank the 15000 Americold associates around the world for their hard work and dedication and servicing our customers every day.
It is their efforts that provide the foundation for our future.
You again for joining us today, and we will now open the call for your questions operator.
Thank you.
We will now be conducting a question and answer session.
You would like to ask a question. Please press Star then one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
You May press Star then two.
I'd like to move a patient from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star Keith.
Please keep to one question and one follow up question.
The first question, we have is from <unk> <unk> of Evercore ISI. Please go ahead.
Yeah.
Good evening, everyone, Hey, George.
Put us down as we expected and as we had talked about you lowered cost to mitigate the impact.
But I guess just throughput remains challenged in <unk> and into next year is the strategy to continue to lower costs.
To mitigate the impact that you know its variable cost, but I guess is there a limit to how much you can reduce costs there.
There are limits the mayor, but when I talk about better variable cost management, we have a ways to go. So we had a what I would call our first quarter, where our labor productivity really.
Showed up on the P&L with sequential improvement in.
Handling margins with with sequential significant sequential declines in throughput. That's the first time, we've seen that since we have been trying to manage labor for the better part of two years now so I'm very encouraged by that we can we can do more on the variable labor front, we intend to do more and we should see sequential improvement in <unk>.
Margins going forward, even in the face of.
Declining throughput, although I will say through October we are starting to see sequential.
Creases in throughput still way off prior year, but sequential increase is due to seasonality. So.
I'm very positive that we can continue the trend on good variable cost management and it's all about right sizing labor to meet the work content.
Okay got it and just as a follow up.
Maybe on pricing into next year, how should we think about pricing with with.
With inflation moderating I guess for both storage and Brent and warehouse. Thanks.
Well, we still have our annual G. R is those happen every year and we still have renewals.
In the case of renewals.
It will be a little bit outsized, because they're coming up through a very previously high inflationary periods. So maybe you want to go a little deeper up yeah. I would say you know our main focus is making sure that renewal of their price up.
Our hit rates that we're embedding.
Annual escalation on a go forward basis that reflects our or the current operating environment. Our <unk> will be implemented like they are every year, which are general rate increases that for the most part go in.
In January and then when we think about new business, new business is being priced at market rates, which are higher than what we've seen our historical pricing.
With a lot of our legacy business. So we're we're confident that pricing will continue to be a lever to help us grow.
The next question, we have from Josh <unk> of Bank of America. Please go ahead.
Yeah, Hey, guys.
George I wanted to kind of well actually no I'm thinking.
Thinking about the Capex guide and how you trimmed it I guess, what's driving that is that somewhat of a function of like throughput or just like a change in plans just kind of help us walk through that.
No. That's a good question Josh it is directly related to the change in throughput. So part a very good cost variable cost management is understanding the main at the preventative maintenance impact of lower throughput. So let me let me make an analogy I think everybody can relate to if you're supposed to change the oil in your car.
Every 5000 miles you might drive 5000 miles in a month you might drive 5000 miles in six months. If you drive at six months you have deferred that preventative maintenance five months. So that's essentially what we're doing here in the face of throughput declines.
Vintage of maintenance on our on our equipment that is used to support.
Throughput usage of the equipment goes down and the preventative maintenance spend is extended over time and reduces.
In this period so.
That's a direct correlation to throughput of throughput picks up preventative maintenance would pick up but so wouldn't earnings from increased handling revenue and profit. So it's a it's part and parcel of managing variable cost along with labor and other components, but it's directly related to the throughput decline.
Okay, No that's really interesting and then.
Since we're on the topic of throughput you mentioned I think earlier that throughput is going to remain a headwind year over year, Alright, I guess is there a way to quantify typically how long these like throughput slowdowns last for and then what happens typically afterwards.
Well, we know that throughput will be down year over year in the fourth quarter. There's no question it'll be up sequentially at least it is in August and we are we believe that's due I mean.
It's up sequentially in October not August.
And we know that that seasonality coming into the holidays. We would assume we will continue to see throughput increased sequentially through Thanksgiving and into Christmas.
Those are the trends, we're seeing but still well off of prior year.
My guess is that in the first half of next year, it's very difficult to make meaningful progress on throughput because of the activity in the food industry in the first half of the year. As you know is seasonally less intense in the second half of the year. My opinion is the first opportunity to see throughput gains would be towards the <unk>.
End of the second quarter, when historically, we would start to see a pretty significant ramp up for grilling season through the summer and holidays, such as Memorial Day July 4th Labor day et cetera. So in my view. That's the first opportunity ended the second quarter into the second half of next year to see increase throughput.
The next question we have is from Craig Melman of Citi. Please go ahead.
Hey, guys.
I just wanted to run through guidance real quick because I appreciate the bridge you gave but.
By my math I was looking at you know the.
And so so yield on the equity raise versus the line that you paid down and it looks like you're somewhere in the three cents accretion there plus the five cents from G&A.
We're in a positive eight cents relative and you guys raised by two so does that mean all the core numbers that you were kind of saying that are under a little bit of pressure.
<unk> kind of negative six cents worse than they were as we sit here this time last quarter.
Yeah.
The first thing as you think about the impact of the interest savings we estimate the <unk> savings would be on a full year basis. If you look.
The impact in years, probably just over a penny as it relates to the capital raise so that's how to think about that as you think about the other cost as George mentioned in his prepared remarks definitely we are seeing pressure on revenue and contribution from lower throughput obviously.
I think you heard and you can see in the results that we have made tremendous progress on the cost management side to really mitigate the impact of what we're seeing on lower throughput I think occupancy stays strong is our really our fourth quarter in a row I think of record occupancy. So that's definitely supporting that.
The raise in the guide so hopefully that helps you bridge those two categories.
Okay.
That's helpful and then George I wanted to go back to your commentary you had mentioned that you guys didn't have the one to 200 basis point drop in occupancy you would expected cause economic was down only 80, but if I look at physical physical is down 210 basis points. So the you know the.
200, plus basis points pick up on on fixed commit sequentially seemed to be what really drove it as the physical kind of looks like it's trending with the year over year decline in USDA numbers.
That's number one and then number two just kind of curious you said, 9% service margins by the end of next year.
Assuming throughput may.
Maybe stays weak on the timing you gave like what kind of ramp do you need to see.
In the back half of the year to get it there and does that 9% on a just in the fourth quarter could you kind of clarify what that 9% means.
Sure.
But we should think about it yes.
Yes, So let me start with the second one first the 9% is the as we said was the run rate we would hit in the second half of the year. So we will achieve that run rate, we would end the year at 9% certainly.
But we would achieve that in the second half of the area and we were able to maintain it going forward.
The first question sorry, what was the first question.
Related to that you guys had thought you would have one to 200 basis points decline was only 80 basis points with physical was actually down over 200, which kind of trended with the USDA. So I'm just trying to get at you guys. Just said throughput is going to be weak but.
Are you seeing that even normally seasonal should be picking up now are you seeing in the fourth quarter ahead of Thanksgiving or is it still much weaker on a year over year basis.
No sorry, I forgot that.
We are seeing sequential improvement in throughput, which should translate into sequential improvement in occupancy.
Due to the seasonal lift you just mentioned around Thanksgiving and Christmas, we still believe that it will occur and we're starting to see the results materialize in October.
GAAP between physical and economic did widen, but we believe that the reason why.
Commit their office because people are planning to use that space in the fourth quarter of their reserved it we see throughput coming so I would expect that gap to narrow in the fourth quarter as large manufacturers of river reserving space for their product to support the holiday season.
Yes, I was wondering can you give us.
Some color in terms of the economics of the Safeway acquisition and with occupancy levels look like in.
Yes.
Economics on the transaction thanks.
Yeah, as we said roughly we invested $37 million.
We expect our net entry NOI yield of approximately 9%. So yes, as we commented I think Rob comments his prepared remarks the sites located in.
New Jersey, and Southern New Jersey.
Courts are existing infrastructure, we have in that market, which is a very strong market for us.
I think the only thing I would add to that as Rob just said, we will look to do.
With that acquisition like we do with all acquisitions implement both our best in class commercial practices and and the Americold operating system, which we think should improve that.
Entry yield over time.
Got it I think I missed it during the comments I appreciate it.
Yes.
The next question we have is from Michael Carroll of RBC. Please go ahead.
Yes. Thanks.
Normal is it for the throughput trends change that quickly I mean, if we were in normal times I'm assuming that this is not a normal time I mean, how much would we be should we expect throughput would vary from quarter to quarter.
I don't know that I can say, how much we expect quarter to quarter, but what I can say is we saw a very very sharp drop there is no doubt about it particularly in the beginning part of the third quarter. It did as I say.
Come back pretty strong in the in the latter part of the third quarter and we continue to see throughput improves sequentially through October but it was a very sharp drop no question about it and I wouldn't consider it normal but I also wouldn't consider it something that has never happened before it's just it's not an annual occurrence, let's put it.
That way and I think it reflects.
An economic environment, that's fairly unique at this at the same time.
Okay, and then the weakness was concentrated in any particular customer I guess property type by your production facilities your distribution centers or any part of the region in the company or was it just broad based across the portfolio.
I would say it was broad based across the portfolio.
Based as we said we believe on a consumer that has less money walking into the grocery store and is facing higher prices.
The next question, we have some keeping Kim of <unk> Securities. Please go ahead.
Thanks, Good afternoon.
We noticed your job postings were down about 40% quarter over quarter I am guessing thats tied to your variable cost control initiatives.
But I just want to tie that to your commentary about this decrease in throughput volume being perhaps temporary.
Because we've obviously learned that it's kind of hard to retain employees, maybe it's easier to hire than retain.
But to make a hiring change like that suggests that maybe just a little bit longer lasting so maybe you can provide some more color around that.
Yes, I think it relates to the last question I mean, the throughput decline was was significant and fairly abrupt in the early part of Q3. So are you are correct in and looking at the job postings and seen a sharp decline because what.
What we did was take very quick action when we saw throughput decline very abruptly in the first part of the third quarter. That's how you manage variable costs really well you have to.
Respond very quickly or every day, you don't you're essentially losing money. So I think the fact that you've noticed that we cut a lot of job postings tied to a real precipitous drop in throughput.
And it is exactly the correct observation and was very intentional on our part to get labor in line with the with the work content, which as I said dropped pretty dramatically.
And if you look at the cost structure for your services.
Services business.
How much is fixed versus variable and I know the difficulty in answering that question because it's not linear it's probably a step function.
Extract it.
I think a good measure would be 50, 50, it's about 50% fixed 50% variable and which should give you an idea.
If we manage the variable side of this business as well as we can which is not just labor, it's a maintenance capex combined with our labor.
And remember.
And the occupancy when when we were about two years ago. We said when occupancy comes back it comes back at a very high rare.
Revenue to EBITDA right, because it's incremental throughput will do the same thing for that 50% of fits right. So we do a really good job on the variable side and I think this is the first quarter, we can point to where we really did we.
We stay on that track through the first half of next year in the second half of throughput improves as many people predict.
We should see a really incremental benefit as we absorbed more fixed cost and get the benefit of the incremental volume on the variable side. So I'm really encouraged by the progress. We've made in this area have been doing a lot of work as everybody knows around productivity I would point to this quarter as the first one where productivity really showed up in the results.
The next question, we have do some mix Tillman of date. Please go ahead.
Hey, good evening, George maybe going back to some of your initial comments on.
Matt.
And like lower end consumer obviously, you had the COVID-19 snap benefits burn off here in February but now you have the cost of living adjustments kind of kicking in here in October is that any way of maybe kicking do put up for maybe just putting some numbers around disposal when consumer exposure you have in the portfolio.
Well I think we've seen the low end I think the low end was the was the first half, let's say of the third quarter, we've seen sequential improvement since it really looks like we will see sequential improvement through the holiday season. That's exactly you know those are the indicators, we see still off year over year, but not as.
Dramatic, let's say is as a portion of the third quarter now the third quarter did recover in the last month and a half or so I think fairly well and that's rolling through the rest of the year, but I would say we've seen the bottom and it was the first half of the third quarter.
So hopefully that puts it in a certain context.
Yeah. That's helpful and then maybe Rob going to use some of your comments on build to suit in fixed commitments along development as we're looking at new starts from here or there is going to be a lot of components of fixed commit associated with them or are you going to have the traditional J curve, just I guess trying to see what the value creation could be stuff that currently under construction versus.
Maybe maybe some of that takes the new starts in the J curve scenario.
Yes, so I would say our expansion projects because they're in markets where.
Today demand is outstripping capacity, our expectation in those expansion projects that we will see significant fixed components associated.
With our expansions obviously in customer dedicated builds our second.
You know main main focus from an expansion of those will be the fixed commitments I think our partnership deals our CPE Casey and DP world agreements will probably be a little bit more mixed in may may may tend to lean a little bit heavier on the.
The variable side of the equation, just the nature of that business, but.
The categories, one and two are expansions and customer.
Build to suits, you should expect to see high fixed content.
That concludes the Q&A session.
With that this concludes today's conference. Thank you for joining US you may now disconnect your lines.
Yes.
Okay.
[music].