Greetings and welcome to the Americold Realty Trust Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Scott Henderson, Chief Investment Officer of Americold. Thank you. You may begin.

Good afternoon. Thank you for joining us today for Americold Realty Trust's 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.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 thank you all for joining our third quarter 2023 earnings conference call. 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. Marc will also provide some additional commentary on our recent capital markets activity, our 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 expected the sequential decline to be 100 basis points to 200 basis points, but we're able to partially overcome this through the normal course seasonal build of inventory. We also derived 50.4% 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 sets another record for this metric at Americold, while maintaining our low customer churn rate at approximately 3.2% 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 perm to temp hours ratio of 75:25. This is 300 basis points improvement to our third quarter 2022 permanent labor level and on a sequential basis, roughly flat to the second quarter 2023, due to seasonality when…

Thank you, George. As George mentioned, our company delivered strong results during the third quarter. Economic occupancy at 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 form basis, we derived 50.4% of rent and storage revenue from fixed commitment storage contracts, which is 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 in fixed storage revenue, a testament that speaks to both the benefits our customers derive from the structure, along with our best-in-class commercial practices. We're very pleased with this continued progress, in particular, the meaningful progress that has been made this year in recommercializing our European platform, as we transition more of that business to our 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 3.5% 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 basis points to 200 basis points. Service revenue per throughput pallet increased by 6.1%. 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…

Thank you, Rob. Today, I will discuss our net investment activities, our recent capital markets activities, our capital position, and liquidity. I'll then provide an update on our full year guidance. During the third quarter, we completed the previously announced purchase of 1 distribution facility in Brisbane, Australia for a total investment of approximately AUD36 million. Additionally, as George and Rob 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 Compreo 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 of our ATM program at a weighted average price of $31.63 per share at a total gross proceeds of 419 million. We utilized all 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 reduce leverage, but will ultimately be used to fund new growth initiatives. This capital raise better positions the balance sheet as we turn to growth. At quarter end, total debt outstanding was $3.2 billion. We have total liquidity of $824 million consisting of cash on hand and revolver availability. Our net debt to pro forma core EBITDA was approximately 5.7x. At this point, we have invested $159 million in our Plainville, Connecticut project in 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 recently…

Thanks, Marc. 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 showing sequential improvement in services margins in the face of throughput volume headwinds. Our latest two automated developments going live 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 CPKC and DP World collaborations. In closing, I'd like to thank the 15,000 Americold associates around the world to their hard work and dedication in servicing our customers every day. It is their efforts that provide the foundation for our future. Thank you again for joining us today and we will now open the call for your questions.

[Operator Instructions] The first question we have is from Samir Khanal of Evercore ISI. Please go ahead.

Yes, good evening everyone. Hey George, throughput is down as we expected and as we had talked about you lowered cost to mitigate the impact. But I guess if throughput remains challenged in 4Q and into the next year, is the strategy to continue to lower cost to mitigate the impact? I know it's variable cost, but I guess is there a limit to how much you can reduce cost there?

There are limits Samir, but when I talk about better variable cost management, we have a ways to go. So, we had what I would call our first quarter where labor productivity really showed up on the P&L with sequential improvement in handling margins with sequential significant sequential declines in throughput. That's the first time we've seen that since we've 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 tend to do more, and we should see sequential improvement in margins going forward, even in the face of declining throughputs, although I will say through October we are starting to see sequential increases in throughput, still way off prior year, but sequential increases due to seasonality. So, I'm very positive that we can continue the trend on good variable cost management and it's all about rightsizing labor to meet the work content.

And just as a follow-up, maybe on pricing into next year, how should we think about pricing with inflation moderating, I guess for both storage and rent and warehouse?

Well, we still have our annual GRIs, those happen every year, and we still have renewals. In the case of renewals, they're probably a little bit outsized because, cloud. They're coming up through a very previously high inflationary period. So, maybe you want to go a little deeper, Ralph.

Yes. I would say, you know our main focus is making sure that, renewals are priced up to renewals are priced up to market rates that we're embedding, annual escalation on a go forward basis that reflects the current operating environment. Our GRIs will be implemented like they are every year, which are general rate increases that for the most part go 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 confident that pricing will continue to be a lever to help us grow.

The next question we have is from Josh Dennerlein of Bank of America.

George, I wanted to kind of, well, actually no. Thinking about the CapEx guide and how you trimmed it. I guess what's driving that? Is that somewhat 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 of very good cost -- variable cost management is understanding, the preventative maintenance impact of lower throughput. So let me make an analogy I think everybody can relate to. If you're supposed to change the oil in your car every 5,000 miles, you might drive 5,000 miles in a month, you might drive 5,000 miles in 6 months. If you drive at 6 months, you've deferred that preventative maintenance, 5 months. So, that's essentially what we're doing here in the face of throughput declines, preventative maintenance 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. If throughput picks up, preventative maintenance would pick up, but so wouldn't earnings from increased handling revenue and profit. So, it's part and parcel of managing variable costs along with labor and other components, but it's directly related to the throughput decline.

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. 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 will be up sequentially, at least it is in August we believe that's due, I mean, it's up subsequently in October, August. And we know that that seasonality coming into the holidays, we would assume, will continue to see throughput increase sequentially, through Thanksgiving and into Christmas, those are the trends we're seeing, but still well off the prior year. My guess is that in the first half of next year it's very difficult to make meaningful progress on throughput, because the activity in the food industry in the first half of the year. As you know, is seasonally less intense than the second half of the year. My opinion is the first opportunity to see throughput gains would be towards the end of 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 end of the second quarter into the second half of next year to see increased throughput.

The next question we have is from Craig Mailman of Citi.

Marc, I just want to run through guidance real quick because I appreciate the bridge you gave. But by my math, I was looking at the AFFO yield on the equity you raised versus the line that you paid down. And it looks like you're somewhere in the $0.03-ish accretion there plus the $0.05 from G&A. So you're somewhere in the positive $0.08 relative and you guys raised by 2. So does that mean all the core numbers that you're kind of saying that are under a little bit of pressure are kind of negative $0.06 worse than they were as we stood here this time last quarter?

Yes. The first thing is you think about the impact of the interest savings, we estimate the $0.03 savings to be on a full year basis if you look. The impact in year is probably just over $0.01 as it relates to the capital raise. So, that's how to think about that. As you think about the other costs, 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 as our really our fourth quarter in a row, I think of record occupancy. So, that's definitely supporting the raise and the guide. So hopefully that helps you bridge those two categories.

That's helpful. Then George, I want to go back to your commentary. You had mentioned that you guys didn't have the 100 basis points to 200 basis point drop in occs that you had expected, because economic was down only 80. But if I look at physical, physical is down 210 basis points. So the 200 plus basis points pickup on fixed commits 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. So I guess 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 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 is that 9% on, just in the fourth quarter, could you kind of clarify what that 9% means, we should think about it? Yes.

So let me start with the second one first. The 9% is the we said was the run rate we would hit in the second half of the year, so we would achieve that run rate. We wouldn't end the year at 9%, certainly, but we would achieve that in the second half of the year, and we would able to maintain it going forward. The first question sorry, what was the first question?

You guys had thought you'd have 100 basis points to 200 basis points decline was only 80 basis points, but physical was actually down over 200 basis points, which kind of trended with the USDA. So I'm just trying together you guys have 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 Q4 ahead of Thanksgiving? Or is it still much weaker on a year over year basis?

No, sorry, I forgot that. But, 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 will occur and we're starting to see the results materialize in October. The gap between physical and economic did widen, but we believe that the reason why fixed commit their office because people are planning to use that space in the fourth quarter, they've reserved it. We see throughput coming, so, I would expect that gap to narrow in the fourth quarter as large manufacturers are reserving space for their product to support the holiday season.

The next question we have is from Mike Mueller of JPMorgan.

I was wondering, can you give us some color in terms of the economics of the Safeway acquisition and what occupancy levels look like and just economics on the transaction?

Yes. As we said, roughly, we invested $37 million and we expect a net entry NOI yield of approximately 9%. So, as we comment I think Rob commented in his in prepared remarks. The site's located in New Jersey and Southern New Jersey, and it supports our existing infrastructure we have out in that market, which is a very strong market for us.

I think the only thing I would add to that, this is Rob, is just that we'll look to do, with that, acquisition like we do with all acquisitions, implement both our best in class commercial practices and the Americold operating system, which we think should improve that entry yield over time.

The next question we have is from Michael Carroll of RBC.

How abnormal is it for the throughput trend to 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 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's no doubt about it, particularly in the beginning part of the third quarter. It did, as I say, come back pretty strong in the latter part of third quarter and we continue to see throughput improved 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's 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 the same time.

And then the weakness, was it concentrated in any particular customer, I guess property type like your production facilities, your distribution centers or any part of the region of 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 is from Ki Bin Kim of Truist Securities.

So, we noticed your job postings were down about 40% quarter-over-quarter. I'm guessing that's 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 this is a little bit longer lasting, so maybe you can provide some more color around it.

Yes, I think it relates to the last question. I mean, the throughput decline was significant and fairly abrupt in the early part of Q3. So you're correct in looking at the job postings and seeing a sharp decline because, what we did was take very quick action when we saw throughput decline very abruptly in the first part of 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 noticed that we cut a lot of job postings tied to a real precipitous drop in throughput, is exactly the correct observation and was very intentional on our part to get labor in line with the work content, which, as I said, dropped pretty dramatically.

And if you look at the cost structure for your -- this is stick with the services business, how much is fixed for a variable? And I know the difficulty in answering that question because it's not linear by a step function, but just trying to get a better sense of how much variable cost can be extracted?

I think a good measure would be 50-50. It's about 50% fixed, 50% variable, what should give you an idea, that if we manage the variable side of this business as well as we can, which is not just labor, it's our maintenance CapEx combined with our labor, if we do that well on 50% of the cost structure, we should be able to expand margins and that's why I say we can still make progress with throughput down. And remember, in occupancy when we were -- about two years ago, we said when occupancy comes back, it comes back at a very high revenue to EBITDA rate because it's incremental. Throughput will do the same thing for that 50% of fixed, 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 stay on that track through the first half of next year. In the second half, if throughput improves as many people predict, we should see a really incremental benefit as we absorb 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. We've been doing 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 is from Nick Thillman of Baird.

Please go ahead. Hey, good evening. George, maybe going back to some of your initial comments on SNAP and like lower end consumer. Obviously, you have the COVID 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 throughput up or maybe just putting some numbers around just the low end consumer exposure you have in the portfolio?

I think we've seen the low end. I think the low end was the first half, let's say, of the Q3, we've seen sequential improvement since. It really looks like we'll see sequential improvement through the holiday season. That's exactly -- those are the indicators we see. Still off year over year, but not as dramatic, let's say, 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.

Yes, that's helpful. And then maybe, Rob, going through some of your comments on build-to-suit and fixed commitments along development. As we're looking at new starts from here, there's going to be a lot of components of fixed commits associated with them. Are we going to have the traditional J curve? Just, I guess, trying to see what the value creation could be of the stuff that's currently under construction versus maybe some of the takes of new starts in a 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 is that we'll see significant fixed components associated with our expansions. Obviously, in customer dedicated builds, our second main focus from expansions, those will is to be fixed commitments. I think our partnership deals, our CPKC and DP World agreements will probably be is a little bit more mixed and may tend to lean a little bit heavier on the variable side of the equation, just the nature of that business. But 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. And with that, this concludes today's conference. Thank you for joining us. You may now disconnect your lines.