Americold Realty Trust
NYSE:COLD
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
21.03
30.58
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Americold Realty Trust
You don't have any saved screeners yet
Good day and welcome to Americold Realty Trust First Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Scott Henderson, VP of Capital Markets and Investor Relations. Please go ahead.
Good afternoon. Thank you for joining us today for Americold Realty Trust first 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. The full definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures is 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 first 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 then discuss our outlook for the remainder of the year. Rob will then provide an update on our recent customer initiatives, and Mark will review our financial results in more detail.
Let me start with the four near-term priorities that we are focused on, which I outlined on our last earnings call. First, we have made great progress in repricing our warehouse business to offset inflationary pressures in our cost structure. As a reminder, exiting the first quarter, we committed to cover all known inflation incurred through the end of 2021, which I am pleased to say we have achieved. The progress of these price initiatives can be seen on Page 7 of our IR supplemental. Rent and storage revenue per economic occupied pallet in our same-store on a constant currency basis increased by 5.6%, service revenue per throughput pallet increased by 6.3%. As the first quarter of this year progress consistent with the broader economy, we have seen inflation continue to rise and we expect that trend to continue. Our pricing initiatives are ongoing and are targeted at addressing the incremental inflationary pressures that have risen during the quarter. We will exit the second quarter at a run rate covering all known inflation incurred through the first quarter.
As it relates to our cost structure, we have added tighter controls, created more robust processes and strengthened our team to ensure that we have an accurate real-time view of each cost component. We are now in a much better position than we were in the third quarter last year and will not be surprised by meaningful movements in our cost structure again. Second, we continue to focus on labor management with the goal of optimizing our mix of permanent and temporary associates in our facilities. Our labor mix affects not only our wage rate structure, but also our productivity and efficiency. Temporary associates cost more per labor hour and a less productive than permanent Americold associates.
Prior to mid-2021, in the aggregate, we were staffed at approximately 70% permanent hours to 30% temporary hours in our warehouse portfolio. Throughout 2021, as the year progressed and the labor market became more challenging, this ratio moved closer to 60:40. Going forward, we are looking to hire more permanent Americold associates into our facilities and have implemented several new initiatives to achieve this goal as well as taking action to increase retention.
During the first quarter, while we made some modest improvement and we're closer to 65:35 for the quarter, we are still lowering our permanent associate mix by approximately 600 basis points versus first quarter 2021. We expect to see continuing improvement throughout the year as a result of our efforts, but it will certainly take time during this challenging labor environment. Please keep in mind that a new associate is not fully productive for approximately three months. Additionally, I'm pleased to share that we added a new Chief Human Resources Officer in the first quarter, Sam Charleston. Sam has deep expertise in HR and the food supply chain, and will be overseeing our hiring and retention initiatives.
Third, we're focused on differentiating our platform by providing best-in-class customer service. While relying on temporary labor during 2021, we were less productive and less efficient, and we know it negatively impacted customer service. Please note, I do not think this is an Americold specific issue. I believe this impacted all companies in the services industry that is dependent on skilled labor. The benefit of a productive predominantly permanent workforce is servicing our customers at best-in-class levels and ultimately leads to increased market share. To improve our customer service, we've added a new leader, Dave Moore, Senior Vice President of Integration and Quality Assurance. Dave has extensive experience in our industry, having held leadership roles at AGRO Merchants and Americold in the past and we're thrilled that he has rejoined our team.
Our final focus area is ensuring that our development projects are delivering on time and on budget and then deliver the appropriate returns. Since I joined the company, we have completed comprehensive reviews of all recently completed and in-process development projects. I'm pleased to report that the projects that have reached stabilization, inclusive of Chesapeake, North Little Rock, Columbus and Savannah, are performing in line with disclosed stated yields in the supplement. I'm also happy to report that our Dunkirk project will be operational this month, on time and on budget, and is expected to stabilize as previously disclosed in our IR supplemental.
As a reminder, this is a dedicated build-to-suit facility for a large private consumer packaged goods manufacturer, with fixed commitment pricing structure and an initial 20-year term. Due to well-publicized global supply chain issues, component availability and customer reflected change orders, we have adjusted completion and stabilization dates for several in-process development projects. We have also made minor adjustments to total estimated capital costs on several projects and adjusted the yields on the upper end for one project, Atlanta Phase 1. These changes can be seen on Page 34 of the IR supplemental. Finally, I'm pleased to announce that we've added a new senior leader, Anita Nanda, Senior Vice President of Global Development. Anita brings 25-plus years of automation and development experience.
Turning to our results. End-consumer demand for temperature controlled food remains strong, but COVID related supply chain and labor disruptions continue to impact the global food supply chain. Throughout the first quarter, our customers' production was impacted by absenteeism due to the Omicron surge. But even after the Omicron wave receded, the labor market remains very challenged and continues to strain our customers' ability to produce at pre-COVID levels. Also please note that Easter fell later in April this year versus earlier in April last year, which contributed to the increase in our economic and physical occupancy in the same-store pool for the month of March year-over-year. The seasonal Easter buildup occurring later this year versus last year is a meaningful driver for the slight economic occupancy improvement in the same-store pool in the first quarter 2022 versus first quarter 2021.
On the cost side, we continue to see inflation in multiple aspects of our business, which I highlighted earlier. Additionally, our absenteeism increased during the Omicron surge, which increased our labor costs, along with our heavy reliance on temporary associates. As I said earlier, not only do temporary associates cost more, but they are less productive than our permanent associates. For the quarter, our global warehouse same-store pool generated total revenue growth of 6%, while we experienced an NOI decline of 3.6%, both on a constant currency basis. AFFO per share was $0.26. The two main factors that led to these results were a meaningful increase in pricing, combined with an even larger increase in our cost structure in the warehouse business.
Let me quickly comment on stabilization of NOI contribution dollars within our same-store pool, which now represents 90% of the total properties in our warehouse segment. At this moment, we are focused on protecting NOI contribution dollars and not as much on NOI margin percentages. As you are well aware, NOI dollars of what drives AFFO per share growth. The four prerequisites for seeing NOI contribution dollars returned to pre-COVID levels are: first, we need to continue our current pricing initiatives to offset inflation; second, we need to integrate and fully commercialize recently added same-store facilities; third, we must achieve the proper mix of perm-to-temp hours ratio; and finally, we need occupancy and throughput volume to recover to pre-COVID levels.
At this point, I want to highlight that we published our third ESG report in April, and it is available on our website. We cover numerous aspects of our approach to ESG in this report, but I will call attention to a few of our key objectives. We are committing to adhering to science-based targets for greenhouse gas emissions this year and will pursue a SBT-verified carbon emission reduction goal to achieve net zero. We're also committing to achieve green building certifications on 50% of our portfolio by 2030. Additionally, this year, we are launching an inaugural Global Diversity and Inclusion Culture Committee, and are developing a three to five year diversity and inclusion strategy.
These are just a few of the highlights. We are very proud of the progress we have made in our ESG journey and look forward to continuing to move forward in this area. Finally, last week, we announced that we partnered with Kraft Heinz, one of our largest customers, and Feed the Children, an organization of Americold has sponsored for numerous years to deliver frozen potatoes to families across foundation living below the poverty line. Grocery prices have risen by almost 9% during the last 12 months, impacting millions of families. We are proud of the work we are doing with Kraft Heinz and Feed the Children to help families in this challenging environment.
With that, I will turn it over to Rob.
Thank you, George. As we discussed on our last two earnings calls, we increased the pricing of our warehouse business in order to address known cost increases. We said we would exit the first quarter with these price increases in place and we have accomplished that goal. As George noted, some of these increases were implemented during the first quarter, meaning the full run rate will not be seen until 2Q results. However, we are continuing to see inflation in our cost structure in other areas and we expect it to continue, as George discussed.
We have implemented additional price increases and we are being very targeted in our approach. As a reminder, approximately 30% of our warehouse revenue is with smaller customers, where our pricing can be adjusted at any time with a 30 to 45 day notice. Approximately 70% of our warehouse revenue is with our top 100 customers. About half of these top 100 customers have contracts with formulaic mechanisms in place that allow for us to equitably adjust our pricing as long as there has been a demonstrable increase in costs. The remaining half of these customers have come to the table clauses that require good faith negotiation to increase price. As a reminder for our top 100 customers, we usually need to see the elevated costs for at least 60 days before we can trigger either our price increases or begin negotiations.
These price increased conversations have been very rational as we are increasing rates to cover macro level inflation. Outside of labor, power is our second largest expense. During the first quarter, power increased by approximately 18% in our same-store on a constant currency basis year-over-year, we're seeing the majority of this increase in our European portfolio within the same-store, driven by the increase in the cost of energy due to the conflict in Ukraine.
However, we are also seeing the cost of power and utilities increase in other global locations as well. In order to address this, we're in the process of instituting power and utility surcharges to our customers and the impacted facilities. The lag period here is approximately four weeks, which means we will see the outsized increases in power and utilities cost for this period of time before we pass it through to our customers. This incremental revenue will be reflected in the rent and storage revenue of our warehouse business on a go-forward basis.
Onto our commercialization efforts. At quarter-end within our global warehouse segment, rent and storage revenue from fixed commitment contracts increased on an absolute dollar basis to $367 million compared to $307 million at the end of the first quarter 2021, on a combined pro forma basis, we derived 39.8% of our rent and storage revenue from fixed commitment storage contracts.
Within our global warehouse segment, we had no material changes to the composition of our top 25 customers who account for approximately 49% of our global warehouse revenue on a pro forma basis. Additionally, our churn rate remained low at approximately 3.3% of total warehouse revenues. Finally, I'm very proud of our Americold associates who allowed us to execute a successful Easter season for our customers and the role we played in delivering holiday cheer to millions of consumers.
Our mission at Americold is to help our customers feed the world. We continue to find new and innovative ways to partner with our customers to fulfill that mission. In the first quarter of 2022, we grew our business with 80% of our top 25 customers year-over-year. Our existing relationships with that strategic tier of customers averages over 30 years, our comprehensive suite of solutions across both the infrastructure and services segments of our business, continue to provide a compelling value proposition to our customers and led to several large new business contracts with both food manufacturers and retailers that were executed during the quarter.
Our pipeline for both global development and business plan for existing infrastructure remains strong as customers continue to look for ways to improve their supply chains. We're grateful for the opportunity to support our customers' growth initiatives through the strength of our platform.
Now I'll turn it over to Marc.
Thank you, Rob. For the first quarter, we reported total company revenue of $706 million, which reflects an 11% increase in growth across all segments of our business, principally driven by our warehouse segment. Total company NOI was $158 million a 1% increase reflecting continuing challenges in the macro operating environment and inflationary pressure.
Our total company NOI margin decreased by 234 basis points to 22.4%. Corporate SG&A totaled $58 million for the first quarter of 2022 as compared to $45 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 cash compensation and in our stock compensation expense, primarily driven by the one-time retentive stock grant awarded in the fourth quarter.
Additionally, as discussed and in line of our expectations, we had increases in our IT spend, insurance, legal and professional fees, travel combined with other inflationary pressures, which were partially offset by synergies from our recent acquisitions. Core EBITDA was $111 million for the first quarter of 2022, a decrease of 5.9% year-over-year. Our core EBITDA margin decreased 284 basis points to 15.7%. Our first quarter AFFO was $69 million or $0.26 per diluted share.
Now I will turn to our results within our global warehouse segment. For the first quarter of 2022, global warehouse segment revenue was $541 million, an increase of 11% compared to the prior year. This growth was driven by our pricing initiatives in the same-store pool paired with recent acquisitions and the ramp of recently completed development projects. Warehouse segment NOI was $146 million for the first quarter of 2022, an increase of 0.1%.
The increase is driven by recently completed acquisitions, primarily offset by lower contribution in our same-store pool. Additionally, approximately $2 million startup costs related to our development projects are also weighing on these results. Global warehouse segment margin was 27% for the first quarter of 2022, a 307 basis point decrease compared to the same quarter of the prior year.
Now I'll turn to our same-store results within our global warehouse segment. For the first quarter of 2022, our same-store global warehouse segment revenue was $483 million, up 4.5% year-over-year and 6% on a constant currency basis. This was driven by increased revenue in both rent and storage and warehouse services.
Same-store global warehouse NOI was $139 million, down 4.7% year-over-year, and a decrease of 3.6% on a constant currency basis. This was driven by NOI growth in the rent and storage portion of our business offset by lower contribution from the warehouse services portion. Same-store global warehouse NOI margin decreased 276 basis points to 28.8%. For the first quarter, same-store global rent and storage revenue increased by 5.2% year-over-year and increased by 6.4% on a constant currency basis. This was driven primarily by rate escalation and a modest increase in economic occupancy.
Our same-store economic occupancy was 77.6%, which reflects an increase of 22 basis points from last year's first quarter economic occupancy, partially related to the timing of the Easter buildup and offset by continued food production challenges, with stable and consumer demand. The slight occupancy increase was coupled with a 5.6% increase to our constant currency same-store rent and storage revenue per economic pallet driven by our pricing initiative and rate escalation.
Our same-store global rent and storage NOI increased by 3% year-over-year and 4% on a constant currency basis. This was due to previously described revenue growth, partially offset by the inflationary pressure on cost inclusive of power, facility maintenance, property taxes, and other facility costs year-over-year. Same-store global rent and storage NOI margin decreased 130 basis points to 61.9% due to the same factors. Same-store global warehouse services revenue for the first quarter increased by 3.9% year-over-year and 5.7% on a constant currency basis.
This revenue growth was driven by our pricing initiatives, which increased our constant currency same-store warehouse services revenue for throughput pallet by 6.3% partially offset by changes in business mix. This revenue growth was also partially offset by 0.6% decline in throughput driven by the challenged food production environment and the timing of Easter. Our same-store warehouse services, the NOI margin was 4.5% for the quarter, a decrease of 411 basis points from the prior year. This was primarily driven by higher cost of labor and other service costs due to elevated inflation.
Now turning to our balance sheet. At quarter-end, total debt outstanding was $3.2 billion. We have total liquidity of $657 million consisting of cash on hand and revolver availability. Our net debt-to-pro forma core EBITDA was approximately 6.6x. At this point, we have spent approximately $423 million on development projects in process, which reflects almost one term of leverage.
Now let me discuss our outlook for the remainder of 2022. We're maintaining our guidance for AFFO per share in the range of $1 to $1.10. Please refer to our IR supplemental for detail on the additional assumptions embedded in this guidance. While George and Rob already provided an update on the current environment, let me provide some additional commentary around our guidance. We expect food manufacturing to continue to be challenged for the remainder of the year, primarily driven by labor constraints. We expect to continue to see inflationary pressures in the near-term. Given this inflationary environment, our ongoing pricing initiatives and the embedded lag for the full year on a constant currency basis, we expect same-store revenue growth will exceed our previous guidance.
We now expect it to be zero to 2% positive. However, this higher revenue growth is being offset by higher inflationary costs. And as a result, we are not changing our NOI contribution dollar expectations. While there are not changes to our maintenance capital expenditure range, please keep in mind that the first quarter tends to be one of the lower quarters in terms of dollar spend within the year.
Finally, please keep in mind that our guidance does not include the impact of acquisitions, dispositions or capital market activity beyond that, which has been previously announced. Now let me turn the call back to George for some closing remarks.
Thanks Marc. Over the past few months, I have had the opportunity to meet hundreds of our associates and cannot be more impressed with their dedication and passion to service our customers. As I look forward to meeting more of our associates, it's clear to me that what makes us a best-in-class service provider in the cold storage industry. I'm extremely proud of the work and cannot express my gratitude to them enough. Thank you again for joining us today. And we will now open up the call to questions.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Samir Khanal from Evercore ISI. Please go ahead.
Good afternoon, everybody. George, maybe talk about kind of what you're hearing from your customers. I know you talked about the labor, kind of situation being challenged, but if you compare that to, let's say 60 days ago, when you provided guidance I mean, do you think it's sort of, I mean, where would you compare that to, and I guess, I just want to kind of get an idea of what the customers are saying to you from a labor perspective?
What they're saying to me from a labor perspective is that the situation has not gotten better. They still do not have enough leverage to produce at levels that they historically would be capable of. They're trying everything they can to get people. They're just struggling as we are, and mentioned in our earnings release here. So I don't see any improvement yet. I see a lot of effort. I see people focused on it. Our customers are certainly focused on it, but with very little results to date.
Okay. And then I guess my second question is around, maybe to Marc, on the average occupancy, which when you look at it year-over-year, it was pretty stable, right? Maybe even up a little bit, but I know you guys have talked about sort of being down about sort of 100 to 200 basis points. So how should we think about that that cadence of occupancy throughout the year?
Yes. I think the Q1 results, as I mentioned in my prepared remarks, were really impacted by just the timing of Easter. If you look more broadly at the macroeconomic conditions and what are manufacturing clients have been saying in their public releases that they're struggling to increase production, just as George had mentioned. The macro, especially the U.S. is our largest component of our portfolio. If you look at the USDA data, you'll see year-over-year declines, so I think the macro environment is still challenged. However, what you see in our Q1 results is roughly a lift due to timing of where Easter fell.
Got it.
So I think if you step back and you normalize, I think we're holding to our volumetric guidance of down roughly 100, 200 basis points for the year.
Okay. So that hasn't changed. Okay. Got it. All right, thank you.
The next question comes from Dave Rogers from Baird. Please go ahead.
Yes, good afternoon everybody. George, maybe somewhat akin to that question, I wanted to ask about kind of what's your expectation longer term of how long it will take to refill the channel? When you have these labor issues, you have poultry stock and the like, all kind of lower than they were. When do you guys kind of build back to the point where you're comfortable kind of getting back to those pre-COVID levels?
Yes. We really haven't set a time frame because we really can't say when the labor force will show up and get back to work in the food industry. I think everybody in the food industry is surprised that it's gone this long. We would have expected the workforce that was there two years ago to be back by now. It's not. As I mentioned, all the companies I've spoken with our top customers, they're all doing all they can to find people. It's just very, very difficult. It's exactly what we're experiencing. So I can't say when it will happen. I can say all of our customers are very motivated for it to happen. There is unmet demand at retail that they know they can capture. They've all said they could sell more if they could produce more. I think if you look at those earnings releases, that's a very consistent statement. So they couldn't be more motivated, but I can't predict when the labor force will show back up.
And then maybe on that labor topic as a follow-up, I mean I know you're trying to drive more permanent labor. If this continues to persist, where you just have lower goods, lower throughput, one, do you need to add more labor, or is it just a shift in the labor? And then two, you talked about kind of market share. So do you think you lost market share with your performance last year? And how much do you think you can gain back?
Well, I'll focus on the last part first. Our churn rate said we did not lose market share. Our churn rate has been very consistent. It stayed in the 3% level right through the last few years. And we don't know of any large customer we have lost. It's simply that our customers are producing less for the reasons I mentioned. When it comes to our labor, we don't need to reduce labor. We need to move labor from temporary associates to permanent associates. You can see in the numbers, we made some progress. We got to 65:35 off a base of 60:40. So we made five percentage points of difference in our permanent workforce as it relates to our temporary workforce. We've said we've historically been at 70:30 permanent people, and I've said I'd like to get to 80:20. So we'll continue trying to hire people and reduce our dependence on temporary labor, and we can do that now. It's not required for more volume. It's simply changing the employee mix we have today.
Okay, thank you.
The next question is from Mike Mueller with JPMorgan. Please go ahead.
Yes. A couple of follow-ups here. For the Easter reference, can you tell us what the comparable number would have been ex-Easter impact or a best guess there? And then can you let us know, at the end of April, what that comp looks like as well? That's the first one.
Yes. As I said, when you step back and you look at all the numbers, everything all together, it's roughly trending to within our guidance range, which is roughly the 100, 200 basis points down. So you can see the impact of the Easter lift on Q1 off of that.
Got it. And that's going to be comparable now. Okay. And then on the expense side, you talked about a few things, power, contract labor and then just inflationary costs. So if we're thinking about what's changed in terms of the higher expenses on a go-forward basis, when you look at those three categories, power, contract labor, timing and then just general inflation, is it more skewed to one of that – one of those items than the other? Or is it just kind of a third, a third, a third?
Yes, I think it's a little a function of the geography. I think what you'd see in North America, the inflationary pressure is probably more seen in labor. If you look in Europe, probably the inflationary pressure is more seen in power. So it's a little geographic specific in terms of what we're seeing. Obviously, the bulk of our dollar spend is the labor spend dwarfs the other categories. So obviously, we're very focused on that category in particular. But our top two spend category is being labor and power. They are the ones we're watching much.
Got it. Thank you.
The next question is from Manny Korchman from Citi. Please go ahead.
Hi, everyone. Can you remind us, in your conversations with your customers, if you've approached the customer or contractually you've gotten them to increase their revenues to cover these cost increases, what happens now? So if costs were up 5%, now we're here a quarter later, five months later or whatever that is, and they're up another 5%. Is that another contractual increase? Or is – at some point, does the new contract needs to reflect what's actually happening and then you're on the hook for whatever happens on the future of that?
Hi, Manny. This is Rob. So what happens is we have that same conversation that we had previously again. So we go back, we demonstrate the fact that costs have moved since we did our last price increase. And depending on either whether it's formulaic or come to the table discussion, we end up demonstrating that we've seen that cost increase and then implementing the next rate increase to cover that.
Thanks. And then have you seen any changes in whether it be consumer or customer demand geographically? And by geographically, I mean, in both in the U.S. and Europe, but also just what's in different markets in the U.S.?
We've not. I mean it's been fairly consistent on our largest customers' earnings releases that they know there is unmet demand. Our largest retail customers are still saying they hit large out of stock conditions. All of our larger customers have said they can sell more if they can make more. So that hasn't changed. I think consumer demand in retail was recently quoted as being remained at elevated levels versus food service. So it has not changed in the last quarter.
It's Michael Bilerman. I had a follow-up question about sort of how this may sort of end just from the standpoint of, as a consumer, we all probably are going to realize that everything is going to cost us more because all of these increased costs just keep on going through the entire chain, which is affecting the inflation that we're all seeing. And it just keeps on going until perhaps it doesn't, and we're potentially going into a recessionary environment if the Fed has too much of an impact. What's going to happen if we do go into a recession? I guess do your customers didn't come back to you and your costs start to go up? And how does this sort of play out if we go on the other side of this, because it sounds like you're going to play catch up for a period of time, and you're going to try to keep on passing all these costs through as they go up. So what happens when we go to the flip side of things?
Well, if we go to the flip side of things, I mean – well, first, let me start with – that's the reason we need to be able to price quickly to offset inflation, right. We want to compress the time between we recognize the incremental inflation and we price for it. That's important to us to eliminate a long lag that could impact us when things turn around. But I mean, is it conceivable that if the scenario you just mentioned played out that we would give price decreases if inflation did recede? We would. I mean we've been pricing simply to offset inflation, that's why the NOI has not changed with the pricing, it was simply offsetting costs and costs which were reduced, we would be in a position where sure, we would look at giving price decreases. I don't see that in the near future. But again, we're trying to just offset cost as it occurs. And should an environment materialize where cost decreases, we would – I would expect we would get pressure from our customers to reduce our pricing, and we would do that. Yes.
And Mike, just building on that comment, that's why for power, which tends to be a more volatile cost, that's why we use surcharge mechanisms, so they can be turned on and turned off depending on the movement in those costs. I think on a macro basis, as you think about it, if we start to slow down and you move into a recession, you see lower inflationary pressure. Eventually, the inflation will fall back within our normal course GRIs that are embedded in our base contracts, and that will reduce the need to have to be kind of continually repricing the business. The last thing I also just want to remind on that is one of the benefits of our platform is we do serve food industry, which is a consumer staple, which tends to be more recession resistant than other areas of the economy all that.
But just…
All that's – yes, go ahead. Sorry.
I was just going to add on. I don't see labor rates reducing. I don't see that ever happening. And as you know, that's the lion's share of our costs and most likely inflation. So I don't see that happening. I think Marc highlighted probably the most common thing where we put in a power surcharge for a period of time. And then we removed the surcharge at power backs up.
Right Yes. No, it's – I mean, this environment obviously is extraordinarily. I mean, everything is always unprecedented because but you're in a position right now, right, where I don't know what stops this virtual cycle and at some point to the customers just sort of back at the inflationary pressures themselves. It's a tough situation for, I guess, each party to be in, neither is happy, right? So that's – I guess you can both be upset.
I think that's pretty accurate.
Yes. All right. Thanks guys.
The next question is from Michael Carroll from RBC Capital Markets. Please go ahead.
Yes. Thanks. George, can you provide us an updated view on how you're viewing the Russia-Ukraine conflict and how this could potentially impact your business? Is it still more of a trade route type issue? Or is this starting to bleed into production concerns I gather in Europe or the U.S. or how you're thinking about that?
I would say, as we said last quarter, the number one issue we're seeing is power increases. Mark mentioned that when it comes to power, Europe is a location that has seen most of the increases. We're offsetting those with power surcharges, but I'd say, that is the number one issue we've seen related to the Ukraine. We have not seen any reduction in production levels. We haven't seen any material movement in inventory levels. It's really just the power that has been the significant driver.
I think last time we talked, you were talking about how it could potentially change trade routes and that could impact your business positively or negatively. I mean, is it impacting trade routes at all?
It is not the port traffic in the ports in Central Europe, where we maintain presence really have not been impacted. I would say, Poland is the one area that experienced a significant amount of disruption in the quarter related to the port, but it's a relatively small business for us there and in the main Europe did fine in that area.
Okay, great. Thanks.
Yes.
And the next question is from Ki Bin Kim with Truist. Please go ahead.
Thanks. Good afternoon, everyone. Just to go back to a couple points here, there's a couple of things that are in fluff right now, you're going to come back to the table and try to push another inflationary increase. You talked about the power surcharge. If I remember correctly, there's about one month lag period. So when you think about those two things together, what kind of improvement in same sort revenue should we expect as we go forward? Because I'm guessing that all those surcharges – new surcharges haven't been reflected in Q1 earnings.
That's right. All the impact of all of those surcharges have not necessarily been impacted in Q1. What we would say is that the impacts that you saw as it relates to pricing the 5.6% on storage revenue for economically occupied pallets and the 6.3% on the services side. Those were increases that started in the fourth quarter continued into the first quarter and will hit their full run rate. Now that we're outside of the first quarter in Q2. And that largely offset the inflation that we knew about in the fourth quarter. With continuing inflation going on in Q1, we've implemented another round of rate increases, which look more like 200 basis points or another 2% that would go on top of what we've already implemented. And just a reminder, what we've implemented that 6% rage, for us, when we get to full run rate of that, that's probably another 100 basis points there.
So we'll see the full impact of what we've done in Q4 and Q1 impact Q2. And then what we just did in Q2 will impact Q3. One point to make though, is that we started this pricing initiative late Q3 and into Q4. So when you get to the back half of the year, we're comping against increases that started last year.
Okay. Those were a lot numbers. I just want to clarify when you said that 100 or 200 basis points improvement to that 6.3% service revenue per pallet.
Yes. So that 6.3% that we've implemented, when that gets to full run rate, that looks more like another 100 basis points. And then on top of that, we've done increases in Q2.
Okay. And next question, I mean, as we're about to slowly climb out of this neighbor shortage inflationary environment, it seems like there might be another storm brewing, if you – I'm not sure if you've had a lot of conversations with your food producers about this, but obviously there's been a lot of changes in fertilizer cost and some severe weather patterns in the U.S. that might potentially impact crop yield. I think in the West Texas and in the great Plains, there's been about 40% of the field is considered very dry. So no soil moisture.
And if you look at some other states, like in West Texas up to 85% of that soil is unusable, but currently for production for crops. I'm not sure if you have any kind of broad thoughts about this and how this might play out as we get into rest of the year for not protein production, but for all the base crops.
Yes. I don't – I have not had that conversation with our top customers. Really my conversations have all been about labor availability, how quickly they can fully staff a facility and how quickly they can fully ramp up a facility and drive production to levels of pre-COVID. So that I can be prepared to accept the inventory they'll produce. I have not heard nor I have asked, which may be why I didn't hear that raw material issues could be affected by weather and drought. Although weather and drought are our issues we face every year, at least in my experience in the food industry. So I’m not sure how different this year will be, but I have not had any discussions with customers that would cite that as an issue they’re facing at the moment.
Okay. Thank you.
The next question is from Anthony Powell from Barclays. Please go ahead.
Hi, good afternoon. So a question on the energy surcharge, is that part of the same contract negotiations or that, that, that you have regularly as you increase cost? Or is that something separate and do customers have the ability to contest that in any way?
Yes. It’s part of the same conversations that we have with our customers. I mean it’s one that’s more easily quantifiable than others. So that conversation generally is, one that is very fact based. And there’s less of a lag between the time that we can put that in. So it’s part of the same conversation but an easy one to quantify.
Got it. Thanks. And maybe bigger picture, I mean, it sounds like a lot of the food producers are waiting for labor to comeback, but what there’s been kind of a structural change in labor availability for I guess for food producing and there’s – you see union issues and a lot of different sectors that is less immigration. So that’s the case. Is there a way for the industry to ramp up production with a permanently, I guess lower labor availability going forward?
I mean, I don’t know of a way they can ramp up production without people, I mean the – to operate food manufacturing lines, it requires people to operate them. So I don’t know why they can do that. What I do know is that when there is demand – consumer demand available for food producers to capture, they are both very motivated to do it.
They will find a way to get labor. I think you’ve seen in the marketplace, some pretty creative programs being developed by some of the largest from companies in America, I’d expect that to continue. And I ultimately think they will attract people back to that industry and produce to free COVID levels, if not higher, quite frankly, to capture as much of this incremental demand as they can.
So I believe they’ll get there. I don’t know of an alternative I – that they I think that the programs are seeing that are getting very creative, but designed to attract people. And I think ultimately they will. And then if you look at the little, slightly longer-term, I think the one thing where you do see is bigger investment in automation going into manufacturing, which is also why we see strong demand for automation in the supply chain. So really the industry in total is looking for ways how do we reduce the dependency on labor, especially if it stays, tight, like what we’re seeing in this near-term.
All right. Thank you.
The next question is from Joshua Donovan from Bank of America. Please go ahead.
Yes. Hey, everyone. If I’m understanding the your ability to push through costs now or push through these costs onto the customers, is it fair to assume that same-store service margin has troughed and should either stabilize or kind of go up across the rest of the year?
Yes. So definitely as you look at our results in the Q1 results, and I think we’ve been very clear that, the cost that we saw and the pricing that we put in place for the cost we saw in last year’s results would all be in place by the end of Q1. So you wouldn’t see the full benefit. And that’s definitely true is you look at our service margin.
The other thing that I’d call out, that’s definitely impacted our service margin in Q1 is the impact of Omicron and the high level of absenteeism that we saw and the disruption that we saw as a result of Omicron. So as we move on, we are still seeing, as we said, inflationary pressure, but as you also heard from our prepared remarks, we’re much faster in a way of getting after it.
So over time, our goal is to still recover, our margin, but just as George mentioned in his prepared remarks, the focus is to make sure we’re recovering the dollars first, ultimately the dollars you’ve heard us say that a number of times over the years. Our focus is how do we actually grow four-wall cash flow more than focused on growing margin. So we’re focused on making sure we’re recovering with price and offsetting cost and growing earnings.
Okay. And so passing along the cost quicker, are you guys doing something different with the negotiated component where you have to go to the – come to the table and kind of come to an agreement with the customer? Is there – are you just starting those earlier or are you doing something different?
Yes. No real change to the commercial conversations. It is just kind of the way the industry operates, but I – but as George mentioned in his prepared remarks, I would say that we have better systems and processes in place to make sure that we identify those cost increases quicker. And that’s – that would be our opportunity to recover faster is to make sure that, that we have those processes in place to understand the cost changes faster. Yes. The last thing I would just say to add that is these inflationary pressures aren’t unique to Americold, our clients are feeling these same pressures. So inflation is top of mind for not only us, but obviously for our customers as well.
Thanks, guys.
The next question is from Vince Tibone from Green Street Advisors. Please go ahead.
Hi, good afternoon. Same store constant currency expense growths is up over 10% in the first quarter. I understand the focus on improving labor efficiency and reducing reliance on temp labor. But it sounds like that’s going to take some time to play out and really see those full benefits. So, revised guidance implies same store expenses are only going to be up 1% to 2% for the full year. So my question is, I was hoping you can help me better understand how these expense trends are going to reverse so quickly and actually decline on a year-over-year basis for the reminder of the year.
Yes. And this builds off what Rob had mentioned earlier. Just as you go through the year, the big step up in expense happened in the third quarter. So as we move through the year, the actual expense comp will slow down. So the change in expenses will slow down as you start to comp against the higher cost base that’s already in place. So we knew for Q1 and likewise for Q2, you’re comping a much higher expense base. But when you get into Q3 and Q4, the real pain of that expense base is already in the baseline number. So the year-over-year growth will slow down.
Got it. That’s helpful. And do you have like a specific target? Sorry, if you already mentioned this. When you think you can reduce the reliance on temp labor or get back to or exceed that 70-30 split of full time to temp labor?
We don’t for the same reason we can’t predict when the food industry recovers to pre-COVID production levels. Every – literally every week and sometimes every day of every week, we’re running job fairs. We’re trying to recruit permanent employees. We’re converting temporary employees to permanent employees when they want to join Americold. We revise hiring practices so we can hire on the spot with implemented second chance programs to attract people that maybe we wouldn’t have attract as aggressively as in the past. We’ve created part-time positions where before we really weren’t interested in part-time labor. So we’re doing everything we can and we’re doing it every day. I just can’t tell you when things will get back to normal, let’s say.
No, that’s all fair. So, I mean, is there anything you can help me as I think about just the guidance? So it sounds like guidance is probably assuming this is going to take a while to play out not really get the benefit in 2022. Is that fair?
That’s correct. That’s how the guidance was constructed. Yes. Vince you heard us say in the past that 2022 is definitely a transition year and our guidance for the year reflects that this is indeed a transition.
Got it. Thank you.
The next question is from Bill Crow from Raymond James. Please go ahead.
Good evening guys. Thanks taking the time. Question for you is, is there excess capacity over the long term in this industry? Do we just need to lose some capacity here to get occupancy back up a little bit?
My opinion is no. There is no excess capacity. What there is, is a – no incremental access capacity, let’s put it that way that didn’t exist pre-COVID. The only difference is that large food manufacturers and even smaller food manufacturers are producing a lot less simply because they can’t staff and operate their facility the same amount of hours per week they would have in the past. So if when that recovers and again, I’m very confident it will because there’s unmet consumer demand, which is really what every food manufacturer wants to satisfy. When that comes back I think we go back to the environment we’re in where I don’t think we were over capacity in the industry at all.
Well, George, you keep saying that that they would sell more if they could, right, if they could manufacture more. What is that ratio of selling to inventory demand? Is that – could that change? In other words, they’ve been on just in time sort of inventory level at this point. What’s to say they can’t continue that and they could drive sales up 15% or 20%? But the incremental impact to your facilities may not be as big as it might have been in the past. Is that not something to worry about?
I don’t believe. So based on my time in the food industry, I mean, retailers are all saying they still experience high degree of stockouts empty shells, customer service levels are at 70% and 75% in my time decades in the food industry have never seen customer service levels that low. All the customers I’ve talked to have said they’re operating inefficiently because when you don’t have the right amount of staffing in your facility, you can’t operate normally.
So they’re operating very inefficiently. They don’t like that. And the amount of inventory that a food producer would put in the system, in my opinion over the years, wasn’t excessive. It was typically four to six weeks. I mean, that’s not a ton of inventory. So it wasn’t like inventories were bloated in the supply chain to begin with.
So what I see is when they find people, they’ll go back to an operating model that’s efficient for them that they can manage better. They’ll go back to four to six weeks of inventory. So they can service retailers at 98.5% or better, which are the industry standards that I live by for a lot of years. Food will be back on shelves and consumers will be buying more than they buy today. And that’s what I see play now.
Thanks. My follow up question is, is really just SG&A. I think if you go back three years, three or four years, you were $110 million and about 6.8% of revenues. And now we’re up double that and nearly 8% of revenues. What should we think about as a stabilized target as a percentage of revenue if that’s the right way to think about it?
Yes. I think I commented on this at the year-end call. So if you look at the core EBITDA, excluding the stock comp expense, we roughly have held flat and our guidance suggests that we hold flat at that historic trend as a percentage of revenue. Obviously it’s a much larger, more global business. But that percent of revenue has held flat. Where you’ve seen the slight pickup recently is in stock comp. In particular, as we mentioned in the fourth quarter of last year, we put in place a retentive stock grant that was a fairly large grant focused on kind of leaders across our organization. And so the impact of that is being felt in this year’s guide and in this year’s overall G&A expense.
But shouldn’t that percentage not hold flat, but actually go down as you’ve grown into this giant global company. I mean, there no efficiencies to gain through M&A transactions?
No. There are, but we’ve actually – so we don’t disagree with that. And we do believe over time, we will leverage our G&A spend, just we’ve actually been investing in G&A to support the growth that we’ve seen. And we have one of the largest development pipelines working that we’ve ever had as a company. So we have several hundred million of ongoing development projects that G&A is supporting. We have north of $1 billion of opportunities that are currently being underwritten by our team for future development, so that we have been investing in the business as well. But I agree on the normal state, we will start to see leveraging of that G&A over time.
Thanks for the time.
Thank you. And the next question is from Nate Crossett from Berenberg. Please go ahead.
Couple questions. First just leverage is, I think the highest it’s been in a while. You have investment grade ratings. Is there any risk that the agencies would change your ratings or when’s the last time they reviewed your ratings? That’d be question number one. Number two, maybe just, can you talk about the current acquisition environment? I don’t think I saw any acquisitions this quarter. So maybe you can just kind of articulate what’s going on there. Are you seeing opportunities? What does pricing look like?
Yes. I’ll take the first part and I’ll let George comment on the acquisition environment. So, we maintain active dialogue with the rating agencies. I think their last formal reviews and you can see their please releases completed at the end of last year. I think they’re aware and we’ve called out that our goal over the long-term is to manage this business roughly around 5x leverage level. We will and we do expect to peak over that when we’re in heavy periods, like we are right now of development.
I commented, in my prepared remarks, we have over a turn of leverage related to in process development today that are not yet gone operational and contributing. So obviously as those developments move to online and start generating cash flow will naturally delever.
Also, we did see some impact to our leverage, as a result of the impact of COVID and the supply chain challenges. But those two, we do think help us naturally delever over time as the business recovers. George, maybe you want to comment?
Yes. When it comes to acquisitions, we have a very strong pipeline. We are generally involved or contacted with almost every meaningful acquisition opportunity comes up in our industry. It hasn’t materially increased or decreased over the last quarter. And we are a pretty discerning buyer. I mean, we want to look at things that add capability either pure customer capability or geographic capability. And when we see something that we’re very interested in we will aggressively go after it. But as of now the pipeline is essentially what it was and we’re going through the process as we always do.
Okay. What about just the pricing within the pipeline? Have you seen any changes just given the change in rates – cap rate wise on potential deals?
I’m not sure we’re involved in anything where we would see that at the moment. The stages we’re in, we wouldn’t have seen that type of change. But I don’t know of any significant changes based on what we mentioned.
Okay, I’ll leave it there. Thanks.
Ladies and gentlemen, this concludes our question-and-answer session and thus concludes today’s call. Thank you very much for joining Americold Realty Trust’s first quarter’s earnings call. You may now disconnect your lines. Take care.