Q3 2024 Americold Realty Trust Inc Earnings Call
Thank you for your patience. This is the conference operator. We will start the call in one minute.
Speaker Change: Greetings and welcome to AmeriCold Realty Trust third quarter 2024 earnings call.
At this time, all participants are in a listen-only mode.
A brief question and answer session will follow the formal presentation.
Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kevin Reed, Vice President, Investor Relations. Thank you. You may begin.
Good morning.
Kevin Reed: Thank you for joining us today for AmeriCorps Realty Trust's 3rd Quarter 2024 Earnings Conference Call.
In addition to the press release distributed this morning, 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.ir.americold.com.
Today's conference call is hosted by AmeriCorps' Chief Executive Officer, George Chappelle, President of the Americas, Rob Chambers, and Chief Financial Officer, Jay Wells.
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.
Speaker Change: During this call, we will discuss certain non-GAAP financial measures, including but not limited to Core EBITDA and AFFO.
Speaker Change: The full definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures are contained in a supplemental information package available on the company's website. Now I will turn the call over to George.
George Chappelle: Thank you, Kevin, and thank you all for joining our third quarter 2024 earnings conference call. I would like to begin this call by extending our sympathies to everyone affected by the recent severe weather events in the US and Europe.
George Chappelle: Our associates planning and proactive outreach to our customers has been exceptional in maximizing safety and limiting disruption.
The AmeriCorps Foundation, which is designed to help our associates in times of need, is actively providing support to those affected in the AmeriCorps family, and we hope for the quickest possible recovery to all.
George Chappelle: This morning, I am pleased to announce our financial results and key operational metrics for the quarter.
George Chappelle: I will then discuss our updated outlook for the remainder of the year. Rob will provide an update of our recent customer initiatives and growth activity, and Jay will discuss our capital position, liquidity, and provide an update to full year 2024 guidance.
George Chappelle: I'll begin with an overview of some key financial achievements for the quarter.
We generated AFFO of approximately $100 million.
George Chappelle: with $0.35 per share, an increase of over 11% from Q3 of last year. Same store NOI was approximately $201 million in the quarter, up 11% from prior year and remains on track to deliver double-digit growth for the full year.
George Chappelle: This performance was driven once again by continued strength of our same store warehouse services.
where we delivered a third consecutive quarter of double-digit margins.
George Chappelle: coming in this quarter at 14%, up almost 11 percentage points from prior year. Our productivity continues to increase as we remain focused on workforce performance and extracting increasingly more benefits out of our new technology program, Project Orion.
George Chappelle: Approximately 18 months ago we said we believed our warehouse services business could add a hundred million dollars in NOI to our bottom line through workforce hiring, retention, and productivity.
George Chappelle: Through the first three quarters of the year, we have already achieved an incremental hundred million dollars of warehouse services NOI versus prior year.
George Chappelle: Furthermore, last quarter we highlighted our expectation that we could deliver services margins of 11% for the full year 2024, an increase from our original expectations.
George Chappelle: Services margins were higher in Q3 partly due to an over delivery on throughput volumes.
George Chappelle: versus our forecast. That said, we believe the new base for our annual warehouse services margins is 12%.
George Chappelle: Project Orion Systems Deployment continues to enable efficiencies in North America and Asia-Pacific as our workforce gains more experience with its use.
George Chappelle: Further, it provides a platform for us to exploit the very latest technology available in the industry.
George Chappelle: For example, we recently completed a review of the artificial intelligence capabilities embedded in our new systems with one of our strategic technology partners.
They were able to use a proprietary AI discovery tool.
George Chappelle: to identify over 400 embedded and native AI opportunities specific to our systems and business.
George Chappelle: including further improvements in customer service, productivity, forecasting, and activity-based pricing that without the power of AI would be very difficult to identify.
George Chappelle: Our technology partner commented that the artificial intelligence capability implemented via Project Orion provides us the ability to leapfrog previously achieved technology innovation and reshape industry performance standards.
George Chappelle: We are confident our technology strategy will both support and enable profitable growth for the foreseeable future.
George Chappelle: The improvements in productivity through both workforce management and Project Orion have enabled us to grow our business through a challenging time of weak consumer demand.
George Chappelle: The continuing theme we hear during food manufacturers and distributors' quarterly earnings calls is that volumes remain pressured as the end consumer continues to be strapped from the cumulative effects of inflation.
George Chappelle: While a full recovery of consumer demand and a return to growth is expected, it does appear it will take longer than originally anticipated. For example, Kraft Heinz commented on its third quarter earnings call that it expects that demand will be softer for longer.
George Chappelle: Given this backdrop, we continue to control the controllable within our business and grow our earnings through productivity and growing our organic sales pipeline, which sets us up for outsized organic growth as consumer demand recovers.
George Chappelle: Turning to our four core priorities, customer service remains very strong across the company.
George Chappelle: One of our most recent fully automated developments, which went live just a year ago in Russellville, Arkansas.
George Chappelle: was awarded Site of the Year by one of our largest customers for a flawless start-up and ramp to full capacity, highlighting the design, build, and operating capability of our automation group.
George Chappelle: While economic accuracy dipped in the third quarter to approximately 77%,
George Chappelle: Rent and storage revenue derived from fixed commitment storage contracts came in at approximately 58 percent.
George Chappelle: The quality of our infrastructure, the breadth of our warehouse services we provide.
and commitment to best-in-class customer service.
George Chappelle: All drive the highest fixed-commit contract percentage of revenue in the industry.
George Chappelle: A safe, well-trained, and productive workforce is critical to offering a broad suite of warehouse services.
and high customer service levels across our global network.
George Chappelle: As we've said many times in the past, it's the services part of our business that customers value the most, as it provides incrementally more supply chain benefit than just simply storing a pallet and keeping it cold.
George Chappelle: Over time, we expect to expand the services we offer to organically grow and provide even more supply chain capabilities to our customers.
The continued refinement of our hiring and retention processes.
George Chappelle: have resulted in a perm to temp hours ratio of 75-25, which is flat year-over-year.
George Chappelle: Associate turnover finished the quarter at 32 percent, a 600 basis point improvement upon the second quarter, and well below pre-COVID levels of 40 percent.
George Chappelle: Our third key metric, the percentage of associates with less than 12 months of service, now stands at 21% and has improved at 100 basis points since the second quarter.
George Chappelle: Our workforce continues to mature and grow in experience, and our warehouse services margin continues to improve in tandem.
George Chappelle: In the third quarter, same-store rent and storage revenue per Economic Occupied Pallet on a constant currency basis increased by almost 4% versus the prior year.
George Chappelle: and the same store services revenue per throughput pallet on a constant currency basis increased by 11%.
George Chappelle: Both were driven by pricing put in place in the back half of 2023, coupled with general rate increases.
or GRIs at the beginning of 2024.
George Chappelle: As we discussed last quarter, we expect our warehouse service pricing comps to compress in the fourth quarter as we lap those increases from prior year.
George Chappelle: As we stated last quarter, we are tracking to exceed our $200 to $300 million guide for announced development starts in 2024, and I am pleased to announce that we now exceeded our guidance.
George Chappelle: with our plan to build a $148 million automated expansion in the Dallas-Fort Worth market.
George Chappelle: This build will further our automation strategy in a very desirable market with the scale to consolidate large customers where inventory fragmentation can be a problem for customers requiring large amounts of space.
George Chappelle: We also completed the expansion of a building we own with our JV partner, RSA, in Dubai.
George Chappelle: The building is rapidly filling up and gives us confidence that when our previously announced 40,000-pallet building in the Port of Jebel Ali goes live next year, it will also fill up quickly.
Appreciate it.
George Chappelle: Through our partnerships, we have many opportunities currently in underwriting and expect next year to be very active as our new development pipeline continues to exceed a billion dollars over the next few years.
George Chappelle: Turning to guidance, we are maintaining our current AFFO per share guidance range of $1.44 to $1.50, which represents an approximately 16% increase from 2023.
George Chappelle: Before I turn the call over to Rob, I would like to provide a brief update on our ESG progress.
George Chappelle: Last week, Gresby released its annual benchmark scores, and I am happy to report our score increased to 81 out of 100.
George Chappelle: We finish first in standing investments in Gresby's predefined peer group, which further highlights our commitment to delivering our sustainability goals and objectives.
With that, I will turn it over to Rob.
Thank you, George.
Rob Chambers: Our pricing initiatives continue to be a strength at AmeriCold as we work tirelessly to ensure we price our business to reflect the value of the service we provide to our customers.
Rob Chambers: At AmeriCold, we believe customer service is the key to growing market share in the long run.
George Chappelle: Our activity-based pricing model ensures that we develop rates that enable us to offer pricing.
George Chappelle: They both allow us to win in the market while also ensuring an appropriate margin across each of the services we provide.
George Chappelle: In the third quarter, same store rent and storage revenue for Economic Occupied Pallet on a constant currency basis increased by approximately 4% versus the prior year.
George Chappelle: Same store, constant currency services revenue for throughput pallet increased by 11%.
George Chappelle: As a result, rate actions, better revenue capture, and incremental value-added services.
We've made great progress in this area.
within our global warehouse segment.
George Chappelle: We had no material changes to the composition of our top 25 customers.
George Chappelle: who account for approximately 51% of our global warehouse revenue on a pro forma basis.
George Chappelle: Our churn rate continues to remain low at approximately 3% of total warehouse revenues.
consistent with historical churn rates.
Speaker Change: As George mentioned, we continue to be successful increasing our fixed commitments with customers, and in the third quarter, rent and storage revenue derived from fixed commitment storage contracts came in at approximately 58%.
A 14th straight quarterly record for AmeriCorps.
George Chappelle: We continue to successfully climb towards our stated target of 60% fixed commits, however we do want to give a reminder that as we get closer to that goal it becomes more difficult given the nature and structure of our client base.
George Chappelle: America continues to be a first choice for the world's largest food manufacturers and grocery retailers when it comes to their temperature controlled supply chain needs.
George Chappelle: Our customers want world-class service and to partner with a provider who can support them at every node in the supply chain, from production advantage locations to major market distribution centers, and then ultimately to retail distribution centers.
George Chappelle: This is a major competitive advantage and uniquely positions AmeriCold within our industry to be a cold storage provider of choice.
Speaker Change: As George mentioned, we're pleased to announce plans for Miracle to develop an automated expansion in the Dallas-Fort Worth market.
George Chappelle: This expansion will be built on land already owned by AmeriCold. This $148 million expansion will add 50,000 pallet positions and 19 million cubic feet to our portfolio and is underwritten with an ROIC in the range of 10 to 12%.
George Chappelle: This building will be uniquely positioned in the market, as it will feature our proven best-in-class automation, it will be accessible by rail, and it will have a tasked conventional capacity.
George Chappelle: We anticipate significant customer demand based on our current pipeline and look forward to breaking ground in Q1 of 2025 and expect to open the facility in Q4 of 2026.
George Chappelle: This facility is a great example of executing our development strategy of both delivering major market expansions and implementing world-class automation.
We expect to further this strategy in coming quarters.
George Chappelle: With this announcement, we have exceeded the high end of our development start guidance for the year, having announced $305 million in development projects.
George Chappelle: We are also pleased to announce the completion of the Dubai expansion project.
George Chappelle: This conventional multi-customer expansion project in our RSAJV is approximately 11,000 pallet positions and over 2 million cubic feet.
George Chappelle: As a reminder, we announce the formation and investment into this JV.
in 2023, and we are 49% owner of the RSAJB.
The facility is now ramping in line with underwriting expectations.
George Chappelle: In addition to these announcements, we're also pleased to note that our four in-progress development projects all remain on track from a timing and underwriting standpoint.
George Chappelle: As a reminder, these include our 37,000 pallet position expansion in Allentown, Pennsylvania.
George Chappelle: This $85 million major market expansion will add 15 million cubic feet and is on track to open in Q2 of 2025.
George Chappelle: 40,000 pallet position Greenfield in the port of Jebel Ali in Dubai.
George Chappelle: This $35 million facility is the flagship build with DP World and is on track to open in Q2 of 2025.
Our 22,000 pallet position greenfield facility in Kansas City, Missouri.
George Chappelle: This $127 million building is a flagship build with CPKC, and it's on track to open in Q2 of 2025.
George Chappelle: are 13,000 pallet position expansion in Sydney, Australia. This $30 million expansion is anchored by one of Australia's largest grocers and is on track to open in Q1 of 2026.
George Chappelle: We continue to make progress ramping the five automated developments that were completed last year.
George Chappelle: Three of these automated facilities are supporting food manufacturers in Atlanta, Georgia, Russellville, Arkansas and Spearwood, Australia, and our proven solutions are performing well and are delivering in line with expectations.
George Chappelle: These automated facilities house several of our largest customers at both their key manufacturing and distribution locations.
George Chappelle: The service levels being delivered by our best-in-class automation are shining examples of AmeriCorps' design and implementation capabilities.
Speaker Change: To reiterate what George mentioned earlier, the Russellville, Arkansas site was awarded Site of the Year by one of our largest customers, a true testament to our automation technology capabilities at work.
Speaker Change: Regarding our two customer dedicated automated retail distribution facilities in Lancaster, Pennsylvania and Plainville, Connecticut, we continue to be thoughtful in our approach. The current system performance has given us increased confidence in our ramp schedule as well as the long-term success of these facilities.
Speaker Change: We are actively working with our customer to increase the volumes, first in our Pennsylvania facility, followed shortly by our Connecticut facility, and ramp up throughout the course of next year. And we anticipate seeing the benefits of the ramp in the second half of 2025.
Speaker Change: We are proud of our ability to grow, even in this difficult consumer environment.
Our Leading Edge Supply Chain Solutions Group.
George Chappelle: is laser focused on the analytics behind the design needs that matter the most to our customers, including first, how to best optimize our customer supply chain by consistently presenting solutions that drive savings and improve performance.
George Chappelle: Second, how to build and operate the most efficient buildings in the industry by maximizing the cubic footage of the buildings.
and using the AmeriCorps operating system to drive efficiency.
George Chappelle: Third, when to deploy automation versus utilizing conventional solutions by analyzing the discrete work content of the customer and specific market.
George Chappelle: Fourth, what the most impactful value-added services are that AmeriCorps can provide by having facilities at every node in the supply chain, we're able to offer dozens of value-added services.
George Chappelle: And fifth, how to create environmentally friendly cold chain solutions through a miracles vast portfolio and partnership network.
George Chappelle: AmeriCorps customers view us as an extension of their own supply chain organization.
George Chappelle: This is made clear in the long-term, committed, and global nature of our relationships.
George Chappelle: That type of trust is built over decades of industry leadership.
Speaker Change: As George mentioned, our new development pipeline continues to exceed a billion dollars in projects across our three development priorities, expansions, customer dedicated builds, and partnership focused builds.
George Chappelle: Even with having announced developments in five of the last six quarters and exceeding the high end of our development start guidance in 2024, our pipeline remains robust.
Separately, for new business targeted at driving same-store occupancy,
George Chappelle: Our pipeline of opportunities is very high and represents a significant growth opportunity.
George Chappelle: We continue to see customers look to outsource to a trusted partner with global scale who can manage the complexity of their supply chains.
George Chappelle: This has resulted in a new business pipeline that represents revenues of over $200 million on a probability-weighted basis and includes growth with both existing customers and would add new names to the portfolio.
George Chappelle: Our strategic account management and field sales teams are well positioned to capitalize on this pipeline and drive occupancy growth into our same store portfolio. Now, I'll turn it over to Jay.
Jay Wells: Thank you, Rob. Today, I will discuss our capital position and liquidity and update our full year guidance.
Jay Wells: Starting with our balance sheet, at quarter end, total net debt outstanding was $3.5 billion.
Jay Wells: We had total liquidity of approximately $922 million, consisting of cash on hand and revolver availability. And our net debt to perform a court EBITDA was approximately 5.5 times.
Jay Wells: Our expansion projects in Allentown, Pennsylvania, Sydney, Australia, Dallas-Fort Worth, Texas, and our greenfield developments in Kansas City, Missouri, and Dubai have increased investment spend that will continue for the foreseeable future with a robust pipeline of development projects that George and Rob discussed.
Jay Wells: Please see page 37 of the IR Supplement for additional details on our development projects.
Jay Wells: Turning to our updated full year 2024 guidance, as George mentioned, we are affirming our AFFO per share to be in the range of $1.44 to $1.50.
An approximate 16% increase from 2023's AFFO.
Jay Wells: Before reviewing the individual components of this guidance that are set forth on page 40 of the IR Supplement, let me quickly remind everyone of the 2024 Same-Store Pool for the Global Warehouse Segment.
Jay Wells: This poll has 226 facilities, which is approximately 96% of the total number of properties in our warehouse segment.
Jay Wells: A summary of the 2024 St. Stourt Pool historic performance for the third quarter of 2023 is presented on page 36 of the IRS Supplement.
Jay Wells: We have nine facilities that are in our 2024 non-same-store pool.
Jay Wells: Now turning to the individual components of our AFFO guidance and starting with our global warehouse segment, we expect full year 2024 same store constant currency revenue growth to be in the range of 1.5 to 3.5 percent.
Jay Wells: Let me provide more detail around the key drivers of this guide.
Jay Wells: With respect to occupancy and throughput volumes, as we discussed over the past quarter, our previous occupancy guidance plan for a normal Q4 holiday season
Jay Wells: with Manufacturers and Retailers Increase in Inventory Levels in Advance of Increased Consumer Demand during the Holiday Season.
Jay Wells: The most recent reports from food manufacturers and producers show the consumer continues to be strained by the cumulative effect of inflation, resulting in continued volume challenges, and as a result, we have seen a slower inventory build in October.
Jay Wells: Based on the current consumer outlook, recent commentary by food producers, and inventory levels at the end of October, we are reducing our full-year expectations for economic occupancy to a decline in the range of 425 to 525 basis points compared to 2023.
Jay Wells: and throughput volume to decrease in the range of 2.5 to 4.5%.
Jay Wells: With respect to pricing, we expect constant currency rent and storage revenue for economic occupied pallet growth to be in the range of 4.5 to 5 percent and constant currency services revenue per throughput pallet growth to be in the range of 9 to 10 percent.
Jay Wells: As a reminder, the pricing guidance reflects our continued pricing and power surcharge initiative to cover known inflation. It also reflects our annual contractual escalation in GRI step-ups and the commercialization of market-based pricing for contracts that we underwrite or remove.
Jay Wells: Lastly, with regard to pricing, comps are expected to compress in Q4 of this year as we anticipate a relatively benign environment associated with inflation-based rate actions.
Jay Wells: So the full year, our same store constant currency NOI growth is now forecasted to be in the range of 10 to 12%.
Jay Wells: Based on productivity and pricing, supported by new systems and processes, we now believe we can deliver services margins of over 12% for the full year 2024.
Jay Wells: Please note that services margins were higher in Q3, partly due to a slight overdelivery on throughput volumes at an approximate 50% contribution margin.
Speaker Change: With regard to the 2024 Non-Fame Store Pool, as can be seen on page 32 of the IR Supplement, the Non-Fame Store Pool generated $0 of NOI in the third quarter of 2024.
Speaker Change: For the full year 2024, we expect the non-fame store pool to generate NOI in the range of negative $2 million to negative $5 million.
Speaker Change: We expect the managed and transportation segments, NOI, to be in the range of $43 million to $47 million, and we expect core SG&A to be in the range of $221 million to $225 million.
Speaker Change: For the full year, we expect interest expense to be in the range of $133 million to $136 million, with approximately $12 million of interest being capitalized year-to-date.
Jay Wells: Regarding development, with the announcement of the automated development in Dallas-Fort Worth, we are increasing our guidance range.
Jay Wells: Please keep in mind that our guidance does not include the impact of acquisitions, dispositions, or capital markets activity beyond that which has been previously announced. And please refer to our IR supplement for detail on the additional assumptions embedded in this guidance.
Speaker Change: Now, let me turn the call back to George for some closing remarks.
George Chappelle: Thanks, Jay. As our results for the third quarter highlight, we continue to improve the operational efficiency of our business and generate double-digit AFFO and same-store NOI growth. We continue to deploy capital on low-risk, highly afraid of developments.
Speaker Change: Driven by our strategic partnerships, expansions of our own buildings, and customer dedicated developments.
Speaker Change: We are positioned to grow at an accelerated rate once volume returns as evidenced by the increased warehouse services margins this quarter on relatively small sequential throughput gains.
Speaker Change: Our technology implementation is helping us expand margins just six months after going live, and with the embedded AI functionality in our new systems, we expect to identify additional opportunities to further enhance our business.
Speaker Change: Unlike traditional industrial REITs, we have the ability to generate outsized organic profit by being a best-in-class operator, which we have done consistently this year.
Speaker Change: As always, I want to give thanks to the over 13,000 associates around the world for their hard work and dedication every day.
Speaker Change: It's their professionalism and dedication, even when faced with the difficult conditions such as extreme weather, that gives our customers the confidence they can always rely on AmeriCoast.
Speaker Change: Thank you again for joining us today, and we will now open the call for your questions.
Operator
Speaker Change: Thank you. We will now be conducting a question and answer session. Please limit yourselves to one question and one follow-up.
Speaker Change: If you would like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
Unknown Speaker
Speaker Change: The first question is from Nick Thillman from Beard. Let's go ahead.
Nick Thillman: Hey, good morning guys. Kind of wanted to touch on occupancy. It seems as though it eroded even further into 3Q and just want to get a little bit more color on kind of what you're seeing there, maybe just where you're seeing softness. Is it geographically broad based, maybe on the asset type? Are you seeing it across all three nodes of your asset classes? Or are you seeing it in the vintage of the asset? Just kind of touch on occupancy a little bit.
Speaker Change: We'll do, Nick. Thanks for the question. I would say that the primary driver of our occupancy decline is consumer demand, and it is broad-based. The whole system runs on consumer demand, and it's not related particularly to a sector or region. It's more consumer driven.
Speaker Change: You know, that's a that's a that has an effect on the on the year over year numbers, but it's it's really broad based consumer demand declining and not related to a sector.
Nick Thillman: Okay, it seemed as though like you expected 3Q though the comps would get a little bit better because you talked about the counter seasonality so I guess as you're looking forward
Speaker Change: Do you think that even like some of these fixed commitment contracts as they come up for renewal in your discussions Have you been having any issues of further like erosion in that sort of number or pushback from customers on that front?
Speaker Change: Well, you saw in the third quarter, we grew it again for the 14th consecutive quarter. That's on a net revenue basis. So it's in line with all the other.
James with Hatton Fix Commits. We continue to see
Speaker Change: Customers willing to commit to our space given the locations and the services we provide. But, Rob, maybe you can add a little color there. Sure. Yeah, we had another good renewal quarter of fixed commitments, and then we grew the overall total.
in terms of both absolute dollars and percentages.
Speaker Change: When I think about the goal that we put out there of getting this into the 60s.
Speaker Change: We've certainly pulled that goal forward, and we're now on the precipice of that almost a year earlier than our own internal expectations. And so we're very proud of our continued progress there.
Speaker Change: and think that we'll continue to make gains. Although, as I said in my prepared remarks, once you get up close to 60%, just the structural nature of the business, it starts to get a little bit more difficult. So there's always gonna be a portion of this business that's transactional and we're okay with that.
Speaker Change: Let me let me just add one more thing on occupancy before we go to the next question and you know You saw our handling margin performance year-over-year We've added a hundred million dollars of NOI just through the first three quarters of the year
Speaker Change: The primary driver of that has been workforce productivity, but there has been a lot of price that went into that business as well, to right-size margins.
Speaker Change: We always planned on losing a little bit of occupancy through that process. The pricing, as you know, has been pretty significant over the last year. We lost far less occupancy than we planned. By far, the biggest issue with occupancy is consumer demand.
Speaker Change: But for the gain of a hundred million dollars year-over-year of NOI to lose a de minimis amount of occupancy for a very short period of time given the pipeline that
Speaker Change: Rob discussed in his prepared remarks was a very good business decision. So that has an effect, although it's pretty small.
Speaker Change: Rob mentioned in prepared remarks that we have a very good pipeline of new business. So, going into next year, we really feel that, you know, even in a tough consumer environment,
Speaker Change: Pushing Pricing and NLI and the Silver Society that we have the pipeline of new business in order to grow occupancy even in a tough environment.
Speaker Change: The next question is from Mike Mueller from J.P. Morgan. Please go ahead.
Mike Mueller: Yeah, hi. I guess, you know, first on the, when you talk about the 12% service margins, is that the bogey just for this year or do you think that's a more sustainable level for kind of going forward?
Speaker Change: I'd say 12%, Mike, is the new base for going forward. We don't expect to go backwards at all. It doesn't mean every quarter will be at 12%. That's why we highlighted the annual.
Speaker Change: Unknown Speaker 12 percent, but that is our new target going forward. And then, you know, if you walk back 14.5 percent to 12, it's related to the throughput over delivery. And as Jay mentioned, the 50 percent flow-through of delivery.
Speaker Change: of incremental business there. So it highlights how accretive, when the volume comes back, how accretive the profit is.
Speaker Change: Got it. And then last question on the, I guess, the 10% year-over-year increase in service.
Speaker Change: Service Revenues per Throughput Pallet. Considering that throughput volumes are still down year-over-year, occupancies are weaker, are you getting any customer pushback on those level of increases from an optical standpoint?
Speaker Change: I think the issue there, Mike, is we said pricing comps would compress in the third and fourth quarter. I think the issue there, Mike, is we said pricing comps would compress in the third
Speaker Change: Second half of the year, you saw the rent and storage pricing compress this quarter to just under four percent. The pricing we're lapping in the handling area really happens in the fourth quarter, so you'll see that pricing compress.
Speaker Change: Between now and the end of the year when you get to the end of the year You'll see that our pricing has come back in line with let's say normal normal business
Speaker Change: The next question is for Samir Kanel from Evercore ISI. Please go ahead.
Samir Kanel: Hey, good morning everybody. George, I guess I just wanted to ask you on the occupancy side here. Look, I know demand is challenged, the consumer is stressed.
Samir Kanel: But where do you think we are? I mean, are we getting close to a point where we may start to see a trough maybe at this point in occupancy this year? I know you've lowered occupancy a few times. Any green shoots out there as you think about the revenue side of the business?
We'd love to get your thoughts.
Speaker Change: Yeah, sure. So what one green shoot is our partnerships, right? They're not demand driven bills. I mean, we're putting
Speaker Change: We're putting they're not consumer demand driven builds. I mean, we're putting infrastructure on ports and railways. That just doesn't exist today So when you think of our development flight pipeline when you think of our partnerships with DP world and CPKC That's not consumer driven. We are we're just putting infrastructure in place where it doesn't exist today
Speaker Change: Where we can essentially take business that exists today, move it into a much more efficient, much more greener transportation and overall supply chain environment. So that's a green shoot simply because it's not time to consume a demand.
Speaker Change: Beyond that, I think our views on recovery are all in the second half of next year.
Speaker Change: We don't see really things changing dramatically between now and the end of the first quarter for sure.
Samir Kanel: I've said multiple times, the first quarter in the food industry is not necessarily a high activity quarter with very little holiday activity.
etc. And we think the second half of the year...
Samir Kanel: is when we could see occupancy gains and see business return to normal.
A more normalized growth level.
Speaker Change: The other thing I would add to that as a green shoot is what George mentioned earlier, which is just our organic sales pipeline. So the pipeline that is focused on driving business into our existing infrastructure, that is very healthy. I mean, when we probability weight our existing pipeline,
Samir Kanel: The new business there is over $200 million in terms of opportunities and we have a very efficient, very highly trained sales force that includes
Samir Kanel: Dedicated Account Management, Field Sales Teams, our Supply Chain Solutions Organization.
Samir Kanel: all who are focused on closing those opportunities and driving occupancy into our same store portfolio. And when we look at the breadth and the maturity of that.
Samir Kanel: Sales Pipeline for our same store, we're encouraged by the fact that it should be driving occupancy growth in the timeline that George outlined.
Samir Kanel: And last comment, what you'll notice is that, you know, we've been talking about weak consumer demand for at least a few quarters now, if not longer, we've continued to grow earnings right through every single decline.
Samir Kanel: in throughput and occupancy, we believe we can still do that. We have tailwinds in our systems environment. We have tailwinds in our productivity environment. So while occupancy is not a bright spot, earnings is. And we'll continue to grow earnings straight through the first half of next year.
Samir Kanel: When volume does return, as evidenced by the handling margins, it flows through so accretively, we feel like we'll be positioned to grow faster than anybody in the industry.
Transcript by Rev.com Page of
Okay, got it. And I guess on the pricing side.
Samir Kanel: Pricing is still very strong, I guess, on the services side. So I'm just trying to understand as we think about, let's call it the next 12 to 24 months, is that do you think this is sustainable given what inflation has done and how we think about
the overall business from a pricing card perspective. Thanks.
Yeah.
Speaker Change: What I was mentioning earlier, Samir, is that if we said pricing comps would compress in the second half of this year, you've seen the rent and storage pricing compress this quarter. What you'll see next quarter is the handling margins compress. So the handling pricing we're lapping was primarily fourth quarter based.
Speaker Change: The Rent and Storage pricing while lapping was primarily third quarter based, so that explains kind of the outsized handling pricing, but go ahead and wrap it around.
Speaker Change: Yeah, yeah, I'd add to that. I mean, we're we continue to be very confident in our ability to price ahead of inflation. You know, first of all, we are we're proactively creating solutions for our customers that are driving efficiency and savings into their supply chain. So
Speaker Change: By us creating those solutions, that helps create the headroom that we need to continue to price our business the way that that we need to be successful. So, you know, we're confident there. I think I think also most of our customers that that we deal with every day.
Samir Kanel: run their own manufacturing facilities, they run their own retail distribution centers. So they know that there's cost increases every year to continue to run this business and they want us to invest in our business.
Samir Kanel: so that we can support them the right way. So, you know, we're confident in our ability to continue to price ahead of inflation. And the last thing I would add is that the majority of our revenue is
Commercialized under under long-term agreements
Samir Kanel: that have pre-negotiated annual general rate increases. So, you know, we have a forward view of where we're going on the majority of our base business.
Samir Kanel: And while we expect that pricing will come back in line with kind of more normalized GRIs going forward and not be as outsized, it still should be accretive when we think about it in the context of pricing ahead of inflation.
Speaker Change: Q4, it really gets to a 4% type price increase on both storage and services, because we've really have lapped at this point in time all the inflation-based pricings that we took last year. Yeah, and I guess that's my point on the services pricing, Samir, rent and storage is normalized in the third quarter.
Samir Kanel: You'll see the normalization of the warehouse services pricing in the fourth.
Speaker Change: The next question is from Vince Tabone from Green Street. Please go ahead.
Vince Tabone: Hi, good morning. Inventory in your portfolio turned around 11 times per year prior to COVID and that's now it's down to around nine times.
Samir Kanel: Do you still think returning to 11 times inventory turns is realistic over the next two years once the consumer health improves, or have you identified anything structural that may mean different inventory strategies, lower inventory turns on a more permanent basis?
Speaker Change: No, I think, Vince, if you go back in time and you quoted the numbers exactly right.
Samir Kanel: The driver of the move from 11% or 11 turns to 9.
Samir Kanel: was really driven by the agro-acquisition that we made prior to me joining the company, but four or five years ago, that business turned
Samir Kanel: far less than the AmeriCorps-based business. And when you meld those together, the turns become nine. That's the real issue on how we went from 11 to nine. There's nothing else.
Samir Kanel: Going on in the core business if you if you strip out the agro acquisition, I think our terms would be close to 11
Samir Kanel: But the point is that acquisition, that we knew going into it, is a slower turning business just because of the commodities and the customers that that business serves.
Speaker Change: That's helpful. So the thing about, you know, maybe once the consumer improves and more steady state business, like what is the right level of inventory turns in your mind for the portfolio? Is there still upside the overall portfolio from nine or is that pretty stable?
Speaker Change: No, no, no, this upside. I mean, we're, you know, pretty low throughput numbers at the moment, given consumer demand is consumer demanding.
Speaker Change: increases and we normalize, let's say, trends in the industry where we grow, you know, one to three percent a year, etc., then turns will increase. There's no question. But if you combine the agro acquisition with suppressed consumer demand, those are the two reasons why the turns are where we are. And again, our base business, xAgro, is turning in line with historical activity.
Speaker Change: and Vince, you know, an area where AmeriCorps is a clear leader here.
Speaker Change: is in the retail side of the business. You know, today it's in...
Speaker Change: the 20 to 25% range of our overall portfolio, but we see outsized growth.
Speaker Change: kind of idiosyncratically for AmeriCold in that space. And that tends to be business that turns much faster than your traditional food manufacturing business. So as we see outside growth there, it will also pull the overall portfolio up.
Speaker Change: A lot of our partnerships too, Vince, if you think of port operations and rail operations.
they're amongst the highest turned
Speaker Change: activities in our overall portfolio. I mean, you've got a ship unloading cargo, it sits in our facility for maybe.
Unknown Speaker ... ... ... ... ... ... ...
Speaker Change: In a year's time, to our Kansas City facility, right on the CPKC rail line, the inventory is likely to stay there less than five days. So some of the business we're putting online now with our partnerships is going to turn as fast or faster than anything in the portfolio.
Speaker Change: The next question is from Josh Dennerlein from Bank of America. Please go ahead.
Speaker Change: Hey, I wanted to, sorry, I wanted to explore your platform and your approach to implementing tech. It seems like you guys are using outside resources. Competitors going to do most of it in-house. Why do you think your approach is the right one for your team?
Speaker Change: Yeah, I think our approach is the right one, Josh, because when I look at things like AI, and I see, you know, 10s of billions of dollars of investment in AI and AI infrastructure, I, I see the hiring of, of the big tech companies for
Speaker Change: tech talent out of universities, et cetera. There's no way in my mind, I can compete with that. I mean, where, you know, in terms of how to implement that type of capability. So it seems pretty obvious to us that partnering.
Speaker Change: and, you know, providing that via cloud services almost automatically to customers.
Speaker Change: is a quicker, cheaper, and more efficient way to implement tech.
Speaker Change: As you know, we implemented our ERP early May, and we're already talking about incremental results it's delivering. So we're very confident we have the right strategy. We can point to the bottom line right now and show you where it's delivered results, and I think that in and of itself says that we've picked the right strategy.
Speaker Change: Okay, and is there anything being rolled out in the next 12 months that we should be aware of or maybe anything that's like being rolled out and then turns on and can kick things kind of into a different gear?
Speaker Change: Continuing to roll out our ERP system, all right, we're continuing, continually finding benefits in our North American and Asia-Pacific business as we
Speaker Change: mine the data we now have that we never had before. So that's a tailwind.
Speaker Change: that prevented us from being there and doing the work we want to do. That will be a huge benefit to Europe.
Speaker Change: And then lastly, as I mentioned on the call, we're going to start to explore with some embedded in generative AI. We have some
Speaker Change: Relatively simple things we can test with that are still productivity gains, but starting slowly, but we believe is it seems like all others do that that could be a massive game changer for our business. So it's all technology we have in house.
Speaker Change: It's all technology we have experts partnered with who have implemented it before and can show us how it can help our business and I think this is probably one of the most significant tailwinds we have going forward.
Speaker Change: The next question is from Keebin Kim from Truist Securities. Please go ahead.
Thank you. Good morning.
Speaker Change: As we start to look forward, you know, I was curious, how much benefit did pricing per pallet or pricing per throughput volume benefit from an inflationary pass-through that hit this year that won't repeat next year?
Speaker Change: Just trying to level set how we, you know, model out estimates for next year.
Speaker Change: Yeah, I mean look I think from from a from a pricing standpoint next year
You know, we would be anticipating.
Speaker Change: increases in that in that low to mid single-digit, you know range which gets back to you know, more historical Pricing that you've seen out of the company and then you know, they'll they'll be you know There's a typical cost increases wage increases insurance increases all those things our team
Speaker Change: Puts productivity goals against those to try and offset as much of that as possible And then the Delta between those two becomes margin opportunity for so not not really ready to give
Speaker Change: Cost Guidance for next year, but from a top line pricing standpoint, I'd be thinking about it that way. And I think the last point that Rob may want to highlight, I mean...
Speaker Change: We have said and we will maintain slight margin improvement year over year through our GRIs.
Speaker Change: that will build over time. That is the model. We don't price to a break even, we price to a slight increase in profit because over time that helps grow our business.
Speaker Change: Okay, and can you remind us what your GRI is typically without inflation impact?
Speaker Change: Our GRIs are what I just described. It's what gets us to that low to mid-single digit.
Speaker Change: The next question is from Michael Carroll from RBC. Please go ahead.
Michael Carroll: Thanks. Can you guys provide some color on the Dallas development that you plan on breaking ground? I mean, what gives you confidence that this market needs this space, especially given the amount of supply that has already been delivered over the past few years? I mean, are you seeing customers that are actively asking you to be in Dallas right now? Which, correct me if I'm wrong, I don't think you have too much exposure right now?
Unknown Speaker
Speaker Change: We have, Mike, five or six facilities in the Dallas-Fort Worth area. Some are relatively small, some bigger. The opportunity for us in Dallas, and I'll hand it over to Rob in a second, is to build a facility of scale that large customers can consolidate.
Rob Chambers: Various piles of inventory in that market into a single location. That's the motivation. It's a consolidation
Rob Chambers: play there. We have facilities there. We know the market very well, and we feel very strongly that it's an opportunity, and maybe, Rob, you want to give a little more color? Yeah, this is a great example of where it's important to recognize that this is not a commoditized space in this industry. So we're building a building that uniquely positions us.
Rob Chambers: to continue to gain market share in that in that market. We're already a big player there. But this facility is going to be exactly what our customers are asking for, which is they want a level of automation and hybrid automation, which is exactly what we're doing here, which is
Rob Chambers: Adding an automated storage and retrieval system expansion with a facility that's already there. This is an expansion that already has conventional capacity. This is a facility that is going to be rail served, which is very important in that market.
Rob Chambers: It's going to allow customers that we have today that are constrained from growing because of occupancy in that market to consolidate their inventory into one facility and become extremely efficient compared to the way that they're situated today.
Rob Chambers: This is a great example of us using our design capabilities, understanding exactly what the market needs, and building something that our customers are asking for. And that's in comparison to some of that speculative build that may have been there that is not what our customers are asking for. So our operating platform, technology solutions.
Rob Chambers: and Supply Chain Analytics are going to create, make sure that this building is very successful.
Speaker Change: And just to double back again, Mike, we know that market very well. We have five or six facilities there. We have a very specific plan for this building, as Rob just outlined. And this is by no means speculative. We've got a very solid plan behind it.
Speaker Change: Okay, and then I'm sorry if I if I miss this, but is this considered a customer build or customers asking for you and you kind of have some anchors already really to take down space or is this more of a market driven build?
Speaker Change: Yeah, so we have our existing customers in that market asking for more space. It's not a, it will be multi-tenanted, but it will be filled with pipeline that is largely our existing customer base.
Speaker Change: The next question is from Todd Thomas from KeyBank Capital Markets. Please go ahead.
Todd Thomas: Hi, thanks. Good morning. George, with regards to the services segment, you know, as margins continue expanding, even as the demand environment remains, you know, softer for longer, when volumes do stabilize,
Todd Thomas: and or, you know, recover from from these levels. How will service margins trend with the mix of fixed and variable costs, just given that they're already in the low double digits? How should we think about that?
Speaker Change: Well, you saw the effect of a relatively small sequential throughput gain, well below 200 bps, what it did to the margin expansion, primarily because, as Jay stated, the flow through was right at 50% as we calculated.
Speaker Change: Volume is going to help a lot. I think volume could help us get to our 15% target.
Speaker Change: Unknown Speaker 14 and a half percent in the third quarter with again a relatively small volume gain is there. So I would say our 15% target is well within reach once we get
Speaker Change: a little bit of consumer demand back in the system. And then productivity is still coming. So, you know, one of the discussions we're having is where is our new aspirational goal? Now, we haven't answered that question yet, but it's pretty clear that 15% is probably a little on the low side.
Speaker Change: When demand does pick up, will margins, you know, sort of improve immediately or is there a lag and should we expect margins to, you know, be a little bit more volatile, you know, early on in a recovery?
Jay Wells: Hi, this is Jay. Good morning. Um, no, I mean, as George said,
Speaker Change: If you look at pure variable cost associated, it does flow through at a 50% contribution margin, so definitely a creative to overall margin for the services side of the business. If you'd argue that if it happens quickly and we have a little bit of inefficiencies, maybe it would drop down to a 40% contribution margin. That might be a little slower, but definitely would still benefit our overall services margin.
Speaker Change: The next question is from Blaine Heck from Wells Fargo. Please go ahead.
Speaker Change: Great, thanks. Good morning. George, appreciate your commentary on the expected timing of an inflection in the back half of next year, but I guess following up on that, what do you think needs to happen specifically to ensure that happens? And what signals should we be looking for? Is it, you know, all about interest rates and inflation moderating, spurring stronger consumption?
Speaker Change: I guess, how does inventory rationalization play into the software conditions and, you know, are there any other major industry dynamics that need to improve and we should be monitoring before we think we can see more of that inflection in operations?
Speaker Change: Yeah, I firmly believe it's one of the very first things you mentioned, which is inflation moderating and interest rates coming down, each of which create lower prices in the food store and or more disposable income in the consumer's pocket. To me, that is the secret, that that's what will spur demand.
Speaker Change: Certainly hope there's an interest rate cut later today and maybe a couple more in the first quarter next year But I think it's all about getting the consumer a little bit more disposable income, which history says
Speaker Change: They will convert into store purchases for food very, very quickly. So to me, that's the impetus and that's what we need to see.
Speaker Change: And then the only other thing I would remind you of is, while that is obviously the macro tailwind that will be helpful.
Speaker Change: You know, we're extraordinarily proactive in going out and driving occupancy into our facilities regardless of what the macro is doing with our sales organization, account management organization, supply chain group, and that pipeline that we have is very encouraging.
Speaker Change: Great, that's really helpful. And apologies if I missed anything on this, but can you talk about the transaction market today? Are there any potential acquisitions that look interesting to you? What would pricing have to look like to make you all interested in deals? And I guess, how do you think about your current preference between acquisitions and development?
Robert Chambers, Kevin Reed, Jay Wells, Unknown Executive
Speaker Change: Well, as you can see by our development pipeline, which still remains over a billion dollars even after all the activity we did this year, including just raising the guide on development starts this quarter. So we're very, very bullish on development. We're always very excited about M&A always, you know, there's no, we don't view that as something that we're not always interested in. The problem is valuation.
Speaker Change: And valuation for us is very simple. We're only buying companies that are accretive day one. And we feel as though.
Speaker Change: We shouldn't hand our multiple out being one of the best providers in the industry to...
Speaker Change: Smaller companies that often don't have the level of maturity and or expertise that we have
Speaker Change: So we're disciplined in that way and we feel like we add value to acquisitions as we should.
Speaker Change: But all within a very responsible framework of valuation, which says, given our position in the industry.
Speaker Change: We should not be paying our multiple for smaller, less efficient, less capable companies. So that's how we feel about M&A. Again, always excited, always participate.
Speaker Change: but very very bullish on a very strong development pipeline which we control and which will accelerate very very quickly as these partnership opportunities exit underwriting.
Speaker Change: This concludes the question and answer session and today's call. You may disconnect your lines at this time. Thank you for your participation.