Thank you for standing by. This is the conference operator. Welcome to the Americold Realty Trust Second Quarter 2020 Earnings Call. As a reminder, all participants are in a listen only mode and this conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Scott Henderson, VP, Capital Markets and Investor Relations. Please go ahead

Good afternoon. Thank you for joining us today for Americold Realty Trust second quarter 2022 earnings conference call. In addition to the press release distributed this afternoon, we have filed a supplemental package with additional detail on our results, which is available in the Investor Relations section on our website at www.americold.com. This afternoon's conference call is hosted by Americold's Chief Executive Officer; George Chappelle; Chief Commercial Officer; Rob Chambers; and Chief Financial Officer, Marc Smernoff. Management will make some prepared comments, after which we will open up the call to your questions. On today's call, management's prepared remarks may contain forward-looking statements. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ from those discussed today. A number of factors could cause actual results to differ materially from those anticipated. Forward-looking statements are based on current expectations, assumptions and beliefs as well as information available to us at this time and speak only as of the date they are made, and management undertakes no obligation to update publicly any of them in light of new information or future events. During this call, we will discuss certain non-GAAP financial measures, including core EBITDA and AFFO. Full definitions of these non-GAAP financial measures and reconciliations to the comparable GAAP financial measures are contained in the supplemental information package available on the Company's website. Now I will turn the call over to George.

Thank you, Scott, and welcome to our second quarter 2022 earnings conference call. This afternoon, I will provide an update on the four near-term priorities that we are focused on, summarize our results and comment on recent external growth activity. I will then discuss our outlook for the remainder of the year. Rob will then provide an update on recent customer initiatives, and Marc will review our financial results in more detail. Let me start with the four near-term priorities that we are focused on. First, we continue to make great progress in repricing our Warehouse business to offset inflationary pressures in our cost structure. Exiting the second quarter, we committed to covering all known inflation incurred through the end of the first quarter, which we have achieved. The progress of these price initiatives can be seen on Page 8 of our IR supplemental. Rent and storage revenue per economic occupied pallet in our same store on a constant currency basis increased by 6.6%. Service revenue per throughput pallet increased by 7.9%. As a reminder, some of these increases were implemented during the second quarter, meaning the full run rate will not be seen until the third quarter results. As it relates to the second quarter, the majority of the inflationary pressures we saw were in power costs and in warehouse supplies costs. We have implemented additional targeted pricing and power surcharge initiatives to address this known inflation, and we will exit the third quarter at a run rate covering all known inflation incurred through the second quarter. Moving through the third quarter, we expect the majority of the inflationary pressures to continue to be both in power and warehouse supplies. If this is the case, we will continue to revisit our pricing in power surcharge initiatives. Second, we continue…

Thank you, George. For the second quarter, we are pleased to report total company revenue and NOI growth of 11% and 8%, respectively. This revenue and NOI growth occurred across all three segments, primarily driven by our warehouse business. We are seeing positive results in the top line fundamentals in our warehouse business across both food manufacturers and retailers. First, we have seen a strong improvement in economic occupancy, and we believe this is sustainable for the rest of the year. Second, we continue to be successful with our pricing initiatives. As we have discussed on previous calls, we will continue our pricing initiatives within our Global Warehouse business in order to address known cost increases from inflation. During this inflationary period, we must do this in order to protect our margin dollars. We successfully exited the second quarter with price increases in place in order to cover known inflation from the first quarter. Some of these increases were implemented during the second quarter, meaning the full run rate will not be seen until third quarter results. As George mentioned, the progress of these price initiatives can be seen on Page 8 of our IR supplemental. Rent and storage revenue for economic occupied pallet in our same-store on a constant currency basis increased by 6.6%. Service revenue per throughput pallet increased by 7.9%. Conversations with customers continue to be productive around our pricing initiatives. We are being very targeted and data-driven in our approach. As a result, we continue to demonstrate Americold's ability to protect margin dollars through pricing increases to offset inflationary pressures. With occupancy now beginning to return, our focus is on ensuring we provide best-in-class service. On to our commercialization efforts. At quarter end, within our Global Warehouse segment, rent and storage revenue from fixed commitment contracts…

Thank you, Rob. For the second quarter, we reported total company revenue of $730 million, which reflects an 11% increase year-over-year, and, as Rob mentioned, growth across all segments of our business, principally driven by our Warehouse segment. Total company NOI was $168 million, an 8% increase, reflecting an improvement in the operating environment and investment activity, offset by higher costs and inefficiencies. Our total company NOI margin decreased by 66 basis points to 23.1%. Corporate SG&A totaled $56 million for the second quarter of 2022 as compared to $42 million for the prior year. As we discussed on our last call, and in line with our expectations, we had increases in our annual performance-based bonus expense and in our stock compensation expense, which was primarily driven by the one-time retentive stock grant awarded in the fourth quarter of 2021. Additionally, as discussed and in line with our expectations, we had increases in our IT spend, insurance, legal and professional fees and travel combined with other inflationary pressures, partially offset by synergies from recent acquisitions. Core EBITDA was $120 million for the second quarter of 2022, an increase of 1.6% year-over-year. Our core EBITDA margin decreased 160 basis points to 16.5%. Our second quarter AFFO was $74 million or $0.27 per diluted share compared to $72 million or $0.28 per diluted share in the prior year quarter. Now I'll turn to our results within our Global Warehouse segment. For the second quarter of 2022, Global Warehouse segment revenue was $564 million, an increase of 12% compared to prior year. This growth was primarily driven by our pricing initiatives and economic occupancy improvement in the same-store pool, paired with the recently completed acquisitions and the ramp of recently completed development projects. Warehouse segment NOI was $151 million for the second quarter…

Thanks, Marc. Overall, during this quarter, we made significant progress on our four near-term priorities. We also saw economic occupancy improvement in our warehouse business, and we continue to demonstrate that we can achieve pricing in our warehouse business to overcome inflation. We still have plenty to do, but I want to thank all of our associates for their hard work and contributions to our performance. I am extremely proud of their efforts and cannot express my gratitude to them enough. Thank you again for joining us today, and we will now open the call for your questions. Operator?

Thank you. We will now begin the question-and-answer session. Your first question today comes from Dave Rodgers. Please go ahead.

Marc, I wanted to start with you on the revenue guidance. Thanks for the additional details that you just provided a moment ago. I guess I wanted to dive in, you have 7% year-to-date on a constant currency basis, and the guide is really 3% to 5%. So despite the components that you gave us, what's the challenge that you see in the second half of the year? It sounds like rate continues to work well. You've already got a good jump on occupancy. I know throughput is an offset. It just seems like that's too much of an offset in the guidance and maybe there's some conservatism. So I'd love a little additional color, please.

Yes. I think the color is, as we ramp through the year, our pricing initiatives really started very late in the third quarter and kind of ramp through the fourth quarter. So as we move throughout the year, going to -- the comp gets tougher from a top line revenue growth just as we start to ramp against our pricing initiatives.

I mean do you expect to like lose occupancy? Or does the occupancy improvement in the second half of the year slowed down for you guys as you kind of look out?

No, it's not so much. I think our occupancy guidance for the full year is roughly as we quoted. We're looking for roughly 100 to 300 basis points of overall occupancy growth year-over-year. But I think where the challenge is when you look at the actual rate comp will start to slow down. So, you'll get benefit from occupancy improvement on overall revenue, but the comp on revenue per either throughput pallet or through economically occupied pallet gets tougher as we get later into the year.

Okay. Maybe a follow-up for you, George. I wanted to ask with your crystal ball kind of what you see as the trajectory of the recovery and stabilization for the business? I think you've talked before, it could take a couple of quarters, could take six or eight quarters. As you look at labor for the manufacturers, as you look at your own labor and you've made some strides and have some more to go, what do you sense is kind of the trajectory of the recovery for the business when you look out maybe late this year or sometime into next year, et cetera?

Well, it's clear to me that full recovery is not this year. I mean we're seeing labor improvement, but I classify it as more of a trickle than a constant flow. It's great that production has increased, but it's increased a minimal amount. I think consumer demand being down a little bit is helping build inventory. I think that's a good thing for the food supply chain in the short term. But I don't see full recovery this year, and I'd even push it out to mid next year, if I had to guess.

Your next question comes from Mike Mueller with JPMorgan. Please go ahead.

I just have a question. You were talking about, I guess, higher inflation, causing changes in consumer habits and maybe more inventory build happening because less goods were being bought at the stores. But what about the old argument of everybody eats 2,000 calories a day, and if you're not buying the food at the store, you're seeing it go out food services and restaurants, et cetera. I mean how should we think about that dynamic?

Well, I think the consumer demand is definitely going to be impacted by higher inflation, less disposable income and people will trade down. I think, historically, in my experience, people trade down into categories that cost less, but provide similar nutritional benefit than what you just described. Good news for us is we typically store and ship products that are in categories that people trade into versus out of in times like this. So I don't know that it will necessarily be a big drag on our business. But certainly, consumers have less money to spend. And as a result, we'll make choices that are different than they used to make even a few months ago.

I also think, Mike, the other thing that weighs in on that is there's -- due to the inflationary environment, you tend to see smaller basket sizes, which I think we're starting to see the retailers report. And you're seeing less pantry stocking that we saw through the COVID cycle as inflation weighs on the average consumer.

Got it. And for the quick follow-up, can you talk about the occupancy trends for July?

Yes. Good question. The trends for July are in line with our guidance. We're seeing occupancy year-over-year improvement well within the range that we updated the guidance on. So as we said in the prepared remarks, we expect that to continue through the year and July certainly backs that up.

Your next question comes from Michael Carroll with RBC. Please go ahead.

I wanted to touch back on to the guidance question. And it looks like in 2021, which was obviously a difficult second half, I mean you did about $0.57 of AFFO, but now your guidance is kind of applying about $0.52 in 2022, despite occupancy being up pretty significantly, you're able to pass on those higher labor costs. I guess what's the disconnect? I mean why would 2022 AFFO drop below what it was in 2021?

Yes. As we mentioned in our prepared remarks, we're very pleased by the progress of the core business in terms of driving NOI growth, but there are headwinds, inclusive of higher interest rate environment, which creates higher interest expense and the strength of the U.S. dollar, which has a translation impact on our earnings from our foreign operations.

Can you kind of quantify how big of an FX impact do you expect to see in 2022? Do you -- are you underwriting more currency exchange or movement than that has already occurred?

Yes. So as I mentioned in the prepared remarks, roughly FX year-to-date cost us about $0.01 a share, but you definitely saw the dollar accelerate as we move through the -- or strengthen as we move through the quarter. So I think those are the biggest drivers. We also -- as we commented earlier, and you can see in our guidance, one other item below NOI is also SG&A, which is still in our overall guidance range that we gave at the beginning of the year, but that is also a detail.

Your next question comes from Samir Khanal with Evercore. Please go ahead.

I guess, George, you talked about the power costs being high and pushing cost to customers. And I think you said you exited 3Q with sort of all the increases on in 2Q, but are you -- can you go back, I guess, to the same customer and negotiate higher prices again in the event that costs continue to be high and inflation is worse than we think? I mean, can you go back and sort of negotiate contracts again?

Yes, we can. In fact, we've done it now three or four times already. And if a 5th time is necessary, we will do it. As we've said, it's not exactly the same based on the inflation we see. So power surcharges just go right on the invoice. That's not a negotiation that the industry is conditioned to that, and we certainly provide the data to customers that backs up the changes when we do it. It's a very fluid process, typically only takes 30 days to implement. The labor inflation, we've highlighted the different methods we use, whether you're in our top 100 or outside of our top 100, but we will do it a fifth time, if necessary. It's -- we've said we've committed to, we're not going to let inflation structurally change our margin structure, and we're as committed to that today as we were when we first made that statement.

Okay. Got it. And then I guess, on an earlier question about how defensive your business is in a recession. I mean I guess what are you factoring into guidance to incorporate that slowdown? And even as we think about '23, right, we're not even in sort of -- I mean there's a view that, yes, maybe there is a potential recession here. But is the sense that from a modeling perspective, like that throughput pallet that continues to decline? Is that the way to think about it? Or what's kind of the assumptions when we do sort of going through recession within the next 12 months, if that were to happen?

Yes. So I guess if you look at our business and our business would be aligned with the food industry really when it comes to recession, which I hope does not occur or is not a deep recession. But the characteristics of our business are that we typically store and forward food products that are center of the eye Walmart, center of the eye at Kroger. They're typically categories that people trade into in a recession versus out of due to the price points. And there is a thought also that if a recession were to occur, hiring could increase or availability of people would increase. So I would say no business I know of this recession proof, but the food industry and our part of it tends to be somewhat recession resistant.

And I think, on that point, our guidance around decline in throughput pallets is reflective of our view on the impact for the balance of the year.

Your next question comes from Joshua Dennerlein with Bank of America. Please go ahead.

Just trying to get a sense of the macro environment impact on your guidance. How big of an impact is the rising interest rates? What were you factor in the last quarter versus like this quarter?

Yes. As you think about it, based on the amount of floating rate debt that we have roughly, on a full year basis, a 100 basis point move in interest rate would be approximately $10 million of incremental cost -- so hopefully, that helps you get a metric.

So a 100-basis-point move in the 10-year is $10 million for the full year. Then you -- is that...

Yes, 100-basis-point move in base rates would translate to $10 million on a full year basis.

Okay. And what's the base rate? Is it SOFR or like a...

Effectively, SOFR.

Your next question comes from Ki Bin Kim with Trust. Please go ahead.

I just wanted to go back to your comments about July occupancy. I was just curious about the recovery in economic occupancy and the labor situation. How that cadence looks like throughout the quarter? There's always an element of seasonality to your business. So it's hard to just look at the numbers at face value. So if you can just provide some color around that.

Yes. So in June -- in the second quarter, we were 288 basis points higher year-over-year. We revised our guidance on occupancy to be 100 basis points to 300 basis points higher for the full year. And July is coming in well within that range. So we expect to hit the revised occupancy guidance. And if you extrapolate that, we should be within 100 to 300 basis points higher month-over-month for the remainder of the year.

And you mentioned the full impact of expense pass-throughs were not reflected in 2Q. Can you just talk about what additional upside there is, whatever metric that you're looking at?

Yes, what we're saying is in the second quarter, we still experienced inflation in labor, warehouse supplies and power. And due to the nature of the lags, various different lags with those -- each of those inflationary items, we would not have it all priced in, in the second quarter. So there's pricing in the third quarter that offsets that inflation that is rolling into the third quarter. And as we experience more inflation in the third quarter, we'll price that in the fourth quarter. So essentially, we're lagging a quarter with each inflationary item.

Okay. And if I can squeeze a third one in, your guidance for same-store revenue is 3% to 5%. Year-to-date, you've already done 7%. Clearly, occupancies moving in the right direction, you have a little bit more uplift from getting a full impact of expense pass-throughs. Your guidance implies about 1% same-store revenue in the back half. I mean I'm trying to get a sense, is that just being conservative because even the throughput coming down, I don't think, could take your -- and it's hard to believe that you'll get 1% same-store revenue in the second half.

Yes. I think certainly throughput, we don't expect to have that level of impact. It comes down to the fourth quarter of last year being -- having a lot of price in that quarter. That's basically when our pricing actions began to hit the business for the fourth quarter of last year. So as we comp the fourth quarter, the revenue increase year-over-year is going to decrease. And it's really just that item that is causing us to guide to that level.

Your next question comes from Craig Mailman with Citigroup. Please go ahead.

I don't want to speak for everyone on the call, but it seems like a consistent theme that we're all trying to get a bridge, right, for why you guys maintain guidance? Because as I listen to you, you guys had $0.53 in the first half of the year, and I know you can't annualize the business because -- but as you think about kind of fourth quarter relative to first quarter, occupancy is going to be up a couple of hundred basis points as is your pricing. I understand that there's going to be a lag on the power surcharge piece of the business. You're going to have the floating rate debt piece of the business, maybe something on FX. But on the other side of the coin, if the consumer does slow, your tenants are going to have a chance to actually build inventories faster than what you would think, right? Your throughput business may not be as high, but from at least economic occupancy standpoint, you could have some power -- some upside there. So I guess what I'm trying to get at is, again, I know someone referenced that $0.52 kind of gets you to the 105 in the back half of the year. And I just wanted to try to put some per share numbers around some of the drags. I understand 100 basis points on rate debt is $10 million. That's about $0.04 on an annual basis, so maybe a $0.01 share drag per quarter and similar thing on FX, right? So maybe you get $0.02 a share per quarter there. But then on the flip side, you're getting the operate upside. So I know it's kind of a long preamble there, but I'm just really trying to get to per share bridge to weight out to people...

Yes, I can try to jump in and bridge some of the other items outside the ones that we've already called out. I would look to the timing of our maintenance capital spend. You'll see that our maintenance capital spend against our full year guidance ramps up through the back half of the year obviously, and it's -- our forecast implies that we're growing that spend relative to last year as our asset base has grown. We also -- if you recall, in our initial year guidance, I commented that will have start-up costs. And obviously, as we get closer to the end of the year, given what Rob discussed about big projects starting to come online, we'll start seeing some higher drag from those development projects in terms of the initial start-up costs. So those are just a few of the items in addition to the other comments that we mentioned that do put some pressure on the back half of the year.

And the SG&A, Marc, that you called out going.

Yes.

Right. No, I get that, but that's on kind of -- you guys are talking big picture, I'm looking for actual impacts on a per share basis. to bridge the gap, right? Like you guys are filling out a bunch of stuff on the headwind side of things. But to try to -- and I would love to also see right 2Q you guys didn't get a full quarter of the price increases, right? So that's going to continue. On the power surcharge side of things, you're basically 30 days behind, right? So you will get some of that back throughout the year. So what's the real drag from that? And then Dunkirk, I get that there's going to be a drag to it, but you guys have conditioned the Street with the J curve on the NOI coming online. And so that should be in people's kind of thought process. So I'm just trying to think what's incremental that kind of gets you from that $0.53 to $0.52 with better fundamentals and the ability to reprice.

Yes. Craig, as I said, I would first look to the timing of maintenance capital spend. If you look to the midpoint of our guide, it's roughly a $12 million increase over the back half from the front half. That's where if you think about our weighted average shares outstanding anywhere between $0.04 to $0.05 right there. So that's just timing of how that capital is deployed.

Your next question comes from Bill Crow with Raymond James. Please go ahead.

George, can I get a clarification before I ask my question. I heard you reference the second quarter of 2023 is it was more of a stabilized point. But I'm trying to figure out was that reference to labor, was that to margins, was that occupancy? Is that kind of -- because I think the time frame for the recovery accelerated a little bit and maybe towards that mid-'23 when we were at NAREIT, but could you just tell me what you're referring to?

Yes. I think the context of the question was the labor market specifically, and my comments were, I don't see the labor market coming back to, let's say, fully normalized pre-COVID levels this year for sure. And I'm very doubtful. It will happen in the first half of next year as well. I think it takes a long time to rehire the people that we lost, and I'm talking from an industry standpoint now, the food industry. And then you have to train them. You have to get them to stay. Turnover, as we mentioned in our prepared remarks, is an issue when people believe they can work in this environment and then find out that they really can't. And then all that has to stabilize. And I don't see any stabilization at the levels of employees that were in the food industry pre-COVID anytime before the back half of next year. That was the context of the comment.

Okay. And then we should just assume that it will be even beyond that before, say, occupancy gets back to 2019 levels and kind of margins improve, right? It sounds like those would lag the workforce stabilization. Is that fair?

I think that's fair. I mean, you should see some improvement when we get back to those levels, but it takes time, right? You have to -- the biggest variable is when does the workforce become as productive as they were pre-COVID. The numbers can -- of people employed can be at levels, but productivity is a big piece of it. So I agree with that, yes.

Okay. And then -- thanks for the clarification, multipart clarification. But one question for you is, on the operating cost increases, has the second derivative started to decline? Are we -- have we gone past peak as far as the rate of increase of costs?

I don't know if we've gone past peak, but it's changed a bit. And it really matters what geography specifically you're talking about. So in the U.S., it seems like the labor inflation has subsided to a degree, but warehouse supplies, which is probably driven by labor in our suppliers business, and power have increased. So it's a little bit of a mix change there. Europe, our European business is now full on with labor inflation. That's it lagged the U.S., but it's there now, and we're dealing with it exactly the same way we did in the U.S. But in addition to power increases that we've talked about in the past, Europe now has significant labor inflation. So it's a little bit of a moving target. But specific to labor in the U.S., I'd say, yes, that has, to a degree, subsided.

Your next question comes from Vince Tibone with Green Street Advisors. Please go ahead.

Looking at Page 27 of the supplemental, economic occupancy is higher in the second quarter of this year as compared to 2Q '19. I understand the portfolio has changed a lot over this period. But what I'm trying to get at is maybe how much occupancy upside you think this could be from current levels once food production levels normalize?

Well, again, we have our guided 100 to 300 basis points higher on an annualized basis. So that should -- we don't think we'll exceed that or we would have raised it. So for this year, 100 to 300 basis points is where we'll land. We feel pretty confident about that. And ideally, throughput picks up, right? I mean when the system normalizes and by the system, I mean the food supply chain, you should see higher output from manufacturers. You should see occupancy rise, but you should also see throughput increase, and that has not happened. So that would suppress inventory to a degree. So you need to factor that in.

Got it. But just -- so you still -- I mean I'm trying to kind of look at maybe more '23 and beyond, like you feel like there's like structural occupancy upside from food production? Or is the second quarter kind of pulls some of that forward because the throughput was down? Do you see what I'm trying to get at?

Well, we said I'd be referring to the occupancy gain we've recently made, we said there are two factors: increased production and slowing consumer demand due to less disposable income in the average consumer today. Those dynamics should change over time. And when we normalize, we should normalize back to inventory levels that reflect not only higher production but higher throughputs driven by normalized consumer demand. So, I'm not sure if I'm answering your question correctly.

No, that's helpful just to clarify. So like is that on a seasonally adjusted basis, like in the second quarter, do you think for a second quarter level, do you think that's higher or lower or about the same stabilized occupancy once everything normalizes versus the actual in the second quarter this year.

It's really hard to say. I'm not sure I can predict that, to be honest. I can say I wouldn't expect it to be worse, let's put it that way.

Your next question comes from Anthony Powell with Barclays. Please go ahead.

Question on the relationship between, I guess, end consumer demand and production. And right now, you're seeing a benefit from consumers buying less, but over the medium term, shouldn't that eventually result in producing less because there's less stuff to be bought? And if we go into a downturn, does that mean there will be more pressure on end consumer demand?

Yes. I think -- the first question, I think there is a long way for manufacturers to go on the production side before they would be comfortable that they reached inventory levels that they feel like not only meet consumer demand, but allow them to run their facilities efficiently, right? So there's a lot of room. I mentioned earlier that the occupancy improvement we've seen is more of a trickle than anything substantial. So I think there's a lot of room there. And I certainly hope consumer demand picks up. I mean, that will ultimately make the food supply chain normalize back to pre-COVID levels. So I'm hoping that's a short-term issue, not a long-term issue.

Maybe on the labor, the turnover you're seeing. We've seen a lot of announcements about warehouse employees being kind of laid off or sort of in there, but you still seem to see a lot of turnover in your business. When people leave your facilities, where are they going? And I guess, how do you see the competitive landscape for labor evolving the next several quarters?

Well, the first question is when they leave us, I don't know where they go. I can't answer that. But I think the labor market will remain very competitive. I think I mentioned through at least the first half of next year. And our turnover is related to individuals who join our company and believe that they can work in our environment and just find that the environment is harsher than they believed it was we deal with that all the time. We have programs to address it with cold acclimation programs and better onboarding processes, but we've got to become a better employer of choice. We've got to have better onboarding practices. We've got to have better check-in practices with employees. We're strengthening all those processes now, but it will remain competitive, and I expect turnover to be the biggest challenge we faced certainly in the second half of next year -- second half of this year and into the first half of next year.

Is it harder to staff your new developments versus your kind of legacy developments? Or is it kind of the same issues in both portfolios?

It's typically a completely different dynamic. Most of our new developments incorporate some type of automation, which means you're hiring systems, professionals, IT professionals, engineering professionals where our more conventional facilities have been in the system a lot longer. We're hiring hourly workforce that is going to -- more $20 an hour workforce that's going to do much more labor in a manual way than any automated way. So the two completely different skill sets in two completely different markets, both of which are tight to find people, but for different reasons.

Thank you. This concludes the question-and-answer session as well as today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.